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HomeMy WebLinkAboutStaff Report 13770 City of Palo Alto (ID # 13770) City Council Staff Report Meeting Date: 1/24/2022 Report Type: Action Items City of Palo Alto Page 1 Title: Discuss Polling Results, Analysis, and Community and Stakeholder Engagement Plan; Recommend Further Refined Parameters for a Possible Local Tax Ballot Measure for November 2022 Election (Business License Tax and Utility Tax Proposals); and Direct Staff on Related Items such as Community and Stakeholder Engagement Plan From: City Manager Lead Department: Administrative Services EXECUTIVE SUMMARY A staff report for this item will be published as part of the next packet released on January 20, 2022 which will include a summary of the Finance Committee discussion on January 18, 2022 and the Committee recommendations for Council consideration. This report is issued to transmit the information intended to be discussed for this City Council agenda item. The Finance Committee has received and reviewed (12/7/21) / will review (1/18/22) a significant volume of information regarding potential local revenue generating measures for the November 2022 ballot. This City Council agenda item will review these prior discussions, the material presented at these prior committee meetings, and the Finance Committee recommendations. Below are links to the materials: December 7, 2021 Finance Committee: Agenda Item #2, Staff Report #13728 (begins on page 55) - Modeling of two methods to replace the General Fund Equity Transfer (GFET) at risk due to legal challenges January 18, 2022 Finance Committee: Agenda Item #1, Staff Report #13875 (begins on page 3) - Refined modeling of a potential business tax at a monthly rate of $0.05 to $0.20 per square foot, potential exemptions, and escalators for rate of tax - Results from the initial round of polling conducted in November/December 2021 related to potential business license and utility tax proposals - Community and Stakeholder Engagement Plan BACKGROUND City Council’s November 8th direction to staff and the Finance Committee: City of Palo Alto Page 2 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: i. Small retail, measured by square footage; ii. Grocery stores; iii. No exemptions; 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 execute initial round of polling (Attachment A), delegate review of the polls to the Finance Committee, pending availability to stay on the workplan timeline, and incorporate the Council’s feedback of the poll, including the modeling assumptions identified in Parts A and Parts B of the motion; and D. Remove the parcel tax as an option from the polling questions. MOTION PASSED 6-1 (Tanaka no) DISCUSSION Summary of December 7, 2021 Finance Committee: Utility On-Bill Tax Staff presented updated analysis and other information for a potential utility on-bill tax at the Finance Committee’s December 7, 2021 meeting (CMR 13728). After reviewing the analysis the Finance Committee unanimously recommended that Council direct staff to pursue preparation of a utility tax that replaces the General Fund Equity Transfer (GFET) at risk in the Green case with the following parameters: • Using a percentage of utility revenue methodology rather than changing the UUT; • Focusing cost recovery on the gas utility only; and • Relying on polling to determine whether to cap growth in the utility tax. The Finance Committee and staff recognized that some of these questions would be further informed by the initial round of polling, and with the information presented Council can review the initial polling results and modify this recommendation if necessary. A summary of the staff analysis for the two approaches to replace GFET revenue is below: Method 1: Distribute the change across gas and electric as an increase in the percentage of Utility Users Tax (UUT) City of Palo Alto Page 3 Method 2: Seek voter approval in modifying the 2009 GFET formula to transfer a percentage of gas utility gross revenues Although both achieve the goal of recovering 100 percent of the GFET revenue currently at risk in the Green case, differences in revenue volatility (stability per the EASE Framework), distribution of tax between residential and non-residential customers, and impacts on sustainability efforts are key differences between these two approaches. Highlights of these key differences are summarized below: Method 1: Increase Gas and Electric UUT Method 2: Percent of Gas Utility Revenue Recovers GFET revenue currently at risk Both approaches recover 100% of GFET revenue currently at risk Ease of explanation Changes practice, more complex Simple, confirms existing practice Revenue growth (Increase in annual revenue from FY 2023 to FY 2025) Increase from $7.34 million to $8.76 million Increase from $7.34 million to $8.61 million Note: due to expected utility cost and rate increases in FY 2023 to FY 2025, either of these methods would increase the GFET significantly faster than the current GFET methodology, which only is forecasted to increase from $7.34 million to $7.9 million through FY 2025. EASE (Stability): Revenue volatility1 +/- 4% to 6% variation in revenue each year based on utility use +/- 10% to 15% variation in revenue each year based on utility use EASE (Equity): Percentage of revenue collected form business Increases share of tax collection on business and non-residential taxpayers (20% residential, 80% business / non-residential) No change in share of revenue collected from business and non- residential from current GFET methodology (40% residential, 60% business / non-residential) EASE (Economic Impact): Impact on sustainability efforts Decreases cost-effectiveness of building and vehicle electrification No impact to sustainability efforts EASE (Stability): Impact of S/CAP goals on revenues Achieving building and vehicle electrification goals outlined in April 2021 S/CAP impact analysis results in little change in revenue. Achieving building and vehicle electrification goals outlined in April 2021 S/CAP impact analysis results in $3.9 million (46%) decrease in revenue. Staff found a few notable differences between Method 1, modifying the UUT rate, and Method 2, transferring a percentage of gas utility revenues. Method 2 was easier to explain. Method 1 was less volatile, collected a higher proportion of tax from businesses than Method 2, and decreased the cost-effectiveness of building electrification. 1 Based on gas / electric sales revenue variations from projections over the last five years City of Palo Alto Page 4 Further on relationship to the City’s Sustainability and Climate Action Plan (S/CAP) goals, Method 1 was significantly less affected by major shifts in electric and gas use associated with long-term S/CAP goals. That said, this is a longer term revenue stability issue that could be solved later as part of a future year S/CAP-related ballot measure. In this context, if an option were to not replace the gas GFET while continuing the electric GFET, a similar disincentive for electrification could be created. Both approaches increased the amount of revenue transferred to the General Fund at a faster rate than the current GFET approach. The current GFET escalates at roughly 2.5% per year, while utility rates are expected to increase at a higher rate in the next few years. If Council wanted to limit the growth of either tax method to be more consistent with the rate of growth of the current GFET methodology, some alternatives were discussed in the Finance Committee report (Attachment D), in the section titled “Revenue Growth and Volatility of Various Utility Tax Methods vs. Current GFET.”