EAST PALO ALTO
CITY COUNCIL
STAFF REPORT
DATE: March 15, 2022
TO: Honorable Mayor and Members of the City Council
VIA: Jaime M. Fontes, City Manager
BY: Karen Camacho, Housing Project Manager
Rachel Horst, Housing and Economic Development Manager
SUBJECT: Potential Ballot Measure for Affordable Housing Revenue Recommendation
Receive the report and provide staff direction on potential revenue sources for affordable housing.
Alignment with City Council Strategic Plan
This recommendation is primarily aligned with:
Priority No. 2: Enhance Economic Vitality
Priority No. 3: Increase Organizational Effectiveness and Efficiency Priority No. 6: Create a Healthy and Safe Community
Background
City Goal of Establishing a Sustainable Affordable Housing Revenue Source For the last three years, City Council has prioritized a sustainable revenue source to support the City’s affordable housing activities. In particular, the City sought additional revenue to support housing preservation activities as part of its two-year Partnership for the Bay’s Future Challenge Grant for Housing Protection and Preservation (“Challenge Grant”), which began in January 2020.
Establishing a sustainable revenue source for housing preservation was one of the three main goals of the Challenge Grant scope of work, in addition to launching a preservation model centered on a Community Land Trust and designing and supporting the passage of a local preservation ordinance like a Tenant Opportunity to Purchase Act/Community Opportunity to Purchase Act.
At recent City Council meetings, East Palo Alto residents have also expressed strong support for City Council to explore funding to help with the City’s affordable housing activities.
Measure V – 2020 Transient Occupancy Tax Ballot Measure On February 18, 2020, City staff presented a report to City Council detailing potential revenue sources to support the City’s Challenge Grant work. The staff report included a comprehensive analysis from David Rosen & Associates (“DRA”) titled “Housing Trust Fund Revenue Sources,” which is provided as Attachment 2. The City Council directed staff to return with more information on a potential adjustment of the City’s Transient Occupancy Tax (“TOT”).
On July 21, 2020, via Resolution No. 99-2020, the City Council unanimously voted to order a submission of a measure amending Chapter 3.68 of the East Palo Alto Municipal Code, to increase the Transient Occupancy Tax (TOT) rate from 12% to 14% over a two-year period, with a 1% increase in 2022 and another 1% increase in 2023, generating an estimated $195,000 the first year and $390,000 per year thereafter to fund affordable housing development, acquisition and rehabilitation activities.
In November 2021, the ballot measure (“Measure V”) received a 64.66% vote in support but fell just short of the required two-thirds vote to pass.
City Council 2022 Priority & EPA OPA
On January 8, 2022, at the City Council Priority Setting for Fiscal Year 2022-2023, City Council once again prioritized a potential ballot measure for affordable housing funding. In addition, at a recent public hearing on the East Palo Alto Opportunity to Purchase Act Ordinance (“EPA OPA”) on January 25, 2022, the City Council directed staff to engage DRA to conduct an updated analysis on potential housing revenue sources and provide new recommendations building on the “Housing Trust Fund Revenue Sources” report.
On January 18, 2022, the City Council adopted Resolution No. 5081, authorizing the City Manager to execute an amendment to an existing contract with DRA to provide an update to the 2020 report with additional recommendations on potential funding sources that may be used to support housing preservation and other affordable housing activities. The memorandum (“DRA Report”) is provided in Attachment 1.
During the public hearing on EPA OPA on March 1, 2022, City Council continued to express interest in creating funding sources to support families in preserving their households and creating affordable homeownership opportunities.
The purpose of this staff report is to present this complement to the 2020 DRA “Housing Trust Fund Revenue Sources” report for City Council review and to seek City Council direction on a potential revenue source to support affordable housing activities, including actions which may require placing a measure on the November 2022 ballot for voter approval.
Analysis
Update to 2020 DRA Report
The DRA Report evaluates additional options for revenue generation through modification of existing general and special taxes1 and new taxes based on projected revenue generation.
The report recommends consideration of the following three areas:
1. Increase and modification of City’s Gross Receipts Tax (“Modified GRT”)2
2. Increase and modification of Transient Occupancy Tax (“Modified TOT”)
3. New parcel tax on residential properties (“Parcel Tax”) Modified Gross Receipts Tax
The City currently levies a GRT on businesses in East Palo Alto, including rental properties of up to five units, at rates shown in Table 1 of Attachment 1. This is referred to as the Business License Tax. For residential rental properties of five or more units only, the City applies a GRT, referred to as Measure O (“Measure O GRT”), currently at a rate of 1.5%. These taxes are shown in the chart below:
Current Gross
Receipts Tax Applicability Tax
Business License
Tax
Rental residential
properties with <5 units
Graduated dollar amount
based on gross receipts (see
Table 1 in Attachment 1)
Measure O Rental residential
properties with 5+ units 1.5%
The DRA Report considers modifications to the GRT that include 1.) extending the Measure O GRT to apply to rental residential properties of fewer than five units owned by non-residents;
2.) removing the 10-year delay on applying the tax to new developments; and 3.) increasing the Measure O GRT to 2% or 2.5%. The estimated increase in revenue from implementing the above is shown in Tables 3 and 5 of Attachment 1.
Modified Transient Occupancy Tax
The DRA Report reviewed the City’s current TOT of 12% and considered the potential increase in revenues from increasing the TOT to 14%, in addition to applying the TOT to shortterm rentals. The anticipated increase in revenue from increasing the TOT is shown in Table 7 of Attachment 1. Due to lack of existing data on short-term rentals in East Palo Alto, DRA was unable to calculate the increase in revenue from applying the TOT to those properties.
Parcel Tax
The DRA report considered levying a new parcel tax, a flat-rate tax, on all residential parcels, at the rate of $100 per parcel. Table 8 of Attachment 1 shows estimated revenue from this Parcel Tax.
Summary of Estimated Revenue
The following table summarizes potential revenue from each of the above options:
1 Special taxes require 2/3 voter approval. General taxes (or increases thereof) require a majority vote. 2 The City’s current GRT, also known as “Measure O,” is levied on properties of five or more units.
Comparison of Potential Increase in Annual Revenue
Modified Gross
Receipts Tax
Modified Transient
Occupancy Tax
Parcel Tax
$400,000 raising
existing Measure O to
2.5%
$115,000 $458,100
$1,150,000 extending
Measure O to <5-unit
rental properties owned
by non-EPA residents +
2.5%
Per the DRA Report, any new or increased GRT as a general tax requires a majority vote of the electorate. To dedicate a GRT revenue for special purposes, such as affordable housing, would require two-thirds voter approval.
Initial Legal Review
The three options presented in the DRA report were reviewed by the Interim City Attorney.
Next Steps
City Council may direct staff to pursue a revenue source that would require placement on the November 8, 2022 ballot. City Council may also direct staff to look further into pursuing the regulation of short-term rentals in a Gross Receipts Tax if it wishes to further explore the Modified Gross Receipts Tax option. If directed, staff will return to City Council on April 19 for final direction.
If the City Council directs staff to pursue a tax of any type, voter approval via a ballot measure is required. The following is a timeline to add a ballot measure in this year’s election.
City Council and County Timeline for Ballot Measure
April 19, 2022 Council discuss and provide direction on potential Ballot Measure provisions. Council also creates subcommittee to provide further input.
May 2022 Staff return with potential Ballot Measure provisions for more direction on particular questions.
May 2022 City Council approves ballot measure.
June 2022
(July 2022 the latest)
Council adopts resolutions ordering submission of
measure.
August 12, 2022 Deadline to submit Resolution is 88 days before election day
August 17, 2022 Deadline to submit an Amendment is 83 days before election day
August 19, 2022* Deadline to submit Argument in Support of measure August 29, 2022* Deadline to submit Impartial Analysis
November 8, 2022 Election Day
* These are the San Mateo County Assessor-County Clerk-Recorder's Office’s recommended deadlines. However, City Council may decide on its own deadlines and set them in the Resolution to notify the County.
Additional Staff Capacity through Breakthrough Grant
On February 1, 2022, the City of East Palo Alto was announced as one of 11 Partnership for the Bay’s Future 2022-2024 Breakthrough Grant recipients. Breakthrough Grant jurisdictions receive a Breakthrough Grant Fellow for a two-year period to implement the grant scope.3 The Breakthrough Grant Fellow is intended to provide added staffing capacity to support the City over the next two years, and may support fund development and resource building for affordable housing activities. This includes any work associated with a potential ballot measure.
Fiscal Impact
The information in this staff report is for information only. If the City Council elects to pursue any funding source, there may be staffing or other considerations that may have a fiscal impact on the City. Staff would return with estimated revenues based on the option that City Council chooses to pursue.
Public Notice
The public was provided notice of this agenda item by making the agenda and report available on the City’s website and at the San Mateo Co. Library located at 2415 University Avenue, East Palo Alto.
Environmental
The action being considered does not constitute a “Project” within the meaning of the California Environmental Quality Act (CEQA), pursuant to CEQA Guideline section 15378 (b)(5), in that it is a government administrative activity that will not result in direct or indirect changes in the environment.
Attachments
1. David Rosen & Associates 2022 Report
2. David Rosen & Associates 2020 Housing Trust Fund Revenue Sources Report 3 The intended result of these efforts is fewer residents at imminent risk of displacement, more permanently affordable rental housing, and more housing stock in East Palo Alto in the hands of East Palo Alto residents.