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HomeMy WebLinkAbout02/19/1991, 1 - INCREASE IN TRANSIENT OCCUPANCY TAX RATE i MEETING DATE: �01N41�r�Vlll!Iflul��' city of San LUIS OBISpo MOGe COUNCIL AGENDA REPORT ITEM NUMBER: FROM: John Dunn, City Administrative Officer William C. Statler, Director of Finance Prepared by: Linda Asprion, Revenue Manager SUBJECT: INCREASE IN TRANSIENT OCCUPANCY TAX RATE CAO RECOMMENDATION Adopt an Ordinance increasing the Transient Occupancy Tax Rate from six percent (6%) to nine percent (9%) effective May 1, 1991. DISCUSSION Background The Transient Occupancy Tax (TOT) was originally implemented in 1968 at a five percent (5%) rate. Only one rate increase has occurred since then; in 1976, the TOT rate was increased by one percent (1%) to the current rate of six percent (6%). The need to address a rate increase in the TOT has been under serious discussion since 1987 when the City's long-term financial health was identified as a major objective during the 1987-89 Financial Plan process. In response to this objective, a Comprehensive Financial Management Plan (CFMP) was prepared, which addresses the City's financial needs through the year 2000. Increasing the TOT rate from six percent (6%) to nine percent (9%) was identified in the CFMP as a key source of new revenue to support the City's long-term financial health. In January 1990, the Council identified the need for citizen participation and involvement in developing programs to ensure the City's long-term financial health. The Citizens' Advisory Committee (CAC) was assigned this task and they have completed their extensive review and evaluation of the City's long-term financial needs. The CAC's report, which was submitted to Council at their February 5, 1991 meeting, points out that the goals of the City toward "quality-of-life" and "economic development" must be viewed as parallel and complimentary objectives to achieve a "balance" in our commitment to financial health and a strong General Fund. Implementing the increase in the TOT rate from six percent (6%) to nine percent (9%) was recommended in CAC's report as being consistent with this commitment. How Do We Compare With Other Cities? In March, 1989, the League of California Cities surveyed the cities throughout the state requesting their transient occupancy tax rates for fiscal years 1984 through 1988. Using this survey, the staff has chosen cities of similar size (greater than 25,000 but less than 100,000 population) with a college and/or tourism environment similar to San Luis Obispo for comparison. Although these TOT rates are for fiscal year 1987-88, the staff has confirmed with each of the following cities that the rates have remained the same. r ti��F�'iililll��►'�' ; city of San lues OBISPO COUNCIL AGENDA REPORT Transient Occupancy Tax Rates for Similar Cities City Population Rate Davis 4068 10% Monterey 30,000 10% Napa 56,000 10.5% Santa Barbara 78,957 10% Ventura 88,741 10% Chico 39,000 9% Santa Cruz 50,000 9S% Claremont 36,000 10% As noted above, the TOT rates range from 9% to 10.5%. The average rate of the eight cities listed is 9.9% for fiscal year 1987-88. For comparison purposes, the following is a summary of TOT rates for local area cities: Transient Occupany Tax Rates for Local Agenciess City Population Rate Morro Bay 9,975 8% Pismo Beach 7,102 7% Santa Maria 52,955 8% Lompoc 32,333 10% Solvang 4,500 8% Other SLO County cities and the County 6% Who Pays Transient Occupancy Taxes? TOT revenues are paid by the visitors to our community; it is not paid by local residents or businesses. Placing this tax on our visitors appropriately recognizes that they receive municipal services during their stay, and as such, they should share in the cost of providing them. What Will Be the Impact on the Local Economy and Tourism? Based on information developed as part of the City's 1983 Strategic Planning Program, it is estimated that tourism represents approximately 20% of the economic industry to the City. Since the increase in TOT rate will be paid by the visitors staying in accommodations within the City limits, it is important to keep the dollar impact in perspective. Increasing the TOT rate to 9% would mean a $3.00 increase on a $100.00 per night room; $2.10 on a $70.00 per night room; and $1.50 on a $50.00 per night room. It is difficult to fully quantify the impact of this rate increase in the local tourist economy. However, since the 9% TOT rate is comparable with other tourist destinations, and the incremental cost to visitors is nominal ($1.00 to $3.00 per night), it is doubtful ���,,�fl� j!j►,j�ip �i�IP�i; city Of San Luis OBISPO WaZe COUNCIL AGENDA REPORT that there would be any serious ramifications. However, any negative impacts can be offset by a continued City commitment to supporting our local tourist economy. How Does the City Promote Tourism? The City actively and financially participates in attracting tourism. In June 1970, the City Council established a seven member Promotional Coordinating Committee (PCC). The long-range goals of the PCC are to: (1) improve the quality of life available to all residents and visitors; and (2) promote the development of the City as a regional trade, recreational, and tourst center. The budget allocation for PCC Operating Programs for 1990-91 is $279,800, which is funded in total by the General Fund through its formal allocation of 20% of TOT revenues to this program. To accomplish their goals, the PCC established a Promotional Program which consists of the following. 1. Advertising. An advertising contract in the amount of $75,700 is in place for the purpose of developing an advertising campaign that encourages overnight travel to the City from other parts of California. Overnight tourism has been a focal point of the campaign for many years because of its relationship to the TOT. 2. Vuitor Promotion. The Chamber of Commerce holds two contracts, one for visitor services and one for promotional services. The combined total of the two contracts is $77,100. The visitor services contract represents the City's contribution toward the operation of a full service Visitors Center which is open to the public seven days a week. Staff at the Visitors Center provide tourists with information about the City, respond to written and telephone inquiries, distribute maps and promotional literature, and maintains information on the local economy, recreational facilities and cultural events in the City. The Chamber typically responds to over 200,000 inquiries regarding the City a year. The Chamber's promotional contract is used to cultivate long-term relationships with the media. The success of this program is measured by the PCC through the number of articles and editorials on the City that appear in popular travel magazines. 3. Visitor & Conference Bureau. - A contract in the amount of $46,000 is held with the San Luis Obispo County Visitor's & Conference Bureau. This contract represents the City's contribution toward an overall marketing of the central coast as a tourist destination. This is accomplished through a combination of direct advertising and promotion. 4. Activity Grants. Various activites are sponsored and financially supported each year by the City to attract visitors from through-out the State. For 1990-91, $75,000 has been allocated for this purpose. / -3 l► city Of San Luis OBisPO WiiCOUNCIL AGENDA REPORT 5. Public Art. The involvement of the PCC in the Public Art program allows for active solicitation for continued improvement of the aesthetic environment of the City. During 1989-90, $50,000 was budgeted for a matching public art program, and $5,000 was budgeted in 1990-91 for on-going support of public art programs. In addition to the PCC, the City assists in financially sponsoring many other activities which benefit the local tourist industry. For example, Farmer's Market Thursday night activites, which the City partially subsidizes, often brings visitors in one night earlier for their week-end; and the new trolley service, which has been paid for in total from the General Fund, services the local motels for the Thursday night activities as well as creating a downtown amenity for visitors. The City also supports a wide variety of special events such as Mardi Gras, Mozart Festival, LaFiesta, Christmas Parade, and other activities in Mission Plaza and the downtown. With all of the funding for these activites coming directly from the General Fund, an increase in the TOT rate will favorably effect the amount of funding which can be allocated to promote tourism. The PCC willl be meeting on February 13, 1991, and the proposed TOT rate increase will be discussed with them at that time. Do We Need Additional Revenues? As discussed in the CFMP and the CAC's report submitted to the Council on February 5, 1991, the City's current financial condition is very strong by state and national standards. The City has enjoyed a strong local economy since World War II, which has contributed significantly to our fiscal success. However, there are many communities that have financial resources equal or greater than our own, but nonetheless have experienced serious financial difficulties. Although our strong local economy has enabled us to deliver an excellent program of municipal services, the City's current financial health is primarily attributable to the City's past and current financial management policies and practices that reflect our commitment to fiscal responsibility. Although the City is in good financial condition today, continuing our committment to an excellent program of municipal services and achieving our public facility goals will require new revenues. The CACs report identified $5.7 million in annual costs required to support new programs or projects that have already been adopted by Council. These expenditure needs only increase if other projects currently under consideration, but not yet adopted, are also considered. An excerpt from this report summarizing these projects is provided in Attachment A Increasing the TOT revenues is one component of an overall strategy to maintain our financial health - now and in the future. Has the Business Community Been Involved? During the past four years there has been extensive discussion between the City and the business community regarding the issue of increasing the TOT. The following is a summary of concerns expressed to date from various elements of the local business community regarding the proposed rate increase. ��ti�i�y��►IIIII�I�►uNui►��;;;ii city of san lues oBispo Nii% COUNCIL AGENDA REPORT Chmnber of Commen e Based on previous discussions, the Chamber is not necessarily in opposition to increasing the TOT rates, assuming that the City continues to maintain its strong support and financial commitment to community advertising and promotional efforts. San Luis Obispo Hotel/Motel Association This group has previously expressed their opposition to the increase, and correspondence opposing the increase has been received directly from two hotel operators. Visitors and Converence Bw ems (PCB) Similar to the Chamber of Commerce, the VCB is not necessarily opposed to the increase, but they are concerned that the City recognize the importance and benefits of the local tourist economy, and that the City will continue its support of community advertising and promotional efforts. A meeting between City staff and the Chamber of Commerce, VCB, and Hotel/Motel Association has been scheduled for Monday, February 11, 1991 to further solicit their opinions and discuss their concerns. Staff will provide a supplemental memorandum to Council summarizing this meeting by February 15, 1991. When Will the Increase Be Implemented? The increase in the TOT rate could be implemented immediately upon Council adoption. However, in order to ensure adequate time for a smooth transition for both City staff and the hotel operators, it is recommended that the increase be effective May 1, 1991. FISCAL IMPACT At a six percent (6%) rate, TOT revenues for 1989-90 were $1,427,768. Accordingly, the three percent (3%) increase in the TOT rate should generate approximately $700,000 annually in new General Fund revenues. Since TOT is a General Fund revenue source, it is available to support any general municipal purpose. By policy, the Council may allocate this revenue as they deem appropriate. Since 1970, the City's policy has been to allocate 20% of TOT revenues to community promotion activities. ALTERNATIVES There are three basic alternatives available to the Council: ■ Approve Less than a 9% Transient Occupancy Tax Rate The Council could approve either a one percent (1%) or a two percent (2%) rate increase rather than the recommended three percent (3%) rate increase. A one percent (1%) increase will equate to approximately $230,000 annually; and a two percent (2%) increase will equate to approximately $460,000 annually. However, taking into consideration the rate in other comparable cities as well as the City's long-term financial health needs, the 9% rate is justified. InI�'%�1ilk►illl�� li;�;li city Of San lues OBISPO COUNCIL AGENDA REPORT ■ Approve No Increase in the Transient Occupancy Tax Rate Based upon the City's long-term financial health needs, as supported by the approved objectives in the Comprehensive Financial Management Plan and the recommendations of the Citizens' Advisory Committee Report, this is not a viable alternative. ■ Approve a Phased Increase in the Transient Occupancy Tax Rate As recommended by the CAC, the Council could implement a phased increase appproach by approving a one percent (1%) or two percent (2%) increase (raising the TOT rate to 7% or 8%) at this time with an additional increase to become effective at a defined later date (i.e. one or two years later). However, taldng into consideration the TOT rates of other comparable cities, the length of time since the last TOT rate increase, and the current requirement for the funds, this alternative is not recommended. SUMMARY Increasing the TOT rate from six percent (6%) to nine percent (9%) has been the subject of extensive community discussion over the past four years. The proposed increase will set TOT rates at competitive levels with similar communities while generating funds that will assist in meeting demonstrated financial needs. As such, it is recommended that the Council adopt an ordinance increasing the TOT rate from six percent (6%) to nine percent (9%) effective May 1, 1991. Attachments: Ordinance to Increase the Transient Occupancy Tax Rate from Six Percent (6%) to Nine Percent (9%) Attachment A. Excerpt from the CAC Report submitted to the Council on February 5, 1991 summarizing new program and project efforts.