CITY OF POMONA
COUNCIL REPORT
October 2, 2023
To: Honorable Mayor and Members of the City Council
From: James Makshanoff, City Manager
Submitted By: Andrew Mowbray, Finance Director/City Treasurer Rosalia Butler, City Clerk
Sonia Carvalho, City Attorney
SUBJECT: IMPACT ANALYSIS REPORT ON THE POSSIBLE EFFECTS OF THE PROPOSED INITIATIVE PETITION TO REDUCE THE TRANSACTIONS & USE TAX RATE FROM 0.75% TO 0.50% AND TO EXTEND THE TERM OF THE TAX BY REPEALING ITS MARCH 31, 2029 SUNSET RECOMMENDATION:
It is recommended that the City Council:
Receive and file the Impact Analysis Report on the possible effects of the proposed initiative petition to reduce the Transactions & Use Tax (TUT) rate from 0.75% to 0.50% and to extend the term of the TUT by repealing its March 31, 2029 sunset; Based upon the Impact Analysis Report, take one of the actions identified below:
Submit the initiative measure to the voters at the “next regular municipal election” occurring at least 88 days later; or Submit the initiative measure to the voters at a special municipal election occurring on a Tuesday that is not on, before or after a State holiday, that is between 88 and 103 days after the City Council calls the election.
Direct City Staff to prepare a competing measure that would be brought forward for consideration on the October 16, 2023 City Council Agenda.
EXECUTIVE SUMMARY:
On September 11, 2023, the City Council directed staff to prepare an impartial and informational report analyzing the impact of the initiative petition to reduce TUT rate from 0.75% to 0.50% and to extend the term of the TUT by repealing its March 31, 2029 sunset.
Pursuant to Elections Code Section 9212, staff utilized data from the City’s Sales Tax Consultant “HdL Companies” who is a pioneer and leader of auditing, operations, and revenue solutions for public agencies. The HdL Companies brings a comprehensive and tailored approach to maximizing and understanding public agency revenues. In addition to the initial projection of the TUT impact by HdL a detailed Impact Analysis Report was prepared by the City’s Financial Advisor, Urban Futures Inc. (UFI) on the possible long-term effects of the proposed initiative. UFI assisted the City in the initial proposal to create the TUT (known as Measure PG on November 2018 ballot), and annually provides an updated 10-year forecast analysis of the City’s General Fund.
FISCAL IMPACT:
The estimated cost of holding an election for this measure on March 5, 2024 or a special election for this same measure is currently unknown. However, the cost of the November 8, 2022 General Municipal Election was approximately $388k. The Los Angeles County Registrar-Recorder will invoice the City of Pomona for Election Services after the election.
The petition to reduce the TUT from 0.75% to 0.50%, will result in a reduction of TUT revenue by one-third. Based on the City’s projected revenue forecast prepared by HdL, this would reduce the annual TUT revenue by an average of $5.8M per fiscal year or $29M over the five-year period. Repealing the March 31, 2029 sunset on the TUT would eliminate the impact of the loss of TUT revenue set to occur in 2029. Detailed financial data is discussed herein under the heading “Impact Analysis Report” (Prepared by UFI), as well as in the HDL 5-year analysis of the TUT reduction covered in Attachment 1.
PREVIOUS RELATED ACTION:
On September 11, 2023, the City Council directed staff to prepare an impartial and informational report analyzing the impact of the initiative petition to reduce the TUT rate from 0.75% to 0.50% and to extend the term of the TUT by repealing its March 31, 2029 sunset.
DISCUSSION:
Over the last several months, a Pomona resident circulated a local initiative measure in the City seeking to reduce the rate of the City’s TUT from three quarters percent (0.75%) to one-half percent (0.50%) and to extend the term of the TUT by repealing its March 31, 2029 expiration date/sunset. On July 5, 2023, the proponent timely submitted a signed petition to the City Clerk’s Office to qualify for the initiative measure for the ballot. The City Clerk’s Office has verified the petition is in proper format and contains the required number of signatures to qualify the measure for the ballot. A certificate of Sufficiency of Initiative Petition was received, filed and accepted by the City Council on the September 11, 2023 Council Meeting.
On September 11, 2023, City Council also directed staff to prepare an impartial and informational report analyzing the impact of the initiative measure on the City’s finances, ability to provide public services, land use and development regulations, and the like.
Staff worked with the City’s sales tax consultant, HdL, to gather initial projections on the proposed initiative and the City’s Financial advisor, Urban Futures, Inc. (UFI), to prepare the following detailed financial impact analysis; Financial Impact Analysis Report (Prepared by UFI)
The citizen initiative to amend the City’s TUT has two interrelated fiscal impacts:
An immediate and permanent reduction in the TUT rate from 0.75% to 0.50%, thereby reducing annual revenues from the TUT by one-third beginning October 1, 2024.
Removal of the March 31, 2029, expiration (sunset) of the TUT, thereby permanently extending the revenue received from the reduced TUT rate (0.50%).
Since both fiscal impacts are to the same source of revenue (the TUT), but they occur at different times in the future (October 1, 2024 and April 1, 2029), both the near-term and long-term fiscal impacts of the initiative are best evaluated together to understand the cumulative impact.
Fiscal Impact Evaluation Tool - City’s Long-Range Financial Forecast Model In accordance with its adopted fiscal policies, the City utilizes a Long-Range Financial Forecast Model “to evaluate known internal and external issues impacting the City’s financial condition.” The Financial Forecast Model is intended to help the City achieve the following:
Attain and maintain financial sustainability.
Obtain sufficient long-term information to guide financial decisions.
Identify sufficient resources to provide programs and services for the stakeholders; Identify potential risks to on-going operations in the long-term financial planning process and communicate these risks on an annual basis; Establish mechanisms to identify early warning indicators; and Identify changes in expenditure or revenue structures needed to deliver services or to meet the goals adopted by the City Council.
When evaluating the City’s future financial condition, the City employs the following two-step process utilizing the Financial Forecast Model:
Baseline Forecast. The first step is to create a “Baseline Forecast.” The Baseline Forecast establishes a neutral projection of the City’s 10-year financial outlook based on the City’s current organization, operations, and revenue/expense structure. The Baseline Forecast represents the City’s best prediction of the City’s future financial condition assuming no changes to the City’s organizational structure or operations, with all revenues and expenses projected using current econometric forecast data, the City’s historic financial data, and appropriate forecasting algorithms.
Scenario Forecast. The second step is to create a “Scenario Forecast.” The Scenario Forecast provides an alternative projection of the City’s 10-year financial outlook based on a set of identified changes to the assumptions in the Baseline Forecast. The Scenario Forecast can be compared to the Baseline Forecast to evaluate the near and long-term financial impact of the changed assumptions.
For purposes of evaluating the impact of the citizen initiative, the City updated the Financial Forecast Model with the City’s FY 2023-24 Adopted Budget data, updated econometric data, and updated data from the City’s third-party tax consultants. It should be noted that the City’s FY 2023-24 Adopted Budget includes funding to begin implementation of the fiscal policies recently adopted by the City Council for reserves, pension stabilization, capital improvements and equipment/vehicle replacement.
Transaction & Use Tax (Status Quo) – Baseline Forecast
As stated above, the Baseline Forecast assumes the “status quo,” which includes the existing structure and revenue generated by the TUT. The TUT currently generates approximately $16.9M million annually in voter-approved, locally controlled revenue. The annual revenue is deposited into the City’s general fund and is spent to pay for the costs of delivering municipal services including police, fire, streets, parks, community centers, recreation programs, libraries, and neighborhood services. The TUT currently expires (sunsets) on March 31, 2029, and the City will not receive any further TUT revenue beginning July 1, 2029.
With the status quo TUT, the Baseline Forecast shows the City’s general fund with slight annual operating surpluses until the TUT expires on March 31, 2029. Upon expiration of the TUT, the City’s general fund revenue declines substantially creating annual operating deficits that start at $18 million and grow annually through the remainder of the forecast. If the City maintained its current level of service delivery, its general fund balance and reserves would be completely depleted by Fiscal Year 2029-30. Balancing the budget and avoiding this financial impact would require a major restructuring and reduction in the current municipal services delivered to city residents and businesses. The City has been aware of the serious financial outlook caused by the TUT expiration and has recently begun internal discussions on how to address the matter prior to the TUT expiration.
Transactions & Use Tax Sunset (March 2029)Annual Operating Deficits of $18+ million (FY30-34)Annual Operating Surpluses (FY24-29)Transactions & Use Tax Sunset (March 2029)Annual Operating Deficits of $18+ million (FY30-34)Annual Operating Surpluses (FY24-29)The following graphs show the fiscal outlook for the Baseline Forecast of the City’s general fund with the status quo TUT:
Transactions & Use Tax Sunset (March 2029)
Annual Operating Deficits of $18+ million (FY30-34)
Annual Operating Surpluses (FY24-29)
Transactions & Use Tax Sunset (March 2029)
Annual Operating Deficits of $18+ million (FY30-34)
Annual Operating Surpluses (FY24-29)
Transactions & Use Tax Sunset (March 2029)Annual Operating Deficits of $18+ million (FY30-34)Annual Operating Surpluses (FY24-29)Transactions & Use Tax Sunset (March 2029)Annual Operating Deficits of $18+ million (FY30-34)Annual Operating Surpluses (FY24-29) Transactions & Use Tax Sunset (March 2029)
Annual Operating Deficits of $18+ million (FY30-34)
Annual Operating Surpluses (FY24-29)
Transactions & Use Tax Sunset (March 2029)
Annual Operating Deficits of $18+ million (FY30-34)
Annual Operating Surpluses (FY24-29)
Transactions & Use Tax Sunset (March 2029)City Reserves and Fund Balance Depleted (FY33)Transactions & Use Tax Sunset (March 2029)City Reserves and Fund Balance Depleted (FY33) Transactions & Use Tax Sunset (March 2029)
City Reserves and Fund Balance Depleted (FY33)
Transactions & Use Tax Sunset (March 2029)
City Reserves and Fund Balance Depleted (FY33)
Transactions & Use Tax (Amended by Citizen Initiative) – Scenario Forecast If the citizen initiative is approved, there will be two amendments (changes) to the TUT. First, the citizen initiative would reduce the TUT rate from 0.75% to 0.50%, reducing by one-third the annual revenue generated by the TUT. The reduced annual revenues to the City’s general fund would begin in the second quarter of FY 2024-25. Second, the citizen initiative would make the TUT permanent by removing the March 2029 expiration (sunset).
The Financial Forecast Model can be used to evaluate both the near-term and long-term fiscal impacts of the citizen initiative by creating a Scenario Forecast in which all assumptions and inputs to the Baseline Forecast are held constant, except for the two changes proposed by the citizen initiative to the TUT (reduced tax rate and removal of the sunset). Because the citizen initiative both lowers the tax rate causing an annual revenue loss beginning in FY 2024-25, and it removes the sunset which provides revenue gains beginning in FY 2029-30, the Scenario Forecast provides the ability to evaluate the net cumulative fiscal impact of both changes over the 10-year forecast period.
The following table shows the annual and cumulative change in revenues generated by the TUT status quo (Baseline Forecast) as compared the TUT amended by the citizen initiative (Scenario Forecast). The decreased tax rate beginning in FY 2024-25 causes initial revenue losses, which are offset by the revenue gains when the sunset is removed in FY 2029-30.
Impact on Revenues Generated by the Transactions & Use Tax Forecast Year
Baseline Forecast
Transactions & Use Tax (status quo)
Scenario Forecast
Transactions & Use Tax (citizen initiative)
Annual
Gross Revenue
(Loss)/Gain
Cumulative
Gross Revenue
(Loss)/Gain
FY 2025
17,202,771
12,902,079
(4,300,692)
(4,300,692)
FY 2026
17,582,364
12,159,060
(5,423,304)
(9,723,996)
FY 2027
17,902,335
12,380,336
(5,521,999)
(15,245,995)
FY 2028
18,251,084
12,621,513
(5,629,571)
(20,875,567)
FY 2029
18,654,024
12,900,165
(5,753,859)
(26,629,425)
FY 2030
-
13,165,452
13,165,452
(13,463,973)
FY 2031
-
13,421,523
13,421,523
(42,450)
FY 2032
-
13,697,157
13,697,157
13,654,707
FY 2033
-
13,942,751
13,942,751
27,597,458
FY 2034
-
14,210,405
14,210,405
41,807,863
(1) HdL provides the City their proprietary sales tax forecast and UFI includes HdL's projection in the Forecast Model with additional data from Moody's Analytics, the State of California and other sources of sales tax data. A nominal difference in the forecasted dollar amounts is simply representative of the fact that any forecast is a projection based on the included data and the design of the algorithm.
However, only looking at the impact of the citizen initiative on revenues generated by the TUT fails to consider the net impact to the financial position of the City’s general fund. The following table shows the impact of the citizen initiative to the annual operating (deficit)/surplus and fund balance of the City’s general fund.
Impact to the Financial Position of City’s General Fund Baseline Forecast
Transactions & Use Tax (status quo)
Scenario Forecast
Transactions & Use Tax (citizen initiative)
Forecast Year
Annual Operating (Deficit)/Surplus
Fund Balance
Annual Operating (Deficit)/Surplus
Fund Balance
FY 2025
2,656,360
60,793,660
(1,644,332)
56,492,968
FY 2026
2,344,842
63,138,502
(3,078,462)
53,414,506
FY 2027
1,679,511
64,818,013
(3,842,488)
49,572,017
FY 2028
1,292,120
66,110,133
(4,337,451)
45,234,566
FY 2029
787,803
66,897,936
(4,966,056)
40,268,510
FY 2030
(17,977,610)
48,920,326
(4,812,158)
35,456,352
FY 2031
(18,198,378)
30,721,947
(4,776,855)
30,679,497
FY 2032
(18,742,736)
11,979,211
(5,045,579)
25,633,918
FY 2033
(19,215,028)
(7,235,817)
(5,272,277)
20,361,641
FY 2034
(19,836,911)
(27,072,728)
(5,626,506)
14,735,135
The data in the table show that while the citizen initiative eliminates the complete loss of TUT revenue beginning in FY 2029-30, the initiative also creates significant and growing annual operating deficits in every year of the forecast. In other words, the citizen initiative replaces one fiscal problem with another for the City’s general fund. The citizen initiative replaces the problem of complete TUT revenue loss in FY 2029-30 with growing annual operating deficits due to permanent reduction in annual TUT revenue. The net result is that compared to the status quo, the citizen initiative simply delays depletion of the General Fund by four years, from FY 2032-33 to FY 2036-37. This similar financial outlook is perhaps best understood by comparing the graphical outputs of the Financial Forecast Model for the Baseline Forecast (TUT status quo) and the Scenario Forecast (TUT amended by the citizen initiative).
BASELINE FORECAST SCENARIO FORECAST
TRANSACTIONS & USE TAX (status quo) TRANSACTIONS & USE TAX (amended by citizen initiative) CONCLUSION:
The impartial and informational report analyzing the impact of the proposed initiative measure on the City’s finances, ability to provide public services, land use and development regulations, and the like displays a financial risk to the City’s general fund in the immediate future by identifying the possible revenue loss of as much as $5.8M annually. On the other hand, the proposal to remove the 2029 TUT sunset remedies the future loss of TUT revenue that has been brought forward in this analysis prior to and in this latest version. With that said, any type of major General Fund ongoing (not onetime) revenue source reduction or elimination will impact City services including, but not limited to Police, Fire, Library, Parks, Recreational Programs, certain Public Works operations, Development Services, City Council, Administration, City Clerk, Finance, and Human Resources. A competing measure that eliminates the 2029 TUT sunset but does not reduce the TUT tax rate may be explored and considered by the City Council.
Prepared by:
Andrew Mowbray
Finance Director / City Treasurer
ATTACHMENT(S):
Attachment 1 – Updated 5-Year Transactions and Use Tax Projection - HdL Impact of the Initiative Petition on the Local Sales Tax