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SR-07-08-2014-8C - 104-092 / 1100-008City Council Meeting: July 8, 2014 Agenda Item: To: Mayor and City Council From: Marsha Jones Moutrie, City Attorney Subject: Rent Control Board's Proposal to Amend the City Charter to Authorize An Annual Registration Fee Of Up To $288 Per Rental Housing Unit And To Limit The Pass Through To Tenants To Half the Fee Recommended Action Staff recommends that the City Council consider and grant the request from the Rent Control Board ( "Board ") to place on the November 2014 ballot an amendment to the City Charter that would establish a maximum annual registration fee of $288 per controlled unit and cap the portion of the fee that landlords may pass through to tenants to half the fee. Executive Summary At its meeting of June 12, 2014 (Attachment A), the Board considered a recommendation from its staff to request that the City Council place an amendment to City Charter Section 1803(n) governing registration fees for controlled rental units. At present, that section authorizes and requires the Board to "finance its reasonable and necessary expenses by charging landlords annual registration fees in amounts deemed reasonable by the Board ", and it authorizes the Board to direct that landlords may pass through to tenants all or part of the cost of registration fees. Thus, Section 1803(n) grants to the Board general authority to impose registration fees and authorize pass throughs. Board staff recommended a proposed amendment that would: (1) authorize the Board to annually set the fee in an amount sufficient to cover reasonable and necessary expenses but not greater than $288 per unit; and (2) limit the amount of the pass through to tenants to 50% of the fee amount that a landlord actually pays. The Board approved the recommendation and forwarded a request that Council place the proposal before the voters. 1 City staff recommends that Council consider and approve the request (Attachment B) for the reasons detailed in the Board's staff report of June 12th and summarized in this report, including that the proposed measure would ensure the Board's long -term fiscal health and reduce the burden on tenants while preserving landlords' fair return on their property. Background As explained in the Board's staff report, the Rent Control Law was adopted by the voters in 1979 to countermand skyrocketing housing prices and demolition of the City's affordable housing stock. The Rent Control Law's substantive provisions establish maximum allowable rents, exemptions, and procedures for adjusting rents, among other things. The law also established the Rent Control Board as a separate entity from the rest of City government, charged with the specific power and responsibility to administer and enforce the Rent Control Law. To fulfill this challenging responsibility, the Board hired and relies upon its staff, which, among other things, daily provides services requested by both tenants and landlords. The Rent Control Law succeeded in achieving its purpose. Rents were stabilized and the "demolition derby" of the 1970's ended. But, new challenges arose -- first as litigation and later as changes to state law, which eventually mandated vacancy decontrol. Today, the Board and its staff continue to interpret, implement and enforce the Rent Control Law. Their work is funded by the registration fee. Charter Section 1803(f)(15) authorizes and requires the Board to charge and collect registration fees. Charter Section 1803(n) provides that the Board must "finance its reasonable and necessary expenses by charging landlords annual registration fees in amounts deemed reasonable by the Board." The Board implements this provision by periodically setting 2 the registration fee in an amount sufficient to cover its expenses. Last year, for the first time in six years, the Board modestly increased the registration fee in order to balance their annual budget. And, as described in Board's staff report, even that modest increase was highly controversial. Now, Board staff predicts that the fees will need to be increased again, likely as soon as fiscal year 2015/16. With that prospect in mind, staff recommended seeking a Charter Amendment to ensure stable funding. The Board accepted its staff's recommendation, and the recommendation was forwarded to the City Attorney's Office. Discussion The Board's staff report provides a detailed explanation of the necessity for the proposed Charter amendment. In summary, the current Charter provision generally authorizing setting the registration fee does not afford sufficient certainty and stability. Last year, when the Board considered raising fees to balance the budget, local landlords threatened to sue unless they were entitled to pass through 100% of the fee. Landlords claimed, as they have in the past, that the fee could not be increased without voter approval. Board staff anticipates that this and other objections to increases will be made in coming years and ensuing litigation will drain Board resources (and thereby drive up fees). Incorporating an upper limit on fees into the City Charter would forestall such challenges and ensure the fiscal stability that will allow the Board and its staff to continue to protect affordable housing to the full extent allowed by law. The current annual per -unit registration fee is $174.96, or $14.58 per month. The maximum fee that the Board proposes is $288 per year, or $24 per month. If the proposed Charter amendment passes and the maximum fee is thereby established, the N Board would continue to set the fee annually, increasing or decreasing it based on the Board's projected expenses for the year. The maximum fee would serve as a limit on the Board's authority. Absent an unforeseen spike in expenses, the Board's staff predicts that, expenses would rise to the level necessitating collection of the proposed maximum of $288 per year in twelve years. Thus, if this proposed measure were adopted by the voters, the registration fee would probably increase gradually over the next dozen years. Meanwhile, adoption of the proposed cap at this time would ensure the stability of Board operations, reduce the likelihood of a legal challenge, and obviate the need for another vote of the people to change the amount in the near future. In addition to ensuring the Board's long -term fiscal health, the cap of $288 per year would allow landlords to continue to receive a fair return. The Board's staff report notes that with the median rent for a one - bedroom apartment at $1629 per month, or $19,548 per year, the proposed maximum fee (which would not be charged for years) would be less than 1.5% of current median rent. And, under the Board's proposal, landlords would be authorized to pass through 50% of the fee. In the past, except for last year, landlords have been allowed to pass through the entire registration fee. In explaining the proposal to limit the pass through to 50 %, Board staff notes that allowing a full pass through of fees may have made sense in 1979. But, it no longer does. Vacancy decontrol and market forces have resulted in a steep increase in median rents. With the current registration fee and pass through, landlords are out of pocket only a tenth of one percent of the rent (1.5% if they forego the pass through). Thus, landlords can likely bear an increase in registration fees and are almost certainly better situated to bear that increase than their increasingly rent - burdened tenants. The maximum proposed fee and pass through would result in tenants experiencing a decrease in the monthly surcharge that could be imposed by their landlords. At the maximum of $288, a 50% recoupment would lower the rent surcharge from $13 to $12 per month. However, at the lower registration fee amounts that Board staff anticipated for the next several G! years, the rent surcharge would likely be closer to $7 -$8 per month — a 40% decrease from the present surcharge. Landlords' out -of- pocket costs might rise but would likely remain at or near 1% of rent, perhaps less because of their ability to factor costs into newly established rents. The Board and its staff also note that the 50% pass through would reflect the fact that Rent Control staff's time is about evenly divided between providing services to landlords and tenants. Thus, the Board has concluded that the proposed pass through would be fair to both tenants and landlords. City staff agrees with the Board staff's analysis and the Board's conclusions and has prepared proposed language amending Section 1803(n). It is attached as Attachment C for Council's review and approval. Staff recommends that the Council direct staff to prepare the resolutions necessary to place the proposed measure on the November ballot. Alternatives Council could decline to place the measure on the ballot or could consider the alternatives that were presented to the Board. They included phasing in the pass through provision over time and imposing an intermediate maximum fee. However, for the reasons stated in the Board's staff report, City staff recommends against these alternatives. Next Steps Staff will return with the resolutions necessary to place City measures on the ballot, including this one, on July 22nd. 5 Financial Impacts & Budget Actions Based on past practice, staff assumes that the Rent Board would reimburse the City for any additional election costs incurred by the City as a result of placing this measure on the November ballot. Prepared by: Marsha Jones Moutrie, City Attorney Approved: Forwarded to Council: Rod Gould City Manager A. Rent Control Board Staff Report dated June 12, 2014 B. Request to Council to Place Measure on the November 2014 Ballot C. Proposed Amendment to City Charter Section 1803(n) I ATTACHMENT A SANTA MONICA RENT CONTROL BOARD MEMORANDUM TO: Santa Monica Rent Control Board FROM: J. Stephen Lewis, General Counsel FOR MEETING OF: June 12, 2014 RE: Recommendation to City Council of Ballot Measure Fixing a Maximum Registration Fee Executive Summary The Board will consider the following question: Should it be recommended that the city council place on the ballot for the November general municipal election a measure to amend the city charter to: • establish a maximum annual registration fee of $288 per unit for rent - controlled emits; and • cap the amount of the fee that landlords may pass through to tenants at fifty percent? If enacted by the voters as proposed in this staff report, the measure would ensure predictable funding for the rent control agency while capping annual registration fees at a specified amount. It would also limit the amount of the registration fee that landlords could pass through to tenants, from a current monthly maximum of $13 per unit to a monthly maximum of $12 per unit, with a likely initial decrease to under $8. Background Due to a variety of factors —its proximity to the ocean, its business climate, and its airport, among others —Santa Monica has long been a magnet for development. Some development is no doubt a good thing; public libraries, affordable- housing projects, and revenue to fund city services all result from it. But there can be too much of even a good thing, as anyone who has ever been stuck in gridlocked traffic or circled block after block looking for parking can attest. It was in part to limit the deleterious effects of runaway development, along with the dramatic spike in housing costs that rampant development can bring, that the voters enacted Santa Monica's rent control law. The law was added to the city charter by voter initiative in 1979 in response to a severe rental- housing shortage precipitated in large part by what came to be known as the "Demolition Derby." During a single fifteen -month period, local landlords razed over 1,300 rental units and converted hundreds more to condominiums. Rental units were lost at a rate ten times greater (relative to population) than in neighboring Los Angeles.' This dramatic reduction in housing supply was accompanied by an equally dramatic rise in rents. Many tenants who were forced to move as the result of demolition were unable to find affordable replacement housing in Santa Monica, with the result that they were permanently displaced from the city. Even those who remained faced the loss of their housing due to rapidly rising rents .2 And, of course, the demolished units would be replaced not by new affordable units equal in number to those that were lost, but by developments that would maximize property owners' profits through high per -unit costs and maximum density. 3 The enactment of local rent control alleviated these problems. While it did not fully stop development in Santa Monica —and was never intended to —it did significantly limit demolition of the existing housing stock and redevelopment in residential areas,4 with the result that the majority of new development in the city has been in commercial corridors. Thus, the existing housing stock has been preserved, development has been dramatically limited (albeit a great deal of development unquestionably continues), and in -place tenants have been protected from displacement by sharp rent increases. But the rent control law is not self - executing, and its administration is not free. The Rent Control Board is required to "[ m]ake such studies, surveys, investigations, conduct such hearings, and obtain such information as is necessary to carry out its powers and 1 Nash v. City of Santa Monica (1984) 37 Cal.3d 97 2 See, City Charter § 1800 ( "A growing shortage of housing units resulting in a low vacancy rate and rapidly rising rents exploiting this shortage constitute a serious housing problem affecting the lives of a substantial portion of those Santa Monica residents who reside in residential housing. In addition, speculation in the purchase and sale of existing residential housing units results in further rent increases. These conditions endanger the public health and welfare of Santa Monica tenants, especially the poor, minorities, students, young families, and senior citizens. ") 3 By saying this, staff does not mean to imply that property owners are "greedy ", as is sometimes alleged. Like any other business owners, landlords are presumably in business to maximize their income. But it is government's job to impose reasonable regulations so that their doing so is not at the expense of the public welfare. The rent control law was one such regulation. A Due to changes in state law, local government can no longer absolutely prohibit the loss of existing rental units; but limitations placed on rents that can be charged for units that are removed from the market and later returned, and the non- exemption from rent control of most new construction on property from which controlled units have been removed has served to severely limit it. duties. 115 These duties include the establishment of maximum allowable rents, enforcement of those rent limitations, investigations of violations, and adjudication of rights and responsibilities under the law. Necessarily, the Board must employ staff to carry out these charter- mandated functions— something that the voters required the Board to do when the rent control law was first enacted.6 The Board's staff and its other expenses are paid for with registration fees that owners must pay for each controlled unit. The Board's entire budget goes toward things that are directly related to its charter - mandated functions (the cost of necessary personnel), or indirectly related to them, but nonetheless essential (the cost of computers, telephones, mail, etc.). These costs increase annually. Faced with a budget deficit that endangered its ability to perform its duties, the Board last year voted to increase registration fees for the first time in over six years. While the increase was modest at $1.58 per month for each unit, it was sufficient to balance the budget. Cost savings, principally through unfilled positions, have enabled the Board to consider a second fiscal year's budget that is near balance without increasing fees. But it is projected that fees will need to be increased again, likely as soon as the 2015/16 fiscal year, in order to avoid a return to unsustainable deficit spending. The graph below shows what will happen to the Board's finances several years out if the fees remain constant at today's level $5,550,000 $5,450,000 $5,350,000 $5,250,000 $5,150,000 $5,050,000 $4,950,000 $4,850,000 $4,750,000 $4,650,000 $4,550,000 $4,450,000 Projected 2013/14 Savings /Deficits $187,950 Projected Expenses 1v «r..,.,,,,ti av 7019/20 2014/15 2015/16 2016/1/ cu"I -�-- -- ($36,101) ($142,405) ($426,682) ($524,056) ($742,583) ($890,052) 5 City Charter § 1803(f)(7). 6 City Charter § 1803(p) ("The Board shall employ and pay such staff, including hearing A ins ectors as may be necessary to perform its function.... "). examiners an p 7 Projected expenses based on city finance department five -year forecast and the historical rate of increase in Board expenses. As the graph shows, a modest projected $36,000 deficit in the next fiscal year would increase to nearly $150,000 the following year, and balloon to close to a half million dollars the year after that. Staff therefore recommends that the Board seek from the city council a ballot measure authorizing an increase in fees up to a specified amount. By enshrining the maximum registration fee in the city charter, the voters would ensure a stable funding source through multiple budget cycles, avoid deficit spending, and safeguard the Board's future ability to function at full capacity in order to secure the benefits that the voters sought by enacting the rent control law in the first place. By authorizing a fee "up to" a maximum amount —but not requiring that the fee actually be that high —the proposed measure would also allow the Board to continue to exercise the fiscal restraint that it traditionally has practiced. Analysis a, Why would changing the Board's authority for charging fees require an amendment to the city charter? Any change in registration fees engenders controversy and the threat of litigation. Indeed, even when the Board lowered fees in 1997, a group of local landlords filed suit. The suit lacked merit and was dismissed by the trial court, after which the plaintiffs appealed. Though frivolous, the trial court proceedings and unsuccessful appeal absorbed substantial resources. When the Board considered raising fees to balance its budget last year, a number of local landlords (many of whom were involved in the 1997 suit against the Board) again threatened to sue. Several said that they would sue if the fee were increased by a single cent. Others said that they wouldn't mind if the fee were increased, but said that they would sue unless they were allowed to pass through 100% of any increase to their tenants. A local lawyer who represents many of those landlords threatened to file a lawsuit that would divest the Board of its entire budget, effectively ending rent control in Santa Monica. Now that lawyer has filed a claim with the Board seeking to do just that. Regardless of the claim's merit, defending against it will be a drain on the Board's already -tight budget, should the claimant ultimately file suit as expected. And, while staff believes that the claim lacks merit, no litigation result is ever guaranteed. But one thing is nearly certain: in view of the long history of litigation and threats of litigation every time the Board changes fees legislatively — regardless of whether they are modestly increased by just enough to balance the budget or even lowered —any future fee increase will result in actual or threatened court action that will drain Board resources that could otherwise be used for the proper administration of the rent control law. Because the challenge to every change in the registration fee has been based on a complaint that the changed fee was not approved by the voters, the surest way to avoid future challenges is for the voters to approve the fee. Under the city charter, registration 4 fees are currently established by a majority vote of the Board; the only way to change this, and to secure voter approval of a specified fee, is to amend the charter to include a maximum specified fee. b. What should the maximum fee be? An increase in the fee should be large enough to allow the Board to continue to meet its reasonable and necessary expenses for several years running, but not so large that it might reasonably be expected to deprive landlords of a fair return. The current annual per -Lmit registration fee is $174.96, or $14.58 monthly. Of this, the charter allows landlords to pass through as much as one hundred percent, subject to any limitation imposed by the Board. Current Board regulations allow landlords to pass through to tenants about ninety percent of it, or $13 per month. For each unit, then, landlords who pass through registration fees currently are out of pocket $1.58 per month, or less than $20 per year. With a $1,629 median monthly rent for a one- bedroom apartment ($19,548 per year), this means that landlords are out of pocket less than one tenth of one percent of the rent.$ Even those landlords who choose not to recoup their fee costs from their tenants are out of pocket less than 1% of the median one- bedroom rent. Thus, there is considerable room to increase the maximum registration fee to a level that will ensure the Board's long -term fiscal health while still allowing landlords to achieve a fair return. Staff believes that a maximum per -unit annual fee of $288 ($24 per unit monthly) would accomplish these twin goals. e. What is meant by a "maximum" fee? Once it is enshrined in the city charter, a fee cannot be changed except by the voters. Because it would be inefficient and expensive to put a measure increasing fees on the ballot at every election, sound planning would dictate that the voters should authorize the Board to charge a fee tap to a certain amount, even while recognizing that it is unlikely that that amount will actually be reached for a number of years. Under the charter as currently written, the registration fee must be sufficient to allow the Board to meet its "reasonable and necessary expenses." It is not proposed that this be changed. Absent an unforeseen spike in expenses, it would take about twelve years before the Board's reasonable and necessary expenses would be so high that it would have to actually collect a $288 annual per -unit fee, as the graph on the following page shows. s Santa Monica Rent Control Board 2013 Annual Report, p. 16 5 Projected Expenses thru FY 26/27 { ,650 000 $288 Registration Fee in FY 25/26 1 -_ - $6,850,000 Registration Fee 5288 13/14 14/15 15/16 16/17 17/18 18/19 19/20 20/21 21/22 22/23 23/24 24/25 25/26 26/27 The charter as currently written also requires the Board to enact an annual budget, and to annually charge registration fees to meet that budget. It is not proposed that these provisions be changed. Because the budget may include only "reasonable and necessary expenses," and because a given year's fees may be sufficient only to meet them, the proposed charter amendment would not authorize the Board to charge the maximum amount until and unless it became necessary to do so. Rather, each year the Board would be permitted to charge a registration fee only in the amount necessary to meet its expenses, and only up to the charter - imposed maximum. It is therefore likely that fees would change incrementally from year to year, only rising over time to the permitted maximum. Even if costs spiked one year, they might decline the next, lowering the Board's reasonable and necessary expenses for that year. So the Board should be empowered to charge an annual registration fee that allows it to meet its reasonable and necessary expenses, but only up to $288 per unit annually. It is expected that the registration fee that the Board would actually charge would be well below the maximum for many years. At some point — several election cycles into the future, at current estimates the Board will have to charge the maximum authorized fee. At some point after that, it will be necessary to ask the voters to increase it. But until then, the voters will have given the Board the authority to meet its expenses while continuing to require it to charge only as much as needed. d. The proposed charter amendment would also limit the registration -fee pass through to 50 %. How would this affect tenants and landlords? From the commencement of rent control thirty -five years ago, landlords have been charged per -unit registration fees. For all but the last of those years, the Board has authorized landlords to fully recoup all of their registration -fee costs from their tenants by means of a monthly surcharge on rents. Because it is envisioned that an increase in the registration fee will be gradual, the initial effects should be negligible to landlords and tenants alike, even assuming the current pass - through system. But the fee will eventually reach its $288 maximum (if such a maximum is enacted via charter amendment). If landlords are permitted to pass through most (or all) of this fee as a rent surcharge, there would undoubtedly be a negative effect on tenants. As fees increased, and the pass - through increased along with them, the pass - through surcharge on tenants would eventually reach $24 per month, which would be in addition to any other surcharges and annual general adjustments. Because they would be recovering most or all of their full cost, the effect on landlords would remain nonexistent, or nearly so. This is the necessary result of the historical practice of allowing landlords to pass through their entire registration fee costs to their tenants. Allowing a full pass through of fees to tenants probably made a great deal of sense when rent control began in 1979. Back then, rents were strictly controlled at their 1978 level. It may have seemed unfair to burden landlords with the cost of a new regulatory system in an environment in which rents were fixed at pre - regulation levels. But since 1999, landlords have been permitted to establish rents for new tenancies at any rate that the market will bear. This has resulted in a steep increase in median rents. Currently, the median rent for a one - bedroom apartment is $1,629 a month ($19,548 per year). With a current registration fee of $14.58 and a permitted pass- through of $13 per month, landlords who pass through registration fees to their tenants are out of pocket less than a tenth of one percent of the rent. Even with no pass through, registration fees are equal to less than 1% of the median one - bedroom rent. Thus, landlords can likely bear an increase in registration fees more easily than increasingly- rent - burdened tenants. Moreover, because landlords now can —and presumably do— account for their costs when establishing initial rents, including the cost of annual registration fees, they are able to recoup those fees even absent a pass - through. Allowing a surcharge to fully recoup a cost already accounted for in the setting of rents would seem to be at least as unfair to tenants as the unfairness to landlords that the traditional full pass through was intended to avoid. To prevent unfairness in either direction, the Board should consider recommending to city council a charter amendment that would allow only half of the registration fee to be passed through to tenants by means of a prorated monthly surcharge. Allowing a fifty percent pass - through of fees would also recognize that, while it is the landlord's business that is being regulated, the Board dedicates roughly half of its efforts to providing services to landlords and tenants alike. Petitions are fried by both landlords and tenants, RA for example, and no matter by whom they are initiated, landlords and tenants are provided equal access to the adjudicatory process. Allowing a fifty percent pass through would also bring Santa Monica in line with other California rent - control jurisdictions, the vast majority of which permit landlords to recoup only half of their paid registration fees from tenants by means of a monthly surcharge. If the charter were amended to allow a maximum registration fee of $288, only half of which landlords could pass through to tenants, the registration -fee surcharge that landlords could impose on tenants would be $12 per month even at its very highest, ($288 12 months x 50% _ $12), down from the $13 that they currently pay. Because only a modest increase in fees will be required in the first years after the amendment, it is likely that the maximum registration -fee pass- through to tenants would be closer to $7 or $8 per month —a roughly 40% decrease from the current $13. Landlords' ultimate out -of- pocket cost might rise, but would remain at or near 1% of the rent. And, because they can account for that cost when setting the rents on new tenancies, even that appears unlikely for most landlords, who experience regular turnover. So if the charter is amended to allow the Board to charge landlords a $288 maximum registration fee, and is also amended to allow landlords to recoup only fifty percent of that payment from tenants by means of a rent surcharge, tenants would be affected by a decrease in the surcharge. Due to continually - rising median rents, which are likely to keep any increase in fees at or near 1% of receipts, and due to their ability to account for registration fee costs when setting initial rents, the effect on landlords would be negligible, if there were any effect at all. e. Should a change in the pass - through percentage be phased in over time? When the Board increased registration fees in 2013, it discussed many of the issues addressed in the preceding paragraph — particularly the unfairness of allowing landlords to recoup their entire registration -fee cost from tenants when, presumably, they already account for it in the rents that they set. It was suggested then that landlords be permitted to recoup only a percentage of the registration -fee cost, with the percentage dropping over time. Numerous permutations of this phase -in idea were discussed. All were eventually rejected. If the Board decides to propose a charter amendment limiting the amount of registration -fee costs that landlords may recover from tenants, staff recommends that any idea of a phase -in again be rejected, with the result that the permitted pass - through be definite and immediate. Staff makes this recommendation for two reasons. First, the charter is like the city's constitution. It is not like a mere ordinance or regulation that can be legislatively changed as needed. Once the voters amend the charter it can be amended further only in a subsequent election. Therefore, it should include broad, basic governing principles, leaving fine - tuning to the regular legislative process. This is why, for example, staff recommends that the charter provide for a maximum registration fee, allowing the Board to legislatively set the fee each year within the charter's limit, rather than including a specific fee in the charter for each of the next several years. This sets parameters and allows legislation within those parameters as needed. But in the case of any permitted pass - through, it is not clear that any subsequent legislation is necessary or advisable. Staff believes that a fixed permitted pass - through of fifty percent makes the most sense for the reasons discussed earlier in this report: Board staff works roughly equally with landlords and tenants alike; it is the landlords' business that is being regulated; the work that staff does relates to ensuring landlords' compliance with that regulation; and tenants benefit from the regulation, making it appropriate that the landlord be permitted to recover some of the regulation's cost from their tenants if they so choose. But if the Board believes that some phase -in is useful or appropriate, then staff recommends that the proposed charter amendment be as simple as possible to permit that; for example, by establishing a maximum pass - through within the parameters of which the Board could, in the future, regulate, rather than enshrining a phase -in in the charter language itself. f. Is there an alternative to the proposed maximum $288 registration fee? As demonstrated by the graphs depicting the Board's projected expenses, it appears likely that it will take another twelve years before a $288 annual registration fee per unit ($24 per unit monthly) will be necessary. And, as noted elsewhere above, it is not proposed that the provision requiring the Board to enact an annual budget covering its "reasonable and necessary expenses" be changed. So, although the proposed charter amendment would theoretically authorize the Board to charge the maximum fee in the first budget year after enactment, existing (and continuing) charter provisions would likely not allow that —it is difficult to conceive of a "reasonable and necessary" expense over the coming year that would justify collecting the maximum fee. But if the Board believes that it would be in the public interest to impose an intermediate maximum fee, absolutely guaranteeing that it could be no higher than a certain level for the first several years, staff recommends that it choose a fee between the current $174.96 and the ultimate proposed maximum of $288. Staff recommends that the intermediate maximum be $240 through fiscal year 2020/21, with a proposed $288 maximum thereafter. As the graph on the following page shows, this would ensure that the Board could meet its anticipated expenses through 2021, and would also be sufficient to allow payment of large, unplanned -for costs, should they arise. $7,850,000 $7,650,000 __. projected Expenses thru FY 26/27 $7,450,00 __ - $240 Cap on Registration Fee in FY 20/21 $7,250,000 -- --- - - - - -- Registration Fee S240 Registration Fee 5288 13/14 14/15 15/16 16/17 17/18 18/19 19/20 20/21 21/22 22/23 23/24 24/25 25/26 26/27 Recommendation: Direct staff to forward to the Santa Monica City Council a recommendation to place on the ballot for the November 2014 general municipal election a proposal to amend the City Charter to: • Authorize a maximum annual registration fee of $288 per unit; and • Permit landlords to pass through to tenants one half of the registration fee actually paid, as a surcharge on the maximum allowable rent, to be prorated in equal amounts monthly. Alternative Recommendation Direct staff to forward to the Santa Monica City Council a recommendation to place on the ballot for the November 2014 general municipal election a proposal to amend the City Charter to: • Authorize a maximum annual registration fee of $240 per unit though June 2021; • Authorize a maximum annual registration fee of $288 per trait from July 2021; and • Permit landlords to pass through to tenants one half of the registration fee actually paid, as a surcharge on the maximum allowable rent, to be prorated in equal amounts monthly. 10 ATTACHMENT B June 23, 2014 Rent control Board 1685 Main Street PO Box 2200 Santa Monica, CA 90407 -2200 Phone: 310- 458 -8751 Mayor Pam O'Connor and Members of the City Council 1685 Main Street Room 209 Santa Monica, CA 90401 Re: Proposed ballot measure to amend the City Charter to establish a maximum annual registration fee for rent controlled units, and to establish that landlords may pass through half of their registration -fee costs to tenants. Dear Mayor and Councilmembers, At its June 12 meeting, the Santa Monica Rent Control Board voted to recommend that the City Council place on the ballot for the November 2014 general municipal election a measure that would: • establish that the Board may impose an annual registration fee of up to $288 for each controlled unit, to fund its reasonable and necessary expenses; and • establish that landlords who have timely paid registration fees may recover fifty percent of that cost by means of a monthly surcharge on tenants' rents. The Board believes that these amendments are in the public interest because they will provide voter approval of .a secure funding source for the Board's Charter- mandated work, aid transparency, encourage fiscal restraint, and limit the burden to tenants caused by registration -fee surcharges. The attached staff report explains in greater detail the reasons for the proposal, and the history behind it. The report suggested two options for the Board's consideration, and they voted to approve option 1, which is consistent with the content of this letter. If there is anything that I can do to help with your consideration of this issue, please do not hesitate to let me know. Sincerely, tephen Lewis �l General Counsel Santa Monica Rent Control Board ATTACHMENT C Proposed Amendment to City Charter Section 1803(n) The Board shall finance its reasonable and necessary expenses by charging landlords annual registration fees in amounts deemed reasonable by the Board up to a maximum annual registration fee of $288 per controlled rental unit. The Beard may direct that all or-part Of Such - €ee Fifty percent (50 %) of the amount of the registration fees may be passed through from landlords to tenants, and the Board may establish applicable conditions and procedures governing the pass through. The Board is also empowered to request and receive funding when and if necessary from any available source for its reasonable and necessary expenses.