Title
Adoption of Resolution Calling an Election to be Consolidated with the City’s Next General Municipal Election on November 8, 2016, and Submitting to the Voters at That Election a Measure, the Utility Modernization Act, That Proposes to Amend the City Charter by Amending Section 12-6 to Reaffirm Alameda Municipal Power’s Annual General Fund Transfer and Amending the Alameda Municipal Code by Repealing Chapter 3-59 and Replacing It with a Modernized Utility Users Tax Ordinance; Consider Authoring a Direct and Possible Rebuttal Argument; and Direct the City Attorney to Prepare the Impartial Analysis. (City Manager 2110)
Body
To: Honorable Mayor and Members of the City Council
From: Jill Keimach, City Manager
Re: Adoption of Resolution Calling an Election to be Consolidated with the City’s Next General Municipal Election on November 8, 2016 and Submitted to the Voters at That Election a Measure, the Utility Modernization Act, That Proposed to Amend the City Charter by Amending Section 12-6 to Reaffirm Alameda Municipal Power’s Annual General Fund Transfer and Amending the Alameda Municipal Code by Repealing Chapter 3-59 and Replacing It with a Modernized Utility Users Tax Ordinance; Consider Authoring a Direct and Possible Rebuttal Argument; and Direct the City Attorney to Prepare the Impartial Analysis
BACKGROUND
On June 7, 2016, the Council unanimously directed staff to prepare the Utility Modernization Act ballot measure for submission to the voters. This staff report submits the proposed legislative changes to the City’s Utility Users Tax Ordinance and the City Charter. It recommends that the City Council adopt a Resolution calling for and giving notice of a General Municipal Election to be held on Tuesday, November 8, 2016 and ordering the submission of the Utility Modernization Act to the voters. If the measure is approved by a majority of the voters, it would modernize the City’s existing Utility User Tax Ordinance and amend the City Charter to reaffirm Alameda Municipal Power’s annual General Fund Transfer.
Adoption of the Utility Modernization Act (UMA), will allow Alameda to maintain essential city services such as police, fire and emergency response, street and sidewalk repairs, park maintenance, and library services by modernizing the City’s existing Utility Users Tax (UUT) and confirming Alameda Municipal Power’s (AMP's) historical support of city services.
As staff explained in its June 7, 2016 report, the City’s UUT Ordinance is over forty (40) years old and its provisions are antiquated. Over the past few years, revenue from the UUT has been in decline, largely due to inconsistencies in telecommunication provider collection practices. Staff believes that modernization of the Ordinance would reverse this trend.
The modernized UUT Ordinance we present for consideration does not raise the current 7.5% tax rate. The new Ordinance, however, is much more explicit in what technology and types of charges it does and does not cover and therefore, some users may see an increase in their bills depending on if their provider is applying the existing tax correctly. It contains modernized definitions of telecommunication, video, electric and gas services which reflect current and emerging technologies. It uses industry standard definitions for the utility services which are readily familiar to the utility providers. Since the utilities are responsible for collecting the tax from end users, the use of modern, standardized definitions should result in more uniformity in provider collection practices. This will ensure that the 7.5% tax rate is applied fairly and equitably to all consumers, regardless of the technology used or the provider of that technology.
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. Staff anticipates that this would bring our UUT revenue level back to Fiscal Year 2007-08 and prevent further declines in this important revenue source.
The UMA also updates the language in the City’s Charter that addresses a practice started in 1914 and officially adopted in 1937. This authorizes AMP to support the City in providing essential City services. Currently, AMP makes a $2.8 million General Fund transfer (in addition to making other, smaller payments required under City Ordinances and for its share of City expenses). This General Fund transfer is similar to payments made by all Utility Companies to the cities in which they operate. AMP also funds approximately $900,000 for the electricity, maintenance and replacement of our street lights. Together, these transfers of goods and services total $3.7 million to fund core services. The UMA measure would confirm this transfer and authorize adjustment in the future to account for inflation.
Since the UMA is a general tax imposed for general governmental purposes, a simple majority is all that is required for its enactment as opposed to a special tax imposed for special purposes which requires a two-thirds vote for adoption.
DISCUSSION
Modernization of the City’s Utility Users Tax Ordinance
The City’s UUT was first adopted by Ordinance in 1972 and then revised in 1995. Subsequently, the voters of the State of California adopted Proposition 218. Even though the City's UUT had been in effect prior to the adoption of Proposition 218, in order for the City to continue to collect the tax legally, voter approval was required. The voters affirmed the City’s UUT in 1998.
The City’s existing UUT applies to the consumption of electricity, gas, cable and telecommunication services. The rate is set at 7.5% and represents 10 percent of the City’s annual General Fund revenue. The UUT is a general tax which is used for a variety of municipal service needs at the discretion of the City Council.
The UUT is levied by the City but collected by the various utilities as a part of their regular billing procedures and then remitted by the utilities to the City. Statewide, city and county utility user taxes generate approximately $2 billion per year. Approximately 150 California cities have similar UUT ordinances. For the City of Alameda, the UUT is the fourth largest revenue source for the General Fund.
The application of utility user taxes to certain telecommunication services has been a topic of substantial legal and legislative turmoil due to changes in technology and federal law. Telephone communications services were included in the original Ordinance, including references to outdated technologies and regulations such as coin operated telephones and lifeline rates.
Technological advances in the telecommunications and electrical utility industries, and deregulation of the gas industry, have changed the way these utility services are delivered and marketed to end-users. As technologies and marketing approaches change, older ordinances, like the City’s, become vulnerable to legal challenge or to inconsistent interpretation due to ambiguity. For example, some technology providers may argue that they are not covered by the old Ordinance’s language, or interpret the old language narrowly resulting in their customers paying less than other similarly situated users, or paying not at all. A modern UUT Ordinance would correct this unfairness by assuring that all taxpayers are treated the same regardless of technology or how the service is bundled or marketed.
Over the last decade, an increasing number of cities with UUTs have gone to their voters to modernize their ordinances to assure applicability to new technologies (e.g. wireless, Voice Over Internet Protocol, aka, VoIP, etc.) and billing methods (e.g. flat rate, etc.). Approximately 90% of the UUTs in California are now voter-approved with modern definitions. Over the past several years, every city in Alameda County with a UUT (except the City of Alameda and Piedmont) has successfully secured voter approval to modernize their UUT Ordinance primarily to reflect the migration from traditional landline telephone use to new electronic communication technologies.
Updating the UUT also protects against legal risks as well as tax erosion due to technology by-pass. The vast majority of public agencies with UUT ordinances have successfully secured voter approval to update the telecommunication and video components of their UUT Ordinance to close loopholes and include modern definitions that avoid potential legal challenges. Nearly all of these types of measures have received overwhelming voter approval, because they simply “modernize” the telecommunication and video definitions so that all taxpayers are treated the same.
Staff recommends leaving the tax rate the same (7.5%), but amending the language of the Ordinance to clarify and protect its intended scope now and into the future. Based on historical tax receipts and our understanding of the accounting practices of the utilities, staff believes that most utility users are already paying UUT on the majority of services they use. For this reason, the typical utility customer likely will not experience an increase in taxes if these amendments are adopted, though some increases may occur to telecommunication users depending on if their service provider is properly applying the existing tax. The following is a brief summary of the amendments included in the proposed Ordinance:
• Includes a modern, functional definition of telecommunication and video services that is technology-neutral, and includes VoIP (voice over internet protocol) telephone service, IP-TV (broadband cable-like services), paging, and private communication services;
• Current federal law prohibits any state or local tax on “internet access” such as email and digital downloads as well as games, music, and software etc. This measure would be consistent with those laws;
• Follows definitions similar to Streamlined Sales and Use Tax definitions that are widely followed in other states and are easily administered by the telecommunication industry;
• Incorporates definitions of “ancillary telecommunication and video services” that are commonly recognized by the industry as being part of such services;
• Includes a modern definition of “video services” since telephone companies are now providing “video” or cable-like services (IP-TV) and CATV companies are providing voice services (VoIP). Note: federal law prohibits a local tax on direct broadcast satellite TV;
• Provides detailed definitions and descriptions of unbundled services that historically have been included in taxable gas and electric services;
• Provides other administrative tools for addressing taxation issues including administrative rulings and sourcing, bundling and nexus guidelines to assure broad and even-handed application of the tax;
• Assures that the Utility Users Tax will be properly collected and that all revenues will be properly collected through the use of third party auditors; and
• Maintains the 2% exemption for Alameda residents whose gross annual household income meets guidelines for low income designation or who are senior citizens. The definition of senior citizen, however, has been raised from 62+ to 65+.
If the City does not seek voter approval of a modernized UUT, then the emergence of new technologies could cause the City to lose the vast majority (if not) all of the annual revenue from the telecommunications component of the UUT.
Alameda Municipal Power (AMP) Transfer
Currently, approximately three percent (3%) of the City’s General Fund revenues comes from an annual “General Fund” transfer from AMP, the City’s electrical utility.
Every year since 1914, AMP has transferred money to the General Fund of the City. In 1937, a charter amendment set forth a formula for retained earnings in Section 12-6 of the City Charter, and then required the City to transfer any “excess” earnings to the City’s General Fund pursuant to Section 12-6 of the City Charter. The text of Section 12-6 of the City Charter has not been updated since 1937.
Since 2009, the amount of the General Fund transfer has been $2,800,000 each year. From 2001-2008 it was $2,500,000 each year; in years prior to 2001 the amount varied, including to amounts as high as $3,614,000 in 1995. The City has used these funds to provide essential City services, such as police and fire protection and parks and library programs.
In addition, AMP provides for the operation, maintenance and replacement of street lights in the City at no charge to the City’s General Fund, at a cost of approximately $900,000 per year. Combined, the total amount of the annual transfer is $3.7 million in cash and services.
In October 2015, an AMP ratepayer sued the City in a class action lawsuit, claiming that certain transfers by AMP to the City constitute a “tax” under Proposition 26, which requires voter approval of local taxes. The City is defending the lawsuit, but to avoid uncertainty regarding the annual $2.8 million dollar cash transfer to the City’s General Fund and the $900,000 in in-kind services provided by AMP, and to ensure that the City has the funds necessary to continue to provide essential services to City residents, the City proposes to amend its Charter to confirm that AMP may continue its current practice of transferring approximately $3.7 million to the City on an annual basis, less any applicable tax exemptions. If the voters approve the transfer, AMP will no longer provide street light services to the City at no charge.
Because AMP is currently providing these funds and services to the City, the proposed Charter amendment will not result in new charges for ratepayers. The Public Utilities Board will continue to set AMP’s rates in an amount sufficient to cover the cost of the annual transfer as part of its ordinary rate-setting process.
The proposed Charter amendment will also authorize the Public Utilities Board to adjust the amount of future transfers to account for inflation, so that the City may continue to have sufficient resources to fund essential services and to adopt rates sufficient to cover the costs of the transfer, in addition to the cost of services.
Ballot Argument
State election law allows the City Council to determine its interest in authoring an argument regarding the measure for printing in the sample ballot. Arguments of no more than 300 words, signed by no more than five registered voters are filed with the City Clerk as the Elections Official. Ballot arguments for and against the Charter amendment are due in the City Clerk's Office by Tuesday, July 19, 2016. Rebuttal arguments, which cannot exceed 250 words, are due in the City Clerk's Office by Thursday, July 28, 2016.
The City Council has options regarding the preparation of a ballot argument and potential rebuttal. The City Council may: 1) draft an argument as a whole body in open session; 2) authorize up to two Councilmembers to meet as a subcommittee of the City Council to draft an argument and have the entire Council sign; 3) authorize up to two Councilmembers to draft an argument and have a combination of Councilmembers and other eligible voters sign; or 4) authorize up to two Councilmembers to draft an argument and have up to five eligible voters sign.
FINANCIAL IMPACT
It is expected that modernizing the City’s Utility 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 declining revenues, additional funds would assist the City in meeting its long term liabilities and upcoming obligations. 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.
With the approval of the Utility Modernization Act measure by the voters, UUT revenue and AMP annual transfer would account for approximately 11% and 4% of the total General Fund inflow of resources (a total of 15% of the City’s only discretionary fund). Staff expects to enforce the revised UUT Ordinance soon after voter approval is received.
The UUT contributes to the formula (known as Balanced Revenue Index or BRI) that calculates increase in compensation for certain City staff, including police and fire employees. The collection of this revenue will affect compensation changes to be effective January 1, 2018. However, it is expected that additional UUT revenue will not escalate BRI anymore than currently anticipated based on the current revenue projection. Should other revenues (property tax, sales tax, transient occupancy tax and/or transfer tax) used in the calculation of BRI exceed current projections cumulatively by more than $2.1 million, it will cause an increase in the BRI.
MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE
Should Council direct staff to place this measure 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
Adopt a Resolution calling and notice of a General Municipal Election to be held on Tuesday, November 8, 2016 and ordering the submission to the electors of the City of Alameda at said election of the Utility Modernization Act which would modernize the City’s Utility User Tax Ordinance and amend the City Charter to reaffirm Alameda Municipal Power’s annual General Fund transfer; consider authoring a direct and possible rebuttal argument; and direct the City Attorney to prepare the impartial analysis.
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