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HomeMy WebLinkAbout2000-09-19 City CouncilC ty Manager’s eport TO:HONORABLE CITY COUNCIL ATTENTION: FINANCE COMMITTEE FROM:CITY MANAGER DEPARTMENT:ADMINISTRATIVE SERVICES DATE:SEPTEMBER 19, 2000 CMR: 336:00 SUBJECT:UPDATE ON STATE REVENUE AND TAX LEGISLATION This is an informational report and no Council action is required. BACKGROUND The purpose o~fThe attached legislative update is to provide Council with a report on current State Budget and legislative proposals that could potentially have revenue and taxation impacts on the City. The City Manager’s Office is in the process of redesigning its legislative program and will explore the periodic provision of such legislative reports. Staff anticipates that it will bring recommendations regarding the City’s legislative priorities and advocacy process to the Council for review and approval in January 2001. The Administrative Services Department and City Manager’s Office have also convened a committee to develop recommendations regarding a City policy on Internet taxation legislation. DISCUSSION The attached report summarizes portions of the Governor’s Adopted 2001 Budget that have local implications. The report also includes a summary and status reports on legislation and committee assignments that could impact City finances. Some recent positive developments include: A major legislative committee effort is focused on State and local fiscal reform. The goal is to protect city revenues and provide stability in financing local city government services. CMR:336:00 Page I of 2 Another important Legislative effort is to cap the property tax shift from cities to schools. SB 1637 passed the Legislature in August and is waiting for the Governor’s signature. The Legislature passed AB 2412 to close a loophole that allows a company with stores in California to establish a Web-based subsidiary and thus avoid sales tax obligations for sales, which occur over the Internet, e.g. Barnes & Noble selling books via the Internet. Some adverse developments include: e The Screen Writers Guild is sponsoring a bill to require that cities use specific tests to determine whether a home based activityis taxable or nontaxable. It is the opinion of the League of California Cities that this bill would result in major implementation questions and a preemption of local business license tax. Although not moving at this time, there were two proposals to redistribute local sales tax revenue on a per capita basis, and to shift sales tax revenues from cities to counties. These bills could resurface in the future and would have significant negative impact to Palo Alto revenues. Summary of other legislation and budget decisions is provided in the attached report. ATTACHMENTS Attachment A:Update on State Budget Proposals and Legislation Affecting City Finances PREPARED BY: Julie Pai, Senior Financial Analyst DEPARTMENT HEAD APPROVAL: CITY MANAGER APPROVAL: C/~ YI~ATST Director, Adn~nistrative Services Assistant City Manager CMR:336:00 Page 2 of 2 September, 2000 THE GOVERNOR’S 2000-01 BUDGET AND RELATED LEGISLATION Govemor Davis signed the 2000-01 Budget Act into law on June 30, 2000. The budget contains substantial one-time and ongoing funding increases in a variety of program areas, including education, health, and social services. The budget includes $1.8 billion to reimburse local governments for the accelerated vehicle license fee reduction, one-time increases of $1.5 billion for transportation, about $570 million for housing, and a variety of other increases in resources and environmental protection programs. A dominant factor affecting the 2000-01 budget negotiations was the extraordinary performance of California’s economy and the resulting dramatic growth in state General Fund revenues. The revenue increases provided a significant amount of additional resources available for tax reductions, education, transportation, and other budgetary priorities. Of special interest to local governments is the following: Local Public Safety - The Budget provides significant funding for local public safety purposes as follows: Citizens’ Option for Public Safety (COPS) - $121.3 million for the COPS program, which is $21.3 million above the 1999-00 level to ensure that all local law enforcement agencies will receive at least $100,000. The COPS program supports local front-line law enforcement, sheriffs’ departments for jail construction and operations, and district attomeys for prosecution. Technology Funding for Local Law Enforcement - $75 million in one-time funding to local law enforcement agencies for the purchase of high-technology equipment. Local agencies will receive a minimum of $100,000 and an additional per-capita amount. DNA profiling - $50 million to conduct DNA analysis of evidence to establish innocence and determine guilt in unsolved sexual assault cases. This funding will be available for three years to provide local law enforcement agencies with the resources necessary to process 18,000 rape investigation kits. Housing - Local government will receive $115 million in grants for several programs to increase housing production and match economic development with housing. $100 million for incentive grants under the Job-Housing Balance Program to counties and cities that increase their issuance of housing bUilding permits. Three $5 million grant programs for economic development planning in areas with high ratios of housing stock to local jobs, building code enforcement, and interregional planning. Transportation - Legislation accompanying the Budget provides $2 billion to establish the Traffic Congestion Relief Fund, which when fully funded will provide over $4.9 billion in additional General Funds toward transportation projects that benefit the state’s most congested areas. Many of these projects will be funded in partnership with local government and are high priorities to local planners. Additionally, $400 million for deferred maintenance of local streets and roads will be allocated by formula grant in 2000-01. Approximately $7.14 per capita is anticipated to be allocated to cities for these purposes. Health and Human Services - The Budget provides for significant funding of $261 million for local health and human services purposes. And provides an augmentation of $52.6 million for Social Services programs. In the Budget, bond allocations of $1.2 billion are included for parks and $763 million for water projects. Bond funds will be available to reduce fees for entrance to state parks, expand water and air quality, and support land conservation programs. Two Palo Alto projects are specifically identified in the Budget Trailer bill to receive funding. These projects are the Junior Zoo renovation and Bay to Ridge Trail, each of which will receive $100,000. THE FOLLOWING ARE SUMMARIES OF SOME LEGISLATIVE BILLS ON REVENUE AND TAXATION OF INTEREST TO LOCAL CITIES. AB 1396 STATE AND L~CAL FISCAL REFORM Summary: Conference committee deletes prior version of bill, which made findings and declarations concerning the need for the Legislature to address issues relating to local government finance and development. The bill now makes a one-time discretionary appropriation of $212 million to local governments for fiscal relief based on a specific allocation formula. Generally, $200 million is allocated to cities, counties, and special districts based on last year’s AB 1661 formula, while $10 million goes to counties based on population and $2 million to independent recreation, park and library specialdistricts throughout the State. Status: On the Governor’s desk for approval and signature. Potential Impacts to CPA: Positive SB 1637 CAP THE PROPERTY TAX SHIFT Summary: This bill caps the shift of property tax revenues from counties to the Educational Revenue Augmentation Fund over a three-year period. Cities, counties, and special districts have continuously supported this measure over the years, which will stem the loss from property tax shifts of the 1990s. . The current value of the shifted property taxes is $4.2 billion. The bill limits the amount of ad valorem property tax revenue annually allocated to each county’s ERAF as follows: ¢"For fiscal year 2001-02, the total amount of revenue allocated to ERAF in FY 2000-01, plus two-thirds of the tax increment for 2001-02. For FY 2002-03, the total amount of revenue allocated to ERAF in FY 2001-02, plus one-third of the tax increment for 2002-03. For FY 2003-04, and all subsequent FY’s, the total amount of revenue allocated to ERAF in FY 2002-03. Status: On the Governor’s desk for approval and signature. The League believes that the Governor’s Office has not "signed off" on a 15roposal to cap ERAF growth. Hehas, however, said that he has no problems with distributing the $200 million in local government discretionary dollars. Potential Impacts to CPA: Positive AB 2412 SALES AND USE TAX CLARIFICATION Summary: Existing law requires retailers with nexus (i.e., retailers engaged in business in the state) to collect sales or use tax on sales made to California purchasers. The bill amends the sales and use tax law to more clearly address how existing nexus rules apply to Internet retailers AB 2412 closes the loophole in current law, which allows a company with stores in California to establish a web-based subsidiary and thus avoid tax obligations for sales which occur over the Internet. Status: On the Governor’s desk for approval and signature. According to the San Jose Mercury News: "Gov. Gray Davis, who opposes Internet taxation, is expected to veto the bill, which targets merchants like Barnes and Noble.com and Borders. com." Potential Impacts to CPA: Positive AB 83 - HOME BASED BUSINESS Summary: This bill, sponsored by the Screen Writers Guild and other groups within the entertainment industry, would apply to all cities and counties and potentially impact more home-based activities beyond writers and artists. This bill requires cities to use one of three specified tests to determine whether a home- based activity is independent contract work (taxable) or work associated with employment, and not subject to local taxes. In the League of Cities’ opinion, this bill would result in major implementation questions in reassessing existing local ordinances, and sets a negative precedent in preemption of local ordinances and could allow other special interest groups to seek similar favorable treatment at local governments’ expense. Status: On the Govemor’s desk for approval and signature. Potential Impact to CPA: The City does not have business license requirements presently. The bill would set precedent to preempt local ordinances and allow special interest groups to seek favorable treatments at local government expense. Consequently, this bill would affect how the City manages its fees and permits in the future. AB 1303 HIGHWAYS/LOCAL PROJECTS/FUNDING Summary: Would return equity in the distribution of the 18-cent state gas tax by shifting 2.5 cents of the current gas tax directly to cities and counties, equating to approximately $375 million a year. Would hold harmless the impact of this shift on the State Highways Account (SHA) by shifting monies from the State’s General Fund surplus. Also requires $300,000 to be appropriated for a new division within Caltrans that is responsible for collecting and assessing data on local road and highway conditions and integrating that data into state transportation plans. Status: Scheduled for August hearing in Senate Transportation Committee. Hearing, however, was cancelled at request of author. Potential Impact to CPA: o Positive SB 165 - LOCAL AGENCY SPEC~L TAX AND BOND ACCOUNTABILITY ACT Summary: This bill would require that any local special tax measure subject to voter approval contain a’ statement indicating the specific single purpose of the special tax. It would require that the proceeds of the special tax be applied to that purpose and require the creation of a trust fund into which the proceeds shall be deposited. It would require an annual report containing specified information concerning the use of the proceeds. The bill would impose similar accountability requirements with respect to any local bond measure, subject to voter approval, that would provide for the sale of bonds by a local agency. Status: On the Governor’s desk for approval and signature. Potential Impact to CPA: This could increase administrative work for the City. OTHER BILLS AND DEVELOPMENTS OF INTEREST In early summer 2000, SB 2000 and SB 1982 were pulled from the Senate Local Government Committee’s hearing calendar. These bills may resurface and the City should be on the alert to express opposition as the bills could have significant negative implications for the City and other similar jurisdictions. SB 2000 SALES TAX REDISTRIBUTION MEASURE Sponsored by State Controller Kathleen Connell, SB 2000 basically freezes a city’s sales tax base and distributes all future growth in sales tax on a population basis throughout the county. Given city opposition and recognizing that the bill could not pass out of committee, Senator Polanco quickly pulled the bill from the calendar. SB 1982 LOCAL FISCAL RESTRUCTURING MEASURE This measure, sponsored by the California State of Association of Counties, was pulled by Senator Alpert, as it was evident that many committee members would not support the bill. SB 1982 reduces the existing sales tax revenues to cities as generated by commercial retail sales by shifting the taxes to counties. The Bill would also allow counties to collect revenues from city residents by imposing new taxes or overlaying additional current taxes. STATE MANDATES (SB 90) According to League of California’s Advisory Committee on State Mandates, of 474 cities in California, 224 cities have not claimed any reimbursement from the state for work they are performing that is partially or fully reimbursable. These mandates are typically referred to as SB 90 mandates, named after the original legislation that established a mechanism to reimburse local agencies for state mandates. Each year, the State Mandates Commission approves new claims. The recent claims that have generated new funds for cities include investment reports, open meetings act requirements, domestic violence reporting and firefighter SIDS training. Local governments are also seeking reimbursement for many unfunded mandates such as: Peace Officers Bill of Rights Law enforcement racial and cultural diversity training Standardized emergency management systems Animal adoption Health benefits for survivors of peace officer ®In 2000, State appropriations to reimburse local agencies are expected to exceed $120 million. There are policy and technical proposal legislations to make the reimbursement process simpler and more equitable. SONOMA COUNTY/ERAF CASE Sonoma and several other counties brought this case contending that the ERAF shift constituted a reimbursable state mandate within the meaning of the California Constitution. The trial court agreed, finding that the shift is a reimbursable mandate because it compelled local agencies to accept financial responsibility for a previously state funded program under Proposition 98. The State has appealed. This is an important case for both local government and the State. PUBLIC EMPLOYEES’ MEDICAL AND HOSPITAL CARE ACT (PEMHCA) The PERS Health Benefits Committee on June 20th made a decision to increase 2001 PEMHCA premiums instead of increasing patient co-payments, which was recommended by the PERS staff. The co-pay levels have not been adjusted since 1993. As .a result of the decision, there will be higher than anticipated premium increases in 2001. The average premium increase for the HMOs will be 9.2 percent instead of 4.9 percent. o The premium for PERS CARE will increase by 15.9 percent instead of 13.2 percent, and Premium for PERS Choice basic will increase by 21.6 percent instead of 18.8 percent. According to the League of California Cities, many cities have not budgeted for this type of premium increase and the cities have expressed serious concerns. E-COMMERCE TAX ISSUES Update According to League of California Cities’ reports, there is an emerging effort in Washington, D.C. to revisit the Intemet Tax Issue. The Congress is hotly debating this issue. Some noteworthy happenings include the following. In a speech before a "High-Tech Summit" organized by the Joint Economic Committee, Carly Fiorina, CEO of Hewlett-Packard Co., told fellow industry members that exempting e- commerce transactions from sales tax was not realistic. She stated that. "What we are calling for is a concerted effort to do the heavy lifting and bring our taxation system into the modem age so that we can tax, in a fair way, both online and offline transactions." Senator John McCain indicated that as chair of the Senate Commerce Committee, he would direct a more cautious approach to e-commerce legislation coming before the committee. He stated his concern that legislation on Intemet commerce was being rushed through to attract favorable attention from members of the high tech industry without weighing all the issues and implications. The National Governor’s Association is presently coordinating discussions on a streamlined sales t,~x system. ’~he Internet sales tax issue is being addressed. The State or" California is presently addressing this controversial issue of e-commerce. In Sacramento, several Internet related bills have passed the Legislature and are on the Governor’s desk for approval. In addition to AB2412, discussed previously in this attachment, these bills include: SB 1949 SB 1933 AB 1784 would direct the Governor or authorized representative to participate in national discussions of tax simplification for Internet sales. On the Governor’s desk for approval and signature. would create the Califomia Commission on Tax Policy in the New Economy to study the impact of the changing economy on current tax structures. On the Governor’s desk for approval and signature. sets a three-year moratorium on Internet access taxes. This was revised from PERMANENTLY prohibiting local gow:~mnents from imposing taxes on Intemet access, online computer services, and bit or bandwidth taxes. On the Governor’s desk for approval and signature. Information Sources: League of California Cities California State Legislature California State Dept of Finance California State Legislative Analysts’ Office