Title
Staff Report for Resolution Approving the Measure HH, OO, PP and NN Citizens Oversight Committee’s Annual Report on Measure HH, OO, PP and NN Tax for Fiscal Year 2016-17
StaffReport
Executive Summary
In November 2010, the City of San Leandro passed a temporary sales tax increase known as Measure Z. Measure Z increased the City sales tax by ¼ percent over a seven-year period. On November 4, 2014, Measure HH half-cent sales tax was approved by more than 60% of voters. The ballot language assured voters that Measure HH receipts, which expire March 31, 2045, would provide revenues to cover vital City services (see Attachment 1, Table1), be subject to annual audits and reviewed by a citizens oversight committee:
Measure HH replaced Measure Z effective April 1, 2015. The table above reflects the pre-Measure Z cost cutting proposals which were avoided due to the passage of Measure Z and Measure HH, OO, PP and NN.
Measures OO, PP, and NN were passed by voters in November 2016. Each was passed by more than 66% of voters. The ballot language promises to enhance many of the City services highlighted in the following bullets.
• Enhancing City infrastructure
• Enhancing library programming for children
• Improving social services
Background
On November 4, 2014, Measure HH half-cent sales tax was approved the voters. The ballot language assured voters that Measure HH receipts expire March 31, 2045, are subject to annual audits, and are reviewed by a citizens oversight committee.
On July 6, 2015, the City Council passed a resolution authorizing the creation of the Measure HH Citizens Oversight Committee. City Council defines the scope of responsibility and duties of the Oversight Committee to include developing an annual report on the following:
• Amounts of Transaction and Use Tax revenue generated by Measure HH
• Use of the tax revenue and the impact on the City operating budget including a statement on the impact of the revenue in reducing the amount of cuts resulting from addressing the budget shortfall
• Statement of expenditures funded by Measure HH revenues
• Impacts of Measure HH on local business competitiveness and the collection ofSales Tax revenues
• Measure HH public information and transparency efforts
• Participation in developing a revenue sustainability plan and strategy
During FY 2016-17, the City accrued three months of sales tax data related to Measure HH. These data are provided by the State Board of Equalization, which are typically at least three months in arrears.
The Measure HH Oversight Committee held its first meeting on September 29, 2015, made several recommendations and discussed its annual report. City staff supported the work of the Committee by producing financial information and community priorities that support the need for Measure HH. Audits have produced clean, unqualified opinions from the City’s Certified Public Accountants, an independent auditor. These audits and budgets adopted by City Council received awards from the Government Finance Officers Association. The audit for fiscal year FY 2014-15 is currently underway and not expected to conclude until January 2017.
The City receives 1.5 cents of the 9.75 cents per dollar sales tax. The State reduced the sales tax by 0.25% due to the expiration of Proposition 30 at the end of 2016. The current allocation of the 9.75 cents sales tax is shown on Attachment 1, Table 2:
In November 2016, San Leandro voters approved Measures OO, PP, and NN. The Measures passed and took effect on January 1, 2017. A summary of these measures and revenue estimates through June 30, 2017 are set forth below.
1) A medical cannabis business tax of up to 10% of gross receipts;
2) A modified business license tax that would reduce fees for small businesses, while charging up to 10% of gross receipts for parking lots, and also charging $100 per 1,000 square feet of real property that is used for warehouse businesses; and
3) An increased transient occupancy tax to 14%.
These potential revenue sources align with previously adopted City Council goals and policy priorities, as outlined below. Furthermore, these new revenue sources would not directly impact the vast majority of San Leandro residents, as a significant portion would be paid by a select number of businesses and people from out of town, such as hotel and airport visitors.
Overview of Potential Cannabis Business Tax - no revenue pending the opening of the first dispensary
Now that the City has issued three cannabis dispensary permits and established a pilot program for cannabis labs and manufacturing businesses, the City has an opportunity to derive an important new source of revenue from these businesses. Similar to many other communities that have permitted the operation of cannabis businesses, the tax in San Leandro is based on the cannabis businesses’ annual gross receipts. Given that the specific rates of such taxes vary by jurisdiction, coupled with the rapidly evolving legal and regulatory landscape surrounding the cannabis industry, the ballot measure was structured such that the tax amount would be “up to” 10% of gross receipts. The language allows the City flexibility to modify the rate over time up to that maximum 10% threshold. The ordinance has also been structured such that it would apply to any business involving the use of any component of the cannabis plant.
Given that no permitted cannabis dispensaries are yet operating in San Leandro, there is uncertainty as to how much revenue will be derived from the tax. However, based upon revenue estimates provided by permit recipients (Harborside San Leandro, Blum and Davis Street Wellness) as part of its application materials for their dispensary permits, staff estimates that this revenue measure could potentially generate more than $500,000 per year based on the initial rate of 6% of gross receipts.
On March 20, 2017, the City Council authorized a tax structure that increases over a three-year period to 8%.
Overview of Modifications to the Business License Tax - $803,000 received through June 30, 2017
The modifications to the business license tax have been designed to align the City’s business license tax rates with City Council priorities to support small businesses located in San Leandro, while also incentivizing the productive use of the City’s industrial areas.
Small Business Discount:
As structured in the ordinance, the per-employee component of the business license tax for small San Leandro businesses with three or fewer employees is eliminated. Previously, these businesses paid a flat fee of $128.20, plus a per- employee fee that varies by business type. The per-employee fee is waived for small businesses.
This modification results in a tax reduction for approximately 1,800 small businesses located in San Leandro and a decrease in business license tax revenue of $156,000 annually.
Warehouse Rate Change:
Additionally, the ordinance modifies the tax rate applied to warehouse and distribution businesses. They were previously charged a flat fee of $128.20, plus a per-employee fee. The ordinance charges them $100 per 1,000 square feet of building space. The rationale for this change is to align the business license fee with the impact of such businesses, much of which comes from the physical size of their business rather than the number of employees. Warehouse and distribution businesses cause heavy wear on local streets through truck and delivery traffic, but generate relatively few jobs and limited business license revenue or sales tax. By modifying the business license tax rate based on square footage, the tax would better reflect such businesses’ impacts on City infrastructure and services. The additional business license revenue to be generated from this change in collection methodology is $450,000 annually.
Parking Lot Range Change:
Lastly, the ordinance would modify the business tax rate that is applied to parking lots (such as those providing long-term parking for Oakland International Airport). Previously, parking lots paid a flat fee of $128.20, plus $38.50 per parking space. The ordinance charges such businesses a rate of 10% of gross receipts. In comparison, the rate in the Oakland is set at 18.5% of gross receipts. The rate would enable the City of San Leandro to capture additional revenue while still providing parking lot businesses in San Leandro a competitive advantage over those located in Oakland. The estimated additional business license revenue to be generated from this change in collection methodology is $600,000 annually.
In summary, staff estimates that the above modifications to the City’s business license tax which align the taxes collected with the economic priorities of the City could generate more than $894,000 annually, while simultaneously reducing the tax burden for approximately 1,800 small businesses located in San Leandro.
Overview of Increase in Transient Occupancy Tax - $217,000 received through
June 30, 2017
The City’s previous transient occupancy tax (TOT) was 10%, which is charged to travelers when renting overnight accommodations of a limited duration in a hotel, inn, tourist home or house, motel or other lodging located within San Leandro. Other communities in the region have established higher rates, including the cities of Oakland and San Francisco, each of which presently have TOT rates of 14%. In addition, the redevelopment of the San Leandro shoreline area is expected to result in the creation of at least one new hotel in San Leandro, which could provide an important source of additional TOT revenue in the future. An additional $400,000 in annual revenue is anticipated, with the potential for greater increases in the future as new hotels are constructed.
Analysis
Amounts of Transaction and Use Tax revenue generated by Measure HH
The adopted Budget approved in June 2016 anticipated $10.8 million Measure HH revenue for FY 2017-18. Actual receipts were $11.3 million. The City was allocated its Measure HH sales tax starting April 1, 2015 but did not budget a full year of receipts until FY 2015-16. The first receipts were received in the fall of 2015.
Use of the tax revenue and the impact on the City operating budget including a statement on the impact of the revenue in reducing the amount of cuts resulting from addressing the budget shortfall
Measure HH revenue is available for any legal expenditure by the City. In the context of public safety, the annual revenue represents about 30% of the police department’s FY 2017-18 budget, which is $37.7 million, and 47% of the fire department budget, which is $23.9 million. Without Measure HH in FY 2017-18, the sworn police officers totaling 93 could be cut by as much as 28 positions (if $11.2 million was removed from the police department budget). Similarly, the fire department 63 firefighters could be down 30 positions (if all $11.2 million was eliminated from its budget). The ballot also indicated that Measure HH would sustain 9-1-1 emergency response times, neighborhood police patrols, investigation and gang suppression officers, library hours/programs, street and pothole repairs, youth after-school and senior programs, and other general City services. The City preserved funding for these programs and projects due to Measure HH.
The pie chart, see Attachment 1, Chart 1, indicates that a total of 54% will be spent on public safety in FY 2017-18. The remaining 46% will fund libraries, parks, community development, infrastructure improvements, repairs, maintenance and administration. The General Fund Transfers have increased from 4% to 9% reflecting a $7 million increase to capital improvements, such as the Shoreline and recreation infrastructure. The abbreviations used in the pie chart are Rec (Recreation and Human Services Department), Gen Govt (General Government - City Attorney, City Clerk, City Council, Human Resources, Finance and City Manager), Com Dev (Community Development Department), and Engineering (Engineering and Transportation). Non-dept. (non-departmental) costs are General Fund debt service, retiree medical, community investment and events, and leases. The City’s FY 2017-18 budget, which ends on June 30, is currently balanced.
Impacts of Measure HH on local business competitiveness and the collection of
Sales Tax revenues
Sales tax increases have occurred at a rate greater than the average rate for other cities in Alameda County since the inception of Measure Z quarter cent sales tax. Four other cities in Alameda County have a 9.75% rate: Albany, Hayward, Newark and Union City. General sales tax increased 3.1% in 16-17, indicating that Measure HH had little effect. Sales tax in all Alameda County cities increased at 4.4% and statewide increased at 2.1% in FY 16-17, according to MuniServices Sales Tax report dated August 15, 2017.
Measure HH public information and transparency efforts
Measure HH revenue has been highlighted in the City Council’s adopted budget. In the adopted Biennial Budget Message, the following excerpt states: Measure HH is approved for a 30-year period and promises to protect and maintain City services. The November ballot language mentions 911 emergency response, neighborhood police patrols, anti-gang enforcement, and library programs for children, adults and families. The successful measure also supports after school programs for youth including homework assistance and reading programs, school police officers and crossing guards. The measure will also help fill potholes and maintain residential streets ($1 million of new General Fund money is allocated to the street overlay rehabilitation program and $542,000 is allocated to Marina Boulevard Improvements in FY 2017-18.)
Participation in developing a revenue sustainability plan and strategy
On July 7, 2014, City Council approved ballot language on the November 4, 2014 ballot that replaced the Measure Z ordinance, which was expiring in March 2018, and extended a ½ cent rate for 30 years. The basis of this initiative is the provision of services and infrastructure which will deteriorate unless additional funds are available to the City. A scientific survey conducted by Godbe Research predicted the strong support for the new initiative as long as it supports the following services provided by the City:
• Maintain 9-1-1 emergency response times
• Maintain neighborhood patrol officers
• Maintain library programs for children, adults & families
• Enhance anti-gang and law enforcement efforts
• Maintain fire prevention services
• Repair potholes/cracks, maintaining residential streets
• Maintain investigation & gang suppression officers
The Committee endorsed these taxes which are expected to generate an additional $1.5 million per year. The services listed above have all been maintained or enhanced with the support of Measure OO, PP, and NN.
Committee Review and Action
The Measure HH, OO, PP and NN Citizens Oversight Committee met on September 19, 2017, to review the performance, the adopted budget and to advance the report for City Council approval.
ATTACHMENTS
Attachment 1, Tables and Chart
Attachment 2, Ballot Measure
PREPARED BY: David Baum, Director of Finance, Finance Department