City of Gonzales
CITY MANAGER DEPARTMENT
STAFF REPORT
TO: Honorable Mayor Rios and City Council
DATE: April 4, 2022
FROM: Rene Mendez, City Manager
SUBJECT: Discussion and Consideration of an Increase of 1/2 Percent (.5%) Transaction and Use Tax
RECOMMENDATION
As directed by the Council, this item is being brought forward to discuss and provide direction on bringing forth to the voters (electorate):
1. Extending the Sunset Timeframe of both Measure K and Measure X another 20 years, from 2044 to 2064; and
2. An additional ½ Percent (.5%) Transaction and Use Tax Increase.
BACKGROUND
In 2014, your Council considered and placed on the ballot a ½ percent (.5%) Transaction and Use Tax (TUT) measure, Measure K, which was ultimately approved by the voters. Subsequently, your Council considered and placed on the ballot an additional ½ percent (.5%) Transaction and Use Tax (TUT) measure, Measure X, which was also approved by the voters with a sunset through 2044, and an oversight Advisory Sub Committee. This measure also extended the life of Measure K, through 2044.
Since the passage of both measures, the City has worked very hard to meet all the requirements set forth by the voters, which staff is pleased to report have all been met. A prime example is the establishment of the TUT Advisory Committee for Measure K, which since its inception, has been very engaged, proactive, and effectively represented the community. To date, all the projects and program recommendations by the Advisory Committee to the Council have been approved. Projects and/or programs for Measure K funds have included:
• Funding the debt service for the renovation of the Community Pool AGENDA
ITEM
7 • Youth Services and Leadership Development
• New restrooms at Central and Meyer Parks
• Tot Lot at Centennial Park
• Improvements to the Skate Park
• Resurfacing of the Tennis Courts (split with the GUSD) • Gonzales Day Camp
• A very successful Community Participation Grants Program • Expanded After School and Summer Youth Program
• Senior Programs
• Accessibility Improvements to the Council Chambers and City Hall • New Playground equipment at Meyer Park
• Internet for All
• A critically needed expansion of Fire Fighter personnel.
For Measure X, both the Advisory Subcommittee and the City Council have shown a desire to focus Measure X expenditures on the Community Center Complex Project.
Over the last year, there has been a lot of great work on the Community Center Complex Project and while everything is moving forward nicely on the design and community input, estimated costs have increased significantly beyond what was initially projected. First, the impacts caused by the COVID-19 Pandemic drove cost up, and now the Russian – Ukraine conflict is also having a significant impact; as a result, the project has gotten significantly more challenging to finance.
The project team comprised of City staff, the Project Manager (Swinerton), and the City’s Financial Advisors (NHA Advisors), have been spending a lot of time developing financial strategies. One of the more promising financing alternatives is to pursue a 40-year United States Department of Agriculture (USDA) loan. While the USDA loan option has shorter duration timeframes, a 40-year loan would provide the most capital for the project and be the most financially feasible. However, two of the potential annual financing sources, Measure X and Measure K, currently sunset in 2044. In order to provide maximum feasibility, it would be important to extend the sunset timeframe of both of these measures at least through 2064.
Another important piece that has been discussed is the possibility of placing before the voters an additional ½ percent (.5%) TUT to help provide additional funding.
As part of the most recent project update to your Council, extending the sunset of the existing tax measures and the possibility of an additional ½ percent (.5%) TUT were presented, and staff was directed to bring those items back for a full discussion.
REVIEW & ANALYSIS
Extending the Sunsets of Both Measure K and X
In order to extend the sunset, the question would need to be placed before the community during the next general election in November. Because General Purpose taxes can only be brought before the electorate during a General Election, any proposed changes, like extending the sunset, would need to similarly occur1.
1 Cal Const Article 13C, Section 2(b) No local government may impose, extend, or increase any general tax unless and until that tax is submitted to the electorate and approved by a majority vote. A general tax shall not be deemed to have been increased if it is imposed at a rate not higher than the maximum rate so approved. The election required by this subdivision shall be consolidated with a regularly scheduled general election for members of the governing body of the local government, except in cases of emergency declared by a unanimous vote of the governing body.
Language for this ballot measure would be fairly straightforward and based on the high community interest for the Community Center Complex Project, staff feels a compelling case would be presented to the electorate for support.
New ½ cent Transaction and Use Tax
As it pertains to the additional ½ percent (.5%) TUT, like the existing measures, the option exists whether to place it before the voters as a General-Purpose Tax or Special-Purpose Tax. There are several key differences between both:
• A general-purpose tax only requires a 50% +1 voter result to pass, as a oppose to a special dedicated tax which would require a 2/3 voter approval. • Depending on the nature of the tax, if general, it would be set to be overseen by a Committee that will bring forward recommendations to the Council. On the other hand, a special-purpose tax would need to reflect what that tax is intended to fund so there would be no need for an oversight Committee.
• A General-Purpose tax could only be brought before the voters during a General Election; however, a Special-Purpose Tax could be placed before the voters during one of the established dates for regular elections or at a special election date set by the Council. In order to save the costs involved with a special election, the Council could also seek approval of a Special-Purpose Tax at an all-mail election. However. there are limitations on the dates at which all-mail elections may be held. The next available date for an all-mail election is August 30, 2022.
Based on the discussion around the Community Center Complex Project and the need to generate additional funding sources, it makes sense to consider an additional ½ percent (.5%) TUT, especially with the large interest in and discussion around the Community for the Center. While, this is certainly positive and bodes well for the success of the measure, it will likely need to be placed before the voters as a Special-Purpose Tax that would require 2/3 support votes to pass. This will be more challenging, but with the “right” compelling message and support, it would have a good chance for success.
If a special tax, your Council could direct staff to specify the purpose and use for the tax, which could certainly include the Community Center as priority number 1. In addition, unlike a general purpose, a special dedicated tax could be placed in front of a special election in 2022.
How does Gonzales Tax Rate Compare to Other Cities?
The following table compares existing local tax rates.
Tax Rate Comparison by City/County
City/County Tax Rate %
Greenfield 9.50%
Salinas 9.25
Seaside 9.25
Marina 9.25
Del Rey Oaks 9.25
Soledad 9.25
Monterey 9.25
Carmel-by-the-Sea 9.25
Sand City 8.75
King City 8.75
Gonzales 8.75
Monterey County (unincorporated area) 7.75
As has been the case before, the simple fact of the matter is that our community when shopping outside the City or online, is paying a higher sales tax rate already so a .5% would have minimal impact.
Furthermore, because many communities around us have higher Transaction and Use Tax rates, when large purchases are made outside the City (i.e., automobiles, large appliances, etc.), the City is losing tax revenue as a result of not having a comparable TUT. This is because while the base Sales & Use Tax (commonly known as the Bradley-Burns), is generally allocated to the jurisdiction where the sale is negotiated or the order is taken, the transactions and use tax is allocated to the district where the goods are delivered or placed into use. As a result, we currently are only capturing 1 percent of a large purchase outside the City made in Salinas and they are capturing the remaining .5% (the difference between 9.25% and 8.75%), which is significant when large purchases are made.
Also, one only needs to look at the revenue generated by the City’s base Bradley-Burns Sales and Use Tax of 7.75%, which is approximately $1.1 million and compared to what is generated by the ½ percent TUT, approximately $700,000, to understand the revenue benefit of out-of-town sales that are captured by the TUT.
Next Steps
If your Council directs staff to bring back the required next steps to move one of both of these measures, it will be important to consider how they are placed and drafted. Careful consideration would need to be given to the timing of both measures and whether to place them together as one ballot measure and/or separate measures.
Based on the direction from your Council, staff would work with the City Attorney to bring back the necessary actions to take before the voters extending the sunset life of both Measures K and X, and also consideration for an additional ½ percent (.5%) TUT.
Explain Recommendation and How it Supports the Vision
Gonzales will continue to be a safe, clean, family-friendly community, diverse in its heritage, and committed to working collaboratively to preserve and retain its small-town charm.
Explain: This item is being brought forward for discussion purposes.
Explain how the Recommendation Directly Implements the Mission The City Council and Staff of the City of Gonzales will realize our Vision by providing the leadership, commitment, and resources necessary to provide excellent services that enhance the quality of life of our diverse community. X Yes ___No ___ NA
Explain: Please see above.
Strong fiscal policies allow us to provide appropriate infrastructure for:
• Public Safety X Yes ____No __NA
• Housing X Yes ____No NA
• Recreation X Yes ____No NA
• Environment X Yes ____No __NA
• Education X Yes ____No NA
Explain: Please see above.
ALTERNATIVES
Your Council has maximum flexibility to decide whether to move forward to extend the sunset timeframe by 20 years to 2064 of both Measure K and X and place another ½ percent (.5%) TUT before the voters.
This item is being brought forward as directed for discussion purposes and direction.
BUDGET IMPACT
Based on the direction provided by your Council, there will be costs to the City which would range from $5,000 to $50,000 to place the measures before the voters during the next General Election and also a Special Election. Based on the direction provided, this cost will be more refined as part of the next item brought before your Council.
On the revenue side, should the Council approve, and the voters pass an additional ½ percent (.5%) increase to the TUT, the increase would generate an additional $700,000 annually. Extending the sunset timeframe through 2064 would improve the City’s financial ability to pursue financing for projects like the Community Center Complex.
CONCLUSION
As directed by the Council, this item is being brought forward to discuss and provide direction on bringing forth to the voters (electorate):
1. Extending the Sunset Timeframe of both Measure K and Measure X another 20 years, from 2044 to 2064; and
2. An additional ½ Percent (.5%) Transaction and Use Tax Increase.