TO: Mayor and Members of the City Council
FROM: City Manager
SUBJECT: Consideration of Introduction and First Reading of an Ordinance of the People of the City of Commerce Enacting a Special Parcel Tax on Industrial Property to Protect the Quality of Life of Our Residents by Maintaining Essential Law Enforcement, Fire, Paramedic Services, Emergency Service / Response Times, Environmental Services and Improve Community Safety MEETING DATE: July 26, 2022
RECOMMENDATION:
It is recommended that the City Council approve the following actions regarding the establishment of a special parcel tax on industrial property in the City:
For the July 26, 2022 Council Meeting that the City Council review and consider staff’s recommendation to implement a special parcel tax on industrial property to assist in the payment of costs of Law Enforcement, Fire, Paramedic Services, Emergency Service / Response Times, Environmental Services and overall Community Safety services; For the July 26, 2022 Council Meeting, first reading and introduction of an Ordinance (attached) entitled An Ordinance of the People of the City of Commerce Enacting a Special Parcel Tax on Industrial Property to Protect the Quality of Life of Our Residents by Maintaining Essential Law Enforcement, Fire, Paramedic Services, Emergency Service / Response Times, Environmental Services and Improve Community Safety, and placing the Ordinance on the ballot for approval of 2/3 of the voters at the November 8, 2022 general election; and BACKGROUND:
The importance of a well-functioning city has never been more evident than in the past 2 years. The impact of the pandemic and the ensuing economic hardship has shown how VITAL it is for our local government to have the resources necessary to provide the services that their residents (commercial and industrial included) rely on and require. It also highlighted that the reliance on ONE MAJOR REVENUE SOURCE could be devastating, only reinforcing the fact that our revenue base needs to diversify.
Prior to Covid the City received $27 million per year or close to 40% of the general fund operating budget from the Commerce Casino. This revenue source dropped to $19.9 million during fiscal year 2020 and then plummeted to $8.9 million during fiscal year 2021 (A loss of close to $20 million was painful, to say the least).
In order to cease depleting and continue to provide essential services to the community, the City Council undertook the following steps:
Reduced operations / services to the community by over $8 million (a majority of the City’s Parks & Recreation and Library Services programs were frozen) Used approximately $15 million in cash / savings
Employee reductions and furloughs (approximately 10 Full-Time positions were eliminated and as many as 238 Part-Time employees were placed on furlough) Supporting a $0.25 sales tax measure that is projected to generate close to $4 million annually With the pandemic disrupting the very core of urban living—from social distancing and lockdowns to destabilized local economies—is Commerce well-placed to respond to a similar crisis in the future? Do we possess the capacity to set the framework for transforming this community into something more vibrant? With our human capital, infrastructure, and favorable location, Commerce has the potential to drive the change needed to create a sustainable, green, healthy, and inclusive society of the future.
An integral part of that transformation is missing – long-term resources that will support the City’s vision/goals/processes that build collective, social and political capital to enhance long-term resilience.
To improve the long-term financial health of the City, the City continues to look at options in providing long term sustainability and the balancing of the needs of basic operations with the aspirational desires of the public. In other words, staff is seeking to ensure providing ongoing services while maintaining finances at a credible and serviceable position with a long-term balance of resources and the cost of doing business.
As part of a local government’s cornerstone, the City must find a way in providing a reasonable path forward to manage with all operational costs, including increasing costs related to essential public services and/or programs. A stronger local public sector requires not only more responsibility but also revenue to match that responsibility.
The City has identified strategies to support the resources and the cost of doing business to support services and fortifying its commitment and vision to the community.
These strategies would assist in that vision by:
Supporting costs crucial to businesses such as infrastructure, maintenance and public safety Diversifying Business Revenue Streams
Providing a sound revenue structure, which is very important in that it helps to generate sustainable and adequate resources available to redistribute to the public by delivering a wide range of public services, including public safety enhancements and an increased focus in mitigating environmental concerns confronting our community. The City’s geographical location (bifurcated by two major freeways and home to two railway switching stations), along with the City being a transportation and industrial hub, has lent itself to environmental hazards / air pollution — key drivers of non-communicable diseases (NCDs) such as cardiovascular diseases, cancers, diabetes and chronic lung diseases. The introduction of the parcel tax could become an important element in mitigating air pollution, thus minimizing environmental risks to Commerce residents.
Diversifying revenues (no single revenue source should be responsible for more than 15% of revenues) and providing financial stability for the organization while reducing risk.
With that said, fiscal health is not about whether governments spend or tax more or less, but whether they can afford to pay for their spending with the revenues that they raise.
Is revenue diversification important in promoting the fiscal health of governments? I have argued for years that a diverse revenue portfolio helps offset the negative effects of external environmental shocks on a city’s fiscal health. Revenue diversification involves relying on different revenue sources and avoiding dependence on one specific type of tax or non-tax sources. In the City’s case, it’s the reliance on card club revenues.
Revenue diversification leads to revenue or spending stability, influencing government fiscal health.
The ability of city governments to provide adequate services ultimately depends on revenue availability. Like all local governments, city government revenue comes from taxes, from other local-raised sources, such as fees, and from intergovernmental sources.
In the City of Commerce, card club revenues remain the single most important source of revenue. The Great Recession and, most recently, the COVID 19 pandemic have influenced the fiscal position of our City primarily through its impact on one-single revenue.
Although the card club revenue remains the single most important source of revenue, there is a longstanding mindset among both elected and staff to move towards alternative revenue sources and away from the reliance on the card club revenue.
As the City’s Assistant City Manager, one of my primary concerns is to ensure that money is coming into the City to keep it going, and it’s easy to get distracted by short term wins that bring you quick cash. However, when combined with profitability, longevity is vital to ensure the City can remain solvent for the long term.
To minimize the risk, the City must be both creative and innovative to ensure the stability of the framework to support long-term success, and one way to do this is to have more than one core stream of income. Recent economic events have demonstrated the importance of diversifying the City’s revenue and not be dependent on just one source of income. The benefit of having more than one considerable income stream is that when one income stream is threatened; you have other revenue lines you can fall back on.
As the harsh reality of 2020 hit the US economy, the City did not possess other options within the framework to rely and expand on, without dipping into reserves and implementing drastic reductions in our expenditures.
The top reasons the City needs to have multiple streams of income in our organization:
Withstanding economic downturns -- If an organization is facing a downturn and revenues start to decline; as a result, you protect your organization and add a layer of insurance by having other revenue sources to rely on, allowing the organization to continue moving forward.
Playing offense is better than playing defense -- Creativity and innovation require clarity and confidence and those can become more difficult to possess when the City is in fight or flight mode. Having other significant streams of revenues gives you the mental and emotional space to strategically pave the way forward with clarity and confidence, even when one major revenue source may be suffering.
Expands visibility & market reach -- Having a more diversified revenue stream could increase the City’s visibility and could serve as a magnet for businesses that may want to relocate to Commerce.
It has been said that by establishing and maintaining multiple streams of funding…organizations are able to avoid excessive dependence on any single revenue source, stabilize their financial positions, and thereby reduce the risk of financial crises.
The benefit of diversification is that it enables organizations to maximize their use of resources and fully realize their potential.
Finding out what our organization does well is a good way to see if your resources are being used to support these strengths. It can also help you identify where you might be wasting time, money and skills. This will allow staff to determine where we can potentially add value for the community.
The ideal scenario for any organization is to be able to expand income without increasing the expenses.
It is widely acknowledged that, while organization diversification is appealing for a number of reasons, it is a ‘high-stakes game’. In other words, both the rewards and the risks are potentially extraordinary. Yet one of the reasons diversification strategies can fail is because they are often ventures undertaken when the organization is under pressure and there isn’t time for thoughtful consideration.
By ensuring the City considers diversification of revenue streams ahead of time, when not under such pressure and it can be given the proper deliberation needed, you are more likely to find success – and safeguard the future of our organization and community! ANALYSIS:
Although the narrative aforementioned was specific to COVID and has been defined as a hiccup in respect to our two largest revenue sources, there is a Proposition on this November’s ballot that could impact our card club receipts on a permanent basis.
Prop 26 (California Tribal Sports Betting Initiative) – would allow in-person-only sports betting exclusively at tribal casinos and California’s four-horse tracks. The coalition in support of Prop 26 says it would generate tens of millions of dollars for schools, wildfire prevention, and other state priorities, whereas, the coalition against the proposition says it would result in lost jobs and money for the local economy. Most importantly for us, this Measure could result in the loss of up to 65% of the City’s card club receipts – that is approximately $17.6 million on a permanent basis!!! That level of impact would be devastating, forcing the City to implement unprecedented reductions, virtually paralyzing the way the City conducts business going forward.
With that said, the question before the City Council is whether it will accept, modify or reject the recommendation of City staff to authorize the proposed Parcel Tax Ordinance be placed on the November 8, 2022 ballot as a ballot measure for the funding of fire & paramedic services and sheriff’s law enforcement services (public safety services), through a special parcel tax on industrial property, and direct staff to prepare the Resolutions necessary to schedule the ballot measure for consideration by voters in November 2022.
The City’s operating budget (General Fund) inclusive of its contract with Los Angeles County totals $60,478,236 for fiscal year (FY) 2022-23. Fire and paramedic services represent $14,241,716 (23.5%) and sheriff’s law enforcement services account for $9,600,138 (15.9%) of the operating budget. Together, public safety accounts for $23,841,854 of the operating budget (39.4%). The remaining $36,636,382 (60.6%) covers the municipal services consisting of the Finance, Planning, Building & Safety, Human Resources, City Clerk, Information Technology, Public Works, and various other administrative functions. It is a cornerstone belief that the City should operate in such a way as to spend or set aside the amount of funding necessary to pay for the annual costs (highlighted above), each year, including depreciation, of running the City.
As part of that cornerstone, the City must find a way to provide a reasonable path forward to manage these operating costs, including increasing costs related to essential public safety services – fast emergency response times and crime prevention remains a top community priority. This parcel tax would be instrumental in ensuring (by providing a dedicated funding source) that the community has enough sheriff’s deputies, firefighters and paramedics to respond quickly to 9-1-1 emergencies.
The land area of the City of Commerce is approximately 85% industrial, 10% commercial and 5% residential. Industrial property is a large consumer of fire, paramedic and police services, not only by the 85% land area occupied by industrial uses, but also by the nature of the heavier and more intensive use typical of industrial property.
Additionally, industrial properties do not contribute to City sales tax revenues, as they only produce property tax revenues. On the other hand, commercial properties produce sales tax and property tax revenues for the City, while residential properties produce property tax revenues and some sales tax revenues through their consumption of local retail goods.
Therefore the typical industrial property creates proportionately less revenue for the City while consuming proportionately larger portions of safety services. This creates a disproportionate drain on the general fund for safety services consumed by industrial properties. It is rational and logical that industrial property should pay its fair share of City safety services.
Based on the above factors, staff is proposing a special parcel tax on industrial properties only. A special parcel tax on industrial properties would more equitably spread the costs of city safety series away from the general fund, and toward the more heavy users of those safety services. The proposed special parcel tax rate is calculated by multiplying the total cost of public safety services ($23,841,854) times the area of industrial land in the City (85%) which results in the cost of public safety services attributable to industrial properties (approximately $20,265,576). This result is then divided by the total square footage of industrial building area in the City (approximately 60,370,911) which results in a maximum tax rate of $.3357 per square foot of industrial building area. This would be the total allocable cost for public safety services used by industrial properties.
Staff is recommending that the proposed Parcel Tax Ordinance adopt a maximum tax rate of $.3357 per square foot of industrial property building square footage, but impose the actual tax at a lower rate of $0.15 per square foot (in the first year) of building area to alleviate the disparate impact on the general fund. The proposed special parcel tax is estimated to annually raise $9,055,000.
The following is a sample of what the potential annual impacts are projected to be (premised on the recommended rate of $0.15 per square foot in the first year):
Structure Square Footage Annual Tax
1,000 $ 150
2,500 $ 375
5,000 $ 750
10,000 $ 1,500
25,000 $ 3,750
50,000 $ 7,500
75,000 $ 11,250
100,000 $ 15,000
250,000 $ 37,500
500,000 $ 75,000
750,000 $112,500
1,000,000 $150,000
The proposed Special Parcel Tax Ordinance is defined as a special tax by California laws and cases, and must be approved by 2/3 of the City registered voters voting on the ballot measure on November 8, 2022.
If approved, the tax levy will remain in effect until it is amended or repealed by the voters, however the Ordinance gives the City Council flexibility to adjust the tax rate and decrease or increase said rate by resolution or ordinance without a vote of City voters provided the tax rate does not exceed the maximum rate of $.3357 per square foot of industrial building area as adjusted by the CPI If approved, the proceeds of the tax are to be deposited into a dedicated account established for the single, dedicated purpose of covering the contract costs, for fire, paramedic and police services throughout the industrial areas of the City, and the Fund will be audited annually by the City’s external auditor.
If approved, the City’s General Fund will be relieved by the amount equitable to the tax proceeds deposited into a dedicated account. Not only will safety services be maintained (or potentially enhanced) for our neighborhoods, but the City will be provided additional resources needed to protect the community’s quality of life by mitigating:
Air pollution from increased truck traffic
The gush of increased stormwater
Environmental justice conflicts
Traffic woes
Noise and light pollution
If not approved, and based on past county ballot measure trends, it is likely that a similar parcel tax measure maybe placed on a future ballot by another governmental entity, all in effect precluding the City from pursuing this matter going forward. With that understanding, the approval of a city initiated parcel tax, and all of its proceeds would stay local, here in Commerce, rather than be consumed by another entity, like LA County.
In conclusion, a decision not to proceed with a special parcel tax, or an unsuccessful vote in November 2022, will result in our continued reliance on the City’s General Fund. Compounded with the potential of losing up to 65% of card club receipts will create havoc in paying for not only fire and paramedic services through the General Fund, but it will definitely result in substantial reductions to all City services. For the ballot measure to be successful, it will be necessary to pass by 2/3 of the voters who cast votes on the ballot measure. It is requested that the City Council consider staff’s recommendation for the ballot measure, and review the ballot question as prepared by staff.
FISCAL IMPACT:
Premised on the recommended tax rate of $0.15 per square foot; there will be a fiscal impact to the City for the proposed special parcel tax measure on the ballot to the tune of approximately $9,055,000 annually (the annual revenue is contingent upon the council approved tax rate). A coinciding expense to the City will entail $35,000 plus related to the costs surrounding the ballot measure itself, with additional costs associated to the preparation of educational materials about the measure and staff presence / meetings to educate voters.
CONCLUSION:
The adoption of the proposed ordinance will be consistent with State law and will protect residents’ quality of life and preserve public safety. The attached proposed ordinance will provide a new source of revenue and relieve the general fund by assisting in the payment of expenses for fire service, paramedic service, and law enforcement services proportionate to the industrial properties in the City.
ALTERNATIVES:
Approve staff’s recommendation;
Make amendments to staff’s recommendation;
Decline staff’s recommendation;
Provide alternative and/or further direction.
Recommended & Prepared By: Vilko Domic, Assistant City Manager Reviewed and Approved By: Noel Tapia, City Attorney
Respectfully Submitted: Edgar P. Cisneros, City Manager ATTACHMENTS:
1. Proposed Ordinance
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CITY OF COMMERCE
AGENDA REPORT
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