Title
Recommendation to Direct Staff to Prepare a Ballot Measure for the November 2016 Election to Update and Modernize the Existing City of Alameda Utility Users Tax Ordinance and Reaffirm Alameda Municipal Power’s General Fund Transfer to Support the Provision of Essential City Services. (City Manager 2110)
Body
To: Honorable Mayor and Members of the City Council
From: Jill Keimach, City Manager
Re: Recommendation to Direct Staff to Prepare a Ballot Measure for the November 2016 Election that Updates and Modernizes the Existing City of Alameda Utility Users Tax Ordinance and Reaffirm Alameda Municipal Power’s General Fund Transfer to Support the Provision of Essential City Services
BACKGROUND
Over the past several years, staff has analyzed and presented to Council an outlook on the City’s long-term fiscal health and suggested ways to ensure the budget is structurally balanced. Although the City’s revenues fluctuate with the economy due to a variety of factors, the five year outlook continues to rely on City reserves to balance the budget. Specifically, over the past decade the revenue the City receives from the Utility User Tax has declined or remained flat while the City’s expenses continue to increase due to rising costs of healthcare and services. In the short term, because of an improved economy and in particular the sale of homes, the City has seen a budget surplus based on one-time events. However, as previously reported, there are underlying issues related to the increase in the cost of living in the Bay Area, the Public Employees Retirement System (PERS) smoothing effect, and the increase in the cost of healthcare that continue to create financial challenges for the City.
In addition to these issues, staff identified in the Fiscal Year (FY) 2015-2017 Capital Improvement Program (CIP) budget areas of concern including deferred maintenance of our aging buildings and infrastructure. This includes a backlog of approximately $10.5 million for 7,000 sidewalk repairs, approximately $12.3 million for urgent deferred maintenance of City-owned buildings and close to $45 million for storm drain improvements (over a 30 year period) mandated by the San Francisco Bay Area Regional Water Quality Control Board which are not fully covered by a separately charged assessment. In addition to this backlog, the City is in the process of building two new highly anticipated park facilities (Jean Sweeney Open Space and Estuary Park) neither of which have a dedicated secured funding stream for on-going maintenance.
In light of these financial realities, the City Council directed staff to conduct a survey to determine if the voters of Alameda were willing to tax themselves for City services. Those results were shared with the Council and community in March of this year (Exhibit 1).
Generally, a majority of likely voters were willing to support a ballot measure that would help pay for city services, especially for 9-1-1 emergency response, police patrol and investigations, fire protection, street maintenance including repairs to storm drains that keep pollution out of the Bay, parks and recreation, libraries, and other programs and services, all of which play a significant role in maintaining Alameda’s high quality of life. Specifically, 61% of voters were likely to support a sales tax measure and 64% were likely to support modernization of the Utility Users Tax ordinance (after some education). A half cent increase to the sales tax would generate approximately $3.5 million annually and a revision to modernize the UUT ordinance would recover roughly $1.5 million annually to bring back the revenue levels the City received in FY 2007-8.
However, as staff earlier reported to Council, Alameda has reached its statutory cap on the amount of sales tax it can impose (9.5 percent) and, therefore, cannot pursue an increase in the sales tax without special state legislation.
DISCUSSION
Utility User Tax - (UUT)
The UUT is a general tax that was adopted in 1972 and applies to the consumption of electricity, gas, cable and telephone services. The rate is set at 7.5% and represents 10 percent of the City’s annual General Fund revenue. It is also the only major revenue source that is on the decline, as shown in the chart below.
Utility User Tax Revenue Trend
Over the past several years, every city in Alameda County with a UUT (except Alameda and Piedmont) has successfully secured voter approval to modernize its UUT ordinance primarily to reflect the migration from traditional landline telephone use to new electronic communication technologies, such as wireless and VOIP (“Voice Over Internet Protocol”). Modernizing the City’s existing UUT would assure that the 7.5% rate is applied fairly to all consumers so that those that use more advanced technology share the tax burden equally. It also is a tax that is paid irrespective of housing status, unlike a parcel tax that is paid solely by property owners.
Staff recommends leaving the tax rate the same (7.5%), but modernizing the language of the entire ordinance to ensure equal treatment of all users. While the tax rate would remain unchanged, the modernized UUT with its more explicit and modernized definitions should ensure an increase in collections and thus result in a net benefit to the City’s General Fund. In addition, the modernized language would avoid further declines in revenue resulting from the trend of bundling services which has been applied to all categories within the UUT including gas, electric, cable and telecommunications. This would bring our UUT revenue level back to Fiscal Year 2007-08 and prevent further declines in this important revenue source.
Generally, the existing language in the current UUT includes a 2% exemption for low income households and seniors (62+). The City has a program that allows seniors, in lieu of taking the exemption, to donate their 2% exemption to Mastick Senior Center. Council should provide direction to staff on whether to leave the scope of the exemption unchanged; to expand it from 2% to a full exemption or to eliminate the it entirely. Staff recommends leaving the scope of the exemption unchanged though increasing the senior exemption age to 65 or older, similar to other senior exemptions in the City. This would still allow staff to continue the program which allows seniors in lieu of taking the exemption to redirect their 2% exemption to enhance senior services at Mastick.
Alameda Municipal Power (AMP) Transfer
Late last October, several southern California attorneys filed a lawsuit against the City (Zachary Ginsburg vs. City of Alameda) which contends that Alameda Municipal Power (AMP) rates should be considered a tax, and therefore must be approved by the voters as required by Proposition 26. AMP’s transfer, contemplated as far back as 1914 and codified in the City’s Charter in 1937 (Article XII Sec. 12.6), has historically provided financial support to the City defraying the cost of services such as police patrol, fire response, park maintenance and library services. Currently, and since 2009, AMP transfers $2.8 million a year to the General Fund as a “General Fund Transfer” and funds approximately $900,000 per year for city-wide street lights, including maintenance, replacement and electricity for a total of $3.7 million per year. The level of support to the City has historically fluctuated but balances AMP’s financial health and the City’s needs. The annual transfer approximate what an investor-owned utility like PG&E would pay the City in the form of a City Franchise Fee for the right to use public rights of way for utility lines, and for the right to provide electric services to City residents.
Staff believes that because the AMP transfer is contemplated in the Charter dating back to 1937, and has been consistent at the same level since pre-Proposition 26, it should not be treated as the imposition of a tax as described in Proposition 26. However, in an abundance of caution, staff is recommending that this practice be confirmed by the voters with the addition of a cost of living adjustment. Should Council agree, the measure would keep the AMP’s financial contribution at the same level as it is currently budgeted, with the result that electric bills would not be affected. AMP would continue to set its rates based on its business needs as it does now, and continue to treat General Fund support as an expense to be factored into its rate making analysis.
Recommendation
In light of the issues discussed above, staff is recommending the City Council place on the November 2016 ballot a measure that updates and modernizes the City’s utility taxes by modifying the Utility Users Tax Ordinance and amending the City Charter to reaffirm AMP’s General Fund transfer. The measure will be called the Utilities Modernization Act (UMA). The Utility Users Tax Ordinance would maintain existing exemptions for seniors and low-income households. This would allow seniors, in lieu of taking their 2% exemption to donate the exempted funds to Mastick Senior Services.
Should the Council agree, staff will bring the revised UUT ordinance and Charter Amendment back on July 5, 2016 for consideration of placement on the November 2016 ballot.
FINANCIAL IMPACT
It is expected that modernizing the City’s Utilities User Tax ordinance could yield the City an additional $1.5 million annually, bringing the total amount collected back to 2007 levels. While the City has struggled to manage its budget based on these declining revenues, additional funds would assist the City in meeting its long term liabilities and upcoming obligations as discussed above. The modernization of the ordinance would also mitigate against potential further declines in revenue.
Placing the AMP transfer on the ballot has no financial impact to the City since the amount of the proposed transfer is the same as current practice. Should the measure fail, the City would continue the practice unless the Ginsburg lawsuit were resolved against the City’s position. Again, staff, including the City Attorney’s office, contend that this practice is exempt from Proposition 26 because of its long standing nature and its contemplation in the City Charter. However, should the plaintiffs prevail, staff would immediately return to Council to discuss cuts to existing staff and city-wide services to absorb the loss in revenue to the General Fund.
MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE
Should Council direct staff to bring this proposed measure back for placement on the November ballot and if adopted by the voters, the measure would amend Section 12-6 of the Charter of the City of Alameda and Article 3-59 of the Alameda Municipal Code.
ENVIRONMENTAL REVIEW
This measure is exempt pursuant to CEQA Guidelines section 15378(b)(4) which excludes from the definition of “project” governmental fiscal activities that do not involve any commitment to any specific project that may result in a potentially significant physical impact on the environment. The passage of this measure does not have any significant connection to the physical environment. The changes being made to the city’s UUT ordinance, expanding its coverage to ensure application to newer forms of telecommunications without changing the tax rate, do not constitute a project because they simply clarify which types of telecommunications activities by users in the city are subject to taxation. The funds themselves are not designated for any particular use. With respect to the charter amendment authorizing certain monetary transfers from Alameda Municipal Power to the general fund, the measure likewise does not constitute a project. The transfers are already taking place, and the money is not designated to be used for any particular purpose or project. Finally, the addition of an inflation adjustment to the amount of future transfers could affect future electric rates likewise would not be expected to cause any change on the physical environment, because the funds are not designated for any particular use.
This measure is also exempt under the “common sense” exemption found in CEQA Guidelines section 15061(b)(3) because as explained above, it can be seen with certainty that there is no possibility that the passage of the measure would result in a significant effect on the physical environment.
RECOMMENDATION
Direct Staff to Bring Back a Ballot Measure for the November 2016 Election that Updates and Modernizes the Existing City of Alameda Utility Users Tax Ordinance and Reaffirms Alameda Municipal Power’s General Fund Transfer to Support the Provision of Essential City Services.
Respectfully submitted,
Jill Keimach, City Manager
Janet Kern, City Attorney
By:
Elizabeth D. Warmerdam, Assistant City Manager
Financial Impact section reviewed,
Elena Adair, Finance Director
Exhibits:
1. Polling Results, March 2016
2. Staff Report, October 20, 2015