SR-212-005
FD:RB:DC/g:\finance\treas\share\sruutrebate1
Council Meeting: May 8, 2001 Santa Monica, California
TO: Mayor and City Council
FROM: City Staff
SUBJECT: Options Regarding the Use of the Citys Increased Utility Users Tax
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Collections Resulting from the Increase in Energy Rates and Possible
Introduction and First Reading of an Amendment to the City’s Utility Users
Tax Ordinance Authorizing Council to Grant a Temporary Rebate of the
Increased Collections
INTRODUCTION
At the Council meeting of April 10, 2001, Council directed staff to evaluate the State
energy situation and return with options to mitigate the impact of increased energy costs
on residents and businesses. This report discusses: (1) Rebating the increased UUT
and/or (2) Using the increased UUT to implement energy conservation measures which
benefit residents and businesses.
BACKGROUND
The State Constitution and various State laws authorize cities to tax utility consumption as
a means of raising revenues to pay for local services. Currently, about 170 California
cities have a utility users tax. Santa Monica’s tax was first established in 1969 and
accounts for approximately 15% of General Fund revenues, which are used to fund basic
functions such as police, fire, library, parks and recreation services. Over the years, the
tax has been increased to pay for increased services, primarily in the area of police
protection.
California is experiencing an energy crisis. Recent action by the California Public Utilities
Commission (PUC) allows an increase on the commodity portion of electrical rates of
approximately 42%. These increases are expected to show up on May or June consumer
bills. A legislated 10% decrease that has been in effect since 1998 is due to expire no
later than March 31, 2002.
Natural gas prices have also increased during the last year. The latest available data
indicates that the cost of gas in April 2001 is more than double the cost of April 2000.
However, April 2001 costs are about 6% lower than the previous month indicating that
prices may be leveling out.
The increases in energy rates translate into increased Utility Users Tax (UUT) receipts for
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the City. While there is still much uncertainty in both the natural gas and electricity
markets, staff has estimated the amount of additional UUT to be received in FY 2001-02 as
a result of energy price increases to be approximately $2.8 million.
Discussion
There are two approaches for mitigating the tax burden resulting from the increased
energy prices.
A. Rebate - A rebate of taxes collected would provide the City the flexibility required to
deal with the constantly changing situation. A temporary rebate requires an enabling
amendment to the City’s UUT ordinance. If, instead, the UUT rate were lowered, the City’s
flexibility to respond to changing conditions would be impaired because an election
requiring a two-thirds vote under Proposition 218 could be required to raise the rate back
to its current level.
Given the estimated time that the extraordinary costs will exist, the severity of the burden
that the rate increases will impose on the taxpayers, forecasted UUT from other utilities,
the overall inflation rate anticipated for the period, and the City’s ability to maintain existing
levels of service, a rebate is warranted for the coming Fiscal Year. The proposed
amendment to the City’s Utility User’s Tax ordinance would authorize Council to implement
such a temporary rebate by making the following findings:
1. Extraordinary circumstances have created the energy crisis.
2. The temporary rebate is necessary to abate a significantly increased tax burden on
a class of service users.
3. The temporary rebate will not adversely impact the City’s ability to meet its financial
obligations and maintain existing service levels.
4. A volatile situation exists that requires periodic reassessment.
Three options for determining the amount of the rebate are presented below.
Option 1 – Based on rate increases that have occurred and are projected to occur during
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FY 2000-01 and FY 2001-02 in the natural gas and electricity sectors, staff estimates that
$2.812 million in additional UUT revenues will be received in FY 2001-02 directly related
to extraordinary rate increases ($1.7 million from electricity and $1.1 million from natural
gas). Under this option, the entire $2.812 million would be rebated.
Option 2 – Option 2 reduces the rebate amount calculated in Option 1 by the projected
loss of UUT revenues resulting from sectors other than electricity and natural gas. Due to
a restructuring in the telephone industry as a result of deregulation, price competition has
resulted and there has been a shift in use from the hardwire sector to the wireless sector.
The net result for telephone users has been a cost decrease and the City has
consequently experienced declining UUT revenues from telephone service over the last
few years. Deducting this loss to offset part of the extraordinary gain from the electricity
and gas increases would reduce the FY 2001-02 rebate amount to $2.527 million.
Option 3 - Option 3 proceeds as in Option 2 and further reduces the rebate calculated in
Option 2 by the energy cost increases for the City for a rebate amount of $2.164 million.
The City’s ability to continue to provide current services or current service levels will not be
adversely impacted under any of these scenarios. However, the ability of the City to
respond to requests for new services and/or service level increases becomes increasingly
restricted. Further, it is possible that the City’s own energy costs will increase more than
now estimated. Nevertheless, because City residents and businesses are faced with a
similar dilemma and must practice conservation or tighten their belts to cover increased
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costs, City departments are prepared for the most restrictive scenario.
Staff is currently in discussions with the various utility service providers to determine their
ability to implement the proposed rebate into their billing system. If a temporary rebate is
approved by the Council, staff recommends that it be in effect for a period of one year
beginning on July 1, 2001. If the utility service providers cannot implement the rebate by
that date, taking into account appropriate noticing to them of the changes, the effective
date of the rebate would remain July 1, 2001 and all excess funds collected between July 1
and the actual implementation date would be included in the rebate when implemented.
City staff would regularly monitor the UUT revenue flow to determine if the amount of the
possible rebate should be adjusted based on changing conditions. Also, as part of each
subsequent year’s budget process, staff will examine all relevant factors and recommend
to Council if extension of the rebate is appropriate.
B. Conservation Measures - A second approach for consideration is the use of part or all
of the excess UUT for consumer conservation and energy efficiency purposes. City staff
have been working diligently for the past several months to identify and facilitate the
implementation of energy conservation and energy efficiency measures by residents and
businesses, and the establishment of an Energy Efficiency Fund by the City would enable
a much broader and more significant effort to reduce usage of both natural gas and
electricity within Santa Monica. Such a fund, for example, could be used to make it more
financially feasible to install photovoltaic (solar electric panels) on the rooftops of
residences and small businesses, offsetting electricity demand. It could also be used to
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finance rebates for more energy efficient appliances (refrigerators, washing machines,
dryers, etc.) as well as to accelerate the installation of compact fluorescent light bulbs and
energy efficient technologies citywide. The advantage of the energy efficiency investments
over a cash rebate is that the benefits to customers would be permanent. If this approach
were selected $1 million of UUT receipts would be directed into a City Energy Efficiency
Fund. While staff believes that many residents and businesses could achieve
considerable savings as a result of such a Fund, this approach does not give every
taxpayer a similar benefit. It may be possible to create an Energy Efficiency Fund with
one-time savings at Year End.
BUDGET/FINANCIAL IMPACT
The following table outlines the revenue impacts and rebate amounts under Options 1, 2,
and 3, first with a full rebate and, in parenthesis, with a portion of the foregone revenue
dedicated to an Energy Efficiency Fund:
FY 2001-02 Average Average Average
Revenue Monthly Rebate Monthly Rebate Monthly Rebate
Options Foregone All Customers Residents Commercial
1 $2,812,000 $5.00 $2.11 $17.02
(1) ($1,812,000) ($3.22) ($1.36) ($10.97)
2 $2,527,000 $4.49 $1.92 $15.30
(2) ($1,527,000) ($2.71) ($1.16) ($9.25)
3 $2,164,000 $3.02 $1.64 $13.10
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(3) ($1,164,000) ($1.62) ($0.88) ($7.05)
If Council authorizes a rebate and/or a use of all or a portion of the excess UUT collections
for conservation programs as described above in Approach B, the budget impacts will be
included in the FY 2001-02 Budget.
RECOMMENDATION
Staff recommends that the City Council:
1) Introduce for first reading the attached amendment to the Utility Users’ Tax
ordinance.
2) Direct staff to implement rebate of the full $2.812 million in estimated UUT receipts
resulting from extraordinary energy cost increases.
3) Direct staff to determine if year-end savings for FY 2000-01 could be used to
establish an Energy Efficiency Fund to further assist residents and businesses and
return to Council with appropriate recommendations at that time.
Prepared by: Mike Dennis, Director of Finance
Craig Perkins, Director, Environmental and Public Works Management
Ralph Bursey, City Treasurer/Revenue Manager
David Carr, Assistant City Treasurer
Attached: Ordinance
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f:\atty\muni\laws\jl\utilityrebate.wpd
City Council Meeting 5-08-01 Santa Monica, California
ORDINANCE NUMBER ____ (CCS)
(City Council Series)
AN ORDINANCE OF THE CITY COUNCIL OF THE
CITY OF SANTA MONICA ADDING SECTION 6.72.180 TO THE
SANTA MONICA MUNICIPAL CODE TO AUTHORIZE
TEMPORARY UTILITY USER REBATES DUE TO
EXTRAORDINARY INCREASES IN UTILITY COSTS
THE CITY COUNCIL OF THE CITY OF SANTA MONICA DOES HEREBY ORDAIN
AS FOLLOWS:
SECTION 1. Section 6.72.180 is hereby added to the Santa Monica Municipal
Code to read as follows:
SECTION 6.72.180. Temporary Utility User Rebates Due to
Extraordinary Increases in Utility
Costs.
(a) The City Council may by resolution grant a temporary utility users
tax rebate to any class of service user in a manner and upon terms and
conditions as the City Council determines to be appropriate for the purpose
of assisting service users to offset extraordinary costs associated with
unusual price increases in utility service charges. The rebate period may
extend for any period up to twelve (12) months in duration and may be
extended for additional periods up to twelve (12) months each. The Tax
Administrator shall implement the tax rebate and may issue rules and
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regulations for this purpose as provided for in Section 6.72.120 of this
Chapter. The Tax Administrator shall provide written notice to all affected
service suppliers as may be required by the Public Utility Commission and
by Public Utilities Code section 799. Service suppliers shall comply with the
rebate as directed by the City Council and the Tax Administrator. Upon
termination or expiration of the temporary utility users tax rebate, the tax
subject to the rebate shall remain in effect the same as before the rebate.
(b) The City Council shall consider the following factors in
determining whether to grant a temporary tax rebate under this Section:
(1) The amount of the increase in the average billing for the
utility service for which a rebate is being considered.
(2) The severity of the burden that the increased billing, and
associated tax, imposes on the customer class for which a rebate is being
considered.
(3) The increased expense to the City as a utility customer due
to the increase in the cost of such utility service.
(4) The estimated time period that the billing increase will likely
persist.
(5) The actual and forecasted utility users tax revenues derived
from other utilities for which a rebate is not being considered, during the
period of utility price increases and during the proposed rebate period.
(6) The actual and forecasted revenues during the proposed
rebate period from other municipal taxes than the utility users tax, during the
period of high energy costs and during the proposed rebate period.
(7) The overall inflation rate during relevant time periods, as
measured by the Consumer Price Index (CPI).
(8) Any other factor that affects the fairness or equity of
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granting such a temporary rebate.
(c) In a resolution granting a temporary tax rebate, the City Council
shall make the following findings:
(1) The temporary tax rebate is necessary to abate a
significantly increased tax burden on a class of service users;
(2) The temporary tax rebate shall not adversely affect the
City’s ability to meet its financial obligations as contemplated in its current
and projected budgets;
(3) Extraordinary circumstances have created an utility crisis within
the City of Santa Monica; and
(4) The utility crisis has created a volatile condition that requires
periodic reassessment by the City Council.
(d) By enacting any temporary utility users tax rebate under this
section, the City Council does not intend the rebate to constitute a repeal or
reduction of the tax that is subject to the rebate. The City Council does not
intend the termination or expiration of a rebate to constitute a tax imposition,
extension or increase within the meaning of the California Constitution
Article XIIIC. To the extent that any aspect of a temporary utility users tax
rebate is determined to be subject to any election requirement under or to
violate any provision of Article XIIIC of the California Constitution, the City
Council intends the entire rebate to be deemed null and void as if it were
never enacted.
SECTION 2. Any provision of the Santa Monica Municipal Code or appendices
thereto inconsistent with the provisions of this Ordinance, to the extent of such
inconsistencies and no further, is hereby repealed or modified to that extent necessary to
effect the provisions of this Ordinance.
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SECTION 3. If any section, subsection, sentence, clause, or phrase of this
Ordinance is for any reason held to be invalid or unconstitutional by a decision of any court
of competent jurisdiction, such decision shall not affect the validity of the remaining
portions of this Ordinance. The City Council hereby declares that it would have passed
this Ordinance and each and every section, subsection, sentence, clause, or phrase not
declared invalid or unconstitutional without regard to whether any portion of the ordinance
would be subsequently declared invalid or unconstitutional.
SECTION 4. The Mayor shall sign and the City Clerk shall attest to the passage of
this Ordinance. The City Clerk shall cause the same to be published once in the official
newspaper within 15 days after its adoption. This Ordinance shall become effective 30
days from its adoption.
APPROVED AS TO FORM:
_________________________
MARSHA JONES MOUTRIE
City Attorney
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