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HomeMy WebLinkAbout01/13/1998, 1 - LONG-TERM FISCAL HEALTH AND OPEN SPACE FINANCING STRATEGIES.1 council. A/3 -981 � 1 ®Nvmhv acEnaa WPM i CITY OF SAN LUIS OBISPO FROM: John Dunn, City Administrative Offi Bill Statler, Director of Finance SUBJECT: LONG -TERM FISCAL HEALTH AND OPEN SPACE FINANCING STRATEGIES CAO RECOMMENDATION Review and discuss long -term fiscal health and open space financing strategies. DISCUSSION As part of the 1997 -99 Financial Plan, the Council adopted two goals affecting City finances: ■ Long -Term Fiscal Health. Protect the City's long -term fiscal health by maintaining a balanced budget, an adequate capital improvement plan and an adequate unreserved fund balance. ■ Long -Term Open Space Funding. Identify a permanent funding mechanism for preserving open space, possibly to be presented to voters in November of 1998. While these are separate goals, they are inter - related, and should be considered together. In addressing these two goals, we have prepared the accompanying "White paper" which discusses emerging trends in governance, and how these directly affect our affect our ability to maintain the City's fiscal health while at the same time achieve important community goals like open space preservation. The white paper also discusses our current financial condition, legislative and initiative efforts currently underway that may affect on fiscal situation, our revenue prospects in the post - Proposition 218 environment, and alternative long -term strategies available to us at this time. SUMMARY As discussed in the white paper, we believe that preparing an effective long -term fiscal health strategy requires an approach that will engage all of our residents in the decision - making process. Doing this successfully requires that we do our homework, and dedicate appropriate effort to this endeavor. We have tried to outline in this white paper the issues and challenges ahead of us in doing this, and we look forward to discussing these concepts further with the Council. ATTACHMENT White paper on long -term fiscal health and open space financing strategies H: Long -Tenn Fiscal Health/L.TFH Council Agenda Report L- ong Term Fisc al - H--. e-alth and Open. Space Financing Strategies Q 0 r-WIR, Al W xl, L- ong Term Fisc al - H--. e-alth and Open. Space Financing Strategies �iiii�►IIIIIIIIIII II►i �I city of san Luis osispo Long Term Fiscal Health and Open Space Financing Strategies OVERVIEW We are entering into a new era of governance, with fundamental changes both in the purpose of government, and in the way that decisions are made. While this is occurring at all levels, it is perhaps most pronounced for local agencies, since they are the level of government closest to the people, and the one most susceptible to these changes. The following is a brief overview of these two changes, and how they directly affect our ability to maintain the City's fiscal health while at the same time achieve important community goals like open space preservation. Changing Role of Government Traditionally, government in a free society has existed for two primary purposes: to set the groundrules for how society will conduct its affairs (and to enforce them); and to provide public services for the common good that the private sector can not or will not provide. It is this second role — government as a direct service provider — that is undergoing the most fundamental change. Following a fifty year period of unprecedented government activism, we are entering into an era of limits to what government can do — and should do. This concern transcends the more traditional "good government" concern of "are we doing this well, as efficiently and effectively as possible ?" to whether we should be doing this at all. There are a number of metaphors for this change. In their book Reinventing Government, Osborne and Gaebler use the analogy of "navigating" versus "rowing." While government may have the responsibility for keeping the community on course (navigator), it doesn't have to be the direct service provider (rower) in doing this — it can achieve its purpose in other collaborative ways with the private sector or with non -profit service providers. In some cases, it may decide that this is not an area where government involvement while possible — is desirable at all. Another analogy is a "barn- raising" versus `wending machine" approach to governance. Under the "barn- raising" model, government's role is to facilitate citizen action and involvement, not to build the "barn" itself. In contrast, under the `bending machine" model, government services are simply another commodity to be paid for — individuals and interest groups expect to put a quarter in, and get a tangible product immediately back out. For most of the twentieth century, government has been in the "rowing" and "vending machine" mind -set; this is changing. Service Delivery Improvements For those services we ultimately choose to provide, we need to ensure that we are providing them in the most cost - effective and efficient manner possible. While government efficiency is.not a /1Y Long Term Fiscal Health and Open Space Financing Strategies Page 2 new issue — it was the driver behind the "Council- Manager" form of government movement that emerged at the turn of this century — it has taken on new importance under a broad range of organizational development banners: transformation, re- engineering, total quality service (TQS), customer - driven service, continuous service improvement, employee empowerment, partnerships and outsourcing. These "effectiveness and efficiency" issues go hand -in -hand with "should we be doing this at all?" How does this changing role affect the City's long -term fiscal health? If in the future we no longer provide certain services at all, or provide them in a fundamentally different way, then our resource needs will be less — perhaps significantly so — than if we continue to do things "the same old way." Representative Versus Direct Democracy The other major megatrend affecting governance is a fundamental change in the way we make decisions. While perhaps related to the first trend, the past twenty years have reflected a shift from `representative democracy" to "direct democracy," especially in local government finance. Proposition 13 did not start this trend, but it certainly resulted from it. Since its passage almost twenty years ago, there have been an increasing number of citizen- approved limits on the ability of elected officials at the local level to make resource decisions on behalf of the community. While Proposition 218 was the most recent (and sweeping) of these, it was simply the last in a long line of expenditure and revenue limitation ballot measures. There are a number of possible explanations for this change: ■ Lack of leadership (or at least the perception) by elected and appointed officials on important issues to the nation, state and community. ■ Increasing distrust of government in general. ■ Loss of community identity (and support) as places of work and home have become increasingly separated. ■ Increasing frustration with the inability to affect government at the state and federal level, and an over - compensation at the one level — local government — where voters feel they can make a difference. ■ Improved information about public. issues, resulting in less reliance on others to make decisions on our behalf. ■ Increased influence of highly- organized and well - financed special interest groups through the initiative process. Whatever the reason, the reality is that there is a decided shift to direct citizen decision - making in a broad range of issues previously thought to be too "technical" for this. While this has occurred in a number of areas such as insurance and campaign financing, it is especially prevalent in "ballot box budgeting." Citizens are no longer willing to give their proxy on financial issues to elected officials, or to their interest group representatives on "blue ribbon" committees. City finance is an issue they want to decide directly for themselves. /- 5� Long Term Fiscal Health and Open Space Financing Strategies Page 3 How does this shift affect the City's long -term fiscal health? We will need broad -based community support — in evidence on election day — to implement new revenue sources. In this new model of direct democracy, creating support among elected officials and community leaders — even if it broadly crosses a number of interest groups — is no longer enough. In summary, before launching into a major "long -term fiscal health" endeavor, we need to be sure that we have correctly defined our fiscal challenges: ■ Is the challenge that we do not have the resources needed to deliver the services desired by our community, so we need more? In this case, we will need to initiate a major effort to gain broad -based community support at the ballot box for these new resources. ■ Or is it that we are not focused on delivering the right services — and then delivering these as effectively as possible? In this case, a major effort to increase resources is simply not warranted. In short, do we truly need new revenues? And if so, how can we best make a compelling case to the electorate that we need them? The purpose of the balance of this `white paper" is to discuss these issues. BACKGROUND As part of the 1997 -99 Financial Plan, the Council adopted two goals affecting City finances: ■ Long -Term Fiscal Health. Protect the City's long -term fiscal health by maintaining a balanced budget, an adequate capital improvement plan and an adequate unreserved fund balance. ■ Long -Term Open Space Funding. Identify a permanent funding mechanism for preserving open space, possibly to be presented to voters in November of 1998. The work programs approved for both of these goals are provided in the Appendix. As discussed below, while these are separate goals, they are inter - related, and should be considered together. Long -Term Fiscal Health Strategies The work program for the "long -term fiscal health" goal includes the following four components: ■ Preparing a long -term strategy for fiscal health. ■ Increasing productivity. ■ Evaluating the costs and benefits of annexing Cal Poly. ■ Monitoring our fiscal condition. Long Term Fiscal Health and Open Space Financing Strategies Page 4 This `white paper" focuses on the first component of the work program: preparing a long -term fiscal health strategy. Work program for the "long -term strategy" component. The budget for 1997 -99 is balanced, and includes the resources needed to accomplish major City goals. However, as reflected in the five year fiscal forecast prepared as part of the 1997 -99 Financial Plan process, we continue to face significant financial challenges if we want to maintain existing service levels (let alone enhance them) and achieve our capital improvement goals. To address these, the work program calls for preparing a longer -term funding strategy that can achieve broad -based community support. Achieving broad -based community support will be especially important if new revenue options requiring voter approval are part of this strategy. The first step in the "action plan" for this element of the work program is to develop and present an approach to the Council, with the possibility of an election in November of 1998. As outlined in this white paper, there are several options available for doing this that might be successful. However, in considering the relationship of the long -term fiscal health and open space financing goals in proposing new revenue sources for voter approval, we believe that: ■ We can combine open space into a broader effort to achieve "quality of life" goals; or ■ We can focus on just open space financing (or one or two more focused areas, such as parks or transportation). ■ However, efforts to do both independently are unlikely to be successful. We will need to have a consistent message: either we need new funding sources to generally improve services, including open space; or we need new sources for more specific purposes (like open space preservation). For this reason, while the findings and options presented in this report are generally discussed in the context of "long -term fiscal health," they are applicable to either a broader or more narrowly focused approach. CURRENT FINANCIAL CONDITION Any long -term fiscal health program needs to be underscored by an analysis of "how are we doing today ?" The following is a high -level answer to this question. The Good News ■ The longer -term economic outlook for the State and central coast region is generally positive. While it is uncertain how this will affect the City in light of increased economic competition from both the north and south county areas, the prospect for economic - growth — and our ability to share in it — is favorable for the first time in many years. ■ Operating revenues are increasing at levels slightly greater than operating costs. Our key revenue sources are performing even better than we projected, and we are containing costs as planned. i -7 Long Tenn Fiscal Health and Open Space financing Strategies Page 5 ■ The 1997 -99 Financial Plan is balanced, with the strongest General Fund capital improvement plan (CIP) in several years. ■ The beginning General Fund balance for 1997 -99 is even stronger than projected, largely due to improved revenues. ■ We have been able to fund a number of new initiatives and projects over the past several years, including: • New headquarters fire station • Improved pavement maintenance (including overlay, sealing and sidewalks) • Natural resource management • Economic development • Open space acquisition • Creek/street widening property acquisition • Park and playground improvements • Youth athletic fields • Expanded recreation and at -risk youth programs • Parks & recreation administrative offices • Performing arts center • Mission plaza property acquisition and improvement . • Adobe acquisition and restoration • City hall seismic retrofit and HVAC improvements • Technology improvements (Windows 95, public safety, financial management, GIS, records management, radio communications, wide area network, public access) In summary, by state and national standards, we are in very good financial shape; the outlook for continued revenue growth is positive; and we have been able to accomplish a number of important community goals. The Bad News Many Desirable Programs and Projects Go Unfunded While the General Fund budget for 1997 -99 is balanced, and funds Council goals and objectives, we will continue to be faced with ongoing challenges in maintaining service levels and achieving capital improvement goals. Projects and issues not fully addressed in the 1997 -99 Financial Plan include: ■ Implementation of adopted long -term plans. There are a number of long -term plans adopted by the Council that will require additional resources in the future to accomplish. In addition to a number of programs set forth in our land use, circulation, open space and parks and recreation elements of the General Plan, specific areas of improvement include: • Downtown improvements. There are a number of improvements in the Conceptual Physical Plan for the City's Center that would be desirable to achieve. In this Long Tenn Fiscal Health and Open Space Financing Strategies Page 6 context, a major work effort for the coming year will be to prepare a master schedule of coordinated infrastructure improvements for the downtown. • Laguna lake master plan. We will be finalizing Army Corps of Engineer permit requirements and design during the next two years. Once this is complete, we will incur significant costs in implementing planned lake and park improvements. • Open space funding. With the narrow defeat of Measure O, and the approval of Proposition 218, the City currently has no identified source of funding for desired open space protection projects, except as resources can be made available through the General Fund, or supplemented by available but limited grant funds. ■ Pavement management. For the first time since 1989 -91, the budget provides funding for pavement sealing and overlay at levels recommended in the 1988 pavement management plan. However, this plan will be updated within the coming year, and it is possible that additional resource commitments may be required to support one of our largest infrastructure investments. In summary, there is a general perception that the City has not been doing enough to properly maintain our street system. ■ Flood protection. While limited resources are provided in this two year plan for flood protection improvements, we will be completing a comprehensive update to our flood management policy. It is likely that implementing this master plan will require significant new resources. ■ Adobe preservation. The City has assumed ownership of three historical adobes over the past few years (Canet, Bowden/La Loma, and Rodriguez), and with this comes responsibility for preserving and maintaining them. While this process may be helped by the formation of a non -profit group with this interest, there is already pressure on the City to do more in preserving and improving these historic buildings. ■ 1999 -01 capital improvement plan (CIP). The challenges that will be facing us in the next two -year Financial Plan are highlighted by the CIP proposed for third and fourth years of this plan. For example, the average General Fund commitment to the CIP is $2.4 million for 1997 -99; for 1999 -01, this increases to $3.7 million, an annual increase of $1.3 million. Diablo Canyon Revenues As discussed with the Council as part of the five year fiscal forecast, electrical restructuring (and its possible effect on PG &E) could have significant impacts on the local economy and on the City's revenue picture. Since that time, there has been a significant change in the way that use tax revenues for Diablo Canyon are apportioned to cities in the County by the State Board of Equalization. The adverse impacts of this change will be mitigated somewhat during 1997 -99 based on our recent phase -in agreement with the County; however, on an annualized basis, this change will reduce ongoing revenues to the City by about $200,000 per year. 0 Long Tenn Fiscal Health and Open Space Financing Strategies Page 7 While no further adverse developments for the City are anticipated within the next few years, the reality is that the energy industry plays a major role in our local economy, and it is going through major changes at this time. This is especially true for the Diablo Canyon power plant. In general, nuclear power plant facilities have a limited life. In this era of electrical restructuring and increased competition, the estimated life of the Diablo Canyon plant could be further shortened due to its comparatively higher cost of producing electricity. PG &E has stated that it believes that this power plant can be operated at competitive prices, and does not plan an early closure. However, this will ultimately be determined by market forces that PG &E does not control. In short, whether this happens sooner or later, when this plant closes it will have a major adverse impact on the local economy. Staffing Costs As a service organization, our largest cost area is for the staff needed to deliver these services: 75% of General Fund operating costs are for staffing. As noted above, over the past several years, we have been successful in containing staffing costs at projected levels, while at the same time maintaining a positive labor relations environment. However, as economic conditions improve, we can expect pressure from employee groups to share in our improved fiscal situation. In addition, if we continue to enhance and expand programs, it is reasonable to assume that some added level of staffing will be needed. It should also be noted that we have benefited from reduced retirement and worker's compensation rates in containing staffing costs. While the City has implemented a number of risk management programs to contain costs in these areas, there are a number of external factors beyond the City's control that affect these costs, and past gains in these areas can not be relied upon in the future. Other Operating Costs Through a number of programs, we have been successful in holding down costs in other key areas such as communications, utilities and insurance. However, even with the most stringent cost controls and innovative efforts, there are many factors beyond our control in these areas. In short, while we have been successful in the past in controlling operating costs, there are no guarantees for sustained containment in the future. The Economy Ultimately, the City's fiscal health is directly related to the health of our local economy. While current trends are favorable, there are simply no guarantees when it comes to the economy other than this: it will always be subject to the ongoing economic cycles of expansion and contraction, and the City of San Luis Obispo is not insulated from these cycles. We are truly a global economy, and events in far -off places (like South Korea) can have significant consequences, even in San Luis Obispo. With a high percentage of income in our County coming from retirement investments, the performance of the stock market can have a significant influence on our overall economic health. Further, as we develop a stronger high- / —i0 Long Tenn Fiscal Health and Open Space Financing Strategies Page 8 technology industry base, we should recognize — for better and worse — that this is an area especially affected by national and international events. Financial Condition Summary Our previous long -term fiscal health efforts for reducing costs and increasing revenues have been successful: in the foreseeable future, we probably have adequate resources to continue existing programs and projects. However, if we want to do more than this, we will need to implement some combination of the following four options: ■ Re- prioritize service levels — stop doing (or cut -back on) things we are doing today. ■ Reduce costs through improved productivity. ■ Maximize our existing revenue based by growing the local economy faster, without reducing quality of life or increasing costs in other areas. ■ Augment our revenues. LEGISLATIVE AND EWTIATIVE EFFORTS There are a number of legislative and initiative efforts underway which could significantly enhance our fiscal outlook if they are successful. Several of these are being considered for the November 1998 ballot. ■ Return of ERAF. From 1991 to 1994, the City lost over $1.0 million annually in shifts from our property tax revenues to the educational revenue augmentation fund (ERAF). In 1997 -98, the full return of ERAF over a ten year period in 10% increments was approved by the State legislature. Under this proposal, the City would have received about $100,000 the first year, $200,000 in the second year, $500,000 by the fifth year, and the full $1.0 million by the tenth year. While this legislation was vetoed by the Governor, there continues to be strong support for this, and it will be in front of the legislature again. ■ League Revenue Protection Measure. The League of California Cities is currently drafting a constitutional amendment to protect existing City revenues from further manipulation and takeaways by the State for consideration by the voters in November of 1998. In addition, they are working on legislation to return ERAF revenues and provide cities with equal authority with counties in soliciting voter approval to increase the countywide sales tax by up to 1/2% and to share in its proceeds. ■ Countywide %% Sales Tax Proposal. On June 5, 1997 at special joint meeting of all the City Councils in the County, a resolution was adopted to explore the possibility of holding an election in November of 1998 to increase the County sales tax rate by 1/2% for transportation purposes, possibly using an approach successfully taken in Santa Clara County that resulted in increased revenues for a broad range of local and regional transportation projects with majority (rather than two- thirds) voter approval. This Long Tenn Fiscal Health and Open Space Financing Strategies Page 9 decision to explore county-wide transportation funding options was based largely on the findings of a study on local street maintenance needs prepared by SLOCOG which concluded that current local revenues are not adequate to fund the needed work. A committee was established for this purpose composed of one elected official and Administrator from each City and the County. At the special joint meeting of the City Councils and Board of Supervisors of San Luis Obispo County scheduled for January 8, 1998, this committee will recommend not proceeding with this idea at this time. This recommendation is based on: their understanding that the necessary circumstances to successfully proceed with an election are not present; and the lack of participation by the County in the committee's deliberations. ■ Covina Sales Tax Proposal. Also planned for the November 1998 ballot, a group in the City of Covina has launched an initiative effort to allow voters, on a county-by -county basis, to reallocate 1% of the State sales tax rate for local purposes. There would be no increase in the sales tax rate under this measure; just a change in its apportionment between the State and cities /counties. The prospects of success for this proposal are uncertain at best. ■ Coastal Open Space Measure. Lastly, a Statewide bond issue for coastal open space is also planned for the November 1998 ballot. If this is placed on the ballot and passes, it is likely that there would be funding for local open space protection efforts. PROSPECTS IN THE POST PROPOSITION 218 ENVIRONMENT Under Proposition 218 adopted in November of 1996, the groundrules for municipal finance were fundamentally changed. In short, any major, broad -based revenue program will require voter approval. In the case of tax revenues, majority voter approval is required for general purpose taxes; and two- thirds voter approval for special taxes. Assessments are still possible for selected services; however, they are limited in the kinds of services that can be funded through them (these typically fall into more traditional services such as streets, sidewalks and sewers where costs and benefits can be closely linked); and there are rigorous "assessment ballot" procedures. Any form of City-wide assessment district (like that envisioned under Measure O) is virtually prohibited. Limited Opportunities for the Council to Increase Revenues There are a limited number of areas where revenues can be raised by the Council without voter approval. However, in this era of "direct democracy," we need to be sure that there is broad - based support for new revenue measures, even if formal voter approval is not required. ■ Service and franchise fees. As identified in the 1997 -99 Financial Plan, there are a limited number of service and franchise fee revenue options which could be implemented by the Council. While the City cost - recovery goals are 100% for most services, there are a limited number of areas where fees are currently set at less than full recovery, most notably recreation, planning, fire engine company inspection, and hazardous materials regulation fees. In total, these have an annual revenue potential of about $700,000 per /— /Z_ Long Term Fiscal Health and Open Space Financing Strategies Page 10 year. Additionally, there are changes in service and franchise fee policies in the water and sewer funds that could result in about $400,000 annually to the General Fund, such as no longer charging the General Fund for water service and implementing a sewer franchise fee. ■ Grants. These can be an important source of funding selected programs and projects. However, grants these days are few and far between, and are focused (appropriately) on the goals and priorities of the granting agency, which may not be the same as the City's. In summary, while they can be important in enhancing City projects and in providing funding for "pilot" programs, grant revenues can not be relied upon as a long -term financing source for high -priority programs and projects. However, we have recently achieved some success in obtaining grants for open space purposes, and we will continue to vigilantly pursue these opportunities. ■ Economic development Enhancing the performance of the local economy is an essential component of an effective long -term fiscal health strategy. However, it is important to stress that: • This is a very long -term program. It can typically take five to twenty years before a community sees the benefits of an effective economic development program. Additionally, the results can never be guaranteed; while the City can be a partner in local economic development efforts (or at least not be a hindrance), ultimately a healthy economy depends on successful private sector market decisions, which the City does not control. • Our current focus is on creating good jobs. While this is needed for a strong and better - balanced local economy, there are limited direct fiscal benefits to the City from doing this. • There are currently no short-term prospects for significant new retail development. When and if it occurs, it is not clear if it will serve to primarily retain our market position, or to capture sales that are going to other areas in our region. Under either scenario, new retail development is essential — it is only a question of whether it retains or expands our retail base. ■ Development impact fees. We currently have development impact fees for water, sewer and transportation improvements needed to serve new development. This could be expanded to other infrastructure improvements such as public safety and general government facilities. While development impact fees can be important fiscal health tools, it is important to stress that they can only be used in addressing new facility problems brought on by new development, not current ones. Additionally, these are not popular in the development community, and may send a mixed message in our economic development efforts. ■ Redevelopment agency. The 1997 -99 Financial Plan includes the goal of exploring the feasibility of forming a City redevelopment agency. While this has not been considered in the past due to the "basic aid" revenue status of our local school district (which means 1_113 Long Term Fiscal Health and Open Space Financing Strategies Page 11 that they are highly dependent on local property tax revenues), recent changes in State legislation have changed the groundrules for sharing tax increment. As such, this may now be a more viable concept. At this point, we have only taken very preliminary steps in exploring the possible benefits of forming a redevelopment agency, including informal discussions with County and school district staff, and a briefing with a consultant specializing in redevelopment who has central coast experience. A Council study session on this topic is planned for the Spring of 1998. Again, it is important to stress that even if this idea proves to be feasible, this is a very long -term strategy — successful redevelopment projects can take many years to bring to fruition. In addition, such agencies focus on specific project areas and redevelopment goals; as such, resulting benefits are typically not as city-wide as other revenue options. ■ Special assessments. As new areas like the Margarita, DeVaul, Orcutt, and Airport areas develop, we may want to change our current policy regarding funding for "city- wide" services, and form assessment districts to provide selected services in these areas. While Proposition 218 substantially changed the groundrules for assessment districts, it did not eliminate their use. Possible candidates for assessment district funding in these areas are street lights, street sweeping and landscape/park maintenance. ■ Annexation of Cal Poly. Studying the feasibility and possible benefits of annexing Cal Poly is a separate component of the "long -term fiscal health" work program. Until this study is completed, the fiscal benefits of doing this are uncertain. ■ Community partnerships. One of the major City goals in the 1997 -99 Financial Plan is to explore opportunities for encouraging partnerships with non -profit organizations for the mutual benefit of both the City and the community organizations. As discussed above, this effort is consistent with the emerging "barn- raising" model of governance, where we place greater reliance on others who are better positioned to accomplish community goals from both a "mission" and financial perspective. A separate companion report on this topic will also be considered at the January 13, 1998 study session. Paramount Need for Broad - Based Community Support Other than these limited — and in some cases very long -term — resource options, we will need strong community support for anything else we do. We will need majority voter approval for general purpose taxes; and two- thirds voter approval for a specific purpose like open space preservation. As summarized below, even with broad -based community support, there are a limited number of revenue - raising options. (Based on previous work completed in identifying revenue options, more detail on these sources is provided in the Appendix). Focused Revenue Options As reviewed extensively in the past, the following revenue sources could generate significant new revenues from a limited number of taxpayers: /- /V Long Term Fiscal Health and Open Space Financing Strategies Page 12 ■ Increasing the transient occupancy tax (TOT) rate. ■ Increasing the business tax rate. ■ Establishing a City property transfer tax. Broader -Based Revenue Options There are very few "broad- based" revenue sources available to the City which would be paid by many taxpayers: ■ Increasing the utility users tax. ■ Establishing a City sales tax rate. This is not currently allowed under State law, and would require special legislation to accomplish. However, we are aware of two cities in California who have done this: Fort Bragg and Truckee. Although possible, this is an option we would need to seriously consider in terms of the economic development implications of having a higher sales tax rate than the other cities in the County. In summary, any new major revenue source, whether for a general or special purpose, will require broad -based community support; and even then, there are a limited number of options available to us. ALTERNATIVES We have identified four basics approaches for the Council's consideration in developing a long- term fiscal health strategy: Intensive, Community-Based Program Communities in California have been successful in generating broad -based voter support for new revenues when: ■ There has been a major community-wide focus on desired programs. In these cases, revenue increases have followed these `visioning" efforts, not driven them. Cities in this category come in a lot of sizes, and include El Cerrito, Duarte, Brea, Torrance and Claremont. At a more local level, Dr. Lauren Brown proposed something like this several years ago in the context of open space funding, and his comments are provided in the Appendix. ■ There are serious fiscal or service problems of crisis proportions. Cities in this group include Moreno Valley and Sacramento. Locally, the passage of a bond issue in the Lucia Mar School District also falls into this category. Although they were driven by very different factors _ hopes versus fears — all of these successful efforts share one thing in common: they were the result of extensive community-based efforts, which included a combination of outreach tools, and professional assistance to use them effectively: / /S Long Tenn Fiscal Health and Open Space Financing Strategies Page 13 ■ Focus groups. ■ Surveys. ■ Town hall meetings. ■ Direct mailings and/or newspaper inserts — "community budget - building" exercises. ■ Strong follow -on advocacy group for ballot measure support. Materials on the process used by the cities of El Cerrito, Duarte, Torrance, Brea and Sacramento are available in the Council reading file. Advantages of this Approach If the need is compelling, this effort is likely to be successful. However, it will require: commitment, resources ($25,000 to $100,000), time, and most importantly, a strong community- based advocacy group that will aggressively raise funds and campaign for the issue once it is on the ballot. . This last issue can not be stressed enough. Under State law, cities have broad discretion in using their funds for professional assistance in researching issues, conducting surveys, and developing voter support strategies. However, once an issue becomes a formal ballot measure, cities can not participate as an advocate in any way. In short, unless there is a strong community-based group who is willing to aggressively raise funds and campaign for the measure, it is not likely to pass. If we want to pursue this option for November of 1998, we need to begin immediately. Disadvantages of this Approach ■ This is a major work effort that may detract from achieving other major City goals such as developing a long -term water supply, improving parking in the downtown, implementing an expanded economic development program, and annexing the airport area. ■ This will require a significant commitment of staff resources and funds for professional assistance. ■ It will be very challenging — although not impossible — to do the things necessary for a successful ballot measure in November of 1998. ■ We need to be confident that we have laid an adequate foundation for effectively pursuing this: • Have we done all that we can do to focus on priorities? • Are we as lean as we can be? • Are we as creative as we can be in providing equal or better service at a lower cost? • Have we maximized our existing revenue base? • Have we created a compelling vision for how we would use additional resources if we had them? Long Term Fiscal Health and Open Space Financing Strategies Page 14 ■ An effort in 1998 may be regarded as premature, given everything stated in this report, but may be viewed as a more realistic option in 2000 or thereafter. Tentative Schedule for November 1998 Ballot Measure The following is a tentative schedule if the Council wants to pursue this approach: ■ Identify goals; issue RFP January ■ Select consultant February ■ Develop work program March ■ Advocacy group begins organizing March. ■ Complete work program — submit to Council July ■ Place on ballot August Community Task Force We could form a community task force similar to the one that worked on open space financing, which resulted in Measure O. However, this may be a case where "blue- ribbon" committees are no longer successful in the new "direct democracy" era, where voters are hesitant to give their proxy to group representatives, even when they strongly support the group's goals. For example, Measure O was supported by virtually every community-based group in the City, including those that are often in opposition to each other — the SLO Chamber of Commerce, Sierra Club, SLO Property Owners Association, ECOSLO, Building Industry Association of the Central Coast, League of Women Voters, SLO Association of Manufacturers and Distributors, Land Conservancy of SLO County, Downtown Business Improvement Association, Youth Sports Organizations, and Neighborhood Organizations — and it still was not successful in gaining majority voter support. In short, the task force process in and of itself — even though it reflected a broad range of community group support at a level unprecedented in a City election — was not enough to achieve sufficient community support for a new funding source for open space preservation. This does not mean that community group participation and endorsements are not important — this is an essential part of a successful new revenue program; but to achieve voter approval, the effort probably needs to go beyond a "blue ribbon" committee to a process that fully engages the community at large and gains their support on election day. Work with Other Cities/County for County-Wide Sales Tax As discussed previously, there are several other cities in the County who are very interested in the concept of a County-wide sales tax to assist them in funding programs and projects of concern in their communities. The Santa Clara County model, which provided funding for both regional and local transportation programs with majority voter approval, may be an option we would like to further consider. In this case, the City could work with other cities and the County in further evaluating this option. However, as noted previously, a committee of city and County Long Term fiscal Health and Open Space Financing Strategies Page 15 representatives has recommended that this not be pursued at this time. It should also be noted that the Santa Clara County ballot measures were not initiated by government agencies, but by a non -profit industry association (the Santa Clara Valley Manufacturing Group). Take a Slower Approach — Prepare for 1999 -01 There are a number of things that could happen between now and the next two year Financial Plan (1999 -01) which could significantly improve the City's fiscal outlook, and mitigate the need for an extensive effort to pursue significant new revenue sources: ■ The State could restore ERAF. ■ The Covina sales tax idea could pass (although the likelihood of this is uncertain at best). ■ The League's initiative and legislative proposals could pass. ■ A statewide bond issue for coastal open space preservation could pass. ■ Our local economy could perform even better than projected. ■ We could enact the revenue options that are available to the Council already. ■ Enhanced retail development could happen somewhere in the City. ■ An analysis of the potential benefits of a redevelopment agency may be favorable, and implementation could be underway within a year. ■ An analysis of the potential benefits of annexing Cal Poly may be favorable, and implementation could be underway within a year. Other issues to consider in taking a slower approach include: ■ There may be too many other revenue proposals on the November 1998 ballot for our own to be successful. ■ We may be better positioned for a more comprehensive effort for 2000 if needed; at this point, we have very little time for the kind of program development and consensus building that has proven necessary in other communities for successful revenue - raising efforts. ■ There is a fledgling effort underway at this time, initiated by a private citizen, to re- examine the open space funding issue. RECONIlVIENDED INTERMEDIATE STEPS Because of the strong possibility that the effort required might detract from our efforts to achieve other major City goals, and the fact that there are a number of other efforts underway by other parties that will also affect our fiscal situation, we currently recommend a "go slow" approach. However, there are several intermediate steps that we could take at this time: / -/8 Long Tenn Fiscal Health and Open Space Financing Strategies Page 16 Invite presentations by others who have successfully done this This could include groups such as: ■ Other cities who have successfully completed major "community budget building" or focused program efforts (like transportation or open space). ■ The Santa Clara Valley Manufacturing Group, who successfully led the campaign for a general purpose sales tax in Santa Clara County. Continue implementing our other long -term fiscal health strategies ■ Improving productivity and implementing cost - saving ideas (see more on this below). ■ Studying the benefits of annexing Cal Poly. ■ Pursuing community partnerships. ■ Exploring the feasibility of forming a redevelopment agency. ■ Continuing our economic development efforts. ■ Considering the revenue options available to the Council without an election, as needed. ■ Continuing to closely monitor our fiscal condition. Continue organizational development and transformation efforts As mentioned earlier in this report, as revenue options have diminished, organizational development has taken on a new level of importance within city governments. In our own organization, various team - building and "transformation" efforts have been initiated, most recently in the Public Works and Utilities Departments. Innovation and change have also been the focus of recent conferences, workshops and literature, and we are beginning to see a significant level of interest in these topics among employees throughout our organization. In order to unify these interests, a preliminary effort is underway at the staff level to consider crafting a common "values statement," with the idea being to "centralize values, but decentralize the way they are achieved." For example, employees in direct service positions can be more free to innovate and make customer service decisions, provided they are consistent with the organization's core values. Those most directly involved in carrying out a job will also be encouraged to identify and implement ways of doing it better and more cost effectively — or not doing certain things at all, if they no longer make sense. One impediment to such change and innovation, however, is fear — especially of "innovating away" one's own job. One solution to this obstacle that has been implemented by some cities (with San Jose as an acknowledged leader in this area) is the adoption of a formal policy by the council that basically states that no employee will lose her or his job as a result of an innovation or productivity improvement that they themselves have recommended. As we work further with our employees on ways of improving productivity, we will discuss this and other ideas, and we will keep the Council informed on our progress. _ Long Term Fiscal Health and Open Space Financing Strategies Page 17 Begin laying the groundwork for a possible Year 2000 ballot measure if needed ■ Completing the master plans that would help further articulate the compelling need for new revenue resources, such as the pavement management, flood protection and downtown infrastructure plans. ■ Ensuring we have done everything else possible in reducing City costs — whether this is better defining what we should be doing, or doing them in more cost - effective ways. ■ Determining the best ways of presenting the City's resource needs to voters in a compelling way. ■ Encouraging community re- examination of funding for open space preservation. SUMMARY Preparing a long -term fiscal health strategy in this era of "direct democracy" requires an approach that will engage all of our residents in the decision - making process. Doing this successfully requires that we do our homework, and allocate adequate resources to this endeavor. We have tried to outline in this white paper the issues and challenges ahead of us in doing this, and we look forward to discussing these concepts further with the Council. H: Long -Term Fiscal Health White Paper Zo lone teRm fiscal health ana open space f>nancmG stuateclies APPENDIX 1997 -99 Goals Related to City Finance • Long Term Fiscal Health • Long -Term Open Space Funding Revenue Options Prepared as Part of the 1993 -95 Financial Plan • Transient occupancy tax • Business tax • Property transfer tax • Utility users tax Quality of Life Action Plan for San Luis Obispo Prepared by Dr. Lauren R. Brown ON FILE IN THE COUNCIL READING FILE, Community Visioning and Revenue - Raising Efforts by Other Cities • El Cerrito • Duarte • Torrance • Sacramento • Brea /— ?-.L POLICIES AND OBJEL i IVES MAJOR CITY GOALS — LONG -TERM FISCAL HEALTH CWAR " Protect the City's long -term fiscal health by maintaining a balanced budget, an adequate capital improvement plan, and an adequate unreserved fund balance. DISCUSSION Background Results of the five year focal forecast As part of the Council goal - setting process for 1997 -99, a detailed five year forecast for the General Fund was prepared in order to assess the City's fiscal environment, and gain some initial insights on the "order of magnitude" difficulty we would likely experience in balancing the budget for 1997 -99. In developing this forecast, staff prepared a preliminary "forecast CIP" that assumed reasonable progress over the next five years in achieving adopted infrastructure and facility improvement goals. This resulted in a General Fund CIP of about $3.9 million annually. Of this amount, about 45% ($1.8 million) was for maintaining existing infrastructure and facilities, and about 55% ($2.1 million) was for expanding, building or acquiring new infrastructure, facilities and equipment. Three different scenarios based on varying capital improvement plan (CIP) assumptions were prepared in this forecast (all other assumptions for revenues, operating expenditures and debt service were the same under each scenario). Depending on the CIP assumptions, the annual revenue /expenditure gap ranged from $1.4 million annually under the modest CIP scenario (which funded the CIP at $2.8 million annually versus the "forecast CIP" of $3.9 million) to an essentially balanced budget under the very reduced CIP scenario (which funded the CIP at $1.4 million annually). While not formally evaluated as one of the three scenarios, funding the CIP at the "reasonable progress" level set forth in the forecast CIP would have resulted in an annual $2.5 million revenue/expenditure gap. Under the reduced CIP scenario — which funds maintenance of existing infrastructure at about $1.9 million per year — the annual revenue/expenditure gap in the forecast was about $500,000. For purposes of preparing the Preliminary Financial Plan, this was the "target" CIP level selected by the Council. The Preliminary Financial Plan includes an average annual General Fund contribution of about $2.4 million. This approximates the "modest" CIP scenario presented in the forecast, but is still $1.0 million short of the "reasonable progress" level. Conclusions about our fiscal situation. In reviewing the results of the 1995 -97 Financial Plan, the recently prepared five year General Fund fiscal forecast, and the 1997 -99 Preliminary Financial Plan, two things are clear: ■ The tough budget decisions made over the past six years have been essential in preserving the City's fiscal health. In comparing our financial condition today, we are on -track with the forecast projections made as part of the 1993 -95 Financial Plan process. ■ Significant challenges continue to face us in funding the delivery of essential services and achieving our adopted CIP goals. This simply underscores the fact that fiscal health is not something we will ever achieve "once and for all"; like our personal health, this requires an ongoing commitment to this goal. -0 POLICIES AND OBJEC i IVES -NWOR CITY GOALS - LONG -TERM FISCAL HEALTH Issues We Will Face in Achieving this Goal The City's short-term strategy for addressing the projected revenue/expenditure gap of $500,000 for 1997 -99 consists of the following four components: ■ Limiting operating cost increases and reviewing service levels for expenditure reduction opportunities. ■ Developing a capital improvement plan (CIP) that focuses on adequately maintains our existing infrastructure and facilities. ■ Considering new revenue opportunities as allowed under Proposition 218. ■ If needed, making strategic use of fiord balance and temporarily taking it below policy levels, subject to preparing a definite plan for restoring this balance in the future. However, this strategy will not serve us well in the longer term if we want to maintain current service levels and achieve our already - adopted infrastructure and facility improvement goals. As noted above, funding the CIP at the "reasonable" progress level results in a $1.0 million annual revenue /expenditure gap, assuming no enhancements in current service levels or new CIP needs. As such, we need to identify and implement other strategies for preserving service levels, achieving CIP goals, and maintaining our fiscal health. These might include: ■ Organizational transformation. Making our organization more productive, and delivering current or higher levels of service for less. ■ Economic development Helping our economy perform better than our forecast projections. ■ Legislative advocacy. Getting back what was taken -away from us by the State. ■ Citizen- supported revenue options. Developing revenue strategies for a possible November 1998 election. ACTION PLAN There are four proposed components to this action plan for fiscal health: ■ Increase organizational productivity. Staffing costs are the largest part of the City's budget, accounting for 75% of operating costs in the General Fund. As such, identifying and implementing ways of improving organizational effectiveness and customer service on an ongoing basis is an essential component of any long -term fiscal health strategy. ■ Prepare a long -term funding strategy. The budget - balancing strategy outlined for 1997 -99 will not resolve our long -term fimding issues if we want to at least maintain existing service levels and achieve our capital improvement goals. To do this, we need to prepare a longer -term funding strategy that can achieve broad -based community support. This will be especially true if new revenue options requiring voter approval are part of this strategy. One approach for doing this is to create a task force similar to that used in developing economic development, environmental protection and open space financing strategies. ■ Evaluate the costs and benefits of annexdng Cal Poly. While Cal Poly is not in the City limits, its operations have a significant impact on the community. The City already provides Cal Poly with four / -Zr, POLICIES AND OBJEL i IVES MAJOR CITY GOALS — LONG -TERM FISCAL HEALTH key municipal services: fire, water, sewer and transit; and we have a major investment on the Cal Poly campus in the performing arts center. Our partnerships and inter - relationships with Cal Poly are likely to increase over time, with the current proposal for sharing in the costs of developing a sports complex as the most recent example. As such, it is timely to ask ourselves in a comprehensive way what the costs and benefits would be if Cal Poly was a formal part of the City. In addition to evaluating the fiscal benefits to the City, this study would also look at the experience of other communities that have major universities within their city limits. It would also evaluate impacts on Cal Poly and the County, as their support will be needed if this is to occur. ■ Review and monitor the City's fiscal condition. Effective reporting and monitoring of the City's fiscal condition on an ongoing basis is an essential, fundamental component of managing our finances and assuring our long -term fiscal health. Increase Organizational Productivity ■ Identify ways of strengthening an organizational culture that constantly asks what are 10/97 we doing and why, and continuously takes positive action to improve City operations, organizational productivity and customer service. ■ Develop and present program to the Council that reinforces and strengthens these 1/98 values on an organization -wide basis. ■ Begin program implementation; monitor progress. 4/98 ■ Formally review program results after one year; identify areas for improvement. 3/99 Prepare Long -Term Strategy for Fiscal Health ■ Develop and present approach and work program to the Council. 9/97 ■ Begin preparing long -term strategy. 11/97 ■ Present recommendations to the Council in time for a measure to be placed on the November 1998 ballot in the event that this is part of the proposed strategy. 4/98 Evaluate Costs and Benefits of Annexing Cal Poly ■ Discuss proposed study with Cal Poly and County officials. 7/97 ■ Determine workscope; request proposals from qualified consultants. 10/97 ■ Select consultant; begin preparing study. 1/98 ■ Complete study; present findings to Council, Cal Poly, County and the community. 7/98 Review and Monitor our Fiscal Condition ■ Adopt the 1997 -99 Financial Plan and begin implementing any specific budget - balancing expenditure or revenue programs set forth in it. 7/97 ■ If approved, begin implementing a new financial management system. 8/97 ■ Prepare, consider and adopt the 1997 -98 mid -year budget review. 2/98 ■ Prepare, consider and adopt the 1998 -99 Financial Plan Supplement. 7/98 ■ Prepare, consider and adopt the 1998 -99 mid -year budget review. 2/99 ■ Continue to provide on -line, up -to -date financial information to departmental staff. Ongoing ■ Continue to issue timely and accurate monthly financial reports. Ongoing ■ Continue to issue comprehensive quarterly financial reports and status reports on achieving major City goals and CIP projects. Ongoing ■ Present reports to Council as needed on any major unanticipated fiscal issues. As needed / -4f-(P POLICIES AND OBJEC i iVES MAJOR CITY GOALS — LONG -TERM FISCAL HEALTH RESPONSIBLE DEPARTMENTS All departments play a critically important role in ensuring the City's long -term fiscal health through their management and use of City resources; however, Administration, Personnel and Finance will be especially involved in achieving this goal. FINANCIAL AND STAFF RESOURCES REQUIRED TO ACHIEVE THE GOAL Organizational Productivity Two new activities are recommended in pursuit of this objective: ■ Organization -wide training. Department program training budgets are typically oriented towards the technical aspects of the department's mission; there are currently no funds set -aside for training on organization -wide goals of improving organizational effectiveness, productivity and customer service. Implementing a training program focused on City values and productivity improvement goals is estimated to cost $25,000 annually. ■ Tuition reimbursement. This program would assist employees in improving their skill levels on their own time. A modest investment of $13,900 annually in this program is recommended. Long -Term Fiscal Health Strategy While this will require a major commitment of existing staff resources, no additional funding is required for this work effort. Study of Cal Poly Annexation Costs and Benefits Consultant assistance is recommended in completing this work at an estimated cost of $30,000. While the consultant will have the lead responsibility for performing this work, there will still be a major commitment of staff time in managing the project, reviewing the consultant's work, and in presenting the results to policy - makers. Consultant assistance is proposed for two reasons: ■ Timing and workloads. Much of this work is planned to be completed at the same time as the "long- term fiscal health" project. It will not be possible for City staff to directly work on both of these, create a quality work product, and adequately deliver day - today services at the same time. ■ Third party credibility. Even if the staff could find the time to do this work, we believe that we will benefit from an independent, third party performing this work. While this is within the technical capabilities of the staff, it will be important for there to be the highest levels of credibility when the results are presented to Cal Poly, the County and the community. Review and Monitoring of the City's Fiscal Condition ■ Operating program costs. Significant staff resources are currently allocated throughout the organization in ensuring the City's fiscal health on an ongoing basis. Other than these existing resources, no specific increases in regular staffing are anticipated over the next two years for this purpose; however, significant efforts will be made by Administration and Finance staff in reviewing budgets and monitoring their status. POLICIES AND OBJEG i IVES MAJOR CITY GOALS — LONG -TERM FISCAL HEALTH ■ CIP costs. The information technology master plan identifies improving the City's financial management information system as one of its highest priorities. During 1996 -97, funding for this project was transferred to the public safety system, which was short on funding and rated as an even higher priority. Implementing a financial system that will help us better manage our fiscal operations and address critical "year 2000 ", payroll and system integration problems will cost $460,000. OUTCOME - FINAL WORK PRODUCT Strategies, programs and systems for assuring our long -term fiscal health in accomplishing important community - goals. / —Lfs COUNCIL GOALS: 1997 -99 FINANCIAL PLAN LONG -TERM OPEN SPACE FUNDING OBJECTIVE Identify a permanent funding mechanism for preserving open space, possibly to be presented to voters for approval in November of 1998. DISCUSSION Background. Establishing a permanent funding mechanism for acquiring open space has been an important City objective for many years, but particularly since 1994. In January of that year, the Council adopted the Open Space Element of the City's General Plan. This element calls for preserving the unique environment in and around the City. Specifically identified within the City were resources such as hillsides, creeks, habitat areas and historical sites. Surrounding the City, there was a designated greenbelt, and within that area the emphasis was on preserving natural resources and agricultural character, and buffering the City from urban encroachment and sprawl. In August of 1994, the Council gave direction to staff to begin implementing this element, which included identifying natural resources within the city and greenbelt, developing and acquiring a priority system for open space acquisition using existing fiords at that time, developing a long -term funding plan for the continued acquisition of open space, and preparing non -fee based strategies to ensure a greenbelt preservation. Progress has been made on all four of these directions. A natural resources inventory within and surrounding the City is underway. Priorities for open space acquisition using the City's existing open space fiords have been completed, and the fiords have been allocated to several priority projects. An effort was undertaken in 1996 to identify a potential fimding program for continued acquisition of open space, and several non -fee programs are underway to ensure long -term greenbelt preservation. These include dedicating lands as part of the development approval process, developing a Memorandum of Understanding with San Luis Obispo County, and encouraging non -profit organizations to seek and obtain the donation of land (or development rights to that land) for conservation purposes. In late 1995, the Council established a task force of interested citizens to evaluate and recommend strategies for funding open space preservation. This was done, and in July of 1996 the Council authorized an advisory ballot mess= on the November 1996 ballot that asked voters if they would be supportive of an assessment district to fiord open space acquisition. This question was put to the voters, and the answer was that the citizens, by a narrow margin, were not in favor of that particular mechanism as a means of such funding. Reasons for this outcome are uncertain; however,. reasons that have been put forward include general anti-tax sentiments, concern about retirees and others living on fixed incomes, and the lack of specific priority properties for the funds. The general goal of open space protection, however, continues to enjoy broad community support, and therefore conservation methodologies such as pursuing state and federal grant funds, donating land or conservation easements, and requiring dedications in conjunction with development entitlements continue to go forward. Staff believes that a more focused and project - oriented open space funding program, perhaps done in association with other community needs, has a reasonable chance of being successful in future elections. Issues we will be facing in achieving this goal. Criticism of the assessment district approach to open space fimding focused on the fact that only a certain segment of the community (property owners) was being singled - out to pay for a benefit that would be received by all; that there were no clear objectives or projects identified in / -ay the program; and that other mechanisms were in place that could accomplish the same objective at little or no taxpayer expense. These arguments can be expected to be raised again and, therefore, the validity of these statements needs to be assessed and responses developed. It is also apparent that differing segments of the community have different emphases within the general objective of preserving open space: some will emphasize recreation lands, some will emphasize wildlife resources, some will emphasize scenic corridors, and others will emphasize preserving our rural setting. As such, it may be appropriate to link these factors in some fashion to achieve as broad a program as possible for consideration by the voters. ACTION PLAN ■ Staff evaluates remaining fimding options available to the Council. 9/97 ■ Review options with the Council in a study session. 10/97 ■ If feasible alternatives exist, establish citizen group to explore long -term funding strategies in greater detail. 11/97 ■ Obtain Council approval of long -term funding strategy for possible consideration by the voters in November of 1998. 3/98 RESPONSIBLE DEPARTMENT ■ Administration will provide overall policy direction to the program, with the Natural Resources Manager as the lead staff person. ■ Parks & Recreation and Public Works will participate and provide informational support. ■ Finance will provide financial information for the project. FINANCIAL AND STAFF RESOURCES REQUIRED TO ACHIEVE THE GOAL Staff time can be made available within current operating levels and minor amounts of funding will be needed to provide for copying and other clerical support services. Funds are available within the existing natural resources protection program. OUTCOME - FINAL WORK PRODUCT Development of a long -term funding strategy for open space preservation, possibly for consideration by the voters in November of 1998. 1_36 TRANSIENT OCCUPANCY TAX FACT SHEET What is transient occupancy tar? This is a tax on the rental of a hotel /motel room based on the price of the room. Is this tax in place of this tine? 4 Yes. The transient occupancy tax (TOT) rate is currently 9% and provides the City approximately $23 million dollars annually. Who pays this tax? This tax is paid by visitors to our community; it is not paid by local residents or businesses. Who currently receives the revenue? The revenue goes directly into the City's General Fund and is used for General Fund purposes. The 1991 -93 Financial Plan policies allocate 20% of TOT revenues for community promotion, cultural activities, and economic stability purposes. Can cities increase their tax rate? Yes. Cities can change the transient occupancy tax rate by adopting an ordinance increasincr the tax rate. No other authority is required to increase this tax. How much revenue would an increase generate? For each percent increase, General Fund revenue will increase approximately $260,000. How does the City's trwment occupancy tax rate compare with other cities? Based upon a survey of the cities chosen for comparison, the following transient occupancy tax rates are in effect: San Luis Obispo 9% A- Monterey 10% Camarillo 9% Napa 10.5% Santa Barbara 10% Santa Cruz 10% Visalia g% Ventura 10% Palm Springs 10% Santa Maria 10% Davis 10% Petaluma 10% San Juan Capistrano 10% Rates in other San Luis Obispo County areas are: Pismo Beach 10% Atascadero 9% Morro Bay 9% Paso Robles 9% Grover Beach 10% Arroyo Grande 6 % San Luis Obispo County 9% ;Pf 725e kx2�e k&AZ ch.�.� =� z'a /00 ev+ D cii6er -4� /-.3/ How can these revenues be used? These revenues are General Fund revenues and can be used for any legitimate government purpose - parks, street maintenance, recreation, police, or fire. Why is this an appropriate City funding source? Placing this tax on the City's visitors appropriately recognizes that they receive municipal services during their stay, and as such, they should share in the cost of providing them. When could an increase be effective? sE Theoretically, an increase could be implemented immediately upon Council approval. However, an effective date that is 90 to 120 days from the date of adoption is recommended in order to ensure a smooth transition for the hotels and motels as they quote prices to tour companies for future bookings. In accordance with Proposition 218, majority voter approval is required for new or increased general purpose taxes, and two- thirds voter approval is required for new or increased special taxes. Unless there is an emergency, new or increased general purpose taxes can only be voted upon at the same time as regularly scheduled governing body elections. / -3z BUSINESS TAX FACT SHEET What is a business tax? This is a tax on businesses operating within the City to raise revenues for general municipal purposes - it is not intended to be regulatory. Is this tax in place at this time? Yes. The tax rate is currently $ .50 per thousand dollars of gross receipts with a minimum tax of $25.00. Who pays this tax? Any person or company conducting business in the City is required to pay a business tax. Business activities include rentals, services, manufacturing, and sales. This includes individuals and companies that may not have a fixed place of business in the City. Are there any exemptions? Very few: ■ Minors under the age of 18 years old. ■ Bonified non -profit organizations. ■ Business types where the payment of local business taxes conflicts with the applicable statues or constitution of the United States or the State of California. Who currently receives the revenue? The revenue comes directly to the City's General Fund and is used for any legitimate government purpose - police, fire, street_maintenance, recreation, parks. Can the City increase the tax rate? A Yes. The City can change the tax rate by adopting an ordinance increasing the tax rate. No other authority is required to increase this tax. How much revenue would a rate increase generate? For each 10 cent increase per thousand dollars of gross receipts, the General Fund revenue will increase approximately $160,000. How does the City's business tax rate compare with other cities? Comparing business tax rates is more difficult as there are several different basis for charging business tax (gross receipts, flat fees, square footage, number of employees, etc.). Both the basis for charging business tax and the business tax revenue for 1991 -92 are listed below. * In accordance with Proposition 218, majority voter approval is required for new or increased general purpose taxes, and two- thirds voter approval is required for new or increased special taxes. Unless there is an emergency, new or increased general purpose taxes can only be voted upon at the same time as regularly scheduled governing body elections. -33 San Luis Obispo Monterey Napa Santa Cruz Ventura Santa Maria Petaluma Camarillo Santa Barbara Visalia Palm Springs Davis San Juan Capistrano *Excludes Business Improvement Association surcharges Why is this an appropriate City funding source? Placing this tax on the City's businesses appropriately recognizes that they receive municipal services, and as such, they should share in the cost of providing them. When could an increase be effective ? -4 ' Theoretically, an increase could be implemented immediately upon Council approval. However, an effective date that is 30 to 60 days from the date of adoption is recommended to allow enough lead time to make the internal administrative and computer changes required. ' In accordance with Proposition 218, majority voter approval is required for new or increased general purpose taxes, and two- thirds voter approval Is required for new or increased special taxes. Unless there is an emergency, new or increased general purpose taxes can only be voted upon at the same time as regularly scheduled governing body elections. -J -/ Percent of Basis for Revenue for General Fund Business Tax 1991 -92 Revenues Gross Receipts $ 6062000* 297% Gross Receipts $1,530,000 5.69% Gross Receipts $ 970,000 4.05% Flat Fee + employees $ 6479000 1.85% Gross Receipts $1,000,000 1.52% Flat Fee $ 230,700 .74% Flat Fee $ 2809000 1.73% Gross Receipts $ 584,300 2.69% Gross Receipts $19236,000 1.91% Gross Receipts $ 6802000 2.41% Flat Fee $ 600,000 2.14% Gross Receipts $ 600,000 3.34% Flat Fee $ 152,900 .94% *Excludes Business Improvement Association surcharges Why is this an appropriate City funding source? Placing this tax on the City's businesses appropriately recognizes that they receive municipal services, and as such, they should share in the cost of providing them. When could an increase be effective ? -4 ' Theoretically, an increase could be implemented immediately upon Council approval. However, an effective date that is 30 to 60 days from the date of adoption is recommended to allow enough lead time to make the internal administrative and computer changes required. ' In accordance with Proposition 218, majority voter approval is required for new or increased general purpose taxes, and two- thirds voter approval Is required for new or increased special taxes. Unless there is an emergency, new or increased general purpose taxes can only be voted upon at the same time as regularly scheduled governing body elections. -J -/ PROPERTY TRANSFER TAX FACT SHEET What it a property transfer tar? This is a tax resulting from the transfer of real property ownership based on the value of the property. Is this tax in place at this tune? Yes. Section 11901 of the Revenue and Taxation Code (RTC) establishes a statewide property transfer tax at the rate of $1.10 per $1,000 of value (or $275 on a property with a transfer value of $250,000). Who pays this tax? The person to whom the property is being transferred - the 'buyer". Who etarently receives the revenue? The County and incorporated cities share equally in the tax revenues - in essence, each has its own rate equal to $0.55 per $1,000. In the unincorporated areas, the County receives all transfer revenues at the $1.10 per $1,000 rate. Can cities increase their tax rate? Yes. Cities are allowed to set their own rate separately from the provisions of RTC Section 11901. In this case, the County would retain the entire proceeds from the $1.10 rate specified in this section. Have any other cities adopted their own property transfer taxes? Yes. At least 22 cities in 10 counties have adopted their own property transfer tax rates. Rates range from $1.15 per $1,000 in Petaluma to $10.00 per $1,000 in Berkeley. How much revenue would an vscrease generate? This depends on two key factors: ■ The value of property transferred annually. ■ The tax rate established by the City. For comparison purposes, the following is a summary of property transfer tax revenues received by the City over the past four years at the current rate of $0.55 per $1,000, and the amount that would have been received at rates ranging from $2.20 per $1,000 to $10.00 per $1,000. Actual Revenues Revenues @ S2.20/S1,000 Revenues @ $330 /$1,000 Revenues @ 54.40151,000 Revenues @ $5.00 151,000 Revenues @ $10.00 /:1,000 1991 -92 $ 68,400 $ 273,600 $ 410,400 $ 547,200 $ 621,800 $1,243,600" 1990 -91 94,300 377,200 565,800 758,200 864,350 1,728,700 1989 -90 137,800 551,200 826,800 1,102,800 1,252,700 2,505,400 1988 -89 136,700 546,800 820,200 1,093,600 1,2427700 2,485,400 / -3s What authority is required to bwmase this tax for the CityI 04 If the revenues will be used for general purposes, Council approval is required. If the revenues will be used for a special purpose, two- thirds voter approval is required. How can these revenues be used? These revenues can be used for any legitimate government purpose - street maintenance, parks, recreation, police, or fire. They can be formally earmarked; however, as noted above, this would require two- thirds voter approval. If designating the use of these revenues is desirable, the Council could allocate them by policy to a special purpose such as parks and open space. For example, the 1991 -93 Financial Plan includes several policies regarding the allocation of General Fund revenues. However, the implementing ordinance itself could not earmark them without two- thirds voter approval. Why is this an appropriate City flvrding source? The City's real property transfer tax will be paid by the buyers of San Luis Obispo properties. As such, it is an appropriate way for new residents to pay their fair share of the amenities that have already been provided by existing residents. For properties changing hands through local buyers, the transfer tax reflects the enhancement of property values by the facilities and programs that the City provides. How would these revenues be collected? The County could continue to collect these revenues for us. Although this would require a formal agreement with the County, initial discussions with them have been favorable. When could an increase be effective? # Theoretically, an increase could be implemented immediately upon Council approval. However, an effective date that is 120 to 180 days from the date of adoption is recommended in order to ensure a smooth transition for the County, businesses directly involved in processing property transfers such as escrow, title and lending companies, and any individuals or companies with properties currently in escrow. Are there any other unplernentation issues? Yes. There has recently been a court case against the City of Los Angeles for increasing the city property transfer tax. The court decided in favor of the City of Los Angeles so they have retained this tax. However, it is anticipated that the decision will appealed to a higher court. For this reason, the City may want to delay implementation of the property transfer tax until an appellate court ruling has been issued. in accordance with Proposition 218, majority voter approval is required for new or increased general purpose taxes, and two- thirds voter approval is required for new or increased special taxes. Unless there is an emergency, new or increased general purpose taxes can only be voted upon at the same time as regularly scheduled governing body elections. / -3� UTILITY USERS TAX FACT SHEET ` What is uOry users tar? This is a tax on the consumption of utility services (i.e. gas, electricity, water, telephone, cable, etc.) similar to a sales tax on commodities. Is this tax in place at this time? Yes. The tax rate is currently 5% and provides the City approximately $2.7 million dollars annually. Do all utility companies charge utility users tax? No. Two utilities, garbage and sewer, do not include utility users tax on their billings. When the original utility users tax ordinance was adopted, the City was billing for three utilities - water, garbage, and sewer - and only water was included with the other utilities to be taxed. Who pays this tar? The individual or business using the utility pays the tax at the time the utility bill is paid. Who currently receives the revenue? The revenue is remitted monthly to the City by each of the utility companies collecting the tax. The revenue goes directly into the City's General Fund and is used for any legitimate government purpose - police, fire, recreation, street maintenance, parks. Can cities increase their tax rate? 7 Yes. Cities can change the utility users tax rate by adopting an ordinance increasing the tax rate. No other authority is required to increase this tax. How much revenue would a rate increase generate? For each percent increase in the utility users tax, General Fund revenue will increase approximately $540,000. Can the City expand the utility users tax base to include all utilities? �'es. Cities can expand the utility users tax base to include all utilities, which in our case would add the two utilities currently not charging the tax - garbage and sewer. To include these two utilities, the City needs to adopt an ordinance indicating the inclusion of garbage and sewer. No other authority is required. v How much revenue would be generated by expanding the utility users tax base? By adding the two remaining utilities - garbage and sewer - approximately $300,000 annual revenue would be generated for .the General Fund. • In accordance with Proposition 218, majority voter approval is required for new or increased general purpose taxes, and two- thirds voter approval Is required for new or increased special taxes. Unless there is an emergency; new or increased general purpose taxes can only be voted upon at the same time as regularly scheduled governing body elections. 1-57 How does the City's utility users tax rate compare with other cities? Based upon a survey of the cities chosen for comparison, the following utility user tax rates are in effect: San Luis Obispo 5% Monterey 5% Camarillo none Napa none Santa Barbara 6 % Santa Cruz 7% Visalia none Ventura 5% Palm Springs none Santa Maria none Davis none Petaluma none San Juan Capistrano none Statewide, 127 cities have established a utility user tax ranging from 3.5% to 12.5 %. Although a majority of cities do not have a utility users tax, an overwhelming majority of State residents (approximately 60 %) are covered by the tax. Why is this an appropriate City funding source? Utility users tax is an established means of generating general fund revenue. Most people in the State pay utility users tax. When could a rate inaease and /or expansion of the tax base be effective? of Theoretically, an increase and inclusion of garbage and sewer in the tax base could be implemented immediately upon Council Approval. However, an effective date that is 60 to 90 days from the date of adoption is recommended in order to allow enough lead time for notification to all utility companies and to allow them time to make any program or billing changes required. ' In accordance with Proposition 218, majority voter approval is required for new or increased general purpose taxes, and two- thirds voter approval is required for new or increased special taxes. Unless there is an emergency, new or increased general purpose taxes can only be voted upon at the same time as regularly scheduled governing body elections. 1-3T A Quality of Life Action Plan for San Luis Obispo The Need The city of San Luis Obispo has established itself as a city that is firmly committed to maintaining its environment and quality of life. Specific examples include proposals to maintain a green belt around the city including farm land and hillsides, to maintain a large amount of open space within the city, to construct bicycle and walking paths along the San Luis Creek in an extension of downtown creek -side park and plaza, and to preserve historical buildings. All of these projects, and more like them, if executed properly would not only maintain, but greatly enhance our environment and quality of life and ensure its continuance for future generations. Such projects have a significant monetary cost. In recent years the primary means by which San Luis Obispo has used to finance such projects are the traditional ones that put the main burden on businesses and landowners, either through taxation or through restrictions on the ways in which landowners are permitted to use their land. These approaches have the effect of placing the burden of the large financial costs for the projects on a relatively small part of the population. A Proposal for a New Approach in San Luis Obispo This is the city that has voted repeatedly, often with large majorities, to adopt various proposals that are seen as protecting our quality of life or our environment. A list of such votes are summarized in the Land -Use Element as adopted by the City Council recently. Further, during the recent debates regarding the various provisions of the Land -Use Element there has been strong input from the business community that it, too, is very concerned about the protection of the quality of life in San Luis Obispo. In turn, many in the environmental groups have indicated that they are serious about maintaining an environment that is supportive of healthy businesses. Consequently, I believe that the city of San Luis Obispo, if effectively led by a coalition of business, environmental, neighborhood, agricultural and other groups, would respond positively at the ballot box to approve a measure that would provide financing to be used for a broad'quality of life program that would include acquisition of open space or development rights. But it should also address broader opportunities, such as an extension of the Mission Plaza, bike paths, parks, and other improvements in the community. This should be a long - terra comprehensive program. It should be bold. It should challenge our whole city to be willing to put real money where we have professed our hearts to be. It should be a broad -based revenue - raising measure so that everyone in the community is making a contribution. It should be discussed widely, with full public input, culminated with voter approval. / -3f There are several specific elements to this proposal: The mayor and city council should appoint a broad -based advisory committee of 7 - 9 people with representation from business, environmental, neighborhood, agricultural and other groups to evaluate and prioritize various proposals to enhance the quality of life. This committee should be constituted following the November elections in order to avoid politicizing the process and in order to make this a project to be shepherded by the 1995 -96 city council. 2. The committee would also consider various revenue - raising measures that would raise sufficient funds to finance the fist of projects. Cost - effectiveness should be a paramount concern. I believe serious consideration should be given to a combination of taxes, including increases in sales tax, property tax, motel and restaurant taxes and other so that all who benefit from the enhancements to the community would contribute financially and so that the burden is not concentrated on any single group. The total raised from San Luis Obispo should be $3,000,000 to $4,000,000 annually, which is approximately 10% of our current city budget. 3. Contact with other cities and with the county should be made to encourage them to participate in a county-wide program. This would enable a regional approach and make possible consideration of bold county-wide programs, as well as individual city projects. This would also make possible the utilization of a sales tax increase, which can only be implemented on a county-wide basis. The levy should have a sunset after 10 years, with continuance of the program requiring fresh voter approval. 5. The funds so raised must be restricted only to the approved projects and not be used to cover general city expenses. 6. The committee would also prepare proposed language for the ballot measure. The city council would be consulted at appropriate times as to progress of the committee's deliberations and would ultimately approve the list of projects, the proposed revenue measures and the wording of the ballot measure. 6. Following approval by the city council, the proposed measure would be circulated as widely as possible with interested groups, businesses, and interested individuals taking the lead in obtaining adequate signatures to place the measure on the ballot for the June, 1996 primary election. This process would be utilized as an essential part of educating the public about the opportunity and be an important step toward generating the broad support needed for the program. The advisory committee would also periodically update the list of approved projects and work closely to advise the city council of new opportunities. / —Z/D Advantages Approval of this concept would place San Luis Obispo in a leadership position as a community with the willingness to put its money where its heart has been. If supported by all segments of our community this could do much to unify the city behind a common vision. It could increase pride that we were willing to adopt the most broadly based taxes to achieve special projects that most communities only dream about. It could create an excitement about what choices our community might make in using these funds. We could think realistically of targeting completion of a large number of projects to create parks, preserve scenic hillsides and a greenbelt around the city, create bicycle and hiking paths and a variety of other projects that seem out of reach now. It could enhance our county as a destination for 'green tourism', particularly if the entire county were interested to participate. Progress could be tracked with public displays that would allow the community to see where its money is going and how much progress has been made. Solicitations for individuals to make dedications of land or development rights could be sought to supplement the program and might be more likely to occur if the whole community was also contributing. This proposal would not create additional bureaucracy because each of the proposed taxes is already being collected and no extra machinery would be needed. Annual retail sales in the city of San Luis Obispo have been in the range of $400,000,000 to $500,000,000. Therefore, a 0.5% sales tax alone could raise approximately $2,000,000. The other taxes could raise a comparable amount and make sure that the total package is not seen to be regressive taxation. A fund of the magnitude of $3,000,000 to $4,000,000 annually could allow San Luis Obispo to achieve some very significant, bold goals. Our example could be used to challenge the county to approve a similar tax which could be used in a broader program to preserve many of the natural resources throughout the county. Offsetting the Disadvantage The obvious disadvantage is that these taxes represents an additional cost that voters in this state have been very reluctant to approve. There may be concern among retail businesses, motels and restaurants that customers would make the decision to go elsewhere. I believe this possibility could be offset by public programs to inform and to instill a pride in what our community is doing. This is a special city, and has led the way before, in matters such as the no- smoking in public places ordinance. This is an idealistic concept, but if effectively presented to our citizens, I believe our voters would approve 'such a bold proposal. Respectively submitted by Lauren R. Brown / -4//