REPORT TO THE CITY COUNCIL
DATE: Regular Meeting of March 8, 2022
TO: Mayor Bailey and Members of the City Council
SUBMITTED BY: J. Patrick Tang, City Attorney
Dante Hall, City Manager
SUBJECT: Follow up from February 22 Council meeting – Discussion of Potential Tax Measures: 1) Renewal of the City’s Existing Voter Approved Utility Users Tax (UUT), and 2) Process for Becoming a Charter City for the Limited Purpose of Increasing the Real Property Transfer Tax (RPTT), which is Only Paid by Buyers or Sellers of Real Property
RECOMMENDED ACTION:
Receive report, discuss, provide direction to staff regarding: 1) Extending the City’s existing, voter-approved Utility Users Tax (UUT) beyond January 1, 2025 and, 2) placing a potential charter city measure on the ballot, for the limited purpose of increasing the Real Property Transfer Tax (RPTT).
FISCAL IMPACT OF RECOMMENDATION:
If the Council moves forward with one or more of the proposed ballot measures, costs will be incurred for staff time, consulting, and ballot related expenses.
EXECUTIVE SUMMARY:
Two potential tax measures are discussed in this report. The first is a renewal of the existing Utility Users Tax (UUT), which if not renewed by an affirmative vote of a majority of voters, will expire January 1, 2025. The second is an increase in the Real Property Transfer Tax (RPTT). Hercules is a general law city, and only charter cities can increase the RPTT beyond the statutorily mandated amount for general law cities. In order to increase the RPTT, the Council must place a ballot measure before the voters at a general election to become a
charter city for that limited pu rpose. The Council has directed that both options be considered for placement on the November 8, 2022 ballot.
BACKGROUND:
At the February 8, 2022 Council meeting, the City’s consultants, the Lew Edwards Group and FM3 Research (“Consultants”) , provided polling results related to extending the existing Utility Users Tax (UUT) currently set to expire in January 2025, and the viability of becoming a Charter City for the limited purpose of increasing the Real Property Transfer Tax (RPTT) (Attachments 1 and 2). After receiving the presentation and after a discussion of options, the Council declined to move forward with a ballot measure in June 2022 for renewing the UUT (this would have required the adoption of a fiscal emergency declaration by a unanimous vote of the Council), and instead directed that staff work with Consultants to determine the viability of placing on the November 2022 ballot:
1) A measure to renew the existing, voter -approved UUT, which if not continued would expire in January 2025; and
2) A measure to become a Charter City for the limited purpose of increasing the RPTT; and
3) In conjunction with 2 above, approval of an ordinance increasing the RPTT to an as yet unspecified amount above the current statutory amount of $0.55 per $1,000 of property value.
The direction from Council to explore the placement of all of the above measures on the November ballot necessitates retention of one or more consultants for additional polling and survey work. At the February 22, 2022 Council meeting, staff presented Council with a contract extension for Lew Edwards and FM3 Research to undertake the work required to determine the viability of placing both the UUT and City Charter/RPTT measures on the November ballot. The Council had a number of questions regarding both of the proposed measures, and agreed to defer action on approval of additional funding for Consultants until the Council could first have additional discussion at tonight’s meeting regarding both the UUT and City Charter/RPTT matters.
DISCUSSION:
What is the UUT? The Utility Users Tax (UUT), pursuant to Title 8, Chapter 8 of the Hercules Municipal Code, is a tax approved in two different elections by Hercules voters and collected by the service provider on the use of various utilities by Hercules residents, covering telecommunications, electricity, natural gas, water, and video service usage. The
UUT is currently assessed at 8%, and the UUT will exp ire on January 1, 2025. The City receives approximately $3.5 million a year from the UUT.
The City is a lean organization and has not fully recovered from the staff and budgetary cuts necessitated by the Great Recession. With the dissolution of the redevelopment agency in 2012 by Sacramento, the City has lost a significant funding source for funding capital improvements. In FY 2011, the City reduced its workforce by 30% and made significant service cuts to bring expenditures in line with its revenues. The attached chart identifies the changes in the number of full-time employees from FY 2011 through FY 2020 (Attachment 3). While these changes saved the City from near bankruptcy, it did not cure the long-term structural deficit, nor contemplate a plan for financial sustainability.
The City relies on UUT proceeds to fund a wide range of services including maintenance of public properties, staffing, and providing for public safety. If the UUT is allowed to expire in January 2025 without being continued, the loss of approximately $3.5 million a year in revenue would drastically impair the City’s ability to provide even a minimal level of service. If we are required to make budget cuts that may include police and neighborhood patrols, street maintenance, parks, senior services, youth programs, and economic development, we risk a decline in our quality of life.
What is the RPTT? The Real Property Transfer Tax (RPTT), pursuant to Title 8, Chapter 3 of the Hercules Municipal Code, is a n existing tax collected by the County Clerk -Recorder which is only paid by buyers or sellers of real property . It is imposed on each deed, instrument or writing by which any land or other realty sold within the City of Hercules is granted, assigned, transferred or otherwise conveyed to any other person or persons, at the rate established by state law for general law cities of $1.10 for each $1,000 of property value.
The tax proceeds received are split, with $.055 per $1,000 going to the County, and the $.055 per $1,000 going to the City. The amount of RPTT the City received in 2021 for all properties sold during that year was a total of $120,000.00.
To increase the RPTT, a general law city must become a charter city. To become a charter city, a general law city must receive voter approval via a ballot measure. Becoming a charter city requires approval by a simple majority of voters at a general elect ion. Other East Bay/Bay Area cities such as Alameda, Albany, Berkeley, El Cerrito, Emeryville, and Hayward have taken this step to expand their authority to collect a larger percentage of these transactions. If the City increases its share of RPTT in this manner, the County would continue to receive $0.55 per $1,000 of property value, but the City would retain the rest of the amount authorized by the tax measure.
At the February 22 meeting, the questions and comments by Council included:
Can the UUT be renewed at a higher rate than the current 8%? How about 9% or 10%?
Answer: Yes. The UUT can be set higher than the current 8% rate; however, the polling to date by Consultants did not contemplate an increase to the current UUT rate of 8% and an increase might poll significantly differently from a renewal with no rate increase. Every increase of 1% of UUT would result in additional revenue of approximately $437,500 based on current UUT revenue of approximately $3.5 million a year.
Should Consultants be provided a specific amount or a range of potential RPTT amounts prior to undertaking additional polling of voters?
Answer: Yes. To fully understand public sentiment of a potential RPTT increase, Council direction on a tax rate range (a low and high dollar amount) would be important to establish prior to polling, so consultants can test that range. Depending on feedback from the polling results, the Council would be able to select a viable RPTT t ax measure amount for placement on the November 2022 ballot.
How have other cities determined the amount of RPTT increase to be sought?
Answer: Most of the cities surveyed have established an increased RPTT rate based in large part on a projection of future need. For example in the case of Emeryville in 2014, which is 95% inside a redevelopment area, the amount of RPTT to be collected, $12 per $1,000 of property value, was calculated based on how much funding for budget and capital impr ovements was lost as a result of redevelopment dissolution, and how much funding would be needed for additional critical capital improvements.
As a point of reference, the chart below identifies the base RPTT rates applied in nearby charter cities. The median tax rate selected by these cities is $12 per $1,000 of property value. The RPTT rate for all charter cities in California has been previously reported and is included in the agenda materials from past Council reports, attached to this report (Attachment 4).
CITY CITY TAX (PER
THOUSAND DOLLARS)
Alameda $12.00
Albany $15.00
Berkeley $15.00
El Cerrito $12.00
Emeryville $12.00
Oakland $15.00
Piedmont $13.00
Richmond $7.00
San Leandro $11.00
Median $12.00
For Hercules, General Fund expenditures are projected to increase at the estimated rate of 3% a year . Expenditure projections for a 5 -year forecast period through 2027 range from $16.8 to $18.6 million assuming the current service levels are preserved. A structural deficit of approximately $2 million will begin in FY 24-25 without additional revenue streams and if the UUT is not renewed beyond its January 2025 expiration date (Attachments 5 and 6).
This forecast does not include the future expectations of the Council and citizens regarding the potential for expanded service levels and public infrastructure needs and improvements.
As mentioned above, in 2011 the City made significant service cuts in the attempt to bring expenditures in line with its revenues. Even if an extension of the UUT at its current rate of 8% were approved by the voters, an additional $3 million annually would still be needed to restore City services to pre - recession levels (or FY 2011) (Attachment 7) .
Should Hercules become a charter city and increase its RPTT, the revenue comparison chart below shows the annual revenue that would be received using the average annual RPTT amounts received for Fiscal Years 2014-2019:
Tax Rate $0.55/1,000 $4/1,000 $8/1,000 $12/1,000 $16/1000 Estimated
Annual Revenue $115K $838K $1.6M $2.5M $3.3M
Therefore, curing the structural deficit projected to begin in FY 24 -25 and restoring prior service levels to meet community de mand would require a
renewal of the UUT at its current 8% rate, and an additional $3 million annually. Given the staff shortag es in the Public Works Department (Attachments 8, 9 and 10), the current lack of a dedicated code enforcement unit, understaffing in the Planning Department, and the perceived need to increase public safety expenditures to meet future needs resulting from a projected increase in 1,509 residentials units (Attachment 11), staff recommends that Consultants be directed to poll voters regarding the Charter City/RPTT proposal based on a range from $8 to $16 per $1,000 to achieve the revenue amounts illustrated in the above table.
What is the timeline for each of the proposed measures?
UUT: A proposed measure to continue the UUT must be submitted at least eighty-eight (88) days before the November 8, 2022 election. The City Council would need to vote on submission of the ballot measure no later than the August 9, 2022 council meeting.
Charter City/RPTT:
Prior to approving submission of the charter to the voters, the City Council must hold at least two public hearings on the proposal of the charter and the content of the charter, and notice of those hearings must be published at least twenty one (21) calendar days before the date of each hearing. The second public hearing must be held at least thirty (30) days after the first hearing, and at least one of the hearings must be held outside of normal business hours.
The City Council may not vote on submission of the charter to the voters until twenty one (21) days after the second public hearing. A charter proposal can only be voted on at a regular general election, absent a declaration of a fiscal emergency. In order for the City Council to place a charter measure on the ballot for November 2022, the City would need to adhere to the following timeline:
The City Council must vote to submit the proposed charter to the voters at least eighty-eight (88) days before the election, and hold at least two public hearings.
City Council holds first public hearing on proposed charter May 10, 2022
Notice of the hearing must be given 21 days in advance
City Council holds second public hearing on proposed charter
June 14, 2022
Must occur at least 30 days after first public hearing
City Council votes on submission of the proposed charter to the voters no later than August 9, 2022.
Election Date: November 8, 2022
CONCLUSION:
Staff seeks further direction from Council regarding the proposed tax measures discussed in this report.
Attachments:
1. February 8, 2022, Staff Report - Polling Results Related to Extending the Existing Utility Users Tax and the Viability of Becoming a Charter City
2. February 4, 2022, Summary Report of January 2022 Community Survey Results
3. Changes in Full-Time Equivalent City Government Employees by Function Last Ten Years
4. February 25, 2020, Staff Report - Process for Becoming a Charter City
5. January 25, 2022, Staff Report - Long-Term Financial Projection
6. FY 21-22 General Fund Five-Year Financial Forecast
7. Estimated Cost to Restore City Staffing Levels to Pre-recession Levels
8. March 23, 2021, Staff Report - Public Works Department Organizational Review and Analysis
9. March 23, 2021, City Council Presentation - Public Works Department Organizational Review and Analysis
10. March 23, 2021, Final Report - Public Works Department Organizational Review and Analysis
11. Summary of Built and Approved Residential Units as of February 28, 2022