October 3, 2023
Department
DATE: October 3, 2023
TO: Members of the City Council
FROM:
Mayor Eduardo Martinez, Councilmember Claudia
Jimenez, and Councilmember Robinson
Subject:
Long Term Financial Analysis of the City’s Budget Under Proposed Alternative Scenarios.
FINANCIAL IMPACT: Amount and funding source to be determined.
PREVIOUS COUNCIL
ACTION:
None
STATEMENT OF THE
ISSUE:
The City Council’s Draft Strategic Goals and Objectives process makes clear that resident services, green
economic development, and climate change resilience
are priorities for Richmond’s elected leadership. These objectives, both those in process and future-oriented, are at significant risk of execution, given the City’s budgetary reliance on petroleum industry revenues. Prudent
economic planning would be for the City to quantify the scale of this industry dependence on its budget, as well as consider policy options for ensuring stable, sufficient revenue.
RECOMMENDED ACTION:
DIRECT city staff to work with the Mayor’s Office to
finalize the draft Request for Proposals for a Long-Term Financial Analysis of the City’s Budget under the
proposed alternative scenarios - Mayor Eduardo Martinez (510-620-6503) and Councilmember Claudia Jimenez
(510-620-6565).
AGENDA
REPORT
October 3, 2023
DISCUSSION:
The City of Richmond relies heavily on revenue from the petroleum industry and its induced economic activities to perform the primary activities expected of a municipality.
In addition to the taxes received from these industries, the City relies on tax revenue from businesses that sell petroleum products; auxiliary businesses that support petroleum industry operations; local businesses who support petroleum industry workers during the course of their work shift; and property and income taxes from residents who are employed within the petroleum industry.
In the June 6, 2023, agenda report detailing the proposed second draft budget for the City of Richmond’s Fiscal Year 2023-2024 (Item Y.1), City staff warns:
Utility Users Tax (UUT) – Average increase of 1.1 percent. As mentioned above, this revenue category has individual revenue streams going in very distinct directions. This revenue category also includes the Chevron Tax Settlement which ends in FY 2024- 2025, meaning the City will have a revenue loss of $4 million annually. For all years on the forecast UUT on cable, telecommunications, and prepaid wireless is forecasted to decrease while that on Gas & Electricity and the Cap Amount are both forecasted to increase.
Several reports have also indicated that governments must prepare in advance for the inevitable loss of tax revenue from the necessary and inevitable decline of the petroleum industry in light of the climate crisis, including the 2022 Environmental Justice Advisory Committee recommendations to the AB32 Climate Change Scoping Plan; “Four Pillars of Just Transition: A Roadmap” (prepared by public health experts and climate economist experts for the Climate Equity Network); and “A Program For Economic Recovery and Clean Energy Transition in California” (published by economists from the University of Massachusetts-Amherst).
As this agenda report will briefly illustrate below, the City of Richmond must plan for the future loss of not just $4 million dollars in the Utility Users Tax, but potentially all petroleum industry-related revenue.
October 3, 2023
In 1982, the number of operating refineries in the United States was 254. As of January 1, 2023, the number of operating refineries in the United States is 124.1 In September 2022, the Union for Concerned Scientists released a study predicting 75% of refineries in the United States will close in the next 30 years.2
A Long-Term Financial Analysis (LTFA) would provide the city with potential economic strategies to avoid what would be a catastrophic economic shock. In combining financial forecasting and possible fiscal strategies, this analysis would consider a potential economic crisis confronting Richmond, examine the financial consequences, and provide a starting point for the City to determine the most appropriate response.
Specifically, by quantifying the local taxes and fees paid to Richmond—and that Richmond would receive via the county— by the petroleum industry, we can develop sustainable alternatives to replace these revenues.
Regional Factors
California is the largest sub-national economy in the world. As an economy with more productive capacity than India and a GDP rivaling Germany’s, its environmental policies and economic directives carry significant weight on the petroleum industry.
On September 23, 2020, Governor Gavin Newsom issued Executive Order N-79-20, which states:
1“ U.S. Number of Operable Refineries as of January 1.” n.d. Www.eia.gov. https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=8_NA_8O0_NUS_C&f=A. 2 Pinto De Moura, Maria. 2022. “Low-Carbon Pathways for Transportation.” https://www.ucsusa.org/sites/default/files/2022-09/low-carbon-pathways-for-transportation-white- paper.pdf.
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It shall be a goal of the State that 100 percent of in-state sales of new passenger cars and trucks will be zero-emission by 2035. It shall be a further goal of the State that 100 percent of medium- and heavy-duty vehicles in the State be zero-emission by 2045 for all operations where feasible and by 2035 for drayage trucks. It shall be further a goal of the State to transition to 100 percent zero-emission off-road vehicles and equipment by 2035 where feasible.
In a September 2022 press release, Governor Gavin Newsom’s office summarized the thrust of the California Climate Commitment, which includes a push to cut air pollution by 60%; reduce state oil consumption by 91%; reduce fossil fuel use in buildings and transportation by 92%; and cut refinery pollution by 94%.
In August 2022, California’s air board (CARB) approved a regulation banning the sale of all new gas-powered cars by 2035. Car manufacturers will have to gradually electrify their fleet of new vehicles, beginning with 35% of 2026 models, increasing to 68% in 2030, and reaching 100% electrification for 2035 models. In December 2022, CARB adopted an update to the AB 32 Climate Change Scoping Plan, which (among many other goals) seeks to reduce statewide oil use 94% by 2045.
It is reasonable to assume that these environmental policies will significantly impact the public’s petroleum consumption and, therefore, revenues from the petroleum and related industries. Such a market shift would, in turn, impact a host of annual taxes and fees received by the City.
Martinez, CA as a Case Study
The sudden closures of two refineries in Contra Costa County within the last few years point to the need for cities to plan for potential transition scenarios. In August 2020, the Marathon corporation unexpectedly announced the closure of the refinery in Martinez, stating it would “indefinitely idle these facilities with no plans to restart normal operations.”3 At the time, the City of Martinez had no plan for how it would address the lost revenue, jobs, and other costs of a transition. Marathon re-opened the refinery some three years later, with a focus on processing biofuels, but operating with a fraction of the workers and economic activity.4 Industry analysts have speculated that the biofuels operation is a temporary phase and the closure of the refinery is imminent.
3“Shutdown of Marathon’s Martinez Refinery Prompts Calls for ‘Just Transition ’for Oil Workers.” 2020.
KQED. August 3, 2020. https://www.kqed.org/news/11831607/shutdown-of-marathons-martinez-refinery- prompts-calls-for-just-transition-for-oil-workers.
4 Parks, Virginia, and Ian Baran. 2023. “Fossil Fuel Layoff: The Economic and Employment Effects of a Refinery Closure on Workers in the Bay Area 1 FOSSIL FUEL LAYOFF the Economic and Employment
October 3, 2023
Effects of a Refinery Closure on Workers in the Bay Area.” https://laborcenter.berkeley.edu/wp- content/uploads/2023/04/Fossil-Fuel-Layoff.pdf.
October 3, 2023
Philadelphia, PA as a Case Study
In 2019, the Philadelphia Energy Solutions (PES) refinery permanently closed. The sprawling facility, covering over 1,300 acres of prime real estate in the city, had been open since 1866. A subsequent report that detailed lessons learned from the closure noted:
The victories and missteps associated with the PES refinery closure offer myriad learning opportunities. The inability to anticipate, build capacity, and plan for the refinery’s closure left Philadelphia unprepared for the dynamic, fast-moving situation that ensued after the 2019 explosion. Primarily, the events represented a failure on the part of city leadership.5
The analysis takes care to repeatedly assert that California refinery communities, in particular, should heed the lessons learned from the PES refinery closure. Among many factors, the report notes an industry similarity between the East and West Coasts:
Refinery capacity for the East Coast Petroleum Administration for Defense District (PADD 1) and West Coast (PADD 5) are contracting, while capacity in the Midwest/Gulf Coast is expanding (Figure 3)(EIA n.d.a.). This is largely the result of the PADD 3 economic access to cheap domestic and Canadian crudes, pipeline infrastructure investments, and history of considerable refinery assets along the Gulf Coasts.
5 Simeone, Christina. 2023. “An Unrefined Ending: Lessons Learned from the Creation and Closure of the Philadelphia Energy Solutions Refinery,” March. https://doi.org/10.47923/2023.14968.
October 3, 2023
October 3, 2023
In Philadelphia, leaders were unwilling to plan for a future that did not feature the petroleum industry. The City of Richmond has the opportunity to heed this report’s warning— and, more importantly, to chart a different, more proactive course.
The Outlook of Fuel Retail
As governments regulate markets to combat climate change and reduce carbon emissions, the automotive industry is undergoing a transition from internal combustion engine vehicles to electric ones. This year, 21% of all new cars sold in California have been zero emission vehicles.6 In July, seven major automakers announced their plans to form a new company that will build a North American charging network for electric vehicles, thereby increasing the needed infrastructure to further incentivize the switch for consumers.7 According to one study, the three biggest automotive markets— the United States, the European Union, and China— will be fully electric by 2035.8
Even in scenarios with slower adoptions of EVs, a 2019 study predicts that a significant portion of the fuel retail network in some markets may become unprofitable by 2035: on a rapid adoption scenario of electric vehicles, autonomous vehicles, and new mobility models, up to 80% of the current fuel-retail network could be unprofitable.9
Needless to say, the economic outlook for gas stations is likely to become challenging rather quickly. The electrification shift is expected to result in a gradual decline in demand for gasoline and diesel, which will have a direct and profound impact on the traditional gas station business model. As EV adoption continues to grow, the revenue generated by gas stations from fuel sales is expected to decline steadily, putting significant pressure on their profitability. We can reasonably predict that this sector of retail in Richmond will be accordingly impacted.
6 https://www.gov.ca.gov/2023/04/21/california-surpasses-1-5-million-zevs-goal-two-years-ahead-of- schedule/#:~:text=This%20year%2C%2021%25%20of%20all,future%2C%E2%80%9D%20said%20Gove rnor%20Newsom.
7 Colias, Mike, River Davis, and Ryan Felton. 2023. “Big Automakers Plan Thousands of EV Chargers in $1 Billion U.S. Push.” Wall Street Journal, July 26, 2023, sec. Business. https://www.wsj.com/articles/big- automakers-plan-thousands-of-ev-chargers-in-1-billion-u-s-push-af748d19. 8“ Why the Future Involves E-Mobility | McKinsey.” n.d. Www.mckinsey.com. https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/why-the-automotive-future-is- electric#/.
9 Rubeis, Mirko, Stuart Groves, Tony Portera, and Giuseppe Bonaccorsi. 2020. “Is There a Future for Service Stations?” BCG Global. September 18, 2020. https://www.bcg.com/publications/2019/service- stations-future.
October 3, 2023
Conclusion
We have, in short, continued to hedge our City’s financial future on an increasingly unsafe bet. Necessary changes in the energy sector require careful planning to ensure that the City of Richmond is prepared for scenarios wherein the local petroleum industry contracts. The reliance for a significant portion of Utility Users Tax revenue on a negotiated agreement that expires in the near-term highlights the need for analysis of policy options for ensuring stable, sufficient revenue.
Prudent economic planning would also anticipate extensive site remediation costs and the massive layoffs that would result from the decline of the petroleum industry, but those important factors are beyond the scope of this item. Instead, this item seeks a) clarity on the long-term financial impact of petroleum industry revenue losses over a twenty-year period and b) proposed fiscal tools to begin replacing this revenue loss in a proactive way.
1 https://www.gov.ca.gov/2023/04/21/california-surpasses-1-5-million-zevs-goal-two- years-ahead-of-
schedule/#:~:text=This%20year%2C%2021%25%20of%20all,future%2C%E2%80%9D %20said%20Governor%20Newsom.
1 Colias, Mike, River Davis, and Ryan Felton. 2023. “Big Automakers Plan Thousands of EV Chargers in $1 Billion U.S. Push.” Wall Street Journal, July 26, 2023, sec. Business. https://www.wsj.com/articles/big-automakers-plan-thousands-of-ev-chargers-in-1-billion- u-s-push-af748d19.
1“ Why the Future Involves E-Mobility | McKinsey.” n.d. Www.mckinsey.com. https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/why-the- automotive-future-is-electric#/.
1 Rubeis, Mirko, Stuart Groves, Tony Portera, and Giuseppe Bonaccorsi. 2020. “Is There a Future for Service Stations?” BCG Global. September 18, 2020. https://www.bcg.com/publications/2019/service-stations-future.
DOCUMENTS ATTACHED:
None