sr-070610-8b (2)City Council Meeting.: July 6, 2010
Agenda Item: ~'f~
To: Mayor and City Council
From: Rod Gould, City Manager
Subject: Tax Measure for November 2010 Ballot
Recommended Action
Staff recommends that Council discuss placing a measure on the November 2010 ballot
that would offset severe State cuts, stabilize City finances, and protect and maintain
essential City services including police, fire, paramedic and emergency 9-1-1, school
and after school programs, by creating cone-half cent transaction and use tax, which
would be added to the sales tax, with independent audits, citizens' oversight and no
money going to Sacramento.
Executive Summary
During the May 2010 budget study sessions and June 15 hearing, staff identified the
need to test possible revenue options in order to partially address the structural deficit
caused by continuing State theft of local funds and an anemic economic recovery. Over
the past six years, the State has taken over $40 million from the City of Santa Monica
budget. These raids on local revenues are predicted to continue given the State's fiscal
crisis. The effects throughout California will likely include loss of human and social
services, further erosion of support for education, and additional public safety cuts.
This report presents a summary of recent polling on voter attitudes regarding City
priorities and potential funding solutions. Staff requests direction to prepare a resolution
placing a proposition on the November 2010 General Municipal Election ballot. The
ballot measure and proposed ordinance, if authorized, will be brought for Council
consideration on July 13, 2010.
Background
The City's adopted Fiscal Year 2010-11 budget is in balance through a variety of
measures including expenditure reductions in services and capital replacement, fee
adjustments, and continued use of the economic uncertainty reserve as a bridge for the
next two years. Given the unprecedented national recession, the FY 2009-10 deficit
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was $8.1 million before corrective action was taken to eliminate it. For FY 2010-11, the
deficit was $13.2 million before Council adopted the budget that included cost
reductions and fee increases.. After those actions, $4.1 million in structural deficit
remains for FY 2010-11, which will be addressed with one time funds while the City
continues to identify strategies to permanently eliminate the ongoing shortfall.
Our five year forecast projects expenditures growing at a rate that exceeds revenue
growth, and anticipated State raids on city and county revenues necessitate discussion
of potential revenue solutions. Future operating costs associated with capital projects
that are underway will add to this deficit. Staff will continue to evaluate opportunities to
close the structural deficit with the least impact to the community. However, the State
budget continues as a significant threat beyond City control.
The FY 2009-10 State Budget included a package of measures to close a $26.3 billion
budget gap. The budget included nearly $2 billion in Proposition 1A borrowing from
local governments (Santa Monica impact - $3.1 million) and another $2 billion transfer
of redevelopment tax increment funds to the State (Santa Monica RDA impact -over
$21 million in FY 2010-11). If the State is allowed to continue to shift funds from
Redevelopment Agencies, a number of important local community projects will be
threatened. In all over the last six years, the State has diverted over $40 million from
the City of Santa Monica budget.
The Governor released his May Revise on May 14, which projects a $19.1 billion budget
deficit through June 2011, and proposes significant cuts in order to close the gap. His
budget includes a tax reduction for corporations while cutting support for education and
further reducing services to the most vulnerable California families. The proposal also
negatively impacts jobs and local communities as a fragile economic recovery is
underway.. It threatens to lay threadbare the social safety net as well as shift
responsibility to counties for 15,000 nonviolent felons from State prisons, which could
impact policing our streets.
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Even as we continue to downsize, tame our ongoing costs and effectively deal with
tepid growth over the next three years, future impacts of a financially moribund State will
be measurable
The voters have approved some protection of local government. revenues from State
raids in recent years, and a League of California Cities sponsored initiative, the "Local
Taxpayers, Public Safety and Transportation Protection Act", has .qualified for the
November 2010 ballot as Proposition 22. If approved, this ballot initiative would attempt
to prevent the State from "raiding" tax revenues.
However, persistent State revenue grabs will exacerbate county social service and
public safety costs, vastly complicate local government efforts to meet the needs of the
most vulnerable, and police local streets. Our schools also have been battered by State
retrenchment in educational funding and the erosion of Proposition 98. Santa Monica
has generously supported the schools against these threats. It is prudent to consider
ways to further bolster general funds for services such as police and fire services,
education and school programs, parks and recreation and other general fund services
given the ongoing State fiscal crisis.
Summary of Poll
During the budget study sessions, staff recommended exploring an increase in the
property transfer tax to match other neighboring cities. Council approved further study
of this and other revenue options. Staff hired an independent public opinion research
firm in June 2010 to prepare and conduct a telephone community survey to assess
constituent attitudes, determine their service and funding priorities, and measure public
support for a potential November 2010 ballot measure. The consultants recommended
testing an alternative to the property transfer tax, and aone-half cent transaction and
use tax was suggested (see attachment A).
Fairbank, Maslin, Maullin, Metz & Associates conducted the telephone community
survey from June 27 through June 30, 2010, which included a random sample of 500
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City registered voters likely to vote in the 2010 election. The margin of error for the
survey is plus or minus 4.4%. A summary of key findings will be presented at the
upcoming Council meeting.
The primary finding is that almost two-thirds of respondents (63%) perceive the City has
a "great" or "some additional" need for funds to provide the level of services that Santa
Monica residents need and want. Although the property transfer tax did not poll
particularly well, voters seem more inclined to support a small sales tax increase. When
asked about a potential one-half cent sales tax measure to fund essential services and
without having detailed information, 59% would vote yes, 38% would vote no, and 3%
are undecided, if an election were held today. When additional information is
presented, support increases to 64% yes, 31% no, and 4% undecided: In addition,
respondents had .strong opinions and preferences on the types of City services they
want maintained and protected. Seventy-one percent are more inclined to vote yes on
the measure when they hear that over the last six years Sacramento has taken over
$40 million from the City of Santa Monica budget and that this measure will ensure local
control of funds to maintain vital services. Santa Monica voters' funding priorities
include: 911 emergency services, school and educational programs,. neighborhood
police patrols, services for residents with disabilities, public transit, youth violence
prevention, programs to retain and attract business and jobs to the city, gang and drug
prevention programs, library services.
Staff intends to develop a public outreach and education program that would provide
factual, objective and balanced information to update and inform the community about
these issues and seek input.
Discussion
As envisioned, this would be considered a general tax and as such would require a
simple majority (50% plus one vote) for voter approval. If the measure specifically limits
the uses of the revenue, it would be considered a special tax and, therefore, require a
two-thirds majority for voter approval. With Council direction staff will develop the
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proposal and resolution, further analyze other alternatives, or cease work on a voter
approved revenue enhancement.
Alternatives
Council may choose not to place a measure on-the ballot. If so, staff would propose
adjustments to the next year's budget for Council action in June. 2011, along with
potential tradeoffs or reductions in expenditures, to maintain a balanced budget, as
necessary.
Financial Impacts & Budget Actions
The cost of placing the measure on the ballot will be covered by the FY2010-11 election
budget. Voter approval of the measure would secure approximately $13 million in
revenue for the General Fund. Current estimates are that approximately one-quarter of
the new revenue would be generated by visitors and tourists.
A reasonable concern would be on the effect of such a tax increase on local retailers.
According to HdL, which is the most prominent auditor of sales tax in California, there
has been no reduction in taxable sales in any California city that has increased its sales
and use tax. Further, the additional transaction and use tax on automobile purchases
would be paid according to where a car is registered. So, Santa Monica residents
would pay the additional half-of-one percent tax wherever the car is purchased if the car
is registered in Santa Monica. Conversely, non-residents would not pay the tax when
purchasing a vehicle in Santa Monica. Thus, it should not harm auto dealers.
Prepared by: Kathryn Vernez, Assistant to the City Manager for Community and
Government Relations
Attachment A: California's Transactions and Use Tax
Approved:
Forwarded to Council:
'~j ~~ ~ G ~ ~ r -~ ~~
5~"
Rod Gould Rod Gould `~
City Manager City Manager
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Attachment A
www.hdlcompanies.com
CALIFORNIA'S TRANSACTIONS AND USE TAX
OVERVIEW
The State Legislature first authorized counties to seek voter approval of special transaction
and use tax Districts in 1969. The first voter approved district tax was the San Francisco Bay
Area Rapid Transit District to finance construction of the BART system. Several
transportation districts in other counties followed and eventually, the use of district taxes was
expanded to fund schools, open space protection, hospitals, county services and public
libraries. The State Legislature also began granting permission to specific cities to seek voter
consideration of a District tax.
In January 2004, the requirement that cities first obtain permission from the state legislature
to approach their voters was dropped and cities were authorized to go directly to their voters
for transactions and use taxes in multiples of 0.25%. As of November 2008, there are 118
districts had been approved in 40 counties. Approximately 90% of the population resides in a
transactions/use tax district. The districts are used to finance a variety of needs including
public safety services, local hospitals, road repairs and capital projects.
As with other California taxes, a transactions ahd use tax district must obtain a majority vote
if for general purposes and two-thirds vote if for specific purposes. However, a 1988 court
decision found a Santa Clara County District that specified that the revenues could be spent
for general county purposes required only a majority vote despite the passage of a related
advisory measure stating the voters' intent that the revenues be spent on specific projects
(Coleman vs. County of Santa Clara (64 Cal. App 4~h 662)).
The combined district transactions tax rates cannot exceed 2.0% for a total sales, transactions
and use tax rate of 10.25% except in Los Angeles County where the maximum rate will be
10.75% effective July 1, 2009. The pertinent provisions of the California Revenue and
Taxation Code are: Section 7251.1, Section 7258.9 and Section 7258.91.
DISTRIBUTION
With the exception of certain goods sold to operators of common carrier aircraft, the
transactions and use tax is imposed on the same goods and merchandise as the local sales and
use tax. However, where the Bradley Burns Sales and Use Tax is generally allocated to the
jurisdiction where the sale is negotiated or order taken, the transactions and use tax is
allocated to the district where the roods are delivered or placed into use.
For "walk-in" retail stores, the Board of Equalization generally assumes that the
merchandise will be used within the district where the store is located, unless the
retailer is asked to ship the merchandise outside the district as part of the sale.
Sellers or lessors of vehicles, vessels or licensed aircraft are required to collect the
transactions tax (if any), only for the district where the conveyance is to be
registered. Residents cannot escape the tax by purchasing ftom a dealer outside the
city as dealers statewide are required to collect any transactions tax for the
jurisdiction where the vehicle is registered.
For sales contracts that require shipment of the merchandise, the transactions tax is
levied for the district to where the merchandise is shipped if that district has a
transactions tax.
Thus, for sales other than "walk-in" stores, the transactions and use tax is imposed only on
consumers located within the district. In projecting revenues, cities who serve a regional
market for vehicles or merchandise to be delivered elsewhere such as contractor materials or
industrial equipment and goods, will find that their transactions and use tax is proportionally
lower than their sales tax revenues. A city whose residents and businesses must shop outside
the city for vehicles and business and construction related goods, will find that their
transactions and use tax receipts are proportionally higher than their sales tax revenues.
Retailers are only required to collect a transaction tax for sales in a specific district if they
have "nexus" in that district. Nexus is established by having a permanent or temporary
business location within the district including a warehouse, salesperson or office; having a
representative in the district for purposes of taking orders, making sales, delivery or
installation; deriving rental income from lease of tangible personal property within the district
or selling conveyances that require registration. If the retailer has no nexus within the district
and therefore does not collect the tax, the buyer is responsible for paying a corresponding use
tax.
PROCESS ISSUES
Cities and counties are required to contract with the State Board of Equalization for
administration of the ordinance imposing the tax. There are two contracts. One is for setting
up the tax, the second is for ongoing administration. Additionally, as the transactions and use
tax is separate and distinct from the local sales and use tax, a separate Resolution of
Confidentiality for access to the allocation data is required.
Cities contemplating a transactions and use tax should begin by contacting the State Board of
Equalization's Local Revenue Allocation Section: A team has been established to assist cities
with the preparatory functions for placing a proposal on the ballot including proper wording
of the ordinance and subsequent contracts. The specific advisor is currently Donna Puchalski
(916) 324-1371. In addition, Board Publication 28, Tax Information for City and County
Officials and Publication 44, Tax Tips for District Taxes contain related information and can
be downloaded from www.boe.ca.eov.
Finally, California Consfitution Article XIII C should be reviewed with the City Attorney to
determine whether or not the specific tax proposal being contemplated falls under the
requirements for consolidation with aregularly-scheduled general election for members of the
governing body.
Revised 3/LJ09