Analysis: What Would a City Revenue Measure Look Like?

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In 2014, the Davis City Council acted to close an immediate $5 million hole in the budget with a new half-cent sales tax.  Since that time however, the council has had several opportunities to put a tax on the ballot to address infrastructure needs and has not done so.

The council, in July 2014, opted not to put a parcel tax on the ballot in the fall after polling showed less than two-thirds threshold support.  In 2016, the council opted not to put major revenue measures on the ballot other than a small increase to the hotel tax and a placeholder for a cannabis tax.

The council at that time could not agree on either size or the targeted funding (parks versus roads, for example) and opted to not rush a tax on the June ballot.  The council then apparently deferred to the school district in November and allowed the school parcel tax to stand alone.

With the revenue discussion scheduled for July 11, there should be plenty of time this time for the council to figure out their revenue needs and what the ideal tax would look like.

Helping them along their way is more robust modeling forecast projections for the budget, that have produced a more accurate and long-range model for city funding needs.

Last month, the staff report introducing the budget concluded, “The average annual shortfall in funding is $7.8 million.”  To put this into perspective, “this amount is roughly equivalent to the current 1% Measure O sales tax, or to a 6.0% utility users tax on power, communications and water/sewer/sanitation services, or to a $270 parcel tax.”

And this is still a low number, as the park maintenance cost remains a work in progress.

As we have reported, the source of this shortfall is not surprising  ̶  with pension costs, road repairs and parks being major sources of budget shortfalls.

City Manager Dirk Brazil summarizes the situation in his transmittal letter to the city council.  “We continue to see stability in our revenue streams, with notable growth in property and sales tax,” he writes.  “Although revenue is currently stable, the City’s expenditure obligations continue to grow. CalPERS announced a change to its pension discount rate over the next three years, effectively increasing the city’s annual pension obligations going forward. While the city continues to fully fund Other Post Employment Benefits (OPEB), also known as retiree medical, those costs will also continue to rise in coming years.”

He continues, “Outside studies show the city needs to commit up to $8.3 million annually toward transportation infrastructure to maintain a suitable pavement criteria index, compared to the $4.4 million proposed for the budget in 2017/18. Finally, the City is in various stages of negotiations with all employee bargaining units, creating some uncertainty related to the 2017/18 budget and beyond.”

While a $270 parcel tax might seem modest at first, that is probably a low number for several reasons.  First, it does not include the needs for parks.

Staff writes, “This is a work in progress. Parks and Community Services staff has been updating the Kitchell study to better identify park facility needs. The forecast currently assumes an annual average unfunded need of $555,000 for parks and structures, $100,000 for pool equipment replacement, $175,000 for park irrigation/conservation, $250,000 for wildlife habitat maintenance and $100,000 for urban forestry, for a total of $1.18 million.”

Second, right now the city is being expected to perform at a low point in staffing and a low funding for other needs.

Staff notes, “In addition to infrastructure concerns, the City should endeavor to keep staffing levels per capita relatively constant so that workload increases caused by population growth and other service demands can be adequately addressed. This will avoid diminishing levels of service over time.”

Staff adds, “Currently, most services are provided by City employees, but even if services were contracted for, additional funding will be required over time. The forecast funds one FTE increase a year, although two FTE would be required to hold staffing levels per capita constant over time. Thus, 50% of the $87 million in service increase costs over the next 20 years would be funded.”

The council has consistently talked about the need for more police officers and there is a shortfall in police equipment, as an example.

Third, part of the budget problem is that the city of Davis lacks revenue generated from sales tax.  There is a transition taking place around retail tax as commerce shifts from local retail outlets to more in the way of online sales.

There is also the fact that the city is heavily relying on auto sales for its sales tax take – not only ironic for a progressive community, but potentially to be a losing venture into the future.

Finally, there are other community needs like addressing the homeless population, which could require revenue sources.

Still, a $270 a year parcel tax, perhaps bumped up a notch or two, seems like a good starting place to address long-term revenue needs.

The question is, will this community support the city as it has the schools?  A parcel tax would require a two-thirds vote  ̶  that has the advantage of being able to hold the city accountable for spending as it promises, unlike general revenue measures like the sales tax that could be diverted to employee compensation increases.

On the other hand, as we saw in 2014 with the polling, at that time even a $150 parcel tax would fail to gain two-thirds of the vote.

Those are big looming questions for the city as it attempts to deal with an ongoing shortfall of funding.

—David M. Greenwald reporting



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About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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21 thoughts on “Analysis: What Would a City Revenue Measure Look Like?”

  1. Keith O

    I don’t like parcel taxes because they’re only paid by a portion of the community.  As much as I hate the idea a utility tax might be the way to go so everyone has skin in the game.  As far as holding the council/city responsible for how these revenues are spent and to make sure they don’t divert the money towards employee compensation maybe we should hold off on any new revenue measures until after the employee contracts are settled. We’ve seen them give away new revenue monies at least twice in the past.  That way we’ll know ahead time if the council/city kept costs in line.

    1. David Greenwald Post author

      The problem that you end up having is that a parcel tax insures that what they promise to spend the money on – gets spent on that. So it’s a tradeoff.

      1. Keith O

        I realise that, but if we wait until the employee contracts are settled and we as citizens see that those costs were held in line we could then vote on a temporary utility tax and make the duration as long as the employee contracts are in force.  That way we as citizens can force the city not to give away the store because they know they have to re-up the utility tax after every round of new contract signings.

        Just an idea, it might take some realigning as I know not all the contracts come due at the same time.   But there’s a way to possibly hold the council accountable without having to do a parcel tax.

      2. Mark West

        That is really a bit of a bogus argument, David, as it really is nothing more than an accounting issue. If all sources of revenues were restricted and specifically tied to certain services then you would have a point but as long as a significant portion of the General Fund may be spent at the City’s discretion, then it is only a matter of using the new restricted funds to replace unrestricted funds which are then freed up to be spent elsewhere. I think you have a false sense of security on our ability to control how the CC spends the funds in the future.

         

        1. Matt Williams

          I agree with Mark; however, there are steps that can be taken that will move the City toward a Culture of Accountability.  One of the recommendations likely to come from the FBC’s June 12th Budget Review meeting is as follows:

          The Budget projects $16,783,812 of Sales Tax Revenues.  The Budget should provide the citizens with a clear explanation of what value the community will receive from the expenditure of those $16 million.  We need to be able to show results to taxpayers, community members and others.  The Budget needs to be disciplined business-like thinking process where we start with the ends that we want (results and indicators) and works backward to the means to get there (revenues and resources).  An example Sales Tax accountability document is the City of Rancho Cordova – Community Enhancement Fund document at http://www.cityofranchocordova.org/what-s-new/community-enhancement-fund

           
          Why should we create a Culture of Accountability? Because trying hard is not good enough. We need to be able to show results to taxpayers, community members and others.  Those results need to be stated in plain language, that everyone can understand and recognize as important. A culture of accountability is a disciplined business-like thinking process where we start with the ends that we want (results and indicators) and work backward to the means to get there.

  2. Matt Williams

    Keith’s point about parcel taxes being paid by only a portion of the community is true for DJUSD; however, I’m not sure that that point is valid for the City. Keith first raised this issue two years ago (possibly longer), citing the settlement agreement between DJUSD and Jose Granda.  To see if Keith was correct I met with Harriet Steiner to get her legal opinion.  She was very clear that the DJUSD settlement did not apply to the City, and that unless the Council decided otherwise, parcel taxes in the City would continue to be levied by residential unit.

    When/if the next parcel tax is proposed, we will know whether that opinion has changed with the passage of time.

    With that said, the concern Keith raises is not actually addressed either through a utility tax or a per residential unit tax.  The reason is simple.  Apartments often are not individually metered for their utilities.  The landlord receives the bill, not the residents.  That is also the case with tax bills.

    Equity in taxation is even harder to accomplish when you add to that the fact that different residences use different amounts of utilities . . . and different residential units support different numbers of residents.

    Unless we go to a “per head” tax taxation will always find equity elusive.

     

    1. Keith O

      She was very clear that the DJUSD settlement did not apply to the City

      So Matt, are we just one lawsuit away from the city getting sued and having the same type of parcel tax structure as DJUSD?

      Equity in taxation is even harder to accomplish when you add to that the fact that different residences use different amounts of utilities . . . and different residential units support different numbers of residents.

      I would venture to say that a utilities tax is far more equitable than a per residence parcel tax.  The more people living in a residence the more utilities they tend to use so they will pay a higher tax than a senior couple or someone living alone.

        1. Keith O

          Do you think they decided that instead of putting money into fighting it they just settled?  What’s to say the city wouldn’t be of the same mind?

        2. Matt Williams

          Nothing would prevent the City from being of the same mind.

          However, I suspect they would decide not to fight much earlier in the process and never propose the traditional parcel tax methodology at all.  If they propose the tax, that is a clear indication that they are prepared to fight.

      1. Matt Williams

        Keith O said . . . “So Matt, are we just one lawsuit away from the city getting sued and having the same type of parcel tax structure as DJUSD?”

        As you know Keith I am not a lawyer, so any opinion I have regarding your question is purely that of a lay person.  With that said, there is a big difference between getting sued and losing a suit.  I’d say that the odds of getting sued are extremely high.  I’m much less comfortable about the odds of winning or losing the suit.

        Keith O also said . . . “I would venture to say that a utilities tax is far more equitable than a per residence parcel tax.  The more people living in a residence the more utilities they tend to use so they will pay a higher tax than a senior couple or someone living alone.”

        I don’t disagree with your premise Keith, or with the example you gave; however, that doesn’t produce equity in taxation.  Take the practice of “double-ups” as a contra-example.  Same taxation amount if taxed by the unit, and more than likely essentially the same utilities costs as single occupancy of the same unit if taxed based on utilities, so in the double-up occupancy each resident is paying half the tax of a single occupancy resident of that same unit.  Another contra-example is comparing utilities-based taxation of a 5-bedroom apartment to a 5-bedroom house.  One has a yard that is irrigated and the other does not.  One has an individual water meter charge and the other does not.  One has a sewer connection fee and monthly sewer usage charges based on water consumption (including irrigation) and the other has no sewer connection fee or monthly sewer usage charges.  So each apartment bedroom is paying much less tax than each of the single family residence occupants are paying.

        So, I stand 100% behind what I said . . . equity in taxation is even harder to accomplish when you add to that the fact that different residences use different amounts of utilities . . . and different residential units support different numbers of residents.

  3. Matt Williams

    David Greenwald said . . . “The council at that time could not agree on either size or the targeted funding (parks versus roads for example) and opted to not rush a tax on the June ballot. With the revenue discussion scheduled for July 11, there should be plenty of time this time for the council to figure out their revenue needs and what the ideal tax would look like.  Helping them along their way is more robust modeling forecast projections for the budget that have produced a more accurate and long-range model for city funding needs.”

    There definitely are more robust forecast projections in the Proposed Budget, and on Monday, June 12th the Finance and Budget Commission (FBC) will have a thorough discussion of that Proposed Budget.  I strongly encourage Davis taxpayers and community members to attend that FBC meeting, which will take place at 7:00 pm in Council Chambers.  Public comment is strongly encouraged at FBC meetings.

    With that said, there are several serious flaws in the Forecast section of the Budget that put the Council at a distinct disadvantage when considering taxation alternatives as a way to increase the City’s revenues.

    The biggest flaw is the fact that the Forecast focuses on one scenario.  The FBC, in its April 4th joint meeting with Council strongly recommended that the forecast should include a range of scenarios, including,

    (A) a “currently proposed case” reflecting the revenues and expenditures of the Proposed Budget

    (B) a “reasonable case” that reflects an adjusted level of expenditures necessary to maintain our current conditions

    (C) an “inclusive case” that includes all of the city capital infrastructure and employee pension needs based on expert consultant reports, and

    (D) a “cost containment case.”

    To make the “currently proposed case” more informative for the Council members, taxpayers, community members and others reading the Proposed Budget, the Forecast section should include a “same store basis” presentation of the effect of the Cummulative Average Growth Rate (“CAGR”) of the revenues and expenses contained in the Proposed Budget. 

    As written, the Proposed Budget does a good job of illustrating both the aggregate CAGR and component CAGR for Revenues on pages 4-2 and 4-3 as follows:

    __ “The CAGR for all revenues is 2.6% including recession effects.” 
     
    __ “The Compound Annual Growth Rate (“CAGR”)of the Property Tax from FY 16/17 through FY 35/36 including recessions is 3.7%.” 
     
    __ “The Sales Tax CAGR including recessions is 3.0%.” “The Municipal Services Tax revenue growth is projected at 3%.” 
     
    __ “The Business License Tax revenue growth is projected at 2%.”
     
    __ “Other Revenues are projected to grow at the Consumer Price Index (CPI), which is projected to be 2%.”
     
    However, understanding the growth rate for expenses from the information provided in pages 4-4 though 4-8 is not as straightforward.   
     
    __ The graphic on page 4-5 and the text in the paragraph immediately before the graphic appears summarize the pages 4-4 discussion with the following statement “Thereafter [from FY 20/21 onward], the Salary and Incentives growth rate is steady at 2.9%.”
     
    __ “Costs related to health, dental, and life insurance are assumed to grow at an annual rate of 2% throughout the forecast.” provides a CAGR for 125 Plan Benefits
     
    __ “Non-personnel operation and maintenance costs generally grow at CPI (2%).” provides a CAGR for Other Expensess
     
    __ It would be useful if calculation of a CAGR percentage for Pension Costs was included in the summary statement “In 20 years [Pension Costs] payments will peak at $18 million, triple what they are today.”
     
    __ It would be useful if calculation of a CAGR percentage for OPEB Costs was included
     
    The projection of the CAGR of both the Revenues and Expenditures information should tie back to the Summary of All Funds table presented on page 3-3 of the Budget Summary section, so that the Council members, taxpayers, community members and others can clearly see whether “on a same store basis” the City is living within its means.

    When Council considers any tax, one of the crucial factors the must include in their consideration is how to pay for the rise in annual Pension costs from $5.64 million to $18 million, and the rise of annual Retiree Medical costs from $4.89 million to (approximately) $15 million.

  4. Robb Davis

    Just one clarification.  A parcel tax is, by statute, a special tax.  Other taxes, including a utility users’ tax, can be placed on the ballot as a general or a special tax.  General taxes can only be placed on the ballot in years in which there is a City Council election. Special taxes can be on other ballots or even done as special elections.

    I also understand that even a special tax (for roads, for example) can and is used to cover employee costs–as those costs relate to the designated expense.  Also, employee costs are set to rise even if the City Council does not approve any raises of any kind.

  5. Ron

    Matt:  “With that said, the concern Keith raises is not actually addressed either through a utility tax or a per residential unit tax.  The reason is simple.  Apartments often are not individually metered for their utilities.  The landlord receives the bill, not the residents.  That is also the case with tax bills.”

    Charging a parcel tax which houses an apartment complex (with many units and residents) the same amount as a single-family dwelling (a single unit, with at most a few residents) is grossly unfair. If/when that occurs, single-family owners/dwellers are subsidizing apartment owners/dwellers.

     

     

    1. Howard P

      Guess you didn’t read the court cases so far.  Unless someone finds a creative new way to do by residence, or by person, a parcel tax is a parcel tax.  Subject to protest and additional court cases.

      If the city were to become a ‘charter city’, the City could go with a local personal income tax. More “progressive”…

      1. Ron

        Howard:  My comment addressed the “fairness” of it – not the law.  Assuming it’s already difficult to obtain voter approval, it’s that much more difficult if voters don’t believe a proposed tax is reasonably/fairly allocated.

        1. Ron

          Of course, it could work the “other” way, as well.  If enough apartment owners/dwellers turn out to vote, they could conceivably “stick it to” single-family owners/dwellers. Perhaps a factor, in a town such as Davis – with lots of apartment complexes.

          Vote for a tax increase, but don’t need to pay for it!  (Of course, that would generally require that voters understand how a parcel tax is allocated.)

        2. Howard P

          Well Ron, absent a change in law, there is no need for a vote, because as I read you, you are a solid “no” unless and until the law is changed… maybe by 2025.  Not helpful now.

          As to utility surtax… yeah, that’s really fair to the poor/elderly who have to do home dialysis (lack of full coverage insurance) with all the water/energy required for that!  Know a half dozen.  Regen for portable oxygen tanks, etc. might also fit in.

          In “fairness”, everyone would pay for what they need, regardless of their needs or ability to pay.  Charity, ‘social justice’, community commitment for support for the poor, the weak, the disabled (they get the best parking spots!) are inherently “unfair”.

          In addition, is it “fair” that DJUSD assessments are levied against those who have never had children, or who have already successfully raised them?  No.

          But, it is “right”, arguably a community benefit, and appropriate.  But “fair”… NO!

        3. Ron

          No – I’m not necessarily opposed to a new tax.

          Regarding the relatively few people who are on dialysis, an exemption can be made.  ANY new tax can conceivably require exemptions of some type.

          Regarding the school parcel tax, I recall that you (and others) noted that single-family dwellings are charged the EXACT SAME amount as an apartment complex (regardless of the number of units), and had expressed concern regarding that.  I was somewhat surprised that the school parcel tax was approved.  Regardless of my personal preferences, I wouldn’t count on the same outcome (regarding a proposed tax for the city), under those same conditions (single-family dwellings charged the same amount as an apartment complex).

           

           

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