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HomeMy WebLinkAbout12/02/1997, 4 - DIABLO CANYON USE TAX SHARING council 12-z-9 j agcnaa RepoRt CITY OF SAN LU I S O B I S P O FROM: John Dunn, City Administrative Offic Bill Statler, Director of Finance SUBJECT: DIABLO CANYON USE TAX SHARING CAO RECOIVIIMENDATION Authorize the City Administrative Officer to sign a memorandum of agreement with the County regarding Diablo Canyon use tax sharing. DISCUSSION Background As the Council is aware, we are no longer receiving an apportionment of use taxes (similar in concept to sales taxes) resulting from refueling operations at the Diablo Canyon power plant. In response to a request from the California Manufacturer's Association, the State Board of Equalization recently changed their apportionment methodology to require that the use tax on individual transactions exceeding $500,000 be allocated to the jurisdiction where the merchandise is first placed in service, rather than apportioned through the County pool as it was previously. This change in methodology was intended to improve the fiscal benefits of attracting and retaining manufacturing operations; it was not intended to change the apportionment of use tax from nuclear power plant operations. Our June 1997 sales tax allocation from the State reflected this change. This means that 100%of the use tax revenues from Diablo Canyon now go to the County rather than the 16% share they have received in the past. While annual revenues from Diablo Canyon refueling activities fluctuate wildly based on PG&E's schedule (they refuel each of the two reactors about every 14 to 18 months), on an annualized basis this means about $458,000 in revenues will be shifted from cities to the County each year. For the City of San Luis Obispo, the average annual impact (based on revenues for the last four years) is about$190,000. In summary, the unintended consequence of this effort to more accurately reflect tax revenues from manufacturing sources - an approach the City and most cities in the State would generally support in concept-will have significant adverse consequences for all of the cities in the County due to our unique situation. Efforts to Mitigate this Impact The cities in the County have been working together in identifying strategies to mitigate the impacts of this change in apportionment methodology. After reviewing this issue with our sales tax advisor(Hinderliter deLamas&Associates), the city managers and finance directors from the Council Agenda Report—Diablo Canyon Use Tag Sharing Page 2 cities in the County met on September 10, 1997 to discuss the reasonable options and strategies available to us. There was general consensus that regardless of the strategy selected, we would be more successful working cooperatively together than independently. The key options which emerged from this meeting were: ■ Work with the County on some form of revenue sharing agreement. ■ Approach the State Board of Equalization for an exception to the new procedures for nuclear power transactions (this is the only facility in the State that would be affected by this type of exception). ■ In the event that these efforts were not successful,possibly pursue State legislation. On September 24, 1997, the city managers met with the Interim County Administrator to discuss a number of issues, including this one. While acknowledging the unintended consequences of this change, and expressing an understanding of the adverse consequences to cities resulting from it, he made no commitments; however, he agreed to consider this issue further, and provide the cities with a response. He also underscored the very difficult situation that the County will be facing as a result of electrical power restructuring, and the related impacts of accelerated depreciation of the Diablo Canyon power plant on the County's property tax revenues. Currently, the County receives about $7 million annually in property tax revenues from Diablo Canyon; all of this revenue is potentially at-risk as a result of electrical restructuring. It should be noted that the impacts of accelerated depreciation are even more adverse for our local school district, which receives about $10 million annually in property tax revenues from Diablo Canyon. The County's Proposal Provided in Attachment A is the County's proposal which they presented to the cities on November 5, 1997, summarized as follows: ■ In fiscal year 1997-98, the County will reimburse to the cities 100% of the amount they would have received is 1996-97 from use tax revenues prior to this change in apportionment methodology by the State Board of Equalization. ■ In fiscal year 1998-99, the County will reimburse to the cities 50% of the amount they would have received in 1997-98 from use tax revenues prior to this change. ■ Beginning in fiscal year 1999-00 and thereafter, the County will retain all revenues resulting from this change, and no finther reimbursements of this type will be made by the County to the cities. f Council Agenda Report—Diablo Canyon Use Tag Sharing Page 3 ■ The cities will not request that the State Board of Equalization modify their revised guidelines regarding the apportionment of individual use tax transactions exceeding $500,000. ■ The cities will support the County's efforts in regards to Diablo Canyon power plant accelerated depreciation concerns. ■ Their proposal is conditioned upon all of the seven cities in the county agreeing with it. In considering our reasonable options and their likelihood of success, we believe this is a reasonable proposal, and we have recommended that the other cities in the County concur with it. (Attachment B). The draft memorandum of agreement implementing this proposal is provided in Attachment C. While some changes may be made to this in its final form to accommodate concerns that other cities may have,we do not believe that these will be substantive. FISCAL IMPACT As noted above, this change in apportionment methodology will result in a loss to the City of about $190,000 per year on an annualized basis. While it is difficult to project the revenue the City will receive from the proposed agreement due the historic volatility of Diablo Canyon use tax revenues, we estimate that this will result in about $169,000 in revenue to the City in 1997- 98, and about $80,000 in 1998-99. There will be no further revenue sharing by the County with the City after 1998-99. ALTERNATIVES While we could approach the State Board of Equalization for an exception, and pursue State legislation if this is not successful, the possibility of success is uncertain at best. Obviously, if we were successful in this effort, this would be far more fiscally desirable than the proposed agreement. However, given the likelihood of success, we believe that the proposed agreement is a reasonable resolution of this issue. ATTACHMENTS A. County proposal for Diablo Canyon use tax sharing B. Letter from the CAO to other cities recommending the County's proposal C. Draft memorandum of agreement for Diablo Canyon use tax sharing H:Diablo Canyon Sales Tax Sharing Agreement �-3 Att County of San Luis Obispo CouNT1'GOVERNMENT CENTER,RM.370 SAN LUIS OBISPO,CALIFORNIA 93408 (805)781.5011 November 5, 1997 OFFICE OF THE COCN'T1•ADMINISTRATOR Mr. John Dunn City Manager 990 Palm Street San Luis Obispo, CA 93401-3249 Re: Diablo Canyon Nuclear Power Plant Sales Tax Dear John, This letter is a follow-up regarding an agreement between the County and Cities regarding the Diablo Canyon sales tax issue. In my discussions with the Board of Supervisors they were advised of the unanticipated budget impact to the Cities as a result of the loss of sales tax. They were also advised of the unanticipated sales tax revenue to the County. We have been authorized to make the offer as presented in this letter. I have drafted wording that can be incorporated into a short term agreement. This agreement would give the Cities time to plan for the sales tax decrease associated with the State Board of Equalization(SBE)rule change. As I have stated before, we are not interested in asking the SBE to make an exception in its sales tax allocation method, as this rule change was supported by the League of Cities. The following points are offered for your consideration: 1. A three year agreement based upon actual sales tax receipts. First year- a return of 100% of the actual pool allocation to Cities based upon the SBE regulations prior to the "use tax" modification language. The Cities would receive $404,789 based upon FY 1996-97 actuals, payable in FY 1997-98. Second year- a return of 50% of the actual pool allocation to Cities based upon the SBE regulations prior to the`lyse tax" modification language. payable in FY 1998-99. Third year- a return of 0% of the actual pool allocation to Cities based upon the SBE regulations prior to the`lase tax" modification language. 2. The Cities do not request the SBE to modify their existing regulations regarding the "use tax"transactions exceeding $500,000. 3. Cities support the County's effort in regards to Diablo Canyon accelerated depreciation issues. 4. All of the seven Cities agree to the terms of the agreement. John,we feel language can be the basis for a short term agreement in which all parties win. The points presented allow the Cities to plan for changes in the sales tax revenue. The County is willing to help the Cities out while at the same time the Cities must recognize the property tax revenue loss the County will incur in 1999 as a result of Diablo Canyon accelerated depreciation. Sincerely, �kkg Interim County Administrator ATTACHNEW B ��►�u��������►iii►�i�►�IIIIIIIIlh1°°1 °° IiliCityof san hues oBispo i 990 Palm Street, San Luis Obispo, CA 93401-3249 November 7, 1997 TO: Robert Hunt,Arroyo Grande Dave Howell,Morro Bay Wade McKinney, Atascadero Jim App,Paso Robles Tom Sullivan, Grover Beach Michael Fuson,Pismo Beach Dear Fellow City Managers/Administrators: Due to the utter impossibility of getting us together(as my dad used to say, stuffing tomcats into a gunnysack would be easier), this is my request of you. As you know, the Managers collectively asked the County to give us some consideration as a result of the State Board of Equalization's rule change on Diablo Canyon sales tax (now done on a situs basis rather than as formally on a pooled basis. The County came back with what, in my opinion, is a very fair offer(see enclosure). However, for it to go into effect will require a positive action by the seven cities of the County. Clark Channing also indicated that he would like to have this matter wrapped up by the end of the year. Therefore, I'm asking for your help, and that is to prepare your analysis and recommendations and get it before your Council as soon as you can. I am designating San Luis Obispo's Finance Director Bill Statler as our"resource person" on this matter. I am asking him to prepare our staff report as soon as possible and to send you a copy. You can use any or part of it or modify it as you desire. Bill may be reached at 781-7125. If you have a reason to believe that your city cannot or will not be participating in this,then let me know immediately as there is no need for the rest of us to go through the effort if we cannot meet the conditions established by the County. However,there will be money available to us if we participate, none if we do not(unless the State Board of Equalization was to act formally on a request from cities,which we do not believe is likely). Thank you for your expeditious handling of this matter. Sincerely, (: jCijty D A inistrative Officer cc: Bill Statler, Finance Director /O The City of San Luis Obispo is committed to include the disabled in all of its services, programs and activities. v Telecommunications Device for the Deaf(805) 781-7410. A tachment Draft Memorandum of Agreement DIABLO CANYON USE TAX SHARING f. 1 y tl WHEREAS, until 1997 use taxes resulting from refueling operations at the Diablo Canyon power plant were allocated to all San Luis Obispo County cities and the County on pool versus situs basis; and WHEREAS, in response to a request from the California Manufacturer's Association, the State Board of Equalization has changed their apportionment methodology to require that the use tax on individual transactions exceeding $500,000 be allocated to the jurisdiction where the merchandise is first placed in service rather than through the County pool; and WHEREAS, this change in methodology: was intended to improve the fiscal benefits of attracting and retaining manufacturing operations; is consistent with general sales tax policy in the State of California of allocating local sales and use tax revenues on a situs rather than pool basis whenever feasible; but was not intended to change the apportionment of use taxes from nuclear power plant operations; and WHEREAS, this change in methodology will result in an unintended shift of about $450,000 per year in use tax revenues on annualized basis from the cities in San Luis Obispo County to the County; and WHEREAS, this change in apportionment methodology will adversely affect the fiscal health of the cities in the County. NOW THEREFORE, the City of San Luis Obispo (City) and the County of San Luis Obispo (County) agree as follows: 1. Reimbursements to the City: 1997-98. In fiscal year 1997-98, the County will reimburse to the City 100% of the amount the City would have received in 1996-97 from use tax revenues prior to this change in apportionment methodology by the State Board of Equalization. This payment will be made by the County by March 1, 1998. 2. Reimbursements to the City: 1998-99. In fiscal year 1998-99, the County will reimburse to the City 50% of the amount the City would have received in 1997-98 from use tax revenues prior to this change in apportionment methodology by the State Board of Equalization. This payment will be made by the County by December 1, 1998. 3. Reimbursements After 1999-98. Beginning in fiscal year 1999-00 and thereafter, the County will retain all revenues resulting from this change in apportionment methodology by the State Board of Equalization, and no further reimbursements of this type will be made by the County to the City. 4. Determination of Reimbursement Amounts. Reimbursement amounts will be determined by Hinder deLamas & Associates. In the event that this firm is no longer in operation at the time that this determination will be made for 1998-99, the City and the County will agree upon an alternative apportionment methodology. Memorandum ojAgreement—Diablo Canyon Use Tax Sharing 5. No City Request for Methodology Changes. The City will not request that the State Board of Equalization modify their revised guidelines regarding the apportionment of individual use tax transactions exceeding $500,000. 6. City Support Regarding Diablo Canyon Depreciation. The City will support the County's efforts in regards to Diablo Canyon power plant accelerated depreciation concerns. Such support is limited to actions such as letters, resolutions and local presentations by City officials; it does not include any direct financial support, or participation in administrative actions or litigation. 7. Amendments. Any amendment, modification, or variation from the terms of this memorandum of agreement (MOA) shall be in writing and shall be effective only upon approval by the City Council of the City and the Board of Supervisors of the County. 8. Complete Agreement. This written MOA constitutes the complete agreement between the parties hereto regarding the sharing of use tax revenues from the Diablo Canyon power plant. No oral agreement, understanding, or representation not reduced to writing and specifically incorporated in this MOA shall be of any force or effect, nor shall any such oral agreement, understanding, or representation be binding upon the parties hereto. 9. Notice. All written notices to the parties hereto shall be sent by United States mail,postage prepaid by registered or certified mail addressed as follows: City City Administrative Officer City of San Luis Obispo 990 Palm Street San Luis Obispo, CA 93401 County County Administrator County of San Luis Obispo County Government Center San Luis Obispo, CA 93401 10. Authority to Execute Agreement. Both the City and the County do covenant that each individual executing this MOA on behalf of each party is a person duly authorized and empowered to do so. COUNTY OF SAN LUIS OBISPO: CITY OF SAN LUIS OBISPO: By: By: County Administrator Date City Administrative Officer Date -2-