HomeMy WebLinkAboutStaff Report 13687
City of Palo Alto (ID # 13687)
City Council Staff Report
Meeting Date: 11/8/2021
City of Palo Alto Page 1
Title: Discuss Updates and Recommend Further Refinement of Potential
Revenue Generating Local Ballot Measures, and Review Draft Initial Polling
Outline (8:30 - 9:30 pm)
From: City Manager
Lead Department: Administrative Services
RECOMMENDATION
The Finance Committee and staff recommend that the City Council:
A. Direct staff to model a business license tax at monthly rates of $0.05 to $0.20 per square
foot, with a preference for no sunset and an annual escalator, and with thresholds for
square footage size and possible exemptions for retail;
i. Discuss and provide direction on any additional industry exemptions for further
staff analysis;
B. Direct staff to model two methods to replace the General Fund Equity Transfer (GFET) at
risk in the Green case:
i. Seek voter approval in modifying the 2009 GFET formula to transfer a
percentage of gas utility gross revenues;
ii. Distribute the change across gas and electric as an increase in the percentage of
Utility Users Tax (UUT); and
C. Direct staff to incorporate the Finance Committee’s feedback regarding the polling
topics (Attachment A) and to execute the initial round of polling and Finance Committee
recommends delegation of review of polls to the Committee, pending availability to stay
on the workplan timeline. Polling should include but not limited to:
i. Evaluating support for a business tax and characteristics of it
ii. Evaluating willingness to support confirmation/replacement of the General Fund
Equity Transfer equity gas transfer; and
iii. Opinion and ranking of funding priorities such as services, infrastructure, and
climate action
EXECUTIVE SUMMARY
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This report continues the City Council and Finance Committee’s discussion and work to explore
the development of a potential revenue generating local measure for the November 2022
ballot, through iterative conversations with the Finance Committee and City Council.
This report seeks to obtain direction from the City Council to direct the Finance Committee, as
the public body of the potential revenue generating local ballot measure, and staff to further
refine the square footage business license tax by identifying possible industry exemptions for
further staff analysis, for the City Council to consider possible exemptions for retail, and to
direct staff to revise the business license tax model by calculating monthly rates per square
foot. In addition to the work for the business license tax, information is provided in the October
19th staff report (CMR 13648) to discuss and direct that staff model two methods to replace the
gas GFET. Lastly, the Finance Committee provided feedback on staff’s proposed approach to
polling but sought additional feedback from the full Council on some topics, such as the uses of
revenue and types of exemptions to poll. See the “Draft Initial Polling Outline” section below.
Following direction to Council, staff will return to the Finance Committee to deliberate on
updates and refinements of the square footage tax, utility tax, and polling.
Attachment B of this report is information presented to the Finance Committee in the October
19th meeting (CMR 13648). This CMR includes attachments that contain detailed discussion of
the following:
• Square footage tax (Attachment A, CMR 13468):
▪ Updated tax models, including revised revenue targets
▪ Comparison of a parcel tax and business license tax
• Utility on-bill tax refined calculations and discussion of options (Attachment B, CMR
13468)
• Draft initial polling outline for the Committee’s discussion and feedback (Attachment C,
CMR 13468)
• Summary of Prior Work on Potential Revenue Generating Ballot Measures (Attachment
D, CMR 13468)
BACKGROUND
The City’s efforts in advancing fiscal sustainability efforts have grown over the past decade. In
2019, several actions and plans were specifically outlined in the Fiscal Sustainability Workplan.
The goal of the workplan was to continue to make proactive progress towards fiscal
sustainability to maintain the quality of life that the City of Palo Alto supports through its
services. Elements of the workplan included proactive funding contributions for the City’s long-
term pension and other post-employment benefits (OPEB) and strategies to structurally balance
and contain cost in the City’s General Fund on an ongoing basis.
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The economic impacts of the COVID-19 pandemic, and efforts to contain and mitigate the
spread of the virus resulted in a $40 million General Fund gap between revenues and expenses
in the FY 2021 Adopted Budget. This gap was balanced through significant service reductions
throughout the organization, concessions from the City’s labor groups, as well as substantive
reductions in the City’s capital investments, impacting catch-up and keep-up costs and funding
of new projects. Significant service reductions taken in FY 2021 persist this year due to both the
current impacts of the pending litigation, the recovery period of the pandemic. In addition, the
City faces significant unmet needs in areas such as affordable housing and transportation,
including but not limited to a significant capital investments in the railroad Caltrain train/grade
crossings. This report represents the next step of discussions with the Finance Committee and
City Council regarding a potential revenue generating ballot measure(s) to balance the financial
needs of the City.
In March 2020, the City Council, considering the uncertain economic impacts of the pandemic,
paused efforts to explore a revenue generating ballot measure. Resumption of this review was
later outlined in the Community and Economic Recovery Workplan and Council Priority in 2021.
On June 15, 2021, the Finance Committee reviewed the Workplan for the November 2022 Local
Ballot Measure(s) and Affordable Housing Funding Referral (CMR 12299), where the Finance
Committee recommended that the City Council:
• Approve the Ballot Measure Workplan, with a focus on development of a business tax
and a utility use-based tax,
• Refinement of estimates, evaluation of a stakeholder outreach plan and polling, and
• Additional information regarding affordable house.
These Finance Committee recommendations were considered by the City Council in their
August 16, 2021 meeting (CMR 12381). Consistent with past practice, the City Council directed
the Finance Committee be the main deliberative body for the development of the potential
revenue generating ballot measure and, through an iterative process outlined in the Ballot
Measure Workplan, that updates will be taken to the City Council for review through June 2022.
The Summary of Prior Work on Potential Revenue Generating Ballot Measures is included in
this attachment. At this meeting, the City Council approved the Ballot Measure Workplan for
the November 2022 General Election and directed the Finance Committee:
• Pursue a business tax and the preference of a square footage-based tax;
• Continue exploration of a utility use-based tax and options to incorporate revenue on
climate adaptability
• Refine estimates and continue evaluation of potential tax measures, and
• The Finance Committee to discuss and develop initial polling to inform future
exploration.
On the September 21, 2021 Finance Committee meeting (CMR 13469), the Committee directed
staff to continue this exploration by returning to the Committee with refined modeling and
additional information. The Finance Committee moved to directed staff to:
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A. Continue to evaluate a business tax based on square footage with a potential
protection/deference to small retail and services with a view towards simplicity in
administration ($10-$40 million dollars per year), with no sunset, an annual escalator,
and consider a minimum threshold of square footage
B. Model a on-bill charge increase in gas to restore the amount at risk from the Green
litigation
C. Polling should include:
i. Support for a business tax and characteristics of it
ii. Willingness to support an equity gas transfer
iii. Opinion and ranking of funding priorities such as services, infrastructure, and
climate action
D. Delegate review of the polls to the Finance Committee, pending ability to stay on the
timeline
E. Direct staff to communicate the Finance Committee’s preferences of the sunset and the
annual escalator to the Council.
Staff returned to the Finance Committee on October 19, 2021 (CMR 13648) with analysis
requested by the Finance Committee, along with additional key information to facilitate the
discussion for items A, B, and C of the Finance Committee’s motion. These components are
included in the above referenced staff report:
• Square footage tax (Attachment A, CMR 13468):
▪ Updated tax models, including revised revenue targets
▪ Comparison of a parcel tax and business license tax
• Utility on-bill tax refined calculations and discussion of options (Attachment B, CMR
13468)
• Draft initial polling outline for the Committee’s discussion and feedback (Attachment C,
CMR 13468)
• Summary of Prior Work on Potential Revenue Generating Ballot Measures (Attachment
D, CMR 13468)
The Finance Committee’s October 19th motion is detailed in the Recommendation section of
this report.
DISCUSSION & ANALYSIS
Exploration by the City Council and the Finance Committee of a potential revenue generating
ballot measure(s) continues and two discussions with the Finance Committee, the designated
body that provides structured public feedback, discussion, and recommendations throughout
the process, occurred in the Committee’s September 21 (CMR 13514) and October 19, 2021
(CMR 13468) meetings.
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Square Footage Tax
The Finance Committee was presented with preliminary modeling and analysis targeted at non-
residential square footage occupied in the City as a basis for a tax, with a revenue target range
of $10 to $40 million. The two tax methodologies for this unit of measure, a parcel tax and a
business license tax, carry a variety of advantages and potential challenges or trade-offs for
consideration. Staff’s analysis utilized data from the City’s property tax consultant, Coren and
Cone (an HdL Company), that was derived from the County of Santa Clara’s assessed value
information for the purposes of the annual property tax roll. The September 21st staff report
discussed the inherent limitations of this data for purposes of modeling a business license tax,
including the lack of building square footage information for some of the City’s major
landowners since the purpose of this data is focused on land assessed value rather than
building square footage.
In the September 21st meeting, the Finance Committee directed staff to continue to evaluate
the square footage tax by exploring potential protections/deference for small retail and
services within the City. In addition to this direction, staff has researched the key features of
two types of tax based on non-residential square footage. Relevant information is summarized
in Table A1: Comparison of a Parcel Tax and Business Tax in Attachment A of (CMR 13468).
There are key differences between these tax methods in two areas: voter approval threshold
and tax base/mandatory exclusions. Under a parcel tax, the requirements regarding who may
be taxed may pose administrative challenges and are a major policy consideration, as this tax
impacts the voter population at large and also the ability to institute a tax with a view towards
simplicity.
In addition to this comparison, staff provided revised calculations of revenue generated by a
square footage tax. During earlier conversations with the City Council and Finance Committee
regarding development of a potential business tax, there was significant interest, and direction,
by the City Council to exempt small businesses. The impact of excluding properties less than
20,000 square feet, which account for approximately 21.1 percent of total square footage area,
is presented in Table A2. Excluding businesses that occupy more than 20,000 square feet results
in an approximately 26 percentage point increase in the annual flat rate compared to a tax rate
applied to all square footage. Based on the model, for example, for square footage of
properties with taxable value, the annual rate for business that occupies 30,000 square feet
would increase from $1.67 per square foot to $2.11 per square foot.
Table A2 also presents a comparison between total square footage in the City and only taxable
square footage, per the data set. The calculation using only taxable square footage results in a
4.7 percentage point increase in the annual flat tax rate. In addition, in its September 21st
meeting, the Committee directed staff to broaden the revenue target range (previously $10 to
$30 million) by increasing the high end of the range to $40 million. Based on the Finance
Committee’s direction, staff has modeled a variety of scenarios that include the Finance
Committee revised revenue range target. The Finance Committee recommends the below
model be revised to calculate monthly rates of $0.05 to $0.20 per square foot, with thresholds
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for square footage size and possible exemptions for retail. Should the City Council support this
recommendation, staff intends to return to the Finance Committee in December with revised
analysis. It is expected that these current rates identified are minimum levels, and once
additional modeling for variables such as exemptions and leakage assumptions are included,
that in order to generate these revenue targets, rate per square foot will increase.
Table A2: Annual Flat Rate per Square Foot by Small, Medium and Large Footage
Medium
30,000 Square Feet
Large
100,000 Square Feet
Types of Businesses Office buildings, retail, specialty
shopping centers, service stations
International Hotel Brands,
manufacturing
Total Square Footage in
City, excluding less than
20,000 sf (Table A3)
$10 M Annual Fee: $15,125
Tax Rate: $0.50/SF
Annual Fee: $50,420
Tax Rate: $0.50/SF
$20 M Annual Fee: $30,250
Tax Rate: $1.01/SF
Annual Fee: $101,840
Tax Rate: $1.01/SF
$30 M Annual Fee: $45,380
Tax Rate: $1.51/SF
Annual Fee: $151,260
Tax Rate: $1.51/SF
$40 M Annual Fee: $60,505
Tax Rate: $2.02/SF
Annual Fee: $201,680
Tax Rate: $2.02/SF
Square footage of
properties with taxable
value, excluding less than
20,000 sf (Table A4)
$10 M Annual Fee: $15,840
Tax Rate: $0.53/SF
Annual Fee: $52,800
Tax Rate: $0.53/SF
$20 M Annual Fee: $31,680
Tax Rate: $1.06/SF
Annual Fee: $105,600
Tax Rate: $1.06/SF
$30.M Annual Fee: $37,530
Tax Rate: $1.58/SF
Annual Fee: $158,400
Tax Rate: $1.58/SF
$40.M Annual Fee: $63,390
Tax Rate: $2.11/SF
Annual Fee: $211,300
Tax Rate: $2.11/SF
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Additional discussion of the above comparison and the revised calculations of a parcel tax and a
business tax can be found in Attachment A of CMR 13468.
Utility On-Bill Tax
In the August 16, 2021 City Council meeting, the City Council directed staff to focus pursuit of a
utility use-based tax to replace revenues at risk due to the Green case and explore the option to
incorporate revenue to support the City’s climate adaptability initiative. Significant detail on the
options can be found in Attachment B. This attachment discusses two utility tax options,
modeled to replace the current gas GFET. Under either option, the current gas GFET would end
and potentially be replaced by:
1. Increasing or expanding the City’s UUT(s) codified in chapter 2.35 of the City’s municipal
code, which would continue to appear as a line item on utility bills, or
2. Modifying the 2009 GFET formula to transfer a percentage of gas utility gross revenues.
Under this option, the transfer could be displayed as a separate percentage of retail
service charges (as a separate line item on utility bills) or it could be embedded in utility
rates.
For additional details, please see Attachment B of CMR 13468. For context when reviewing
utility tax options, the City’s FY 2022 Adopted Budget includes $9.7 million for UUT assessed on
utility usage and the City’s current UUT rate is 5 percent. GFET revenues from the gas utility in
the FY 2022 Adopted Budget were $1.8 million.
Draft Initial Polling Outline
Staff has engaged with Fairbank, Maslin, Maullin, Metz & Associates (FM3) to design the draft
outline for initial polling, expected to be conducted in December 2021. The draft outline
(Attachment C, CMR 13468) that was reviewed by the Finance Committee on October 21st
includes questions to determine the support for a business tax and the characteristics of it; the
willingness to support a utility tax; and questions that test the ranking of funding priorities, with
services, infrastructure, and climate action as focus points. In its discussion on October 21st, the
Finance Committee provided the following comments regarding the draft outline of initial
polling:
• Seek guidance from the full Council on how potential uses of the tax revenues are
framed in the poll.
• Seek feedback from the full Council regarding potential business tax exemptions to poll
• Structuring the poll to solicit feedback for both the business tax and a parcel tax; using
split polling is an option
• Poll voter sentiment around a utility tax, including:
▪ Polling voter reaction to a measure that just replaces gas GFET funds at risk due
to the Green case
▪ Polling whether to frame the measure as a transfer of a percentage of gas utility
gross revenues or a separate on-bill utility tax on gas and electric bills
▪ Polling voter reaction to adding funding for climate action to the utility tax
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• General feedback and refinements of test ballot arguments, how to frame the tax rate,
and considerations of how to frame topics, including feedback on terms such as
“changing character of the community,” “infrastructure,” and “affordable housing.”
Attachment A of this staff report includes the Finance Committee’s feedback on the draft initial
poll outline. Staff has compiled a list of feedback and questions from the Finance Committee to
consider in the draft initial poll outline for the City Council’s consideration. For reference, the
results of the initial poll conducted in January 2020 can be found in CMR 11019. Areas to be
considered as part of this initial poll include:
1. How to describe the potential uses of funds in the polling, such as:
a. Maintaining the City's ability to fund basic City services
b. Restore City services cut during the pandemic-related economic downturn, such
as library hours, recreational services, and police and fire services
c. Investing in community-owned assets like roads, community centers, libraries,
parks, and public safety facilities
d. Funding affordable housing
e. Funding extraordinary community investment needs, such as Caltrain grade
separations
2. Whether to survey opinion on both a parcel tax and a business license tax, or just a
business license tax.
3. Which types of exemptions to include in a business license tax. Previously discussed:
a. An exemption for businesses under a square footage threshold. The threshold
could be unspecified in the first round of polling and become more specific in the
second round.
b. An exemption for retail.
c. An exemption for for-profit medical and educational facilities (non-profit
facilities are mandated to be exempted by the California Revenue and Tax Code).
d. Delegation of creation of exemptions to the City Council, so long as tax rates
were not increased as a result.
In the September 21, 2021 Finance Committee meeting, the Committee passed the motion to
seek direction from the City Council to delegate review of polls to the Finance Committee,
pending ability to stay on the ballot measure workplan timeline. For ease of reference, below
outlines the governance aspect (initially referred to in CMR 12299 that went to City Council on
August 16, CMR 12381) of this project.
Finance Committee: would serve as the public body to review periodic progress reports,
allowing for structured public discussion and the provision of feedback and recommendations
on the review and development of a potential revenue-generating local ballot measure. Staff
will manage, review, and synthesize work done in-house and by external consultants and
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incorporate stakeholder feedback into regular progress reports to the Finance Committee.
Ultimately, the Finance Committee would recommend their preferred potential revenue
generating local ballot measure(s) to the City Council for further action.
City Council: would serve as the governing body for policy direction at key decision points. This
includes direction to conduct polling, approval of alternatives to be evaluated, and decisions on
what should be placed on the November 2022 ballot.
In considering this recommendation from the Finance Committee, staff have outlined the
following variables for City Council consideration regarding the discussion of delegation to the
Finance Committee:
• Review poll outlines and provide feedback to the City’s opinion research consultant
• Review results of polls and direct staff to refine potential ballot measure(s)
•
• Recommend to the City Council key decisions regarding ballot measure as a result of poll
results
Conclusion & Next Steps
It is also important to recognize the compressed timeline to bring a ballot measure forward for
the November 2022 general election. Further narrowing the focus of the potential revenue
generating ballot measure is critical so that staff can continue advancing the Ballot Measure
Workplan that was approved by Council in August. Specifically, consideration by the City
Council of the Finance Committee’s recommended tax model for a square footage measured
business license tax that includes thresholds, possible exemptions for retail and any additional
industry exemptions for further staff analysis.
In addition, consideration by the City Council of the Finance Committee’s direction to staff to
model two methods for utility tax. The second, distribute the change across gas and electric as
an increase in the percentage of Utility Users Tax (UUT). The first, seeking voter approval in
modifying the GFET formula to transfer a percentage of gas utility gross revenue.
Finally, in regard to initial polling, in its September 21st meeting, the Finance Committee
recommended that the City Council consider that review of polls be delegated to the Finance
Committee, pending availability to stay on the ballot measure workplan timeline. In addition, in
the October 21st meeting, the Finance Committee recommended that the City Council
incorporate the Finance Committee’s feedback regarding the polling topics and to execute the
initial round of polling.
The below table recaps the Ballot Measure Workplan, as approved by the City Council in
August.
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Table 1: Ballot Measure Workplan Timeline
November 2021
Council:
- Confirm potential revenue-generating proposals, including refined
modeling and analysis
- Direction to complete initial polling and initial stakeholder outreach
December 2021
Finance Committee:
- Consideration of additional refinements and updates
Council/Committee (TBD):
- Review results of initial poll, timing to be December-February
January to
April 2022
Finance and Council:
- Provide iterative policy decisions and direction based on staff work
related to stakeholder outreach, polling, and draft legal documents
- Second refined round of polling to be reviewed by Finance and Council
Decision on revenue-generating ballot measure(s) to pursue
May to June 2022
Council:
- Final Approval of November 2022 Ballot Measures, including ballot
measure language
August 2022
Language submitted to Santa Clara County Registrar of Voters
November 2022
Election
Consultant support is required to augment staff on topics such as research, modeling and
analysis, polling, and stakeholder outreach and eventually drafting ballot measure and
ordinance language. Staff expects to return to the City Council for an appropriation request of
these funds and approval of consultant contracts, as needed (discussed in the Fiscal/Resource
Impact Section).
FISCAL/RESOURCE IMPACT
Implementation of this workplan to develop a revenue generating local ballot measure will
require significant resources that include internal staff, consultant expertise, as well as
stakeholder engagement. Resource needs will scale proportionately based on the ballot
measure option and the complexity of the measure that the Finance Committee and City
Council direct staff to pursue. Therefore, it is important that the scope of the potential ballot
measure(s) be clearly defined and effectively narrowed for staff to deploy the appropriate
resources to successfully progress through the workplan.
Overall, the City’s reduction in workforce has impacted services and operations in the past two
fiscal years. It is expected that this initiative will require an equivalent of approximately two full
time dedicated staff positions and will have an impact on other projects. In addition, support
will be required from outside consultants and engagement with internal stakeholders in key
departments. The City Council appropriated funding for this activity as part of the FY 2022
Preliminary 1st Quarter. Contracts will be brought forward for approval as appropriate.
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STAKEHOLDER ENGAGEMENT
The Ballot Measure Workplan integrates stakeholder engagement through constituent polling
and stakeholder outreach. Staff, throughout the process and from previous conversations, has
solicited input and feedback with the Finance Committee, the City Council, residents, and the
business community. Based on the Ballot Measure Workplan, staff plans to seek the City
Council’s direction to complete initial polling and initial stakeholder outreach. The City has
engaged with Fairbank, Maslin, Maullin, Metz & Associates (FM3) to develop the draft initial
polling outline. The stakeholder outreach strategy has yet to be finalized, as staff is engaging
with several revenue measure strategy and communications consulting firms.
ENVIRONMENTAL REVIEW
This activity is not a project under California Environmental Quality Act (CEQA) as defined in
CEQA Guidelines, section 15378, because it has no potential for resulting in either a direct or
reasonably foreseeable indirect physical change in the environment.
Attachments:
• Attachment13.a: Attachment A: Revised Draft Initial Poll Outline
• Attachment13.b: Attachment B: CMR 13648 Finance Committee October 19 Ballot
Measure Update and Refinements
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ATTACHMENT A
12100 Wilshire Boulevard, Suite 350 | Los Angeles, CA 90025
Phone: (310) 828-1183 | Fax: (310) 453-6562
1999 Harrison St., Suite 2020 | Oakland, CA 94612
Phone: (510) 451-9521 | Fax: (510) 451-0384
TO City of Palo Alto Staff and Council
FROM Dave Metz and Miranda Everitt
FM3 Research
RE: Updated Ballot Measure Survey Outline
DATE October 27, 2021
This memo outlines our recommended approach for the Palo Alto ballot measure structure survey, anticipating a
potential business tax measure in November 2022. This survey is structured to update baseline attitudes about
City government and issues of concern by re-asking about those topics in the same we have in prior years. It then
moves into design of a potential business tax measure: asking about general support for additional revenue, then
about potential mechanisms, project priorities for new funding, and preferences on measure structure. Voters
will also hear an exchange of pros and cons, modeling in brief the impact of "yes" and "no" campaigns. They will
also be briefly asked about a measure dealing with an equity transfer from the utility fund.
1. Survey introduction
2. Cell or landline, safety check
3. Right direction/wrong track (tracking to prior years)
4. Job rating - Palo Alto city government (tracking to prior years)
5. Approval rating on specific aspects of City management (tracking most to prior years)
a. Maintaining infrastructure
b. Managing budget/finances
c. Affordable housing
d. Using tax dollars efficiently
e. Transportation
6. Need for additional funding (tracking to prior years)
7. Need for additional funding to maintain and improve infrastructure (tracking to prior years)
8. Problem seriousness battery (tracking most to prior years)
a. Parking
b. Affordable housing and housing costs
c. Cost of living
d. The impacts of the coronavirus (economic and public health, or more general)
e. Climate change
f. Wildfire and/or smoke/air pollution
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g. Waste and inefficiency in local government
h. Condition of the local economy
i. Crime
j. Unhoused population / Homelessness
k. Traffic
l. Growth and development
m. Local tax rates
n. Airplane noise
o. Caltrain electrification/crossings
9. General support for or opposition to a business tax – rotating the order in which they are heard first
a. Parcel tax
b. Business license tax
10. Open-ended question on reason for support/opposition
11. General support for or opposition to GFET measure – rotating two approaches
a. Affirming the existing practice of transferring a portion of utility revenues to the City’s General
Fund to pay for other City services
b. Creating a climate fund to support new and existing City efforts to fight climate change
12. Stepping back, reasons the City may place a tax increase on the ballot. Would you support or oppose a
City tax increase if it went to …?
a. Maintaining the City's ability to fund basic City services
b. Restore City services cut during the pandemic-related economic downturn, such as library hours,
recreational services, and police and fire services
c. Investing in community-owned assets like roads, community centers, libraries, parks, and public
safety facilities
d. Funding affordable housing
e. Funding extraordinary community investment needs, such as Caltrain grade separations
13. Importance of potential projects/priorities, with variations in wording (tracking many to prior years)
a. Infrastructure
b. Streets/roads
c. Traffic congestion and parking
d. Access for people with disabilities
e. Unhoused / Homelessness
f. Operating hours for park, recreation, and community facilities
g. Caltrain electrification/crossings
h. Police and fire services
i. Library services
j. Shuttle programs
k. Sustainability and climate action plan goals
14. Support for or opposition to business tax components
a. Rate
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b. Tax structure, e.g. parcel tax or business tax
c. How it is calculated, e.g. square footage, number of employees or payroll
d. Potential exemptions
i. Beneath a certain square footage
ii. Retail
iii. For-profit medical and educational facilities
iv. Delegation of creation of exemptions to City Council
e. Sunset or length
f. CPI and escalators
15. Arguments in support of a measure, such as:
a. Fairness
b. Specific uses of the tax
c. Need for stability in funding
d. Loss of services without new funding
e. Scale of tax (e.g. 1% of commercial rent)
f. Comparison to other cities nearby
16. Re-vote
17. Arguments opposing a measure, such as:
a. Too many taxes/cost of living
b. Potential for government waste/mismanagement
c. Hurts local businesses during economic recovery from COVID
18. Final vote
19. Demographics
a. Work in Palo Alto
b. Own a business in Palo Alto
c. Education
d. Ethnicity/race
e. Income
f. Gender
20. Voter file information (will not need to ask this)
a. Party
b. Age
c. Past election participation
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City of Palo Alto (ID # 13648)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 10/19/2021
City of Palo Alto Page 1
Title: Discuss Updates and Recommend Further Refinement of Potential
Revenue Generating Local Ballot Measures, and Review Draft Initial Polling
Outline
From: City Manager
Lead Department: Administrative Services
RECOMMENDATION
Staff recommends that the Finance Committee:
A. Review the refined calculations of a potential tax on non-residential square footage and
recommend that the City Council direct staff for further refinement of a potential
business tax, including the following tax structure components:
1. Tax method of the square footage tax (i.e. parcel or business tax), considering
simplicity in administration of the tax
2. Exemptions by City Council policy
3. Taxation level as a dollar value or percent of General Fund
4. Rate structure (i.e. flat or tiered)
5. Other tax attributes, such as general or specific tax, annual escalator, sunset
clause, or minimum threshold of square footage
B. Review the refined calculations of a potential utility on-bill tax for gas usage and
consider potential exemptions by City Council policy, the taxation level, rate structure,
and other tax attributes
C. Review and refine draft outline of initial polling and that the City Council direct staff to
proceed with initial polling.
EXECUTIVE SUMMARY
This report continues the Finance Committee’s discussion and work to explore the
development of a potential revenue generating local measure for the November 2022 ballot
and seeks to identify and refine structure and components of a potential business tax ballot
measure and/or utility on-bill tax, through iterative conversations with the Finance Committee
and City Council. The City’s current financial condition, elevated by economic impacts of the
pandemic and the City’s utility transfer litigation, is the impetus for restarting this conversation.
The City of Palo Alto has continuously worked towards fiscal sustainability over the past decade
through several actions, and most recently outlined in the Community and Economic Recovery
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workplan and City Council Priority in 2021, includes exploration of a revenue generating local
tax measure as a component. The economic impacts and uncertainty of the novel coronavirus
pandemic resulted in a $40 million gap between revenues and expenses in the General Fund
that were bridged through significant reductions and cost containment measures. At the onset
of the pandemic, the City Council decided to pause efforts in exploration of a ballot measure.
In addition, in FY 2021 a local court held that a portion of the City’s annual transfer from the gas
and electric utilities could no longer lawfully continue, absent voter approval. The results of the
lawsuit will have important implications for the City, as well as other municipal utilities and
cities in California. On September 20, 2021, the City Council voted to appeal the trial court’s
decision in this class action lawsuit.
This report contains key information that will facilitate this discussion by providing, per the
Finance Committee’s direction:
• Square footage tax (Attachment A):
▪ Updated tax models, including revised revenue targets
▪ Legal framework around a square footage-based parcel tax and business tax
• Utility on-bill tax refined calculations and discussion of options (Attachment B)
• Draft initial polling outline for the Committee’s discussion and feedback (Attachment C)
• Summary of Prior Work on Potential Revenue Generating Ballot Measures (Attachment
D)
BACKGROUND
The City’s efforts in advancing fiscal sustainability have grown over the past decade. In 2019,
several actions and plans were specifically outlined in the Fiscal Sustainability Workplan. The
goal of the workplan was to continue to make proactive progress towards fiscal sustainability to
maintain the quality of life that the City of Palo Alto supports through its services. Elements of
the workplan included proactive funding contributions for the City’s long-term pension and
other post-employment benefits (OPEB) and strategies to structurally balance and contain cost
in the City’s General Fund on an ongoing basis.
The economic impacts of the COVID-19 pandemic, and efforts to contain and mitigate the
spread of the virus resulted in a $40 million General Fund gap between revenues and expenses
in the FY 2021 Adopted Budget. This gap was balanced through significant service reductions
throughout the organization, concessions from the City’s labor groups, as well as substantive
reductions in the City’s capital investments, impacting catch-up and keep-up costs and funding
of new projects. In FY 2022, the Adopted Budget was adjusted for both the current impacts of
the pending litigation, the recovery period of the pandemic, and reliance on a one-time funding
bridge to delay further service reductions beyond those approved in the FY 2021 Adopted
Budget. Significant service reductions taken in FY 2021 persist this year and on an ongoing basis
unless revenue levels can be brought in alignment with expense levels. This report represents
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the next step of discussions with the Finance Committee and City Council regarding a potential
revenue generating ballot measure to balance the structural financial needs of the City.
In March 2020, the City Council, considering the uncertain economic impacts of the pandemic,
paused efforts to explore a revenue generating ballot measure. Resumption of this review was
later outlined in the Community and Economic Recovery Workplan and Council Priority in 2021.
On June 15, 2021, the Finance Committee reviewed the Workplan for the November 2022 Local
Ballot Measure(s) and Affordable Housing Funding Referral (CMR 12299), where the Finance
Committee recommended that the City Council:
▪ Approve the Ballot Measure Workplan, with a focus on development of a business tax
and a utility use-based tax,
▪ Refinement of estimates, evaluation of a stakeholder outreach plan and polling, and
▪ Additional information regarding affordable housing.
These Finance Committee recommendations were considered by the City Council in their
August 16, 2021 meeting (CMR 12381). Consistent with past practice, the City Council directed
the Finance Committee be the main deliberative body for the development of the potential
revenue generating ballot measure and, through an iterative process outlined in the Ballot
Measure Workplan, that updates will be taken to the City Council for review through June 2022.
The Summary of Prior Work on Potential Revenue Generating Ballot Measures is included in
this attachment. At this meeting, the City Council approved the Ballot Measure Workplan for
the November 2022 General Election and directed the Finance Committee:
▪ Pursue a business tax and the preference of a square footage-based tax;
▪ Continue exploration of a utility use-based tax and options to incorporate revenue on
climate adaptability
▪ Refine estimates and continue evaluation of potential tax measures, and
▪ The Finance Committee to discuss and develop initial polling to inform future
exploration.
In the September 21, 2021 Finance Committee meeting, the Committee directed staff to
continue this exploration by returning to the Committee with refined modeling and additional
information. The Finance Committee’s motion is as follows:
MOTION: Council Member Filseth moved, seconded by Chair Cormack to recommend the
City Council direct staff to:
A. Continue to evaluate a business tax based on square footage with a potential
protection/deference to small retail and services with a view towards simplicity in
administration ($10-$40 million dollars per year), with no sunset, an annual
escalator, and consider a minimum threshold of square footage
B. Model a Utility Users Tax increase in gas to restore the amount at risk from the
Green litigation
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C. Polling should include:
a. Support for a business tax and characteristics of it
b. Willingness to support an equity gas transfer
c. Opinion and ranking of funding priorities such as services, infrastructure, and
climate action
D. Delegate review of the polls to the Finance Committee, pending ability to stay on the
timeline
E. Direct staff to communicate the Finance Committee’s preferences of the sunset and
the annual escalator to the Council.
MOTION PASSED: 3-0
This report contains key information that will facilitate this discussion for items A, B, and C of
the Finance Committee’s motion, by providing:
• Square footage tax (Attachment A):
▪ Updated tax models, including revised revenue targets
▪ Legal parameters around a square footage-based parcel tax and business tax
• Utility on-bill tax refined calculations and discussion of options (Attachment B)
• Draft initial polling outline for the Committee’s discussion and feedback (Attachment C)
• Summary of Prior Work on Potential Revenue Generating Ballot Measures (Attachment
D)
DISCUSSION & ANALYSIS
The Discussion & Analysis section of this report outlines key components for the Finance
Committee’s discussion regarding a square footage tax, using either a parcel tax or business
license tax methodology; additional information for a utility on-bill tax; and a draft outline of
the initial polling. In addition, each of these topics is further discussed in the attachments of
this report, which are referenced within each title below.
The City Council directed staff to further explore a potential revenue generating local tax
measure as a means of generating additional revenue from businesses operating within the
City, with the preference of using non-residential (i.e. commercial) square footage occupancy as
the unit of measure for such a tax. In addition, the City Council directed staff to explore a
potential utility on-bill tax, and review options to support climate adaptability goals. This is the
second planned discussion with the Finance Committee regarding potential revenue generating
local tax measures for the November 2022 election. This report continues this discussion and
outlines staff’s completed research and analysis since the September 21, 2021 Finance
Committee (CMR 13514) and summarizes implications of each tax base. This direction was
further refined by the Finance Committee on September 21, 2011, where the Committee
directed staff to model a utility on-bill tax to restore the amount at risk from the Utility Transfer
Litigation.
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Square Footage Tax (Attachment A)
A discussion of procedural requirements, approval thresholds and exemptions for a Parcel Tax
(non-residential) and Business Tax (measured by square footage occupied) is at Attachment A.
Modeling and Analysis
The key component of the square footage tax is determination of the tax method: parcel tax or
business license tax. Calculations using data from the City’s property tax consultant, Coren and
Cone (an HdL Company) were presented to the Finance Committee in the September 21, 2021
meeting. As in the discussion on September 21st, staff considers the 20,000 square foot
threshold to be a baseline for small retail and services that may also include other
neighborhood amenities (i.e. grocery stores, restaurants). Since the data from Coren and Cone
are from the County of Santa Clara and is used for property tax analysis, inherent limitation of
data, including category and classes, and lack of information on building square footage,
preclude precise revenue outcomes; it is important to acknowledge that these models are
calculations using parcel data. In addition, revenue targets modeled below will shrink as the
City Council selects exemptions and further refinements.
Table A2: Annual Flat Rate per Square Foot by Small, Medium, and Large Footage below models
a flat square footage tax for businesses that occupy more than 20,000 square feet; Table A2 can
be found in its complete form in Attachment A.
Table A2: Annual Flat Rate per Square Foot by Small, Medium, and
Large Footage
Medium
30,000 Square Feet
Large
100,000 Square Feet
Types of Businesses Office buildings, retail,
specialty shopping
centers, service stations
International Hotel
Brands, manufacturing
Total Square
Footage in City,
excluding less
than 20,000 sf
(Table A3)
$10 M Annual Fee: $15,125
Tax Rate: $0.50/SF
Annual Fee: $50,420
Tax Rate: $0.50/SF
$20 M Annual Fee: $30,250
Tax Rate: $1.01/SF
Annual Fee: $101,840
Tax Rate: $1.01/SF
$30 M Annual Fee: $45,380
Tax Rate: $1.51/SF
Annual Fee: $151,260
Tax Rate: $1.51/SF
$40 M Annual Fee: $60,505
Tax Rate: $2.02/SF
Annual Fee: $201,680
Tax Rate: $2.02/SF
Square footage of
properties with
taxable value,
excluding less
than 20,000 sf
(Table A4)
$10 M Annual Fee: $15,840
Tax Rate: $0.53/SF
Annual Fee: $52,800
Tax Rate: $0.53/SF
$20 M Annual Fee: $31,680
Tax Rate: $1.06/SF
Annual Fee: $105,600
Tax Rate: $1.06/SF
$30.M Annual Fee: $37,530
Tax Rate: $1.58/SF
Annual Fee: $158,400
Tax Rate: $1.58/SF
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Table A2: Annual Flat Rate per Square Foot by Small, Medium, and
Large Footage
Medium
30,000 Square Feet
Large
100,000 Square Feet
$40.M Annual Fee: $63,390
Tax Rate: $2.11/SF
Annual Fee: $211,300
Tax Rate: $2.11/SF
A key component that is detailed in Attachment A is that the impact of excluding properties
that occupy less than 20,000 square feet, approximately 21.1 percent of total square footage
area. Excluding businesses that occupy more than 20,000 square feet results in a 26.8
percentage point increase in the annual flat rate. In addition, Table A2 also presents a
comparison between total square footage in the City and only taxable square footage, per the
data set. The calculation using only taxable square footage increases the annual flat tax rate by
4.7 percent points.
Utility On-Bill Tax (Attachment B)
In the August 16, 2021 City Council meeting, the City Council directed staff to focus pursuit of a
utility use-based tax and explore the option to incorporate revenue to support the City’s climate
adaptability initiative. The City’s FY 2022 Adopted Budget includes $9.7 million for UUT assessed on
utility usage and the City’s current UUT rate is 5 percent. Significant detail on the options can be
found in Attachment B. This attachment discusses two utility tax options, modeled to replace the
current gas GFET. Under either option, the current gas GFET would end and potentially be replaced
by:
1) Increasing or expanding the City’s UUT(s) codified in chapter 2.35 of the City’s municipal
code, which would continue to appear as a line item on utility bills, and
2) Modifying the 2009 GFET formula to transfer a percentage of gas utility gross revenues.
Under this option, the transfer could be displayed as a separate percentage of retail service
charges (as a separate line item on utility bills) or it could be embedded in utility rates.
For additional details, please see Attachment B.
Draft Initial Polling Outline (Attachment C)
Staff has engaged with Fairbank, Maslin, Maullin, Metz & Associates (FM3) to design the draft
outline for initial polling, expected to be conducted in December 2021. The draft outline
includes questions to determine the support for a business tax and the characteristics of it; the
willingness to support a utility tax; and questions that test the ranking of funding priorities, with
services, infrastructure, and climate action as focus points. The results of the initial poll
conducted in January 2020 can be found in CMR 11019.
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Conclusion & Next Steps
It is also important to recognize the compressed timeline to bring a ballot measure forward for
the November 2022 general election. Further narrowing the focus of the potential revenue
generating ballot measure is critical so that staff can continue advancing the Ballot Measure
Workplan that was approved by Council in August. Specifically, providing direction on the tax
method (parcel tax or business license tax), the desired revenue range that this tax is estimated
to generate, and the Finance Committee’s direction on the proposed rate for gas utility use-
based tax to restore the amount at risk under the Green litigation.
This report outlines staff’s further research regarding the legal framework surrounding a
business license tax using square footage as the unit of measure. Upheld case law regarding the
parcel tax method requires that the parcel tax be applied to the entire area that is voting on the
measure, which would include residential properties. Options to minimize impact on non-
commercial properties include creating a tiered tax that assesses a nominal amount on non-
commercial parcels or to institute a separate rebate program that would “refund” residential
property owners, as well as any classes/categories designated by the City Council (i.e. small
retail and service businesses). The scope and resources to implement a rebate program and yet
to be determined. A rebate program would be considerations under the “Administrability” and
“Economic Benefits” components of the EASE Framework where the cost of administration and
compliance of the tax may be higher and the efficiency of the tax may be lower, due to the
potential complexities of a rebate program and need for residents and protected
classes/categories must apply for a rebate. Despite these potential challenges, a parcel tax can
be assessed on properties that are exempted from ad valorem property tax, including religious,
educations, charitable institutions, hospitals, and non-profits entities. Based on work
performed by the City’s consultant, Matrix Consulting Group, in 2019, the City’s largest
employers are in the professional services, healthcare, and social assistance (CMR 10445).
While the employee headcount data has most likely changed since pre-pandemic levels, parcel
data indicates that the property owners with large footprints within the City may fall into
categories that a parcel tax can be legally assessed.
A business license tax has the flexibility to be a general tax, with simple majority passage, or a
special tax, with 2/3 approval passage. The City has broad discretion in creating different
categories and classes or taxation, variable rates within these categories/classes, or can exempt
specific categories/classes, as long as there is a reasonable basis and/or rationale tied with
these choices. A business license tax using square footage as the unit of measure would be
assessed on the square footage that is being used by the business, therefore there the potential
for “square footage leakage” is higher than a parcel tax. For example, in an office complex with
a variety of businesses, only the square feet occupied by the business is taxed; common areas
such as hallways or a parking lot would not be included in the calculation of the business license
tax. Finally, banks and financial institutions, non-profit entities, including medical and
educational, are exempt from a business license tax. A key consideration with this legal
exemption is although the landowner may be a non-profit entity, the business license tax is
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driven by the type of business activity that is conducted in the space, rather than the taxable
status of the landowner.
The below table recaps the Ballot Measure Workplan, as approved by the City Council in
August.
Consultant support is required to augment staff on topics such as research, modeling and
analysis, polling, and stakeholder outreach and eventually drafting ballot measure and
ordinance language. Staff expects to return to the City Council for an appropriation request of
these funds and approval of consultant contracts, as needed (discussed in the Fiscal/Resource
Impact Section).
FISCAL/RESOURCE IMPACT
Implementation of this workplan to develop a revenue generating local ballot measure will
require significant resources that include internal staff, consultant expertise, as well as
Table 1: Ballot Measure Workplan Timeline
October 2021
Finance:
Accept refined revenue estimates
Discuss and provide guidance and initial polling and stakeholder outreach
Council:
Discuss roles of Councilmembers, Community Leaders, and Advocates
November 2021
Council:
Confirm potential revenue-generating proposals, including revised revenue
estimates
Direction to complete initial polling and initial stakeholder outreach
December 2021
Council:
Decision on revenue-generating ballot measure(s) to pursue
January to
April 2022
Finance and Council:
Provide iterative policy decisions and direction based on staff work related
to stakeholder outreach, polling, and draft legal documents
Second refined round of polling to be reviewed by Finance and Council
May to June 2022
Council:
Final Approval of November 2022 Ballot Measures, including ballot
measure language
August 2022
Language submitted to Santa Clara County Registrar of Voters
November 2022
Election
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stakeholder engagement. Resource needs will scale proportionately based on the ballot
measure option and the complexity of the measure that the Finance Committee and City
Council direct staff to pursue. Therefore, it is important that the scope of the potential ballot
measure(s) be clearly defined and effectively narrowed for staff to deploy the appropriate
resources to successfully progress through the workplan.
Overall, the City’s reduction in workforce has impacted services and operations in the past two
fiscal years. It is expected that this initiative will require an equivalent of approximately two full
time dedicated staff positions and will have an impact on other projects. In addition, support
will be required from outside consultants and engagement with internal stakeholders in key
departments. Staff will return to the City Council for appropriation of funds and approval of
consultant contracts, as appropriate.
STAKEHOLDER ENGAGEMENT
The Ballot Measure Workplan integrates stakeholder engagement through constituent polling
and stakeholder outreach. Staff, throughout the process and from previous conversations, has
solicited input and feedback with the Finance Committee, the City Council, residents, and the
business community. Based on the Ballot Measure Workplan, staff plans to seek the City
Council’s direction to complete initial polling and initial stakeholder outreach. The City has
engaged with Fairbank, Maslin, Maullin, Metz & Associates (FM3) to develop the draft initial
polling outline. The stakeholder outreach strategy has yet to be finalized, as staff is engaging
with several revenue measure strategy and communications consulting firms.
ENVIRONMENTAL REVIEW
This activity is not a project under California Environmental Quality Act (CEQA) as defined in
CEQA Guidelines, section 15378, because it has no potential for resulting in either a direct or
reasonably foreseeable indirect physical change in the environment.
.
Attachments:
• Attachment A: Preliminary Square Footage Ballot Measure Options
• Attachment B: Preliminary Utility Ballot Measure Options
• Attachment C: Draft Initial Poll Outline
• Attachment D: Summary of Prior Work on Potential Revenue Generating Ballot
Measures
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ATTACHMENT A
Attachment A - 1
Preliminary Square Footage Ballot Measure Options
Through the City of Palo Alto’s conversations exploring a potential business tax, the City Council
directed staff to pursue a business tax with the priority of square footage as the basis for such a
tax. To date, the City Council has not yet chosen the underlying tax method (i.e. parcel tax or
business tax measured by square footage occupied), and there are material differences to
different approaches including a different threshold for voter passage and legal guidelines and
issues involving each tax method. These specific questions are discussed in detail in this
attachment, along with refined tax modeling, as directed by the Finance Committee in the
September 21, 2021 meeting. This attachment includes:
• Procedural requirements for parcel taxes and business taxes
• Policy exemption options that consider deference to small businesses based on a
minimum threshold of square footage,
• Revised tax model with an updated range of revenue targets ($10-$40 million per year)
on non-residential square footage,
• Preliminary calculations that show what revenue a potential tax on non-residential
square footage could generate in different scenarios
Two Forms of Tax Based on Non-Residential Square Footage: Non-Residential Parcel Tax and
Business Tax Measured by Square Footage Occupied
Staff has researched the key features of two types of tax based on non-residential square
footage. Relevant information is summarized in Table A1: Comparison of a Parcel Tax and
Business Tax and discussed below. Both tax methodologies have a fair amount of flexibility in
use of revenues. However, there are key differences between these tax methods in two areas:
voter approval threshold and tax base/mandatory exclusions. Under a parcel tax, the
requirements regarding who may be taxed may pose administrative challenges and is a major
policy consideration, as this tax impacts the voter population at large and also the ability to
institute a tax with a view towards simplicity.
Table A1: Comparison of Parcel Tax and a Business Tax
Parcel Tax
(Non-Residential Properties)
Business License Tax, Measured
by Square Footage Occupied
Voter Approval
Requirement
Requires 2/3 approval,
considered to be a special tax
City may elect either:
General Tax, simple majority
approval – if proceeds are for
general City purposes; or
Special Tax, 2/3 approval – if
proceeds are committed to a
defined purpose
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ATTACHMENT A
Attachment A - 2
Table A1: Comparison of Parcel Tax and a Business Tax
Parcel Tax
(Non-Residential Properties)
Business License Tax, Measured
by Square Footage Occupied
Requirements Regarding
Who May be Taxed
Traditional parcel taxes apply to
all parcels within a jurisdiction
(though rates may vary by
property type). At least one
jurisdiction has adopted a
parcel tax that applies to a
particular property type with
the jurisdiction. Staff will
provide further information to
Council on this issue.
City has broad discretion to
define the entities to be taxed,
provided that the tax is applied
to business activity carried on
within the jurisdiction. The City
may apply the tax by type or
size of locally-present business
activity, may create different
categories of taxation, may vary
rates between categories, or
exempt categories, so long as
there is some reasonable and
rational basis for the categories
and distinctions.
Requirements Regarding
Use of Proceeds
Parcel taxes are by definition
special taxes, meaning that
proceeds are dedicated to a
defined purpose. The City has
discretion to define the purpose
narrowly (such as a single
service line) or broadly (listing a
wide variety of City programs
and services)
The City may choose a general
tax, which means proceeds are
available for any City purpose
(with the option that the City
Council may indicate by
ordinance its intention
regarding use of the proceeds),
or a special tax, which must be
dedicated to a defined purpose.
Mandatory Exemptions Applies broadly. Property tax
exemptions in the California
Constitution for religious,
educational, and charitable
institutions; hospitals; and non-
profits entities, are limited to ad
valorem taxes and do not apply
to locally-adopted parcel taxes.
Statutory tax exemptions for
banks and financial
corporations do not apply to
property taxes, including locally-
adopted parcel taxes.
Banks and financial
corporations are exempt from
this type of local tax (Cal. Rev. &
Tax. Code §23182); non-profit
entities, including medical and
educational institutions, are
also exempt (Cal. Rev. & Tax.
Code § 7284.1)
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ATTACHMENT A
Attachment A - 3
Parcel Tax
Since it is a tax on a property, a parcel tax must be considered as a special tax and requires 2/3
voter approval. Definition of the use of revenue can be scaled to be very narrow, listing one or
two lines of service or capital investment needs, or very broad, listing many lines of service and
general capital investment needs. Constitutional exemption from ad valorem property tax for
religious, educational, charitable institutions, hospitals, and non-profit entities, does not apply
to a parcel tax. Statutory exemption from local taxation for banks and financial corporations
also does not apply to a parcel tax.
Traditional parcel taxes apply broadly to parcels within the jurisdiction, though rates may vary
by property type. Recently, at least one jurisdiction has adopted a parcel tax that applies only to
certain commercial parcels within the jurisdiction. Staff will provide further confidential advice
on this issue.
Parcel categories and descriptions (driven by “use codes”) provide a limited range of categories,
therefore the ability to craft specific policy exemptions is finite. A second, more broad option
that considers potential protection/deference to small retail and services, would be the
development of separate business support program that could assist small retail and services
that lease commercial space and may be exposed to landlords who pass on the tax. This option
requires further exploration by staff, including potential structure, guidelines, and process and
budgetary resources required to administrate the program. These resources would be scaled
based on the complexity of the program.
Unlike a business license tax, a parcel tax would apply to religious, educational, charitable
institutions, hospitals, and non-profits; the ad valorem property tax exemptions permitted to
these entities do not apply to a parcel tax. Banks and financial corporations would also be
subject to a parcel tax.
Business License Tax
Although the more common business tax unit of measure is the gross receipts method, a
business tax using square footage of the business is allowed under California law. The California
Government Code and the Business Professions Code, authorize local governments, including
charter cities, to impose a business license tax based on a unit of measure that fairly reflects
the proportion of the taxed activity carried on within the taxing jurisdiction. An example of a
nearby municipal agency that assesses a business license tax based on the square footage unit
of measure is the City of Cupertino. A business license tax can be structured as a general tax,
requiring a simple majority for passage, or a special tax, requiring 2/3 majority approval for
passage. This distinction is based on whether revenues generated from the tax will be used for
general government purposes or will be restricted in any way, which would designate the tax as
a special tax.
Unlike a parcel tax, banks and financial institutions and non-profit entities, including medical
and educational institutions, are exempt from a business license tax. Compared to a parcel tax,
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ATTACHMENT A
Attachment A - 4
the business license tax methodology provides more flexibility and broad discretion to create
different categories of entities to be taxed, provided that there is some reasonable and rational
basis for these categories and distinctions. For example, if the Council wishes to exempt small
retail and service businesses, the ballot measure language would include language defining
these categories and classes. This approach poses substantially less administrative burden in
assessing the tax.
Revised Calculations of Revenue Generated by a Square Footage Tax
Based on available data detailed later in this report, non-residential square footage varies
between the total 25.140 million square feet of non-residential space in the City of Palo Alto
(Table A3) and 24.003 million square feet for properties with taxable value (Table A4). The
calculation of taxable square footage likely reflects the available square footage for a business
tax and models the annual rates necessary to reach different revenue targets identified by the
City Council, before any exemptions are assumed. It is critical to understand that these very
calculations that are modeled using parcel data and are driven by property owner data and
categories designated by the County of Santa Clara, therefore the categories described in staff’s
models does not necessarily correlate to the business activity performed in the space.
These models are derived from simple mathematical calculations from parcel data as described.
Rates and impacts will change based on the methodology selected (parcel tax versus business
tax) and any policy exemptions that are selected by the City Council. Should the City Council
choose to include additional exceptions under the business license tax methodology rate, an
adjusted increase by a corresponding amount would be required to capture the desired level of
revenue. If a parcel tax is selected, the option to protect certain business categories would be
implemented via a separate business support program, as described earlier in this attachment.
During earlier conversations with the City Council and Finance Committee regarding
development of a potential business tax, there was significant interest, and direction, by the
City Council to exempt small businesses. The impact of excluding properties less than 20,000
square feet, which account for approximately 21.1 percent of total square footage area, is
presented in Table A2. Excluding businesses that occupy more than 20,000 square feet results
in a 26.8 percentage point increase in the annual flat rate compared to a tax rate applied to all
square footage.
In addition, Table A2 also presents a comparison between total square footage in the City and
only taxable square footage, per the data set. The calculation using only taxable square footage
results in a 4.7 percentage point increase in the annual flat tax rate.
Based on the Finance Committee’s direction, staff has modeled a variety of scenarios that
include the Finance Committee revised revenue range target, $10-$40 million in tax revenue
annually.
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ATTACHMENT A
Attachment A - 5
Table A2: Annual Flat Rate per Square Foot by Small, Medium and Large Footage
Small
2,500 Square Feet
Medium
30,000 Square Feet
Large
100,000 Square Feet
Types of Businesses Cafes/coffee shops, small
local/neighborhood
businesses and shops,
small commercial
Office buildings, retail,
specialty shopping
centers, service stations
International Hotel
Brands, manufacturing
Total Square
Footage in City
(Table A3)
$10 M Annual Fee: $995
Tax Rate: $0.40/SF
Annual Fee: $11,940
Tax Rate: $0.40/SF
Annual Fee: $39,800
Tax Rate: $0.40/SF
$20 M Annual Fee: $1,990
Tax Rate: $0.80/SF
Annual Fee: $23,880
Tax Rate: $0.80/SF
Annual Fee: $79,600
Tax Rate: $0.80/SF
$30 M Annual Fee: $2,985
Tax Rate: $1.20/SF
Annual Fee: $35,820
Tax Rate: $1.20/SF
Annual Fee: $119,400
Tax Rate: $1.20/SF
$40 M Annual Fee: $3,980
Tax Rate: $1.60/SF
Annual Fee: $47,735
Tax Rate: $1.60/SF
Annual Fee: $159,110
Tax Rate: $1.60/SF
Square footage of
properties with
taxable value
(Table A4)
$10 M Annual Fee: $1,045
Tax Rate: $0.42/SF
Annual Fee: $12,50
Tax Rate: $0.42/SF
Annual Fee: $41,660
Tax Rate: $0.42/SF
$20 M Annual Fee: $2,085
Tax Rate: $0.83/SF
Annual Fee: $24,995
Tax Rate: $0.83/SF
Annual Fee: $83,320
Tax Rate: $0.83/SF
$30 M Annual Fee: $3,125
Tax Rate: $1.25/SF
Annual Fee: $37,495
Tax Rate: $1.25/SF
Annual Fee: $124,980
Tax Rate: $1.25/SF
$40 M Annual Fee: $4,165
Tax Rate: $1.67/SF
Annual Fee: $49,995
Tax Rate: $1.67/SF
Annual Fee: $166,645
Tax Rate: $1.67/SF
Total Square
Footage in City,
excluding less
than 20,000 sf
(Table A3)
$10 M N/A Annual Fee: $15,125
Tax Rate: $0.50/SF
Annual Fee: $50,420
Tax Rate: $0.50/SF
$20 M N/A Annual Fee: $30,250
Tax Rate: $1.01/SF
Annual Fee: $101,840
Tax Rate: $1.01/SF
$30 M N/A Annual Fee: $45,380
Tax Rate: $1.51/SF
Annual Fee: $151,260
Tax Rate: $1.51/SF
$40 M N/A Annual Fee: $60,505
Tax Rate: $2.02/SF
Annual Fee: $201,680
Tax Rate: $2.02/SF
Square footage of
properties with
taxable value,
excluding less
than 20,000 sf
(Table A4)
$10 M N/A Annual Fee: $15,840
Tax Rate: $0.53/SF
Annual Fee: $52,800
Tax Rate: $0.53/SF
$20 M N/A Annual Fee: $31,680
Tax Rate: $1.06/SF
Annual Fee: $105,600
Tax Rate: $1.06/SF
$30.M N/A Annual Fee: $37,530
Tax Rate: $1.58/SF
Annual Fee: $158,400
Tax Rate: $1.58/SF
$40.M N/A Annual Fee: $63,390
Tax Rate: $2.11/SF
Annual Fee: $211,300
Tax Rate: $2.11/SF
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ATTACHMENT A
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As in the legal framework section of this attachment, a business tax would have necessary
exemptions by state and federal statue and would therefore shrink the available square footage
that a tax could be assessed on, resulting in corresponding increases to the rates. In addition,
parcel data is limited to categories designated by the County of Santa Clara and does not
necessarily correlate to the type of business activity that is conducted on the property.
Review of Available Square Footage Data
Through conversations with the City’s property tax consultant, Coren and Cone (an HdL
company), the City procured parcel information for properties within the City of Palo Alto. This
includes a breakdown of the categorization of the parcel, such as commercial or industrial, as
well as the taxable valuation of the property, parcel square footage, and building square
footage. The data set is generally consistent with information previously presented to the City
Council as part of CMR 10445, which detailed approximately 25.8 million square feet of non-
residential space available for rent in the City of Palo Alto.
Although this data set is generally consistent with the information previously presented to the
City Council, staff has identified gaps in the data set. Notably, 746 of 20,933 parcels (or
approximately 3.5 percent) did not include building square footage data. For example, many of
Stanford’s properties do not list a building square footage, including both the new 824,000
square foot hospital finished in November 2019 and the 521,000 square foot Lucille Packard
Children’s Hospital completed in 2017. The preliminary tables and calculations in this report will
be further refined as the process continues and the conversation narrows and focuses. Staff will
be able to prioritize resolving gaps in the data consistent with City Council’s direction on next
steps. Given the lack of information on building square footage from various parcels – including
many owned by Stanford - the differences between the base calculation and the exclusion of
those with a taxable assessed value of zero is likely lower than it will be in later calculations.
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ATTACHMENT A
Attachment A - 7
Table A3: Total Square Footage by Size by Category
Size Commercial
Govt.
Owned Industrial Inst. Misc. Rec. Vacant
Grand
Total
% of
Total
Running
%
1 -2,000 163,025 - 2,910 6,436 784 1,980 28,485 203,620 0.8%
2,001 - 5,000 886,416 - 119,663 6,539 - 13,563 39,257 1,065,438 4.2% 5.0%
5,001 - 8,000 905,355 - 138,249 6,420 - 21,126 6,112 1,077,262 4.3% 9.3%
8,001 - 12,000 926,898 10,120 226,735 11,392 11,786 - - 1,186,931 4.7% 14.1%
12,001 - 16,000 639,260 29,112 202,324 27,791 - 29,042 - 927,529 3.7% 17.7%
16,001 - 20,000 664,726 - 181,080 - - - - 845,806 3.4% 21.1%
20,001 - 40,000 1,991,079 - 499,571 23,276 - 153,046 - 2,666,972 10.6% 31.7%
40,001 - 75,000 1,971,313 - 677,243 109,528 - - - 2,758,084 11.0% 42.7%
75,001 - 100,000 1,234,293 75,045 859,708 - - - - 2,169,046 8.6% 51.3%
100,001 - 200,000 3,579,181 - 262,125 - - - - 3,841,306 15.3% 66.6%
200,001 - 300,000 1,977,847 - 628,724 - - - - 2,606,571 10.4% 77.0%
300,001 - 500,000 458,842 - 1,047,936 - - - - 1,506,778 6.0% 83.0%
500,001 - 750,000 675,100 - 1,169,927 - - - - 1,845,027 7.3% 90.3%
750,000 – 1.5 M 1,395,540 - 1,043,988 - - - - 2,439,528 9.7% 100.0%
Total 17,468,875 114,277 7,060,183 191,382 12,570 218,757 73,854 25,139,898
% of Total 69.5% 0.5% 28.1% 0.8% 0.1% 0.9% 0.3%
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Table A4: Square Footage by Size by Category – Only Properties with Taxable Value
Size Commercial
Govt.
Owned Industrial Inst. Misc. Rec. Vacant
Grand
Total
% of
Total
Running
%
1 -2,000 163,025 - 2,910 2,508 784 1,980 28,485 199,692 0.8%
2,001 - 5,000 870,322 - 119,663 - - 10,514 39,257 1,039,756 4.3% 5.2%
5,001 - 8,000 880,358 - 138,249 - - 21,126 6,112 1,045,845 4.4% 9.5%
8,001 - 12,000 889,309 10,120 226,735 - 11,786 - - 1,137,950 4.7% 14.3%
12,001 - 16,000 600,507 14,640 202,324 27,791 - 29,042 - 874,304 3.6% 17.9%
16,001 - 20,000 594,262 - 181,080 - - - - 775,342 3.2% 21.1%
20,001 - 40,000 1,884,014 - 499,571 23,276 - 90,546 - 2,497,407 10.4% 31.5%
40,001 - 75,000 1,929,883 - 604,547 59,820 - - - 2,594,250 10.8% 42.3%
75,001 - 100,000 1,234,293 - 687,008 - - - - 1,921,301 8.0% 50.4%
100,001 - 200,000 3,459,198 - 262,125 - - - - 3,721,323 15.5% 65.9%
200,001 - 300,000 1,977,847 - 427,029 - - - - 2,404,876 10.0% 75.9%
300,001 - 500,000 458,842 - 1,047,936 - - - - 1,506,778 6.3% 82.2%
500,001 - 750,000 675,100 - 1,169,927 - - - - 1,845,027 7.7% 89.8%
750,000 – 1.5 M 1,395,540 - 1,043,988 - - - - 2,439,528 10.2% 100.0%
Total 17,012,500 24,760 6,613,092 113,395 12,570 153,208 73,854 24,003,379
% of Total 70.9% 0.1% 27.6% 0.5% 0.1% 0.6% 0.3%
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ATTACHMENT B
Attachment B - 1
Preliminary Utility Ballot Measure Options
The City Council has directed staff, through the City of Palo Alto’s conversations exploring a
potential business tax, to pursue a utility users tax (UUT) and to explore the option to generate
revenue to support the City’s climate adaptability goals. This attachment transmits analysis
related to a potential ballot measure to further the Finance Committee and City Council’s
conversations on this issue. In addition to potentially increasing the City’s utility users tax,
currently set at 5 percent, there are a variety of alternatives that the Finance Committee and
City Council can consider in structuring such a tax, each of which relate to the broader question
of whether and how to modify or replace the Council-adopted General Fund Equity Transfer
(GFET) methodology.
At the September 21, 2021 Finance Committee meeting, the Committee directed staff to model
a UUT increase applied to retail gas service charges to restore the amount at risk in the Green v
City of Palo Alto, a class action lawsuit which challenged the City’s gas and electric rates under
Proposition 26. In Green, the trial court judge found that the City’s electric rates are valid, but
the City’s gas rates include an element of tax requiring voter approval under California’s
Proposition 26 because they are set at a level sufficient to fund an annual transfer of
approximately $7.7 million to the City’s General Fund. Last month, City Council authorized an
appeal to seek guidance from the Court of Appeal on a variety of legal questions that will
impact Palo Alto and, potentially, municipal utilities across California.
The GFET is included in the City’s utility rate model as an expense. With respect to electricity,
the utility generates sufficient revenue from sources other than rate payers to pay for the GFET.
Therefore, the electric GFET does not impact rates. With respect to gas, the GFET impacts the
utility rate. The Green litigation has shifted the City’s FY 2022 financial balancing strategy and
has potentially significant, long-term budgetary impacts to the City’s General Fund. If the gas
GFET is excluded from Palo Alto’s utility rate model, based on the FY 2022 Adopted Budget,
approximately $7.4 million would no longer be transferred to the General Fund and would
remain with the City’s gas enterprise, reducing gas rates. Finance Committee and City Council
direction is needed on whether to seek to recover for the General Fund an equivalent amount,
or some portion of the total, via a modified voter-approved GFET, an increase or expansion of
the current 5 percent UUT, or some combination of both.
This attachment discusses two utility tax options, modeled to replace the current gas GFET.
Under either option, the current gas GFET would end and potentially be replaced by:
1) Increasing or expanding the City’s UUT(s) codified in chapter 2.35 of the City’s municipal
code, which would continue to appear as a line item on utility bills, and
2) Modifying the 2009 GFET formula to transfer a percentage of gas utility gross revenues.
Under this option, the transfer could be displayed as a separate percentage of retail
service charges (as a separate line item on utility bills) or it could be embedded in utility
rates.
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ATTACHMENT B
Attachment B - 2
This attachment also includes discussion of the following topics that were included in CMR
13514, Attachment B. Staff has included once again for ease of reference:
• Climate adaptability options that includes impact on current rates and estimated
generated revenue to support this initiative;
• General Fund Equity Transfer Methodology
• Review of EASE framework as it pertains to utility users tax;
• Utility user tax rates for cities in Santa Clara County and San Mateo County.
Potential Modifications to the City’s Gas Utility Users Tax, Chapter 2.35 of the Municipal Code
UUTs are very common across California, with the vast majority structured to create general
fund revenue with majority voter approval. Roughly half of California residents and businesses
pay a UUT. Enacted in 1987, the City’s UUTs are applied to electricity, water and gas usage as
well as telephone service. The tax rate applied to utilities is five percent.
Replacing the amount of the gas GFET, approximately $7.7 million annually (based on staff’s
forecast beyond this budget year), would result in a 32 percent gas UUT rate, made up of a 27
percent tax to replace the gas GFET plus the current 5 percent rate. Staff estimates that for
every 1 percent increase to the gas UUT rate, an additional $284,000 in UUT revenue would be
generated. This calculation is based on estimated sales activity and utility rates in the FY 2022
Adopted Budget.
If the $7.7 million was collected via the gas, electric, and water UUTs, the resulting rate would
be 9 percent, an addition of 4 percent over the current 5 percent rate. Additionally, if the
amount was collected from all of the City’s utilities (gas, electric, water, wastewater, refuse,
storm drain, and fiber), the resulting UUT rate would be 7 percent, a two percent increase over
the current UUT rate.
Table B1: Modification to City’s Utility Users Taxes (Based on FY 2022 Budget and Rates)
Gas Gas, Electric,
Water
Gas, Electric,
Water,
Wastewater,
Refuse, Storm,
Fiber
Estimated UUT 32% 9% 7%
Additional Revenue Generated
by each 1% UUT change
$284,000 $1,910,000 $2,475,000
Under this approach, the amount of gas GFET currently collected via the City’s gas utility rates
would end, resulting in a lower average gas bill. Table B2 outlines the decrease for residential
and commercial gas customers, based on rates that are effective December 2020. The average
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ATTACHMENT B
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monthly gas residential bill would decrease from $45 to $37, which is 30 percent lower than
PG&E’s rates.
Table B2: Gas Residential and Commercial Monthly Bill Comparisons
Type
Usage
level
(therms)
Palo Alto PG&E $
Difference
%
Difference
Palo Alto
Excluding
Gas GFET
$
Difference
%
Difference
Residential Median** $45 $53 ($8) -14% $37 ($16) -30%
Commercial 500 $685 $718 ($33) -5% $562 ($156) -22%
Commercial 5000 $5,986 $6,831 ($845) -12% $4,909 ($1,922) -28%
Commercial 10000 $11,875 $12,045 ($170) -1% $9,738 ($2,308) -19%
Commercial 50000 $59,005 $51,419 $7,586 15% $48,384 ($3,035) -6%
If the City opts to increase the water UUT or impose a new UUT for wastewater or storm drain
services, there is some risk of legal challenge. Recently, plaintiffs challenged the City of Long
Beach’s 12 percent tax on its water and wastewater utilities, claiming that UUTs on services
other than electric and gas are either invalid, or require 2/3 voter approval, as special taxes
based on an incident of property ownership (here, on utility services).1 Fees for gas and electric
service, however, are exempt from the California constitution’s definition of property-related
fee, and Long Beach’s gas UUT was not part of this challenge.2
Long Beach is currently appealing this litigation, and if Long Beach loses its appeal, the result
could produce a split of authority at the appellate level which would require Supreme Court
review to resolve.3 While it seems unlikely that a court would strike the legal foundation for
hundreds of existing UUTs statewide, the City Attorney’s office is monitoring this case closely.
This case is just one example of the variety of legal theories and voter initiatives being
advanced in this area of municipal finance law.4
Potential Voter Approval of Percentage of Gross Utility Revenues
Another option is to leave the current UUT intact and seek voter approval to simplify the 2009
GFET methodology to impose a flat tax on gross utility revenues. The flat tax could be displayed
separately on the customer’s bill or be embedded in rates. Collecting the projected annual $7.7
million gas transfer via this method would reduce gas utility rates (as shown in Table B2) and
add a gross gas revenues tax of approximately 24 percent. Embedding the amount of the tax
1 The challenge was premised on language in Article XIII D, section 3 of the California Constitution, added by
Proposition 218 in 1996, which lists 4 types of valid taxes, assessments and fees, including special taxes receiving a
2/3 vote, and “fees or charges for property related services”.
2 See Article XIII D, section 3 of the California Constitution: “For purposes of this article, fees for the provision of
electrical or gas service shall not be deemed charges or fees imposed as an incident of property ownership.”
3 Kimball, et. al. v. City of Long Beach (Case No. B305134, appeal pending).
4 On October 1, 2021, a Sacramento law firm submitted a proposed ballot measure to the Secretary of State, the
“Taxpayer Protection and Government Accountability Act”, which could bar the use of utility rate proceeds for
general fund purposes, even with voter approval. The measure could invalidate some voter-approved taxes
imposed after Oct 1, 2021 but prior to the measure’s effective date.
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ATTACHMENT B
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within the utility’s cost of providing service would not require a change in utility rates and is
consistent with how the GFET is collected now. Both options would require voter approval.
Several other cities with municipal utilities, including Burbank, Colton, Pasadena and
Sacramento, structure their annual utility transfers as a percentage of gross revenues, which is
then covered by utility revenues as a cost of providing service. Cities have been challenged
over this practice, and this area of the law remains in flux. However, California’s Court of
Appeal recently upheld Sacramento and Pasadena’s voter-approved general fund transfer
taxes, which were structured as an 11 percent and 12 percent tax, respectively, on the gross
revenues of Sacramento’s and Pasadena’s city-operated utility enterprises.5 Each of these
taxes are embedded in the cost of providing utility services, and are not identified as a separate
line item on the customer’s utility bills.
Climate Adaptability Funding Options
In the August 16, 2021 City Council meeting, the City Council directed staff to focus pursuit of a
utility use-based tax and explore the option to incorporate revenue to support the City’s
climate adaptability initiative. The City’s FY 2022 Adopted Budget includes $9.7 million for UUTs
assessed on utility usage for electric, gas, and water; the City’s current UUT rate is 5 percent.
Staff estimates that a 1 percent increase to the UUT rate, for both gas and electric, is estimated
to yield an additional $2 million in UUT revenue in the General Fund, while a 1 percent increase
in the gas utility only is estimated to yield $284,000. These calculations are based on sales
activity and utility rates in the FY 2022 Adopted Budget. To illustrate, if the desired total UUT
revenue is $30 million, a $20 million increase above the FY 2022 Adopted Budget, then the UUT
rate, if applied to gas, electric, and water, would be approximately 15 percent, an additional 10
percent on top of the current 5 percent rate.
Furthermore, based on the City’s Sustainability and Climate Action Plan (S/CAP) and the plan’s
goal to reduce natural gas usage, in applying the EASE Framework, the long-term stability of
this revenue source decreases over time. Staff has included Chart B1, Forecast Gas
Consumption, that was included in the Gas Utility Financial Plan (CMR 12240). This chart is a
baseline forecast used for utility rate modeling and does not include reductions resulting from
S/CAP key actions (i.e. approximately a 7 percent decrease from 2020 to 2030), which would
further reduce revenue generated from a potential ballot measure. Further analysis by staff
would have to be done to calculate the potential estimated impacts of the City’s S/CAP goals in
reducing use of natural gas and the impacts to potential utility tax to recover the amount of the
gas GFET.
5 Wyatt v. City of Sacramento, (2021) 60 Cal.App.5th 373; Komesar v. City of Pasadena (2021, Case No. B314666).
ATTACHMENT B 13.b
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ATTACHMENT B
Attachment B - 5
Review of the Equity, Administrability, Stability, and Economic Benefits (EASE) framework for
a Utility Based Tax
The City Council and Finance Committee have used the EASE framework as the main means of
evaluating potential tax ballot measures. A review of the EASE frameworks for both the UUT
and tax on utility gross revenues is presented in Table B1 below.
Table B3. EASE Framework for Utility Users Tax
Utility Users Tax Tax on Utility Gross Revenues
Equity Utility Users Tax is a flat rate tax
imposed on the charges made for
metered utility and charges for
service (includes customer charges,
service charges, standby charges,
charges for temporary services,
demand charges, and annual and
monthly charges.
This tax is considered a proportional
tax, a tax that takes the same
percentage from all groups, since the
flat tax rate is assessed based on the
customer bill, the amount of tax paid
by a customer directly correlates to
the amount of utility commodity that
is used.
This tax can be a flat rate assessed
on gross utility revenues (includes
customer charges, service charges,
standby charges, charges for
temporary services, demand
charges, and annual and monthly
charges.
Similar to the UUT, this tax is
considered a proportional tax, a tax
that takes the same percentage
from all groups, since the flat tax
rate is assessed based on the
customer bill, the amount of tax
paid by a customer directly
correlates to the amount of utility
commodity that is used.
Administrability This tax is administrated through the City’s Utility Billing system and appears
monthly on customer bills. The cost for administrating this tax is assumed
in the City’s Utility Department budget and is supported internally by City
staff.
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ATTACHMENT B
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Table B3. EASE Framework for Utility Users Tax
Stability The City’s Sustainability and Climate Action Plan outlines a variety of work
plan items that makes progress towards reducing the City’s carbon impacts,
greenhouse gas emissions, and resource consumption. Changes in resource
consumption, particularly for gas will have a direct impact on the amount
of UUT revenue collected by the City in the long term. The City’s
Sustainability and Climate Action Plan (S/CAP) update project includes a
draft Three-Year Workplan that focuses on reducing use of natural gas that
will impact the ability to generate revenues to restore the amount at risk
from the Green litigation.
In addition to the long-term reduction of gas use, month to month gas
commodity costs and usage vary and although the market price of gas has
dropped over the past decade, these variables may have a long-term
stability of this tax revenue source if applied to gas utility usage. See below
charts, excerpted from the Gas Utility Plan that was presented to the City
Council in April 2021 (CMR 12240, Gas Utility Financial Plan)
Economic
Benefits
This tax may deter certain business industries that have heavy resource
consumption (i.e. industrial, manufacturing). Weighing this impact against
the overall lower utility rates, specifically if utility rates are adjusted
downward for the General Fund Equity Transfer, will offset this impact.
Payment of the tax for customers is incorporated into the customer’s
monthly bill; the seamless administration of this tax minimizes disruption
for the taxpayer.
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ATTACHMENT B
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Chart B1: Forecast Gas Consumption
Chart B2: Gas Commodity Rates from July 2012 through January 2021
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Utility User Tax Rates for Cities in Santa Clara County and San Mateo County
The Utility User Tax rates for cities in San Mateo County and Santa Clara County are listed in Table
B4, A comparison of Local Utility User Tax Rates obtained from the California State Controller.
Average UUT rates in the region fall between 2 percent (City of Sunnyvale) and 6.5 percent (City
of Pacifica). The City’s 5 percent rate falls within the overall average of the region.
Table B4. Comparison of Local Utility User Tax Rates
Electric Gas
Residential Commercial Residential Commercial
San Mateo County
Daly City 5.0% 5.0% 5.0% 5.0%
East Palo Alto 5.0% 5.0% 5.0% 5.0%
Menlo Park 3.5% 3.5% 3.5% 3.5%
Pacifica 6.5% 6.5% 6.5% 6.5%
Portola Valley 4.5% 4.5% 4.5% 4.5%
Redwood City 5.0% 5.0% 5.0% 5.0%
Electric Gas
Residential Commercial Residential Commercial
Santa Clara County
Cupertino 2.4% 2.4% 2.4% 2.4%
Gilroy 5.0% 5.0% 5.0% 5.0%
Los Altos 3.5% 3.5% 3.5% 3.5%
Mountain View 3.0% 3.0% 3.0% 3.0%
Palo Alto 5.0% 5.0% 5.0% 5.0%
San Jose 5.0% 5.0% 5.0% 5.0%
Sunnyvale 2.0% 2.0% 2.0% 2.0%
Source: California State Controller, Cities Annual Reports
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Attachment B - 9
In addition to the information discussed earlier in this staff report, below is staff’s research of several pertinent utility tax measures in
California, including the ballot questions, rate, and passage rates.
City Ballot Question Ballot
Measure Rate Date Approved?
City of Anaheim Shall Section 1221 of the Anaheim City Charter
regarding water and electric rates be amended to:
update language regarding financial reserves,
reaffirm and authorize the transfer of money to the
City's general fund to support general City services,
remove unnecessary language that duplicates a
requirement of the California Constitution, and
authorize programs to assist non-residential and
residential customers?
Measure N Rates shall be sufficient to pay basic
expenses, as well as (Sec 1221(e)):
4% of operating revenue earned by
water and electric utilities during
prior fiscal year.
Sec 1221 also put ratepayer
discounts and customer assistance
programs in the Charter, to be paid
from rates.
Nov. 2014 Defeated.
No: 50.1%
Yes: 49.9%
City of Banning To allow approximately $2,325,000 annually for
unrestricted general revenue purposes such as
police, fire, paramedics, parks, and senior services
while stabilizing electric utility rates, shall an
ordinance be adopted authorizing a transfer not to
exceed 7.5% of annual electric utility gross revenues
to the City's General Fund until December 1, 2021
and 5.5% thereafter, for unlimited duration, and
establishing a rate freeze for 3 years, except as
needed for financial emergency or bond covenants?
Measure P Transfer 7.5% of annual electric
utility gross revenues to General
fund until Dec. 1, 2021, and 5.5%
thereafter, and setting a rate freeze
for 3 years, except for emergencies.
Nov. 2018 Defeated.
No: 51.29%
Yes: 48.71%
City of Burbank To maintain essential City services/infrastructure like
police, fire, parks, libraries, streets and street
lighting, shall the measure be adopted amending the
City of Burbank Charter to continue the past practice
of transferring not more than 7% of Burbank Water
and Power’s gross annual sales of electricity, paid by
retail electric rate payers, providing approximately
$12.5 million annually to the City’s General Fund
until ended by voters, with all money spent to
benefit Burbank residents?
Measure T 7% of gross annual electricity sales
paid by retail rate payers, as a
separate line item on the bill or
embedded within rates and applied
retroactively to 2016/17 fiscal year.
June 5, 2018. Approved.
Yes: 81.1%
No: 18.9%
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Attachment B - 10
City Ballot Question Ballot
Measure Rate Date Approved?
City of Colton To add approximately $4,800,000 in funding annually
for general city services such as police, fire,
paramedics, parks, libraries and senior services while
stabilizing electric utility rates; shall an ordinance be
adopted authorizing a transfer not to exceed 20% of
annual electric utility gross revenues to the City’s
General Fund reverting back to a 12.39% maximum
on June 30, 2021, and establishing a freeze on
electric utility rates for 5 years, except in cases of
financial emergency?
Measure D 20% of Electric Utility’s prior year
gross revenues for 5 years.
June 2016 Approved.
Yes: 76.2%
No: 23.8%
City of Pasadena Shall the measure maintaining 911 response, fire,
paramedic, public health, senior and homeless
services, street repairs, and other services by
amending the City Charter to continue collecting in
electric rates and maintain the longstanding transfer,
limited to 12% gross revenue, providing $18,000,000
annually to Pasadena's General Fund that does not
increase taxes or utility rates until ended by voters,
requiring financial audits with all funds locally
controlled benefitting Pasadena residents, be
adopted?
Measure P
12% of gross revenue of electric
utility.
Nov. 3 2020 Approved:
Yes: 83.57%
Challenged in Komesar v. City of
Pasadena, upheld.
City of Sacramento In order to comply with Prop 218 . .. shall the City of
Sacramento replace its current in-lieu franchise and
property tax fees on water, sewer, drainage and
garbage with a general tax which will not result in
any changes to existing city utility rates??
Measure I Tax of 11 percent on gross revenues
from user fees & charges imposed
by city enterprises providing water,
sewer, storm drainage, & solid
waste services
June 1998 Approved:
Yes: 54.4%
Challenged in Wyatt v. City of
Sacramento, upheld.
ATTACHMENT B 13.b
Packet Pg. 155
ATTACHMENT C
12100 Wilshire Boulevard, Suite 350 | Los Angeles, CA 90025
Phone: (310) 828-1183 | Fax: (310) 453-6562
1999 Harrison St., Suite 2020 | Oakland, CA 94612
Phone: (510) 451-9521 | Fax: (510) 451-0384
TO City of Palo Alto Staff and Council
FROM Dave Metz and Miranda Everitt
FM3 Research
RE: Ballot Measure Survey Outline
DATE October 8, 2021
This memo outlines our recommended approach for the Palo Alto ballot measure structure survey, anticipating a
potential business tax measure in November 2022. This survey is structured to update baseline attitudes about
City government and issues of concern by re-asking about those topics in the same we have in prior years. It then
moves into design of a potential business tax measure: asking about general support for additional revenue, then
about potential mechanisms, project priorities for new funding, and preferences on measure structure. Voters
will also hear an exchange of pros and cons, modeling in brief the impact of "yes" and "no" campaigns. They will
also be briefly asked about a measure dealing with an equity transfer from the utility fund.
• Survey introduction
• Cell or landline, safety check
• Right direction/wrong track (tracking to prior years)
• Job rating - Palo Alto city government (tracking to prior years)
• Approval rating on specific aspects of City management (tracking most to prior years)
• Maintaining infrastructure
• Managing budget/finances
• Affordable housing
• Using tax dollars efficiently
• Transportation
• Need for additional funding (tracking to prior years)
• Need for additional funding to maintain and improve infrastructure (tracking to prior years)
• Problem seriousness battery (tracking most to prior years)
• Parking
• Affordable housing and housing costs
• Cost of living
• The impacts of the coronavirus (economic and public health, or more general)
• Climate change
ATTACHMENT B 13.b
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ATTACHMENT C
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• Wildfire and/or smoke/air pollution
• Waste and inefficiency in local government
• Condition of the local economy
• Crime
• Unhoused population / Homelessness
• Traffic
• Growth and development
• Local tax rates
• Changing character of the community
• Airplane noise
• Caltrain electrification/crossings
• General support for or opposition to a business tax -- either split sampling or rotating
• Parcel tax
• Business license tax
• Open-ended question on reason for support/opposition
• Importance of potential projects/priorities, with variations in wording (tracking many to prior years)
• Infrastructure
• Streets/roads
• Traffic congestion and parking
• Access for people with disabilities
• Affordable housing
• Unhoused / Homelessness
• Operating hours for park, recreation, and community facilities
• Caltrain electrification/crossings
• Police and fire services
• Library services
• Shuttle programs
• Sustainability and climate action plan goals
• Should authority be delegated to City Council to decide on components such as length and exemptions?
• Support for or opposition to business tax components
• Rate
• Tax structure, e.g. parcel tax or business tax
• How it is calculated, e.g. square footage, number of employees or payroll
• Potential exemptions
• Sunset or length
• CPI and escalators
ATTACHMENT B 13.b
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ATTACHMENT C
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• Arguments in support of a measure, such as:
• Fairness
• Specific uses of the tax
• Need for stability in funding
• Re-vote
• Arguments opposing a measure, such as:
• Too many taxes/cost of living
• Potential for government waste/mismanagement
• Hurts local businesses during economic recovery from COVID
• Final vote
• General support for or opposition to a utility tax - either split sampling or rotating
• Assessed on gas, electric, and water usage
• Assessed on only gas usage
• Demographics
• Work in Palo Alto
• Own a business in Palo Alto
• Education
• Ethnicity
• Income
• Gender
• Voter file information (will not need to ask this)
• Party
• Age
• Past election participation
ATTACHMENT B 13.b
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ATTACHMENT D
Attachment D - 1
Summary of Prior Work on
Potential Revenue Generating Ballot Measures
The City of Palo Alto has been discussing its options for potential revenue-generating ballot
measures through 2019 and 2020. This work was suspended at City Council direction in March
2020 in order to marshal available resources to manage through the COVID-19 pandemic. A
brief timeline of the CMRs and discussions with the Finance Committee and the City Council
since April of 2019, when staff was formally directed to begin working on this project by the
City Council, is included below for additional context. The date, the forum of the meeting
(Finance Committee or City Council), the summary title, and the CMR number are included for
ease of reference.
Timeline
4/22/2019 City Council, “2019 Fiscal Sustainability Workplan”, CMR 10267
4/22/2019 City Council, “Approve Workplan for a Potential Revenue Generated Ballot
Measure”, CMR 10261
6/18/2019 Finance Committee, “Review, Comment, and Accept Preliminary Revenue Estimates
for Consideration of a Ballot Measure”, CMR 10392
8/20/2019 Finance Committee, “Evaluation and Discussion of Potential Revenue Generating
Ballot Measures”, CMR 10445
9/16/2019 City Council, “Evaluation and Discussion of Potential Revenue Generating Ballot
Measures and Budget Amendment”, CMR 10615
10/1/2019 Finance Committee, “Revised Workplan for Consideration of a Ballot Measure”, CMR
10712
10/15/2019 Finance Committee, “Stakeholder Outreach, Initial Polling, and Discussion of a
Potential Ballot Measure”, CMR 10743
11/4/2019 City Council, “Potential Ballot Measure Polling/Outreach, Contract, Solicitation
Exemption and Budget Amendment”, CMR 10792
12/2/2019 City Council, “Structure and Scenarios of Initial Round of Polling for a Potential Local
Tax Measure”, CMR 10891
12/17/2019 Finance Committee, “Consideration, Evaluation, and Discussion of a Revenue
Generating Local Tax Ballot Measure, Review of Refined Modeling, Analysis, Tax Structure and
Recommendation to the City Council”, CMR 10655
ATTACHMENT B 13.b
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ATTACHMENT D
Attachment D - 2
1/27/2020 City Council, “Update, Consideration, and Potential Direction on Possible Local Tax
Measure for 2020 Election”, CMR 11019
3/23/20 City Council, “Consideration of Analysis, Public Outreach, and Refined Polling and
Further Direction on a Potential Local Business Tax Ballot Measure for 2020 Election”, CMR
11161
3/23/20 City Council, “Consideration of Analysis, Public Outreach, and Refined Polling and
Further Direction on a Potential Local Business Tax Ballot Measure for 2020 Election”, At-Places
Memorandum
6/15/2021, Finance Committee Staff Report, “Recommend the City Council Approve the
Workplan for Pursuit of a Revenue-Generating Local Ballot Measure for the November 2022
General Election; Review and Potential Guidance to Staff on Affordable Housing Funding as
Referred by the Council”, CMR 12299
8/16/2021 City Council, “Approve the Workplan for Development of a Revenue-Generating
Local Ballot Measure for the November 2022 General Election; Review and Potential Guidance
to Staff on Affordable Housing Funds as Referred by the City Council”, CMR 12381
9/21/2021 Finance Committee Staff Report, “Discuss Updates and a Recommended Further
Refinement of Potential Revenue Generating Local Ballot Measures,” CMR 13514
ATTACHMENT B 13.b
Packet Pg. 160