HomeMy WebLinkAbout2001-05-08 City Council (2)City of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
ATTENTION: FINANCE COMMITTEE.
FROM:CITY MANAGER DEPARTMENT:ADMINISTRATIVE
SERVICES
DATE:MAY 8, 2001 CMR: 228:01
SUBJECT:STATUS OF EFFORTS ON IDENTIFYING NEW GENERAL
FUND REVENUE SOURCES
This is an information report and no Council action is required. "
BACKGROUND
On July 20, 1998, the Council approved a General Fund financing and prioritization plan for
the City’s Infrastructure Management Program (CMR: 191:98). This plan identified $100
million of needed improvements over ten years. Of the $100 million, Council approved $78
million in funding. To provide the additional $22 million required, staff outlined a variety
of revenue raising options, among which an increase in the Transient Occupancy Tax (TOT)
from 10 to 13 percent was recommended. Council directed staffto discuss this proposal with
the Chamber of Commerce (Chamber). -In addition, on July 20, Council endorsed the
concept that new infrastructure improvements such as those envisioned in the Library Master
Plan should come from completely new revenue sources.
The Chamber expressed concern about the amount of the TOT increase and indicated its
position that both businesses and residents should bear the costs of financing infrastructure
improvements. In addition to exploring a TOT increase, the Chamber suggested either
raising or extending the Utility Users Tax (UUT) to international and interstate phone calls.
The Chamber also expressed interest in creating a nominal Business Registry fee in order to
compile information on all businesses in Palo Alto and to cover costs for administering the
fee.
During the presentation of the City’s Long Range Financial Plan to the Finance Committee
(CMR:269:00) and in a study session with Council last summer, staffindicated that projected
CMR: 228:01 Page 1 of 4
surpluses were inadequate to finance the remaining $22 million of existing infrastructure
needs and any major new.capital projects. As a result of the Finance Committee meeting,
staff received conceptual approval to explore options to close the existing infrastructure
deficit. These included the previously mentioned TOT increase, as well as extending the
UUT to interstate and international phone calls. In addition, staff was directed to identify
potential development fees, research the feasibility of using tax increment financing, and
explore a Business License Registry fee designed to gather information on businesses in the
City and to recover administrative costs.
For new infrastructure work, the Finance Committee accepted staff’s, recommendation to
research the use of general obligation bonds and a parcel tax and rejected the use of special
assessment and Mello-Roos fmancing districts. To determine the community’s priorities for
new capital projects and its willingness to pay for those projects, staff recommended use of
a survey. As staff was preparing a survey scope based on Council input, the City was
preparing for an election on increasing storm drain fees for a 30-year capital improvement
program.
The adverse results from this election caused staffto pause and conduct a series of dialogues
with the community on their priorities and how to go about funding them. A clear message
emerging from the dialogues was that the City needed to focus on its basic infrastructure
needs and to use existing resources to meet those needs. Residents confirmed Council
direction that new revenue sources (including increases in existing taxes) should be devoted
to new capital projects such as the implementation of the Library Master Plan.
DISCUSSION
With the Proposed Budget for 2001-2003, the City Manager will outline a plan to fund the
remaining $22 million infrastructure deficit. This plan relies on the use of existing resources
to fund existing infrastructure needs, allowing the use of new revenue sources for new
facilities. If approved by Council, the City Manager’s proposal establishes an agreement
with the community that the City will take care of existing General Fund capital needs within
current resources and it is the community’s responsibility (along with Council and staff) to
support new revenue initiatives for new capital needs.
This report focuses on the status of three potential areas for raising new revenues. These
include development impact fees, a business license tax, and an increase in the TOT.
Development fees are not viewed as a major source of revenue to fund significant, new
capital projects, but more as a vehicle for funding incremental improvements to existing
facilities. With the City Manager’s new proposal, efforts on General Obligation Bonds and
a parcel tax would be placed in abeyance. Research into the use of tax increment financing
or the use of a redevelopment agency is continuing and a separate report will be coming to
the Finance Committee on this issue.
CMR: 228:01 Page 2 of 4
Development Impact Fees
A development impact fee is a fee charged to pay for measures to alleviate the impact of
proposed developments. The City can use such fees to finance the incremental cost of
improvements to public facilities and services necessitated by these new developments. The
City of Palo Alto already has a number of development impact fees in place. These include
traffic impact fees in the Stanford Research Park and San Antonio/West Bayshore areas,
housing impact fees for commercial and residential projects of three or more units, and a
parking assessment district in the University Avenue area.
Based upon Council’s direction, staff is currently evaluating impact fees for parks and
community facilities and the feasibility of impact fees for public safety. Additionally, staff
will examine existing ~impact fee levels and structuresto determine if expansion of those fees
would be warranted. Additional impact fees requiring extensive evaluation and a nexus
study, such as those for transportation improvements and traffic calming measures, would
be included in a subsequent study, should the City decide to pursue impact fees further.
To date, staff has held a meeting with representatives ~om City departments tO explain the
purpose of the study, solicit ideas for potential fees and discuss areas of concern. Staff has
been working to provide the data necessary to perform the evaluation, and has begun initial
analysis. At this point, there is no estimate available as to the potential revenues generated
by such impact fees. Staff plans to return to the Finance Committee with. preliminary
findings and recommendations by July 2001.
Business License Tax
As stated, in presenting an outline of the City’s Infrastructure.Financing Plan to the Chamber
of Commerce, the idea of creating a Business Registry Fee emerged. Discussion focused on
a nominal fee primarily designed to gather information on businesses and to act as a tool in
the City’s economic outreach program. The City of Palo Alto is one of the few cities in
California without a business license tax (BLT), an important revenue source throughout the
state. Discussions with the Chamber revealed opposition to a BLT as a revenue enhancement
measure.
In light of the need for new revenue sources to support new General Fund programs and
~merging sentiment among residents (through the community dialogues) for a business
license tax, this option is being explored.
There are a number of critical factors to consider in establishing a BLT. These include: the
methodology used for levying the tax; the revenue goals of the program; the impact on
businesses; and the administrative implications of implementing the tax. Staff intends to
involve the business community in all discussions and plans related to implementation of the
tax. Creation of a BLT must be approved by the voters.
CMR: 228:01 Page 3 of 4
Transient Occupancy Tax
Staff presented to Council a fairly extensive discussion and analysis of a proposed TOT
increase during the last presentation of the Long Range Financial Plan (CMR:269:00). Staff
proposed increasing the TOT from 10 to 12 percent. Basically, the TOT is a non-resident tax
that is passed through to visitors. In staff’s view, the ability of the local hotel industry to
sustain annual rate increases and .occupancy rates over the past 5-10 years indicates
flexibility in raising the TOT. While the economic climate has shifted negatively since
staff’s last report, there are indications of improvement in the coming quarters that should
maintain the vitality of the hotel industry. Resident input from the community dialogues
indicated considerable support for an increase in the TOT..Any increase in the TOT must
receive voter approval.
PREPARED BY:
JOI~AC(}IO.
Dep~y Director, Administrative Services
Director, ~’~ministrative Services
CITY MANAGER APPROVAL:
~ON
Assistant City Manager
CMR: 228:01 Page 4 of 4