Title
Recommendation to Provide Direction on Potential Revenue Measures to Submit to Voters for the November 8, 2022 Election. (City Manager 10021030) [Continued from May 3, 2022]
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 2022 ballot, or place no measure at all.
BACKGROUND
The City of Alameda (City) has maintained fiscal discipline and is currently able to meet its policy of a 25% reserve. While General Fund revenue for this fiscal year and Fiscal Year 2022-23 is expected to remain healthy, the City faces significant and ongoing challenges. As of 2020, Alameda had over $200 million in deferred maintenance in citywide infrastructure and another $597 million in infrastructure needs at Alameda Point. Like many other Bay Area communities, Alameda must also address sea level rise, climate change, traffic safety, disaster preparedness, and affordable housing.
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 of more than twenty years, 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 $7 to 8 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 about $2 million annually to continue to maintain our storm drainage infrastructure.
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. 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 8, 2022 Election
California holds a gubernatorial general election on November 8, 2022. Turnout is expected to be more modest than a Presidential election, although as a result of anticipated lower turnout, there may be fewer (competing) measures on the ballot. At the time of this staff reporting, there are three statewide initiatives that have not yet qualified but meet the 25% threshold, these initiatives would increase taxes on high income earners to fund: pandemic detection and preparation, arts and music education in schools, and greenhouse gas emissions. There is also a proposed minimum wage increase and associated initiative that would make it harder to raise taxes.
Revenue Measure Options
Staff seeks City Council direction whether to place a revenue measure on the November 8, 2022 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.
In March 2020, the City Council was preparing to discuss a possible revenue measure for the November 2020 ballot to address a variety of identified local funding needs. COVID-19 put those discussions on hold. While the City’s General Fund continues to be bolstered by the volatile Transfer Tax, the 10-year financial forecasts, pension and other post-employment benefits (OPEB) obligations, and funding for climate adaptation, affordable housing and other infrastructure needs make this an important conversation to move forward. Up until March 2020, staff had been working with two consulting firms, Terris Barnes Walters Boigon Heath Lester Props and Measures Strategy and Communications (TBWBH) and Fairbank, Maslin, Maullin, Metz, and Associates (FM3) Research, to consider four possible revenue measures for the November 2020 ballot:
- Transient occupancy tax (TOT);
- Cannabis tax;
- Infrastructure bond; and
- Business license tax.
Below is the link to the staff report that was published, but not presented or discussed, in March 2020:
<https://alameda.legistar.com/LegislationDetail.aspx?ID=4617959&GUID=7E6A933D-BCD4-40E2-AB7F-1AF6A1BB1667&Options=ID%7CText%7C&Search=FM3&FullText=1>
On December 7, 2021, City Council awarded two contracts to move forward with a potential revenue measure for the November 2022 ballot. A contract with TBWBH for assistance with ballot measure strategy and informational outreach, and a contract with FM3 for public opinion survey development, implementation, and analysis. These two firms are the consultant team that assisted the City in 2019 and 2020 with consideration of a potential revenue measure, and assisted the City with the successful Measure F sales tax measure in 2018.
Following the award of contracts, staff worked with FM3 and TBWBH to conduct an initial public opinion survey. The survey was designed to broadly test opinions about City government, City services, current problems/issues facing the community, priorities for funding, and willingness to support specific revenue measures. The specific revenue measures included the options considered in 2020, as well as affordable housing measures and an increase in property transfer tax. The survey was conducted February 2-13, 2022. The detailed presentation of the survey’s results are below and attached as Exhibit 2 to this staff report.
Based on the February survey, there are two types of revenue measures potentially viable: an infrastructure bond or an increase to the transient occupancy tax, the business license tax, and/or adoption of a new cannabis tax. There are pros and cons to advancing any one or more of these measures, or to choosing to advance no measure at all. In the discussion section below, staff lays out the pros and cons of each option.
Staff is now seeking City Council direction to place a measure, or measures, on the November ballot. Should City Council decide to move forward one or more measures, staff would prepare messaging and engage in community outreach as well as conducting additional, more targeted polling. The results of this outreach would be presented to City Council in July, at which time staff would also present proposed ballot language which the City Council must approve 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.
DISCUSSION
Option #1: Infrastructure Bond
Alameda’s infrastructure has significant need with more than $200 million in deferred maintenance in citywide infrastructure and another $597 million in infrastructure needs 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 $15-20 million swim center, a new $30-40 million fire station at Alameda Point, or the many priorities identified in long-range plans including the Transportation Choices Plan and Sewer and Storm Master Plans.
An infrastructure bond is a general obligation bond whose revenue is dedicated to maintaining or improving public infrastructure. To succeed, it must be approved by two-thirds of those voting. (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> ACA 1 < > to reduce this threshold to 55%.)
Placing an infrastructure bond on the ballot is by far the most time and resource intensive of the options being presented. It involves extensive outreach, stakeholder engagement, more public polling, and an engaged communications effort, requiring significant investment 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; robust increases in street paving and building repairs; and one-time projects identified in the Transportation Choices Plan and Sewer and Storm Master Plans.
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 February 2-11, 2022 survey conducted by FM3 research showed support for the infrastructure bond ranging from 67% 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 January 2020 survey showed support at 62-68% 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 $95 million bond.
• Subject of the bond. The language in the infrastructure measure surveyed by FM3 focused on traffic safety, climate change, sea level rise, natural disasters, and repairing buildings, streets, parks, and playgrounds. Perhaps an infrastructure bond focused on other needs and priorities of Alamedans might improve support for the bond. The February survey found the following problems as either extremely serious or very serious: the cost of housing (67%), affordable housing (61%), climate change (58%), traffic safety (58%), traffic and congestion (57%), shelter for homeless (57%), and crime (51%). The February survey also found that the majority of Alameda voters (57%) see at least some need for additional funding for City services with the highest priorities for funding including emergency response times, bridge upgrades, and flood prevention. Seven in ten survey respondents rate infrastructure repairs and response to violent crimes and either extremely important or very important priorities. Two-thirds or more value improving cyclist and pedestrian safety and preparing for disaster, and the majority value improving traffic flow and public transit as well as park improvements. 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 replacement of infrastructure at Alameda Point as an eligible use of bond funds?
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?
o Climate Adaptation and Hazard Mitigation: Should the bond include projects identified in Alameda’s Climate Adaptation and Hazard Mitigation Plan as part of the City’s infrastructure needs to which bond proceeds may be spent?
o Smart City Infrastructure: Should the bond include implementation of the Smart City Master Plan as an eligible use of bond funds?
• 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 8, 2022 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 define 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. Although decreased during the pandemic, at the current rate, the TOT is expected to raise $2.2 - $2.4 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 $200,000-$500,000 annually. In the February 2022 survey, 69% of respondents 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 in recent years has raised $2.2 - $2.4 million annually for the General Fund. An across-the-board increase of 5-10% would raise $100,000-$200,000 annually, and, generally, increase the tax by $3 to $1,200 annually per business. In the February 2022 survey, 70% of respondents supported an increase to the business license tax for medium and large businesses where only 56% supported an increase in the business license tax overall.
• A new tax of 4% on cannabis businesses’ gross receipts, regardless of their source, would potentially raise $100,000-$500,000 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 February 2022 survey, 69% 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 February 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 $700,000 annually.
Option #3: Place No Measure on the November Ballot
The City Council could also place no measure on the November 3, 2022 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 8, 2022 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 $120,000.
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 8, 2022 election.
Respectfully submitted,
Gerry Beaudin, Interim City Manager
By,
Liz Acord, Public Works Coordinator
Financial Impact section reviewed,
Margaret L. O'Brien, Finance Director
Exhibits:
1. Revenue Measures
2. Survey Results