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HomeMy WebLinkAboutStaff Report 265-07City of Palo Alto City Manager’s Report TO: ATTENTION: FROM: DATE: SUBJECT: HONORABLE CITY COUNCIL FINANCE COMMITTEE CITY MANAGER DEPARTMENT: ADMINISTRATIVE SERVICES JUNE 19, 2007 CMR: 265:07 REQUEST TO INCREASE THE CITY TRANSIENT OCCUPANCY TAX OF PALO ALTO’S RECOMMENDATION Staff recommends that Council direct staff to authorize a vote of the electorate at the November 6, 2007 election to increase the City’s Transient Occupancy Tax (TOT) from 10 to 12 percent. In addition, staff recommends that Council consider funding of promotional activities, such as Destination Palo Alto, that support tourism. BACKGROUND California Revenue and Taxation Code (7280) authorizes the legislative body of any city or county in the State of California to levy a tax on the privilege of occupying a room, hotel room or other lodging establishment for a period of 30 days or less. This tax is commonly referred to as a "transient occupancy tax" (TOT) or "hotel tax." Palo Alto’s TOT was originally adopted as a general tax by Ordinance No. 2567 in July 1970. The tax is assessed by hoteliers on behalf of the City on transients who stay in Palo Alto for 30 days or less. The tax is imposed on all occupants except officers or employees of a foreign government who are exempt by express provision of federal law or international treaty, as well as state and federal workers on official business. The initial 5 percent TOT was increased to 6 percent in 1976 and was last increased in 1983 to its current rate of 10 percent. In 1986, Chapter 2.33 of the Palo Alto Municipal Code was amended to reflect various administrative changes to the TOT ordinance. ¯Palo Alto’s tax rate of 10 percent is within the median range statewide and slightly above the median rate of 9.75 percent locally. As illustrated in the chart below (see attachment D for full survey of Bay Area cities), most local cities, with the exception of East Palo Alto, have TOT rates of 10 percent. Statewide TOT rates range from 8 percent to a high of 15 percent. CMR: 265:07 Page 1 of 6 CITY TOT RATE San Jose 10 % Mountain View 10% Sunnyvale 9% (9.5 effective Jan. 09) Menlo Park 10 % E. Palo Alto 12% Redwood City 10 % San Francisco 14% The number of available rooms in Palo Alto has decreased by 21 percent over the last 5 years. Two hotel closings contributed to the decrease in availability. The Craig Hotel, a 63-room lodging establishment, closed in 2003:04. However, the most significant decrease occurred in 2005-06 when the Hyatt Hotel closed its 350-room Palo Alto location. Palo Alto has 28 lodging establishments representing 1,865 available rooms which generated revenues of $6.24 million in 2005-06. Although TOT revenue decreased significantly in recent years, it remains a major source of funding, accounting for more than 5 percent of the City’s total General Fund revenue. Palo Alto’s proximity to the international port city of San Francisco, its vibrant downtown, Stanford Research Park, and its association with world renowned Stanford Hospital and University, make Palo Alto an attractive destination point for business and leisure travel. DISCUSSION The passage of Propositions 13, 62 and 218 made distinctions between types of taxes and the voter approvals required to enact them. Tax categories determine when elections are held, how the revenue can be used and what percent of the vote is required for passage. For voting purposes, all taxes are categorized as either general or special taxes. Revenue from general taxes may be’ used for general governmental purposes. Revenue from special taxesis earmarked for a specific purpose. This distinction determines whether a tax must be approved by a majority vote of the electorate (general tax), or a two-thirds vote (special tax). Assuming a TOT tax increase would be used for general government purposes, it must be submitted to the electorate at a regularly scheduled general election at which members of the Council or governing body will be elected, unless, by unanimous vote, the Council finds that there is an emergency that justifies placing the proposed tax before the voters at a special election. The tax will take effect if approved by a 50 percent + 1 simple majority of voters voting in the election. Timetable A general tax ballot measure must be submitted to the County of Santa Clara 88 days before the scheduled regional general election. If this deadline is not met, the City’s next opportunity to place a measure before the voters will be in November 2009. Staff has outlined the critical procedures and timelines that must be met for the TOT ballot measure to qualify for the November 2007 general election. CMR: 265:07 Page 2 of 6 Responsibility Finance Committee City Council Required Procedure Make a recommendation to the full Council regarding adoption of the TOT Ordinance Pass Finance Committee recommendation to submit TOT tax increase to voters (2/3 Council vote required). Approve the resolution submitting ballot measure to voters, designate ballot argument authors and authorize the City Attorney to prepare an impartial analysis. Ballot arguments approved. Timeline June 19, 2007 July 9, 2007 July 9, 2007 August 6, 2007 Upon completion of the required actions, the City Clerk will file the resolution with the County of Santa Clara and manage the ballot measure argument process. These actions must be completed no later than the August 6, 2007 Council meeting for the ballot measure to qualify for the November 6, 2007 general election. Chapter 2.33 Administrative Changes The use of technology in the hotel industry has expanded to include on-line registration. Internet travel sites such as Expedia, Orbitz, Hotels.corn, Priceline.com and Travelocity are becoming increasingly popular with business and leisure travelers. There are two basic models used for Internet room sales. The first model does not present a collection problem for the City, but the second model can result in underpayment of TOT. The first model Simply charges a rate for the hotel and the hotel tax is remitted to the City on that rate. Under the second model, the hotel and the Internet travel company negotiate a discounted rate for the hotel room. The on-line provider then marks up its inventory of rooms to sell to the public, adds a service charge to the room rate and offers it at the higher price to the customer. It charges and collects taxes from travelers based on the marked-up rate, but only pays taxes to cities based on the lower, negotiated retail rate charged to the customer. The Internet providers argue that the added service charge should not be subject to occupancy taxes because it is not part of the room rate. The Internet companies contend that the service charge reflects the cost associated with operating and marketing their services. Nationwide, municipalities are suing the Internet travel companies alleging substantial underpayment of transient occupancy taxes. Municipalities are responding to this problem through vigilant enforcement as well as clarifying legislation. Staff recommends that the City’s ordinance be amended to clarify that the TOT shall be applied to the full hotel rate paid by the actual transient. CMR: 265:07 Page 3 of 6 Business Community Outreach In an effort to determine business community response to the proposed increase in the TOT rate, staff contacted twelve of the City’s largest employers. Of the companies that responded, 44 percent indicated that a TOT increase of 2 percent would not adversely affect company business practices. The remaining companies indicated that an increase would make Palo Alto hotels less competitive and could result in their booking reservations at hotels in surrounding communities. Staff has also met with the Chamber of Commerce and made a commitment to continue the dialogue process. Summary of Comments: Pro "I’m not saying the 2% increase would be critical, but it would certainly go into our calculation. "I don’t think it would make much difference. It’s not that big a deal." "It doesn’t seem like much. It shouldn’t make much of a difference." "There are not enough hotels to begin with. Supply and demand is more the issue. The 2 percent increase is not going to break them, put it that way." Coil "We would worry about the hotels in Palo Alto". The increase would make our hotels less competitive and we’d Start putting people up in Mountain View". "We as a company are not too happy with it. It increases our budget costs, plus hotel rates themselves are going up. Surveyed other cities and found their rates at 9.5-10 percent with no plans for increasing them. Therefore, we would be likely to put employees and job applicants up in hotels in East Palo Alto, Mountain View, Menlo Park and Los Altos." "Oh, when people visit us, hotel rates are already so high for what we get. We’re nonprofit, so it’s hard to find something affordable. This wouldn’t help." "Would book people at hotels in Mountain View. Get quite a few visitors from the East Coast and from India- who stay for long periods of time. Two percent would make a big difference, particularly when they’re staying at higher priced hotels. Would choose less expensive hotels, with a less expensive TOT, in Mountain View." CMR: 265:07 Page 4 of 6 Tourism Funding Recommendation To support visitor outreach, the City Manager is recommending that Council consider funding efforts that promote tourism in Palo Alto. Destination Palo Alto has been established by the City Manager to improve economic growth, by encouraging tourism and visitorship and exploring ways to package and promote marketable attractions in Palo Alto. Through marketing campaigns, these organizations provide an opportunity to simulate the local economy and promote Palo Alto as a destination of choice among prospective business and leisure travelers. Promoting community specific programs and services will give Palo Alto a competitive advantage over surrounding cities, and facilitate tourism by sponsoring events that highlight Palo Alto’s flourishing cultural and historical essence. Managed and funded outreach programs will encourage visitors to explore, experience and return to Palo Alto. RESOURCE IMPACT After modest growth over the past two years, transient occupancy tax revenue surged upward by 12.4 percent in 2005-06. The average citywide occupancy rate consistently exceeded 70 percent in the latter half of 2005-06 for the first time since 2000-01. Average daily room rates rose by 9.7 percent in 2005-06. Per Diem rates in 2005-06 exceeded $130, a level not seen since 2002- 03. First quarter 2006-07 data show both room and occupancy rates rising further. In the first five months of the fiscal year, average citywide occupancy and room rates rose by 4.4 and 4.7 percent, respectively. An increase in the TOT rate of 1 to 2 percent is predicted to increase net General Fund revenues by approximately $624,000 to $1.2 million annually. The proceeds of the TOT as a general tax will be deposited in the City’s General fund and used for general governmental purposes. The past 5 years, 2001-2006, have been the City’s most challenging period of fiscal reform. The regional economic downturn resulted in reductions in the City’s workforce and reductions to the General Fund expense base of approximately $20 million. As the City develops a "sustainable budget" and meets the $3 Million infrastructure challenge set as a policy by the Council, it muSt consider new revenue sources. Without identifying new revenue sources, further cost savings and service reductions will be necessary. As the City evaluates options, among the opportunities for revenue generation is the potential to increase the TOT. POLICY IMPLICATIONS The actions described in this report are consistent with existing City policy. ENVIRONMENTAL REVIEW The actions described in this report do not constitute a project for the purposes of the California Environmental Quality Act. PREPARED BY: Senior Financial Analyst CMR: 265:07 Page 5 of 6 DEPARTMENT HEAD APPROVAL: CITY MANAGER APPROVAL: C~AA~EAT~"~ !~’~’~- Director~ Admi~rative Services ~MI~I~Y~ Assistant City Manager ATTACHMENTS Attachment A: Resolution Calling a General Municipal Election Attachment B: Resolution to Amend Palo Alto Municipal Code Attachment C: Ordinance Amending Chapter 2.33 of Title 2 of the Palo Alto Municipal Code Attachment D: Survey of Bay Area TOT CMR: 265:07 Page 6 of 6 ATTACHMENT A NOT YET APPROVED RESOLUTION NO. RESOLUTION OF THE COUNCIL OF THE CITY OF PAL0 ALTO CALLING ITS GENERAL MUNICIPAL ELECTION OF COUNCIL MEMBERS, REQUESTING THE SERVICES OF THE REGISTRAR OF VOTERS, AND ORDERING THE CONSOLIDATION OF SAID ELECTION WHEREAS, Article III, Section 3, of the Palo Alto CitY Charter requires that a general municipal election for election of council members be held on the first Tuesday after the first Monday in November of each odd-numbered year, that is, November 6, 2007; and WHEREAS, elections are scheduled to be held on November 6,2007, in certain school districts and certain special districts in Santa Clara County; and WHEREAS, pursuant to Education Code Section 5342 and Part 3 of Division i0 of the Elections Code, commencing at Section 10400, such elections may be partially or completely consolidated. NOW, THEREFORE, the Council of the City of Palo Alto does RESOLVE as follows: SECTION I. A general municipal election is hereby called for the City of Palo Alto to be held on Tuesday, November 6, 2007, for the purpose of electing four (4) council members for full terms (four years). The City Clerk is directed to do all things required by law to effectuate such general municipal election. SECTION 2. The Council of the City of Palo Alto requests the governing body of any such other political subdivision, or any officers otherwise authorized by law, to partially or completely consolidate such elections and to further provide that the canvass be made by any body or official authorized by law to canvass the returns of the election, except that in accordance with Article III, Section 4, of the Palo Alto Charter, the City Council must meet and declare the results of said election, and that this City Council consents to such consolidation. SECTION 3. Pursuant to Section 10002 of the California Elections Code, the Council of the City of Palo Alto hereby requests the Board of Supervisors of Santa Clara County to permit the Registrar of Voters to render services to the City of Palo Alto relating to the conduct of Palo Alto’s General Municipal and Special Elections which are called to be held on Tuesday, November 6, 2007. 070501jb 0130107 1 NOT YET APPROVED The services shall be of the type normally performed by the Registrar of Voters in assisting the clerks of municipalities in the conduct of elections including, but not limited to, checking registrations, mailing ballots, hiring election officers and arranging for polling places, receiving absent voter bailot applications, mailing and receiving absent voter ballots and opening and counting same, providing and distributing election supplies, and furnishing voting machines. Subject to approval of the Board of Supervisors of Santa Clara County of the foregoing request, the City Clerk is hereby authorized to engage the services of the Registrar of Voters of the County of Santa Clara to aid in the conduct of said elections including canvassing the returns of said elections. Further, the Director of Administrative Services is authorized and directed to pay the cost of said services provided that no payment shall .be made for services which the Registrar of Voters is otherwise required by law to perform. ~The City Clerk is directed to submit a certified copy of this resolution to the Board of Supervisors of the County of Santa Clara. SECTION 4. The Council finds that this resolution does not constitute a project subject to the California Environmental Quality Act. INTRODUCED AND PASSED: AYES: NOES: ABSTENTIONS: ABSENT: ATTEST:APPROVED: City Clerk APPROVED AS TO FORM: Mayor City Attorney City Manager Services 070501 jb 0130107 2 NOT YET APPROVED ATTACHMENT B EXHIBIT "A" TO RESOLUTION NO. PROPOSED AMENDMENT TO THE PALO ALTO MUNICIPAL CODE The City Council of the city of Palo Alto, on its own motion, submits to the Electors the following amendment to the Palo Alto Municipal Code. The City Council has called a consolidated general election for the purpose of voting on the amendment to be held on Tuesday, November 6, 2007. The proposed amendment to th~ Municipal code follows the statement of the measure. The provisions of the Municipal code proposed to be deleted are printed as strikc out type, and the new provisions are printed as underlined type. CITY OF PALO ALTO MEASURE Shall the Palo Alto Municipal Code be amended to .increase the transient occupancy tax (commonly called the "hotel tax") which is charged only on persons who occupy hotel or motel rooms in the City for 30 days or less, from the current 10% to 12% in order to help maintain basic City services? YES NO 2.33.020 Tax imposed (a) For the privilege of occupancy in any hotel, each transient is subject to and shall pay a tax in the amount of ~ ~ccn~ (in~U) twelve percent (12%) of the rent charged by the operator. Said tax constitutes a debt owed by the transient to the City, which is extinguished only by payment to the operator or to the City. The transient shall pay the tax to the operator of the hotel at the time the rent is paid. If the rent is paid in installments, a proportionate share of the tax shall be made with each installment. Any unpaid tax shall be due upon the transient’s ceasing occupancy in the hotel. If for any reason the tax due is 070501 jb 0130107 3 ¯NOT YET APPROVED not paid to the operator of the hotel, the Supervisor of Revenue collections may require that such tax shall be paid directly to the Supervisor of Revenue Collections. The resolution authorizing the election must also include the ballot measure question, which must be limited to twenty five words or less. Council can assign one or more members to write the argument in favor of the ballot measure. The Council may also authorize the Council member that authors the argument in favor of the measure to approve organizations wanting to support the measure to sign the ballot argument. Ballot arguments have a limit of 5- signatures. Council can place a measure before the voters, they can endorse the measure and authorize memb@rs to write the argument in favor of the measure; however, the Council cannot spend money to<, promote the passage of the measure---(~G-~-~-~-e-~ 82~i3 (hi ~)ii~ 070501 jb 0130107 4 ** NOT YET APPROVED** ATTACHMENT C ORDINANCE NO. ORDINANCE OF THE COUNCIL OF THE CITY OF PALO ALTO AMENDING CHAPTER 2.33 OF TITLE 2 OF THE PALO ALTO MUNICIPAL CODE RELATING TO THE TRANSIENT OCCUPANCY TAX NOW, THEREFORE, the Council of the City of Palo Alto does ORDAIN as follows: SECTION 1. Chapter 2.33 of the Palo Alto Municipal Code is hereby amended by amending Section 2.33.020 as follows: 2.33.020 Tax imposed (a)For the privilege of occupancy in any hotel, each transient is subject to and shall pay a tax in the amount of ........................... -.- twelve percent (12%) of the rent charged by the operator. Said tax constitutes a debt owed by the transient to the City, which is extinguished only by payment to the operator or to the City. The transient shall pay the tax to the operator of the hotel at the time the rent is paid. If the rent is paid in installments, a proportionate share of the tax shall be made with each installment. Any unpaid tax shall be due upon the transient’s ceasing occupancy in the hotel. If for any reason the tax due is not paid to the operator of the hotel, the Supervisor of Revenue collections may require that such tax shall be paid directly to the Supervisor of Revenue Collections. SECTION 2. CONSTITUTIONALITY; SEVERABILITY. If any section, subsection, sentence, clause or phrase of this ordinance is for any reason held to be invalid, such decision or decisions shall not affect the validity of the remaining portions of this ordinance. The City Council hereby declares that it would have passed this ordinance, and each section, subsection, sentence, clause and phrase thereof irrespective of the fact that any one or more sections, subsections, sentences, clauses or phrases be declared invalid. SECTION 3. EXEMPTION FROM CEQA. The City Council finds, pursuant to Title 14 of the California Code of Regulations, Section 15061(b)(3), this ordinance is exempt from the requirements of the California Environmental Quality act (CEQA) in that it is not a Project which has the potential for causing a significant effect on the environment. // // // 070426jb 0130105 ** NOT YET APPROVED** SECTION 4. EFFECTIVE DATE. This ordinance shall be adopted, if approved by a majority of the voters voting on the measure, at an election to be held on November 6, 2007, and shall go into effect on January 1, 2008, after the City Council has, by resolution, declared that the ballot measure was approved by a majority of voters voting thereon. INTRODUCED: PASSED: AYES: NOES: ABSTENTIONS: ABSENT: ATTEST:APPROVED: City Clerk APPROVED AS TO FORM: Mayor City Manager Senior Assistant City Attorney Director of Administrative Services 070426jb 0130105 2 o. o o o. q q Lq O. q O. O. O. q 0~ o~ ~o o. o. o.o. q o q o,o. q q q o.q o o q o.q o. q q ::3 o o q o o o.o o o o o q o o o. o o o o. o q o o o o o o. o o. o q q o q o o q o. o o q o o. o q q q o.o o. q q o q q o q q o.o. o q o. q o. o. q q o.q o~o. o.