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HomeMy WebLinkAbout2019-06-18 Finance Committee Agenda PacketFinance Committee 1 MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE CITY COUNCIL AFTER DISTRIBUTION OF THE AGENDA PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE CITY CLERK’S OFFICE AT PALO ALTO CITY HALL, 250 HAMILTON AVE. DURING NORMAL BUSINESS HOURS. Tuesday, June 18, 2019 Special Meeting Community Meeting Room 5:30 PM Agenda posted according to PAMC Section 2.04.070. Supporting materials are available in the Council Chambers on the Thursday 12 days preceding the meeting. PUBLIC COMMENT Members of the public may speak to agendized items. If you wish to address the Committee on any issue that is on this agenda, please complete a speaker request card located on the table at the entrance to the Council Chambers/Community Meeting Room, and deliver it to the Clerk prior to discussion of the item. You are not required to give your name on the speaker card in order to speak to the Committee, but it is very helpful. Public comment may be addressed to the full Finance Committee via email at City.Council@cityofpaloalto.org. Call to Order Oral Communications Members of the public may speak to any item NOT on the agenda. Action Items 1. Fiscal Year 2019, Third Quarter Financial Report 2. Discuss and Accept Preliminary Revenue Estimates for Consideration of a Tax Generating Ballot Measure(s) in Support of the 2019 Fiscal Sustainability Council Priority, and Provide Feedback on Potential Tax Measures Future Meetings and Agendas Adjournment AMERICANS WITH DISABILITY ACT (ADA) Persons with disabilities who require auxiliary aids or services in using City facilities, services or programs or who would like information on the City’s compliance with the Americans with Disabilities Act (ADA) of 1990, may contact (650) 329-2550 (Voice) 24 hours in advance. 2 June 18, 2019 MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE CITY COUNCIL AFTER DISTRIBUTION OF THE AGENDA PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE CITY CLERK’S OFFICE AT PALO ALTO CITY HALL, 250 HAMILTON AVE. DURING NORMAL BUSINESS HOURS. Finance Committee Items Tentatively Scheduled Meeting Date Line No. Title Referral Date August 20,2019 1 Potential Revenue Ballot Measure - ASD City of Palo Alto (ID # 10079) Finance Committee Staff Report Report Type: Action Items Meeting Date: 6/18/2019 City of Palo Alto Page 1 Summary Title: Fiscal Year 2019, Third Quarter Financial Report Title: Fiscal Year 2019, Third Quarter Financial Report From: City Manager Lead Department: Administrative Services Staff recommends that the Finance Committee review and approve the Third (3rd) Quarter financial report. Background The purpose of this report is to provide the Finance Committee with information on the financial condition of the City’s General Fund and Enterprise Funds as of the end of the 3rd quarter (ending March 31, 2019) of fiscal year (FY) 2019. Discussion This report summarizes the actual financial activity of the General and Enterprise Funds for the first nine-months of the fiscal year and compares these financial results to the same prior year period and to the FY 2019 Adjusted Budget. The General Fund Third Quarter Financial Report (Attachment A) provides a breakdown of revenues by source and expenses by function, with separate columns for Adopted Budget and Adjusted Budget. The Adjusted Budget column includes prior year commitments that were carried forward into this fiscal year and amendments to the FY 2019 Adopted Budget through March 31. Encumbrances and actual expenses for the nine-month period are also reported. General Fund revenues (excluding operating transfers and other sources) through the 3rd quarter total $129.0 million, or 66 percent of the Adjusted Budget. Compared to the same prior year period, this fiscal year’s actuals are 7 percent higher and is driven by increased cash receipts for sales tax and utility user tax compared to prior year. General Fund expenses for 3rd quarter are 3 percent higher than prior year and are tracking at 73 percent of Adjusted Budget which is similar to the prior year trend. Following is a detailed discussion of the most significant revenue and expense items. City of Palo Alto Page 2 Revenue Highlights for 3rd Quarter FY 2019 Following table highlights the City’s major revenue sources for the 3rd quarter compared to the same quarter in the prior year. The 3rd quarter is also compared to the adjusted budget for the year. % change FY 2019 %FY 2018 % Property Tax 1%46,232$ 64%42,327$ 69% Sales Tax 21%31,747 68%30,208 59% Charges for Services -1%28,419 57%25,125 65% Transient Occupancy Tax -3%25,049 61%24,398 64% Utility User Tax 7%16,092 72%15,367 71% Permits and Licenses -6%8,545 71%8,432 77% Documentary Transfer Tax -13%8,034 60%6,930 80% All Other Revenue Sources -6%32,875 73%33,543 76% Total Revenue 7%$196,993 66%$186,330 68% 129,031$ $127,387 6,107 6,528 4,801 5,510 23,984 25,484 16,157 16,375 15,251 15,650 11,626 10,860 29,429$ 29,050$ 21,674 17,930 3rd Quarter Actuals Adjusted Budget FY 2019 FY 2018 City of Palo Alto General Fund Revenue FY 2019 3rd Quarter (000's) Property tax revenue for the last three years had growth rates in the low 7 percent to a high 8 percent in FY 2018. It’s expected the FY 2019 adjusted budget of $46.2 million, which is $3.9 million or 8.5 percent higher than the prior year’s actual revenue will be met or exceeded. The budget includes conservative assumptions for Excess Educational Revenue Augmentation Fund (ERAF) revenue. Though the City has received Excess ERAF for over four years and this revenue source continues in the current fiscal year, this portion of the property tax revenue is not considered ongoing. Sales tax revenue had a robust 3.9 percent increase in FY 2018 after plateauing between FY 2015 to FY 2017. As of the 3rd quarter, cash receipts are $2.2 million or 21 percent higher than the 3rd quarter of the prior year. The FY 2019 outlook is that revenue will exceed the Adjusted Budget due to a combination of activities including strong economic performance in the auto sales and leasing sectors; a larger than expected sales tax receipt for FY 2018 collections, and a negative adjustment in this fiscal year due to sales tax misallocation to Palo Alto, in prior fiscal years. City of Palo Alto Page 3 On the horizon for sales tax, the U.S. Supreme Court's ruling in Wayfair v. South Dakota in June 2018 allows states more authority to require out-of-state sellers to collect use tax. Previously, California individuals were responsible for reporting and paying use tax on out-of-state purchases. The California Department of Tax and Fee Administration (CDTFA) announced that it will require out-of-state retailers to collect and remit use tax beginning on April 1, 2019 if in the preceding or current calendar year their sales into California exceed $100,000, or 200 or more separate transactions. In late April 2019, the Governor signed into law AB 147 which increased the sales threshold to $500,000 or more. Per the City’s sales tax consultant (MuniServices or Avenu Analytics), the Wayfair decision is expected to lead to increased use tax compliance resulting in an additional $219 million in California sales tax revenue in FY 2019 and $554 million in FY 2020. These estimates were calculated prior to the increased sales tax threshold and the revised threshold will result in lower sales tax estimates for the state. Prior to the threshold change, the FY 2019 impact of the Wayfair decision was expected to be nominal in FY 2020. The City’s sales tax forecast will be updated once staff receives updated information. Transient occupancy tax (TOT) revenue is expected to exceed the Adjusted Budget of $25.1 million, which is $0.1 million or 0.5 percent higher than the prior year’s actual receipts. In addition to the modest base receipts growth, the voter approved 1.5 percent tax rate increase, which went into effect on April 1, 2019, is expected to bring in an additional $0.8 million in revenue. The Adjusted Budget does not include the additional 1.5 percent that went into effect on April 1, 2019. The cash receipts for the 3rd quarter decreased $0.4 million or 2.6 percent due to timing of collections. The actual revenue represents 7 ½ months of TOT earnings not the 9 months in this report period. Economically, cumulative growth in the first two and half quarters has been 2.4 percent. During the first two and half quarters, average daily room rates and occupancy were $277 per day and 76.7 percent which is 4.7 percent higher and 0.9 percent lower over the prior year, respectively. This revenue stream will continue to be monitored and adjustments will be brought forward as appropriate. Documentary transfer tax is expected to be at or slightly below the adjusted budget of $8.0 million. This revenue source is highly dependent on sales volume and the mix of commercial and residential sales, resulting in variances or that may include significant, one-time transactions. Revenue for the 3rd quarter is $4.8 million and is $0.7 million, or 12.9 percent, below prior year’s receipts for the same time period due to large commercial sales in prior year. Revenue as of the 3rd quarters in FY 2019 is consistent with FY 2016 and FY 2017 receipts for the same time period. Permits and licenses revenue is down primarily due to a decrease in new construction permit revenue mainly for the $1.4 million permits issued to Channing House and Leland Stanford Jr. University Board of Trustee from the same period last year. City of Palo Alto Page 4 Expense Highlights for 3rd Quarter FY 2019 Following is a table which highlights the City’s expenses by function for the 3rd quarter, compared to 3rd quarter of the prior year. Each quarter’s expense is expressed as a percentage of the Adjusted Budget for each year. City of Palo Alto General Fund Expenses FY 2019 3rd Quarter (000's) FY 2019 FY 2018 % change FY 2019 %FY 2018 % Police 31,546$ 29,577$ 7%42,602$ 74%42,774$ 69% Fire 24,511 25,132 -2%33,204 74%32,556 77% Community Services 21,659 18,662 16%30,263 72%28,967 64% Public Works 12,236 12,901 -5%18,662 66%19,079 68% Development Services 8,987 8,382 7%13,103 69%13,194 64% Library 6,814 6,677 2%9,767 70%9,771 68% Administrative Services 5,600 5,638 -1%7,834 71%8,253 68% Planning and Community Env 5,458 6,127 -11%10,509 52%10,938 56% All Other Departments 15,982 15,309 4%30,383 53%25,067 61% Total Expenses 132,793$ 128,405$ 3%196,327$ 68%190,599$ 67% 3rd Quarter Actuals Adjusted Budget Total expenses for the 3rd quarter of the fiscal year are up $4.4 million or 3 percent from the same quarter last year, but in total it is 7 percent lower than the adjusted budgeted amounts for FY 2019. Community Services increased $3.0 million or 16 percent from the same quarter last year. The increase is due to Golf course operations, as the Golf course re-opened in May 2018. Development Services increased $0.6 million or 7 percent from the same quarter last year. This is due to higher salaries and benefits, overtime and contract services Police and Fire comprises 42 percent of total General Fund expenditures for the 3rd quarter, which is comparable to the prior year. Following is a table which highlights some Police and Fire salaries and overtime for the 3rd quarter. City of Palo Alto Page 5 Public Safety Salaries and Overtime Expense FY 2019 3rd Quarter YTD (000's) FY 2019 FY 2018 % change FY 2019 %FY 2018 % Inc (Dec) Police - Salaries 13,180$ 12,534$ 5%18,991$ 69%18,827$ 67% Police - Overtime 1,921 1,746 10%1,813 106%1,700 103% Total Police 15,101 14,280 6%20,804 73%20,527 70% Fire - Salaries 9,770 9,515 3%14,356 68%13,914 68% Fire - Overtime 2,580 3,108 -17%2,094 123%1,571 198% Total Fire 12,350 12,623 -2%16,450 75%15,485 82% Total Public Safety Salaries & Overtime 27,451$ 26,903$ 2%37,254$ 74%36,012$ 75% 3rd Quarter YTD Actuals Adjusted Budget Police overtime is 10 percent higher from prior year due to staff vacancies. The Patrol Division and Communications Center are both impacted by the number of current vacancies. In addition to that the officers received a salary increase starting July 1, 2018. On a combined basis, salaries and overtime are at 73 percent of adjusted budget through the 3rd quarter of the fiscal year. Fire overtime is 17 percent lower due to fewer vacancies for the third quarter in FY 2019. On a combined basis, salaries and overtime are at 75 percent of the budget through the 3rd quarter of the fiscal year. In a recent audit of the Fire Department’s records for FY 2015, it was determined that the Department needs to refund $165,000 to the State Ground Emergency Medical Transport (GEMT) program. The State GEMT program provides reimbursements to emergency medical service programs/organizations to reduce the financial loss of ambulance transports for patients covered by Medi-Cal. In FY 2015, the Department received reimbursements totaling approximately $210,000; however, the recent audit identified $165,000 of ineligible reimbursements that need to be refunded. It is anticipated that a year-end budgetary action will be needed to fund the $165,000 owed to GEMT, and an additional budgetary action may be needed once the audit of FY 2016 is completed. Subsequent to FY 2016, the Fire Department applied additional direction to its methodology of determining eligible reimbursable expenses City of Palo Alto Page 6 to exclude engine medics from GEMT. As a result of this change in methodology, it is not anticipated that adjustments will be necessary for reimbursement periods after FY 2016 General Fund Budget Stabilization Reserve (BSR) Balance As reported to the Finance Committee on December 4, FY 2018 ended with a surplus of $11.5 million when compared to the FY 2019 Adopted Budget and a BSR balance of $52.8 million. After deducting the 2019 General Adopted Budget and subsequent budget amendments to the reserve through Council approved actions, the BSR balance is $42.3 million which is 20.1 percent of FY 2019 expenditures and operating transfers adopted budget. The Finance Committee approved a recommended $2.0 million reduction in the BSR to transfer funds from the BSR to the Infrastructure Reserve; this would bring the BSR to $40.3 million or approximately 19 percent of the FY 2019 Adopted Budget expenses. Enterprise Funds Following is a summary of change in net position for each of the Enterprise Funds for the nine months ended March 31, 2019, including a comparison of results from the same period last year. City of Palo Alto Enterprise Funds Change in Net Position FY 2019 3rd Quarter 3rd Qtr 3nd Qtr Increase FY 2019 FY 2018 (Decrease)% Change Water 9,149$ 8,902$ 247$ 3% Electric 12,227 6,247 5,980 96% Fiber Optic 2,278 1,182 1,096 93% Gas 5,121 3,369 1,752 52% Wastewater collection 2,126 1,036 1,090 105% Wastewater treatment 14,547 7,940 6,607 83% Refuse 5,751 7,079 (1,328)-19% Storm Drainage 1,973 2,197 (224)-10% Airport 1,458 3,403 (1,945)-57% Total Change in Net Position 54,629$ 41,356$ 13,273$ 32% Water Fund increased $0.2 million from prior year due to increase in connection fees and other operating revenues. City of Palo Alto Page 7 Electric Fund increased $6.0 million from prior year due to increase in operating revenues as a result of 6 percent rate increase effective July 1, 2018, connection fees and other operating revenues offset by the decrease in operations and maintenance costs. Fiber Optics Fund increased $1.1 million from prior year due to increase in operating revenues mainly from Dark Fiber Backbone Commercial Lease. Gas Fund increased $1.8 million from prior year as a result of rate increase and higher consumption rate coupled with a decrease in carbon neutral purchases offset by the increase in commodity and transportation costs. Wastewater Collection Fund increased $1.1 million from prior year due to an 11 percent rate increase effective July 1, 2018. Wastewater Treatment Fund increased $6.6 million from prior year as a result of an increase in State Revolving Fund Loan cost reimbursement for the Dewatering & Loadout Facility Project and higher sewage treatment and operating costs resulting to higher partner’s billing. Refuse Fund decreased $1.3 million from prior year due to decrease in operating revenues and increase in operations and maintenance costs. Storm Drain Fund decreased $0.2 million from prior year due to increase in operating transfers to Capital Projects Fund for Charleston Arastradero Corridor project. Airport Fund decreased $1.9 million from prior year due to the decrease in grant revenues for the Airport’s Apron Reconstruction Capital Improvement Project. Pension Update Following is a table which shows the employee count in each of the Miscellaneous and Safety Plans as of March 2019. As of that date, 49 percent of the City’s full-time employees were enrolled in Tier 2 and 3 plans, compared to 45 percent as of March 2018. City of Palo Alto Page 8 Mar-19 Mar-18 Mar-19 Mar-18 Tier 1 1 4 Tier 1 58 62 Tier 2 2 2 Tier 2 7 6 Tier 3 4 4 Tier 3 24 15 Sub-total 7 10 Sub-total 89 83 Tier 1 92 102 Tier 1 3 3 Tier 2 43 47 Tier 2 0 0 Tier 3 59 54 Tier 3 0 0 Sub-total 194 Sub-total 3 3 Tier 1 255 300 Tier 1 3 4 Tier 2 59 67 Tier 2 0 1 Tier 3 217 191 Tier 3 0 0 Sub-total 531 558 Sub-total 3 5 Tier 1 44 44 Tier 1 40 44 Tier 2 1 1 Tier 2 5 4 Tier 3 2 2 Tier 3 25 23 Sub-total 47 47 Sub-total 70 71 Tier 1 6 6 Tier 2 1 1 Tier 3 0 0 Sub-total 7 7 Tier 1 1 1 Tier 2 0 0 Tier 3 1 1 Sub-total 2 2 Total Tier 1 392 450 Total Tier 1 111 120 Tier 2 105 117 Tier 2 13 11 Tier 3 282 251 Tier 3 49 38 Grand Total Misc Plans 779 818 Grand Total Safety Plans 173 169 %Tier 1 50%55%%Tier 1 64%71% Tier 2 13%14%Tier 2 8%7% Tier 3 36%31%Tier 3 28%22% Tier 1 2.7% @ 55 Tier 1 3% @ 50 Tier 2 2% @ 60 Tier 2 3% @ 55 Tier 3 2% @ 62 Tier 3 2.7% @ 57 Police Management Association Police Management Fire Management PAPOA Service Employees International Union Utilities Management Miscellaneous Plans Safety Plans Fire Chiefs Association Employee Group IAFFCity Council and Council Appointed Officers Employee Group Management and Professional Attachments: • Attachment A: General Fund 3rd Quarter Financial Report ATTACHMENT A CITY OF PALO ALTO GENERAL FUND THIRD QUARTER FINANCIAL REPORT QUARTER ENDING MARCH 31, 2019 (in thousands) BUDGET ACTUALS (as of 03/31/2019) Adopted Adjusted Pre Rev/Exp % of Adj Categories Budget Budget Encumbr Encumbr Actual Budget* Revenues & Other Sources Sales Tax 31,247 31,747 - - 21,674 68% Property Tax 45,332 46,232 - - 29,429 64% Transient Occupancy Tax 25,049 25,049 - - 15,251 61% Documentary Transfer Tax 7,434 8,034 - - 4,801 60% Utility Users Tax 16,092 16,092 - - 11,626 72% Motor Vehicle Tax, Penalties & Fines 2,032 2,032 - - 1,706 84% Charges for Services 28,419 28,419 - - 16,157 57% Permits & Licenses 8,545 8,545 - - 6,107 71% Return on Investment 1,166 1,166 - - 929 80% Rental Income 15,734 15,734 - - 11,849 75% From Other Agencies 2,943 3,229 - - 1,263 39% Charges To Other Funds 10,093 10,147 - - 7,703 76% Other Revenues 567 567 - - 536 95% Total Revenues 194,653 196,993 - - 129,031 66% Operating Transfers-In 19,772 20,074 - - 15,056 75% Encumbrances and Reappropriation 7,818 - - - - Contribution from Budget Stabilization Reserve - - - - - - Total Sources of Funds 214,425 224,885 - - 144,087 66% Expenditures & Other Uses City Attorney 3,264 3,580 60 190 2,352 73% City Auditor 1,258 1,168 104 913 87% City Clerk 1,282 1,267 128 834 76% City Council 488 501 42 294 67% City Manager 4,386 4,791 300 690 2,870 81% Administrative Services 7,963 7,834 43 62 5,600 73% Community Services 28,914 30,263 51 2,214 21,659 79% Development Services 12,561 13,103 925 8,987 76% Fire 31,825 33,204 44 408 24,511 75% Library 9,664 9,767 252 6,814 72% Office of Emergency Services 1,509 1,678 865 52% Human Resources 3,591 3,796 42 150 2,646 75% Planning and Community Environment 8,791 10,509 380 1,664 5,458 71% Police 41,951 42,602 126 569 31,546 76% Public Works 18,462 18,662 152 2,381 12,236 79% Non-Departmental 3,824 13,602 5 5,208 38% Total Expenditures 179,733 196,327 1,198 9,784 132,793 73% Operating Transfers-Out 5,726 9,397 - - 8,441 90% Transfer to Infrastructure 25,172 27,172 - - 20,379 75% Total Use of Funds 210,631 232,896 1,198 9,784 161,613 74% City of Palo Alto (ID # 10392) Finance Committee Staff Report Report Type: Action Items Meeting Date: 6/18/2019 City of Palo Alto Page 1 Summary Title: Review, Comment, and Accept Preliminary Revenue Estimates for Consideration of a Ballot Measure Title: Discuss and Accept Preliminary Revenue Estimates for Consideration of a Tax Generating Ballot Measure(s) in Support of the 2019 Fiscal Sustainability Council Priority, and Provide Feedback on Potential Tax Measures From: City Manager Lead Department: Administrative Services Recommendation Staff recommends that the Finance Committee review this report and provide comments on the potential ballot measures the City could pursue to generate additional revenue. Areas to consider commenting on include but are not limited to: A. Which potential tax measures, if any, staff should prioritize and focus analysis on; B. What potential baseline assumptions of annual revenue or bond financed proceeds should be transmitted to the Council Rail Committee of the Whole to be used in rail planning; and C. Direction to proceed with refinement of estimates and evaluation of potential tax measures, including stakeholder outreach, polling and further feasibility analysis by October/November. Background The City of Palo Alto has explored a number of revenue generating measures historically and through adoption of the 2019 Fiscal Sustainability Council Priority workplan, the Council asked staff to continue these pursuits as part of the workplan. City of Palo Alto Page 2 Specifically, the 2019 Fiscal Sustainability workplan seeks to ensure providing ongoing services while maintaining finances at a credible and serviceable position with a long-term balance of resources and the cost of doing business. Within the ecosystem of day to day financial management, services provided to the community by the City’s workforce, and the local (and broader) economy, the workplan identified many strategies to support either the resources or the cost of doing business to support services and individually they will not succeed, but together they strive to maintain a sustainable equilibrium in this ecosystem. Specifically, components approved by the City Council were elements M and N of the workplan: M. Analysis of revenue generating options, N. Develop a plan for a business tax proposal, including reform of the business registry through implementation of a business license program. The full 2019 Fiscal Sustainability workplan can be found here: https://www.cityofpaloalto.org/civicax/filebank/documents/70506 Staff subsequently provided a workplan specifically to address these components of the 2019 Fiscal Sustainability workplan specifically in regards to revenue generating measures and a potential business tax proposal. This workplan was approved by a majority of the City Council (6-1) and can be found here: https://www.cityofpaloalto.org/civicax/filebank/documents/70507 This workplan identified the Finance Committee as the public body to review periodic progress reports, allow for structured public discussion, and provide feedback and recommendations on the review and development of a potential ballot measure or other revenue generating strategy. Ultimately, the Finance Committee would recommend a preferred revenue generating proposal(s) for City Council action. This is the first report as part of this workplan which outlines an iterative process. Discussion Municipalities, specifically charter City municipalities such as the City of Palo Alto, have two primary mechanisms for generating revenue: charging fees for service and taxes. The City of Palo Alto has a robust municipal fee schedule which it reviews annually as part of the budget process. In addition, the City has service agreements with other entities in neighboring jurisdictions for services provided, including services at the regional water quality plant, to Stanford Fire and for communication services. These fees for services, governed by various state laws, help defray some of the cost of services. Cities also can impose taxes; however, adoption of or changes to those taxes must be approved by the voters in accordance with Proposition 218. A simple majority is required for approval of a general tax, and a 2/3 supermajority approval is required for a special tax. These potential measures must coincide with an election with established dates. City of Palo Alto Page 3 Below is a more detailed description of the various taxes the City of Palo Alto collects, some general information about the taxes and the drivers for them, and lastly potential revenue increases that could be seen if the tax rates were changed, or a new tax was imposed. In consultation with our current sales tax consultant a framework to help think through potential measures is as follows, E.A.S.E.: Equity: Who does the tax impact and how is that felt across all residents or businesses in the same industry? Administrability: How is the tax administered and what would be the cost of compliance on taxpayers and the City? Stability: What are the drivers of the tax and how does the tax type in question affect the volatility of the revenue over time (including potential recessionary or modernization scenarios)? Economic Benefits: Is the tax efficient, promote economic development objectives and minimize disruption on the taxpayer? The modeling of the potential implications of changes in current tax rates is purely staff’s estimate based on discrete basic assumptions and math. It is anticipated that these figures will only be reduced based on additional variables, exemptions, or changes in the base and more refined estimates will be provided later this year. Property Taxes Property Taxes are the largest revenue generator for the City of Palo Alto with estimated receipts of $48.6 million in FY 2020. Under current law, all taxable real and personal property is subject to a basic tax rate of one (1) percent of assessed value collected by local jurisdictions and school districts for general service purposes. There are other taxes and levies on a typical property tax bill such as a parcel tax, General Obligation (GO) bond, and special assessments. In Santa Clara County, four (4) countywide levies totaling 1.5 per 100 dollars of valuation and one GO bond specifically for Palo Alto 0.01106 per 100 dollars of valuation are levied in addition to the 1 percent. Below is some information about the City’s Property Tax for the 2018/2019 taxable year which had a taxable assessed value of $36.7 billion: - The City has a little over 20,000 parcels (not including exempt parcels) of which approximately 19,000 or 95 percent are residential land use. Residential land use represents 68.57 percent of the total taxable assessed value. - Approximately 35 percent of the parcels in Palo Alto have an assessed value less than $600,000 - Based on property transactions in calendar year 2018, it is estimated that approximately 50 percent of the City of Palo Alto’s growth in assessed value is due to parcel turnover and the assessed value was adjusted based on the sale price. Of the 1 percent property tax that is assessed on the property owner, the City of Palo Alto receives only 9.4 percent, or 9.4 cents for every property tax dollar a property owner pays to the county. The majority of the tax dollar paid or 56.6 percent goes to the school district, City of Palo Alto Page 4 community college, and county school service, 15.9 percent goes to the county and the remaining goes to special districts and to the State. Potential Tax Rate Change Property taxes are regulated by state laws, including voter-approved constitutional provisions such as Proposition 13, therefore, changing the rate itself is not within a municipality’s authority. However, cities can use mechanisms such as parcel taxes which are levies on parcels of property, which are assessed based on property or parcels. Typically, these are set at some fixed amount per parcel and cannot be based on the value of a property. These levies can be based on lot square footage and or land use designation. Parcel taxes are usually special taxes requiring a 2/3 voter approval and these are levied on the property owner. Additional information on this type of tax and the potential revenue generation is discussed under the “Business Tax” section later in this report. Sales and Use Taxes Sales and Use Taxes are the second largest revenue generator for the City of Palo Alto with estimated receipts of $34.3 million in FY 2020. Sales Tax rates are comprised of state, regional, and local assessments and typically vary slightly by city because of this. Administered by the State of California and the newly established California Department of Tax and Fee Administration (CDTFA), cities are apportioned their receipts based on the point of sale or for internet sales based on County pools. Currently the City of Palo Alto has a tax rate of 9.0 percent paid for goods sold within Palo Alto. The City receives 1.0 percent point of the purchase price or 11.1 percent for each tax dollar paid. The remaining sales tax dollars are distributed as follows: State of California (5.75 percentage points), Santa Clara County (0.125 percentage point), Santa Clara Valley Transportation Districts (1.625 percentage points), and the Public Safety Fund (0.5 percentage point). Potential Tax Rate Change An increase in the Sales Tax rate of ¼ cent, or 0.25 percentage points district tax, would generate approximately $4.5 million in additional revenue annually. This tax would be equitable across businesses of the same industry, however, it does not apply to industries that are not subject to sales tax. Sales tax is widely considered to be an outdated tax structure and according to the City’s consultants only applies to up to 40 percent of the economic base. This structure and the driver for it, disposable income being a significant portion this tax, is subject to economic fluctuations as well as longer term fluctuations and the consumption of goods changes in society. City of Palo Alto Page 5 Transient Occupancy Tax Transient Occupancy Tax (TOT) is the third largest tax revenue generator for the City of Palo Alto with estimated receipts of $29.3 million in FY 2020. The rate in Palo Alto is 15.5 percent and is applied to the daily rate charged by a hotel, motel, and lodging establishment. Most recently City voters approved two ballot measures, one in November 2014 (and November 2018 increasing the rate from 12 percent to 15.5 percent. Potential Tax Rate Change An increase in the TOT rate would primarily impact the visitor population. A 0.5 percentage point increase in the rate from 15.5 percent to 16 percent would generate approximately $900,000 additional revenue annually. Documentary Transfer Tax Documentary Transfer Taxes are one of the most volatile tax revenues and in FY 2020 are anticipated to generate $8.4 million in receipts for the City of Palo Alto. These receipts have reached peak levels of $10.1 million (in FY 2015) or lows of $3.1 million (in FY 2009) during recession periods. This tax is applied to the sale of real property within Palo Alto at the time property ownership is transferred. The State of California has a standard base rate of $1.10 per $1,000 of sale price of which the City and the County split these proceeds 50/50, each receiving $0.55 per $1,000 of the sale price. The City of Palo Alto has a non-conforming rate, and the current rate is $3.30 per thousand dollars of sale value. A house that sells for $1.5 million, for example, would result in the City collecting $4,950. This tax is collected by Santa Clara County and then remitted to the City. Potential Tax Rate Change Property owners who sell their property would be impacted by an increase in the rate and would pay this tax once per sale of a parcel. Assuming approximately $9 million in annual proceeds, a $1.10 increase in the rate to $4.40 per $1,000 of the sale price would result in additional revenue of approximately $2.8 million. City of Palo Alto Page 6 Utility User Tax Utility User Taxes (UUT) generate an estimated $17.6 million in receipts in FY 2020. The Utility Users Tax is charged to all users of electricity, gas, water, and telephone services. Each utility has a slightly different user base and this tax is based on consumption by respective utility. With the City of Palo Alto as the provider for utility services - electric, gas, and water – some metrics are available based on annual rate payer revenues in these utilities. The electric utility revenues reflect approximately 70 to 75 percent commercial usage and 25 to 30 percent residential usage. The gas utility revenues reflect approximately 45 to 50 percent commercial usage and 50 to 55 percent residential usage. The water utility revenues reflect approximately 30 to 35 percent commercial usage with 65 to 70 percent residential usage. These rates not only impact the utility user tax, but in addition have some correlation to the annual equity transfers to the General Fund from the electric and gas utilities totaling nearly $20 million annually. The current tax rate is for electricity, gas, and water is 5.0 percent and for telephone is 4.8 percent. In November 2014, Palo Alto voters approved decreasing the telephone utility user tax rate from 5.0 percent to 4.75 percent. This tax decrease became effective on April 1, 2015 due to Public Utility Commission advance noticing requirements. This ballot change modernized the ordinance, providing better stability and the ability for it to adapt to the changing customer environment and new technologies. These taxes are charged directly on the monthly billing, therefore receipts are not transferred or submitted via any separate tax return except from the utility providers. Potential Tax Rate Change Assuming a 1 percentage point increase in the current UUT rates, bringing the electricity, gas, and water rate from 5 percent to 6 percent, and the telephone rate from 4.8 percent to 5.8 percent, $2.3 million in additional revenues are estimated annually. As a consumption-based tax, high volume customers bear more of the cost. Business Tax The City of Palo Alto does not currently have a business license tax. In 2014, the City approved a Business Registration Certificate (BRC) Program which currently has a $54 annual registry fee per business. This annual fee is in addition to specific area assessments such as the Downtown Business Improvement District (BID) or Downtown Parking Assessment District. Through the BRC Program, the City has collected some demographic data for businesses that participate in the Program, however, staff recognizes this data is incomplete and is working to bolster the integrity and thoroughness of the data. Business License Taxes are typically assessed based on a baseline variable, examples include but are not limited to, a flat fee, head count, square footage, gross receipts or a payroll tax. With incomplete data, modeling tax receipts based on these variables is challenging. Staff is working to onboard a consultant to assist in defining these variables and build a profile of our business community to help model more refined revenue estimates later this year. City of Palo Alto Page 7 Potential New Tax A number of cities have recently updated or instituted business tax modernization efforts. In the absence of this more refined data, staff has modeled what these measures potentially generate if applied in the City of Palo Alto based on the current data available (sources cities as appropriate). These assumptions do not factor any programmatic considerations the Council may wish to consider such as exemptions based on size or hardship, nor does it assume cost of administration. This would be a new tax, which does not have existing business processes in place, not only collections but also enforcement. In order to purse a new type of tax, a number of variables and definition of those variables will be necessary. City of Mountain View: In 2018, the City of Mountain View citizens approved a per-employee business tax which is tiered based on the number of employees. A table of the tiers is below. In total it is estimated to generate approximately $6 million in annual revenues. Per the American Community Survey (ACS), there are approximately 97,000 jobs in Palo Alto1. Assuming the highest per employee count of $150/ employee (highest employee count per Mountain View’s tax table and excluding the $584,195 base), a flat rate would generate $14.55 million in annual revenues. The City only has the data by company in the BRC Program. If this tiered fee structure is modeled with the Business Registry Program annual revenues only generate between $2.5 and $5 million annually. East Palo Alto: The City of East Palo Alto recently approved a parcel tax of $2.50/square foot for commercial development over 25,000 square feet. Currently based on CoStar Realty Information, the Palo Alto has approximately 12 million square feet of office space2. This includes Class A through C space. If assessed a $2.5/square foot tax, $31 million in annual revenues are anticipated to be generated. This figure does not include any exemptions, nor does it adjust to exclude facilities 24,999 square feet or less like East Palo Alto’s at this time. Based on the data from CoStar, average rental costs are $6.24/square foot per month3 for that 12 million in office space in the city which has a vacancy rate of 6.5 percent. This square footage does not include industrial or retail spaces. 1 ACS 2013-2017 5-year estimates table B08501: means of transportation to work by age by workplace geography 2 CoStar Realty Information Inc.: Fourth Quarter report 2018, www.costar.com 3 15CoStar Realty Information Inc.: Fourth Quarter report 2018, www.costar.com Number of Employees Business License Tax 1 $75 2-25 $75 + $5/per employee over 1 26-50 $195 + $10/per employee over 25 51-500 $445 + $75/per employee over 50 501-1,000 $34,195 + $100/per employee over 500 1,001-5,000 $84,195 + $125/per employee over 1,000 5,001 + $584,195 + $150/per employee over 5,000 City of Palo Alto Page 8 Timeline As outlined in the original workplan, staff anticipated to return to the Finance Committee in late August with more refined revenues estimates for potential ballot measures. At that meeting, staff will ask the Finance Committee to discuss polling and make a recommendation on next steps to forward to the full City Council in September. Ultimately, the current workplan outlines a Council decision by October/November on what type of measure to pursue including the major variables for it to be based on. Resource Impacts No funding or staff are currently assumed in the budget to support these efforts, therefore, a budget amendment for the consultant costs will be necessary in the General Fund. Known cost estimates are outlined below. Consultant assistance for the research and analysis, especially of a potential Business Tax will be necessary. Work through August to develop more refined estimates for tax measures is anticipated to cost $50,000 to $80,000. Costs beyond this would depend on the additional research and support necessary. In addition to the cost of consultant work through August, if Council were to continue to pursue a ballot measure, consultant support to define and refine through an iterative process will be necessary. Polling costs are anticipated to cost $35,000 per poll, however this is dependent on the length and quantity of the poll. Outreach costs to assist in communication strategy will be necessary as well. Staff is working to obtain early estimates of this cost, however, staff does not have them at this time. Lastly, there will be election costs associated with any ballot measure to establish or increase a tax. Environmental Review This report is not a project for the purposes of the California Environmental Quality Act (CEQA). Environmental review is not required.