Title
Recommendation to Provide Direction on Potential Revenue Measures to Submit to Voters for the November 3, 2020 Election. (City Manager 2110) [Not heard March 17, 2020]
Body
To: Honorable Mayor and Members of the City Council
EXECUTIVE SUMMARY
Staff seeks direction from the City Council on whether to focus on one or more revenue measures to be placed on the November 2020 ballot, or place no measure at all.
UPDATE SINCE MARCH 17, 2020
The item was continued from March 17 after the County’s shelter in place order, which took effect that day. As the public health crisis has progressed, the financial and economic toll on the City, its businesses, and its residents has come into clearer focus. This toll makes the discussion of revenue measures all the more necessary, as a possible part of the solution to the challenge of the City’s declining revenues. At the same time, this discussion is all the more difficult because Alameda’s residents and taxpayers face the most challenging financial circumstances experienced in decades.
Shortly before the pandemic spread, a discussion started and is continuing on another type of revenue measure not identified previously. Some cities are considering an adjustment to their local utility users tax so that the more carbon intense utilities, such as natural gas, are taxed at a higher rate than lower carbon intense utilities, such as electricity. In effect, this adjustment would serve as a local carbon tax and incentivize electrification, which is a key measure of Alameda’s Climate Action and Resiliency Plan.
BACKGROUND
The City of Alameda (City) has maintained fiscal discipline and currently to meets its policy of a 25% reserve. Even with proactive measures and fiscal discipline, significant challenges exist. The General Fund is expected to have its expenses exceed revenue beginning in Fiscal Year (FY) 2021-22 based on current projections, and the City will be unable to meet its 25% reserve in that same fiscal year. By FY 2022-23, the annual gap between expenses and revenue is projected to grow to $4.2 million, in part due to substantially increasing and required payments to CalPERS.
These financial challenges are not new. The City has been considering them since at least 2009, with the Fiscal Sustainability Committee’s Long Range Financial Forecast 2009-2019 and the last three biennial budget processes. The FY 2019-21 capital budget identified nearly $800 million in deferred maintenance in public infrastructure Citywide, including at Alameda Point.
Given the scale of these challenges, a consideration of revenue measures is warranted.
History of Revenue Measures
Since 2000, the City has placed six local revenue measures on the ballot. By way of comparison, over that same time period, the cities of Berkeley, Oakland, and San Leandro have placed 21, 17, and 7 measures, respectively. The City’s revenue measures were:
• In 2000, 78% of voters approved Measure O, an $11 million general obligation bond to fund the new main library and improvements to branch libraries;
• In 2008, 51% of voters approved Measure P, raising the property transfer tax from $5.40 to $12.00 per $1,000 of value, resulting in a significant benefit to the fiscal stability of the City;
• In 2012, 51% of voters voted yes on Measure C, a one-half cent sales tax increase, although this measure failed as it fell short of the two-thirds threshold required when revenue is dedicated to specific projects. This measure proposed to dedicate its proceeds to City vehicles, library improvements, and constructing an emergency operations center;
• In 2016, 73% of voters approved Measure K1, Utility Modernization Act, modernizing the existing utilities users tax and confirming Alameda Municipal Power’s (AMP) historical support of City services;
• In 2018, 61.5% of voters approved Measure F, Essential Services Protection Measure, a one-half cent sales tax raising $4-5 million annually; and
• In 2019, 57% of property owners approved the Water Quality and Flood Protection Initiative, adding an average single-family residential fee of $78 annually to the property tax statement and raising nearly $3 million annually to continue to maintain our storm drainage infrastructure.
The City Council considered placing a $95 million infrastructure bond on the June 2018 ballot, but instead placed the successful Measure F, Essential Services Protection Measure, on the November 2018 ballot.
November 3, 2020 Election
California holds a general election on November 3, 2020. It is expected to have a high-turnout due to the Presidential election. Given the projected turnout and strong economy, the ballot is likely to include more than a few revenue measures.
For example, the State is likely to consider the California Tax on Commercial and Industrial Properties for Education and Local Government Funding initiative. It involves a potential change to the “split roll” tax in which commercial properties worth more than $3 million would be assessed on their current value, rather than, as it is now, their purchase price with a modest inflationary increase. If this initiative passes, the revenue will be dedicated to schools and local governments. Another measure being considered for the November 3, 2020 ballot is a $4.75 billion climate resiliency bond benefitting infrastructure in the State’s most climate vulnerable communities.
The nine county San Francisco Bay region is considering a $100 billion regional transportation measure, funded through a 1% sales tax (<https://fasterbayarea.org/>).
Alameda County placed Measure C, Children’s Health and Child Care Initiative, on the March 2020 ballot, charging a transactions tax rate of one-half of one percent (1/2%) on retail transactions of tangible personal property.
In Alameda, the Alameda Unified School District (AUSD) placed the Alameda Teacher/Staff Retention parcel tax on the March 2020 ballot, charging 26.5 cents per building square foot annually on all properties (capped at $7,999) for seven years.
Revenue Measure Options
In 2018, the City Council considered a one-half cent sales tax, infrastructure bond, cannabis tax, business license tax, and transient occupancy tax. The basics of those measures-other than the one-half cent sales tax-are included in the attached Exhibit 1, Revenue Measures.
Staff seeks City Council direction whether to place a revenue measure on the November 3, 2020 ballot. City Council could direct staff to focus on one or more measures to be placed on the November ballot, place no measure at all, and/or propose measures not identified in this staff report to prepare for either this November ballot or future elections.
To inform that decision, staff engaged with FM3 Research, a public opinion and research firm, to conduct a statistically valid survey of Alameda voters. That survey was conducted January 22-29, 2020. The detailed presentation of the survey’s results is attached as Exhibit 2 to this staff report.
To place a measure, or measures, on the November ballot, the City Council might request public opinion surveying in May or June to assess whether proposed ballot language is aligned with voters’ needs and preferences. City Council must approve the ballot measure by July so that the measure may be submitted to the Alameda County Registrar of Voters in early August. Ballot arguments are then submitted in mid- to late-August.
There are pros and cons to advancing any one or more of these measures, or to choosing to advance no measure at all. Below, staff lays out the pros and cons of each option.
DISCUSSION
Option #1: Infrastructure Bond
Alameda’s infrastructure has significant need, as there is more than $200 million in deferred maintenance in citywide infrastructure and another $597 million in infrastructure need at Alameda Point. These infrastructure needs have not been updated to include the City’s adopted Climate Action and Resiliency Plan, which includes both maintenance and new infrastructure, and new facilities and improvements like a $12-15 million swim center, a new $30-40 million fire station at Alameda Point, or the new revenue for capital projects from the Water Quality and Flood Protection fee.
An infrastructure bond is a general obligation bond whose revenue is dedicated to maintaining or improving public infrastructure. To succeed, two-thirds of those voting must approve a general obligation bond. (There have been recent unsuccessful efforts such as ACA 1 <https://www.cacities.org/Top/News/News-Articles/2019/March/ACA-1-Offers-Flexibility-for-Local-Financing-of-In> to reduce this threshold to 55%.)
Placing an infrastructure bond on the ballot is by far the most time and resource intensive of these options. It involves extensive outreach, stakeholder engagement, more public polling, and an engaged communications effort, requiring significant investments of time from the City Council, City Manager’s Office, and departments of Public Works, Recreation and Parks, and Community Development.
This time and resource, of course, comes with a tradeoff to current commitments, including traffic safety improvements, parks maintenance, and the implementation of the new Water Quality and Flood Protection fee, Climate Action and Resiliency Plan, and Transportation Choices Plan, among others. At the same time, the City is implementing its most significant capital program in decades, including new public infrastructure at Alameda Point; one-time transportation projects like the Seaplane Lagoon Ferry Terminal, Central/Clement Complete Streets Projects, and the Cross Alameda Trail; and robust increases in street paving and building repairs.
These tradeoffs may be sensible, given the most significant constraint on renewing public infrastructure is funding, and a successful infrastructure bond would help reduce that constraint.
Compared with other revenue measures, an infrastructure bond requires a higher (two-thirds) vote requirement. Since 2002, more than 70% of local measures in California have passed when only a majority vote is required. The success rate drops to slightly more than 50% when a two-thirds vote is required.
The January 22-29, 2020 survey conducted by FM3 research showed support for the infrastructure bond ranging from 62% to 68%. Given the threshold for success is 67% and the margin of error is 4.9%, this survey suggests the infrastructure bond has a challenging path to succeed. (For comparison, FM3’s February 2018 survey showed support at 67-70% with the same margin of error.)
Infrastructure bond proceeds can only be spent on capital projects, not operating needs. This means, for example, that a bond could indirectly support affordable housing by helping fund the public sewers, storm drain, and sidewalk improvements necessary to build such housing, but could not fund direct housing assistance to low-income tenants or housing referral services. Similarly, a bond can fund important traffic safety improvement projects, but cannot fund transit passes for low-income residents of Alameda.
Should the City Council choose to consider placing the infrastructure bond on the November ballot, City staff seeks further direction on the following:
• Amount. What is the appropriate amount for an infrastructure bond? FM3 surveyed a $100 million and $125 million bond, which would result in an average levy of $46 or $58 per $100,000 of assessed value per year for the next thirty years.
• Subject of the bond. The language in the infrastructure measure surveyed by FM3 focused on traffic safety, climate change, natural disasters, and repairing buildings, parks, playgrounds, and sidewalks. Perhaps an infrastructure bond focused on other needs and priorities of Alamedans might improve support for the bond. The January survey found the following problems as either extremely serious or very serious: affordable housing (67%), safe routes to school (72%), repairing deteriorating streets (74%) and sidewalks (72%), and/or preventing flooding (67%-83%). What are the right subject areas for developing the infrastructure bond? Other projects that the City Council will need to consider in an infrastructure bond if the City Council moves forward with this option include:
o Alameda Point. Should the bond include the replacement of infrastructure at Alameda Point as an eligible use of bond funds for specific purposes such as critical infrastructure?
o City Aquatic Center. Should the bond include this project as part of the City’s infrastructure needs to which bond proceeds may be spent?
o West End Fire Station/Alameda Point. Should the bond include this project as part of the City’s infrastructure needs to which bond proceeds may be spent?
• Specificity. Successful infrastructure bonds from Berkeley (2016, 87% of voters approving), Oakland (2016, 82% of voters approving), and San Jose (2018, 71%) defined their infrastructure needs, dedicated bond proceeds to meeting their infrastructure needs, gave staff direction on how to prioritize needs (see more below), and, after voters approved the bond, City Councils adopted capital budgets with bond proceeds programmed according to those priorities.
An alternative used by some public entities, often with larger geographic scope and multiple public entities within that scope, is to afford voters an opportunity to vote on an actual project list for the infrastructure bond. For example, East Bay Regional Parks District’s (EBRPD) Measure FF here <https://www.ebparks.org/about/measure/measure_ff.htm> has an approved project list broken out by each city within their jurisdiction.
Alameda’s approach to date has been to define infrastructure needs in accord with Berkeley, Oakland, and San Jose’s approach. If the City Council prefers a defined project list as included in EBRPD’s Measure FF, this would require a significant amount of time, perhaps even a formal community engagement process. Such a list remains inherently imprecise, as it contemplates the City’s changing needs and priorities over a 15-20 year timeframe.
If the City Council decides an infrastructure bond is warranted for the November 3, 2020 ballot, staff recommends preparation of: a) an update to the City’s infrastructure needs, b) draft spending plan for the first disbursement of bond proceeds (likely 1/3 of the overall bond amount), and c) proposed floor and/or ceiling percentages on the categories of infrastructure expenses, e.g., between 20-30% of bond proceeds spent on traffic safety projects. If the City Council decides to consider placing an infrastructure bond, staff will bring options back in the summer.
• Priorities. Should the City Council adopt priorities for eligible projects in advance of the measure’s vote? Cities sometimes defined these priorities before submission of an infrastructure bond for voters, and sometimes wait to determine whether voters approve of the bond before defining implementation priorities. An example of draft priorities could be:
o Focus on deteriorating facilities and infrastructure;
o Protect and improve health and safety;
o Provide equitable and community-wide benefits;
o Advance goals from the City's adopted plans, including housing, transportation, and climate;
o Help the City become more environmentally responsible and financially sustainable, including lowering or containing future costs to local taxpayers; and/or
o Leverage taxpayer dollars to secure additional matching grants or other funding that may otherwise go to other communities.
Option #2: Increase the Transient Occupancy Tax, Increase the Business License Tax, and/or Adopt a New Cannabis Tax
The following three tax measures would raise less revenue than the infrastructure bond, but only require a majority vote to succeed.
• Alameda’s transient occupancy tax (TOT) was enacted in 1974 and has not been adjusted since 1990. The hotel occupant pays the tax, which is equal to 10% of the room rate charged by the hotel. At the current rate, the TOT raises $2 million annually for the General Fund. The TOT in surrounding jurisdictions ranges from 12-14%, therefore, there is room to increase the tax and remain competitive. A 1-2% increase in TOT would raise an additional $150,000-$300,000 annually. In the January 2019 survey, 73% supported an increase in the TOT. If the City Council wishes to consider this option, it is recommended that we reach out to the hotels in the City.
• The business license tax was enacted in 1943 and is adjusted annually, where applicable, by the Consumer Price Index. It is charged to local businesses and raises $2.2 million annually for the General Fund. An across-the-board increase of 5-10% would raise $110,000-$220,000 annually, and, generally, increase the tax by $5-$20 annually per business. In the January 2019 survey, only 41% supported an increase in the business license tax.
• A new tax of 4% on cannabis businesses’ gross receipts, regardless of their source, would potentially raise $240,000-$480,000 annually. A gross receipts tax is similar to a sales tax, but it is levied on the seller of goods or services. The additional revenue assumes four retail dispensaries and includes application of the levy on medicinal cannabis. Medicinal cannabis is exempt from state taxes, but cities may include or exempt medicinal cannabis from their local taxes. In the January 2019 survey, 74% supported a new cannabis tax.
A TOT increase of 2-4% and a cannabis tax of 4% are well within the range of surrounding jurisdictions’ tax rates; staff has not fully surveyed surrounding jurisdictions to compare business license taxes. If the TOT increase and new cannabis tax were placed on the ballot by the City Council, each is less likely than the infrastructure bond to generate significant opposition or require a significant investment in time and resources to be successful. Each also yields significantly less revenue than an infrastructure bond.
Revenue from these measures can be used for both operating (e.g., services for the unhoused, transit passes, etc.) and capital needs. If any of these revenue measures were dedicated to specific programs or projects, (e.g., a pool replacement), the threshold for passage moves from a majority to two thirds. The January survey results suggest a TOT increase and/or cannabis tax may exceed two thirds support. Moreover, the City Council could place the TOT increase and new cannabis tax on the same ballot, raising up to $780,000 annually.
Option #3: Place No Measure on the November Ballot
The City Council could also place no measure on the November 3, 2020 ballot. The long-term financial plan might situate the revenue discussion in a broader context of the next 5-10 years, and identify the opportunities for placing revenue measures over that time.
ALTERNATIVES
• Direct staff to focus on one or more measures to be placed on the November ballot.
• Direct staff to place no measure at all on the November ballot.
• Direct staff to explore revenue measures not identified here and/or prepare them for this November ballot and/or for future elections.
FINANCIAL IMPACTS
Since November 3, 2020 is a general election with many measures expected on the ballot, election costs are likely to be no more than $30,000 for printing and translation. Should the City Council decide to place a measure or measures on the ballot, consultant costs and polling are likely to be in the range of $100,000.
MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE
This action is consistent with the Alameda Municipal Code.
ENVIRONMENTAL REVIEW
This activity is not a project and is exempt from the California Environmental Quality Act (CEQA) pursuant to section 15378 (b)(4) of the CEQA Guidelines, because it concerns governmental fiscal activities (consideration of funding mechanisms), which does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment.
CLIMATE IMPACTS
The ability of the City to meet the challenge of reducing its greenhouse gas emissions, responding to sea level rise, more frequent and intense storms, and other climate change impacts will require an infusion of new funds.
RECOMMENDATION
Provide direction on potential revenue measures to submit to voters for the November 3, 2020 election.
CITY MANAGER RECOMMENDATION
The City Manager seeks Council direction on how to move forward on consideration of a potential revenue measure. If the City Council determines it further wants to consider an infrastructure bond, I recommend we focus on that potential ballot measure and bring back options specific to the infrastructure bond in June.
Respectfully submitted,
Liam Garland, Public Works Director
Financial Impact section reviewed,
Elena Adair, Finance DirectorNancy Bronstein, Human Resources Director and Interim Finance Director
cc: Eric Levitt, City Manager
Exhibits:
1. Revenue Measures
2. Survey Results