City Council Memorandum
TO: HONORABLE MAYOR AND CITY COUNCIL DATE: DECEMBER 19, 2023 FROM: PUBLIC UTILITIES DEPARTMENT WARDS: ALL
SUBJECT: WORKSHOP TO DISCUSS THE GENERAL FUND TRANSFERS FROM PUBLIC UTILITIES DEPARTMENT ISSUES:
To conduct a workshop to discuss the history, background, and issues relating to the General Fund Transfers.
RECOMMENDATIONS:
That the City Council:
Conduct a workshop on the General Fund Transfers;
Direct the City Manager regarding the options relating to the Water General Fund Transfer; and Direct the City Manager regarding the options relating to the Electric General Fund Transfer.
BOARD RECOMMENDATION:
There has been no action or recommendation from the Board of Public Utilities on this item. Because the General Fund Transfer is governed by City Charter Section 2104(f), the authority of setting the amount of the General Fund Transfer charged to the water and electric utilities resides with the City Council.
BACKGROUND:
Charter History
In 1907 voters within the City of Riverside (City) elected to establish a City Charter (Charter) to determine and establish the City organization and operations. The Charter is, in general terms, the locally adopted City constitution establishing specific duties and powers to be held by the City. The Charter provides authority for the City to enact certain legislation over its municipal affairs and not rely solely on the state legislature, though the City is required to abide by many state laws as well as the United States Constitution and federal law.
General Fund Transfer (GFT) regulation has origins dating back to the first Charter in 1907. In Section 172(4) of that Charter, the concept of providing funding for the general fund of the City through a transfer from the public utilities department was established. It stated:
After all expenditures have been made that are required in the first, second and third subdivisions of this section, the profit, if any there be, remaining in the electric fund at the end of the fiscal year, from operation of the plant for such year, may, with consent of both the council and the board of public utilities, be transferred, in whole or in part, into the general fund for the use of said fund.
The 1953 Charter, effective April 12, 1953, and as amended in 1967 introduced Section 1304 to revise the prior Section 172(4) guidance. Section 1304, “Use of Revenue” states:
… each public utility shall be kept separate and apart from all other moneys of the city and shall be used for the purposes and in the order as follows:
Payment of operating and maintenance expenses
Payment of interest on bonded debt
Payment of principal of said debt
Payment for capital expenditures
Payment into the contingency reserve fund, and
The remainder shall be paid into the general fund
At this point in time, the Charter continued to provide for a transfer of funds from public utilities after all specified payments and uses of funds were satisfied which was similar in principle to the provisions of the original 1907 Charter.
The concept of determining an amount to be transferred from the public utilities to the general fund based on a specified percentage was introduced in 1968. Riverside voters approved by majority vote on June 4, 1968, a number of Charter amendments effective July 16, 1968. One of those amendments was to Section 1304(f). The previous language, as stated above, was replaced in full with the following:
f) For the annual payment by each utility into the general fund in twelve (12) equal monthly installments during each fiscal year, an amount equal to 11.5% of the gross operating revenues, exclusive of surcharges, of each specific utility for the last fiscal year ended and reported upon by independent public auditors.
This action of the voters, in essence, provided a specific amount, stated as a percentage, to be transferred annually from each of the City’s public utilities to the general fund of the City.
In 1977, Riverside voters once again to modify the GFT language in the Charter to provide the City Council with the authority to modify the percentage of funds to be transferred to the general fund. Voters approved, by majority vote on November 8, 1977, a Charter amendment to Section 1304(f), per ballot Measure A, to provide that City-owned electric and water utilities may each pay an amount to the City’s general fund which could be less than the current required 11.5% of gross operating revenues. This voter action rescinded the fixed annual payment of 11.5% from each public utility and created the current practice today of providing, in the form of a GFT, an amount not to exceed 11.5% of gross operating revenues of each of the electric and water utilities.
In 2013, as a response to a lawsuit and settlement (see Moreno v. Riverside discussed below), Riverside voters again approved, with a majority vote, the use of a GFT from the water utility and specified how the funds, called proceeds, could be spent. The ballot measure, titled Measure A, was approved on June 4, 2013, and became effective on August 7, 2013. It added Section 1204.1 to the City Charter and continued the transfer of funds from the City water utility to the general fund as previously approved by City voters per the 1907, 1952, 1968 and 1977 ballot measures. Section 1204.1 now reads:
The revenue of the water public utility for each fiscal year shall be kept separate and apart from all other moneys of the City by deposit in the appropriate revenue fund and shall be used for the purposes and in the order set forth in Section 1204 and for the annual payment by the water utility into the general fund in twelve equal monthly installments during each fiscal year, an amount not to exceed 11.5 percent of the gross operating revenues, exclusive of surcharges, of the water utility for the last fiscal year ended and reported upon by independent public auditors. The proceeds shall be used to maintain local general purposes as the City Council may by budget or other appropriation direct such as 9-1-1 response, police patrols/fire protection, children’s after-school and senior/disabled services, and protect supplies of clean drinking water from contamination.
The last ballot measure vote relating to the GFT took place on November 2, 2021. In response to another lawsuit and settlement (Parada et al. v. Riverside), the voters were asked to consider the City’s continuance of “…collecting in electric rates and maintain the voter-approved fund transfer (established 1968) and limited to 11.5% of gross revenue, providing approximately $40,000,000 annually to the City of Riverside’s General Fund not increasing tax or utility rates, until ended by voters.” This 2021 ballot measure (titled Measure C) to approve and ratify the GFT from the electric utility is similar to Measure A approved in 2013 for the water utility. Measure C was approved by a majority vote adding Section 1204.2 to the Charter.
Sec. 1204.2. - Electric Utility Revenue.
The revenue of the electric public utility for each fiscal year shall be kept separate and apart from all other moneys of the City by deposit in the appropriate revenue fund and shall be used for the purposes and in the order set forth in Section 1204 and for the annual payment by the electric utility into the general fund in twelve equal monthly installments during each fiscal year, an amount not to exceed 11.5 percent of the gross operating revenues, exclusive of surcharges, of the electric utility for the last fiscal year ended and reported upon by independent public auditors. The proceeds shall be used to maintain local general purposes as the City Council may by budget or other appropriation direct such as 9-1-1 response, fire, paramedic, police, street repairs, parks, senior services, homelessness, and other general services. (Res. 23739 § 1(Att. A), 2021) Among the rationales for general fund transfers, which are used by nearly every public power utility and many public water utilities in California are that they allow some of the cost of City services that benefit visitors to the City to be funded by the businesses which draw those visitors and they replace revenues a privately owned utility would pay in property and other taxes so that the decision to municipalize utility services does not reduce the City’s ability to fund essential services.
California Propositions affecting the GFT
Statewide propositions beginning with Proposition 13 in 1978 and Proposition 62 in 1986 (which does not apply to charter cities like Riverside) impacted the amount of property taxes which could be charged and established rules for voter approved “special” and “general” taxes. With statewide voter approval of Proposition 218 in 1996 and Proposition 26 in 2010, charges of fees, assessments, and taxes were also limited which have had significant impacts on the GFT’s previously approved by Riverside voters.
The key aspects of each of these propositions are shown in the following table:
Voter Propositions Affecting State and Local Governments* Proposition 218 (1996)
Local Governments must obtain majority voter approval for any new or increased general tax.
Voters may repeal or reduce any local tax, assessment, fee, or charge.
Local governments must put all assessments, and property-related charges and fees to a vote of the people before imposition or increase.
Benefit assessment must be calculated by the benefit received by each parcel of real property.
Local governments prohibited from imposing property-related fees on property owners for services that are available to the public at large (e.g., police and fire services).
Proposition 26 (2010)
Redefined “Tax” to mean any levy, charge or exaction of any kind imposed by a local government, except for seven specifically defined exceptions that are considered fees.
Fees and charges that do not fit one of the seven exceptions must receive voter approval. *Adapted from California Special Districts Association table titled, “Voter Initiatives Restricting Local Revenue” Legal Challenges to the GFT
In 1996, California voters passed Proposition 218, a constitutional amendment requiring taxes or property-related assessments, fees and charges to be approved by ballot measure with a two-thirds majority vote for “special taxes”, and at 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, a majority vote is required for taxes imposed for “general governmental purposes”. In 2006, in the case entitled Bighorn Desert View Water Agency v. Verjil (2006) 39 Cal.4th 205, 214, the California Supreme Court held that Proposition 218 applied to water rates. In 2012, the Moreno v. Riverside case challenged Riverside’s GFT imposed on the water utility. In May 2013, the parties settled the matter with terms including the end of the water utility transfer unless voters reapproved it, and an agreement that the City refund $10M to the water utility. As a result, Measure A was placed on the ballot and approved by a majority of voters who supported continuing the transfer of water utility revenues to the general fund for the purposes specified. On December 19, 2019, a class action lawsuit entitled Simpson v. City of Riverside was filed against the City alleging that the City is overcharging customers for water utility service in violation of Article XIIID, Section 6 of the California Constitution (Proposition 218), on the grounds that the water GFT is unconstitutional notwithstanding its repeated voter approval. The Court issued its ruling on the liability phase on August 17, 2023, finding that the City’s water rates violated Article XIID, Section 6 of the California Constitution because they were set in an amount sufficient to recover the General Fund Transfer. A trial date of April 3, 2024, has been set for the second phase of the trial regarding damages.
In 2010, California voters passed Proposition 26 which provided that certain fees and charges must be approved by voters. In 2018, the City was served with a lawsuit titled Parada et al. v. City of Riverside. The plaintiffs in that lawsuit argued that the electric GFT was an added tax that required voter approval under Proposition 26. They alleged that the City violated Proposition 26 by not securing voter approval for the GFT even though a transfer from the electric utility was approved in Charter amendments in 1977 and 1968. In May 2021, the parties reached a Conditional Settlement Agreement. Pursuant to the Settlement, the City refunded $24 million to electric ratepayers and placed a measure on the November 2021 ballot, titled Measure C, which asked voters to approve the City’s GFT practices as a general tax. On November 2, 2021, City residents voted and approved the ballot Measure C. Prior to that election, a lawsuit was filed by Riversiders Against Increased Taxes, challenging the date of the Measure C election. That lawsuit is currently on appeal.
Current Calculation of the GFT
Each year, the Riverside Public Utilities Finance Division uses the recently closed and audited year-end revenue numbers to calculate the General Fund Transfer amounts from the Electric and Water sales from that closed fiscal year. The calculations are completed and shared with the City’s Finance Department approximately 6 - 9 months after the fiscal year-end.
The calculations are based on actual gross operating revenues with actuals through the end of each fiscal year as defined in Charter Section 1204.1 for the water utility and 1204.2 for the electric utility.
Water Fund
Definition
General Fund Transfer for Fiscal Year 2022/23 from Fiscal Year 2021/22 activity Retail Sales,
(Net of Uncollectibles)
Net of Changes in Billed Utility Accounts Receivables (A/R) and Allowance for Uncollectible A/R from prior year. $ 72,201,111
Plus Other Operating Revenue
551,495
Excluding revenue from Surcharge area Outside City
(1,713,105)
Total Gross Operating Revenue
71,039,502
Multiplied by the General Fund Transfer Rate
11.5%
Total Water fund General Transfer Amount
$ 8,169,500
Electric Fund
Definition
General Fund Transfer for Fiscal Year 2022/23 from Fiscal Year 2021/22 activity Retail Sales,
(Net of Uncollectibles)
Net of Changes in Billed Utility Accounts Receivables (A/R) and Allowance for Uncollectible A/R from prior year. $ 334,737,543
Plus Transmission Revenue
32,245,109
Plus Other Operating Revenue
1,068,016
Total Gross Operating Revenue
368,050,668
Multiplied by the General Fund Transfer Rate
11.5%
Total Electric fund General Transfer Amount
$ 42,325,800
Per City records dating back to Fiscal Year (FY) 1985/86, the actual Water GFT rate was 11.5% of gross operating revenue through the most recent FY. The actual Electric GFT rate ranged from 5.6% in FY 1985/86 to 11.5% for three months in FY 1992/93 and from FY 2009/10 to the present. The increase in FY 2009/10 coincides with significant decreases in other General Fund revenues resulting from the “Great Recession” and aligns with the Riverside Municipal Code (RMC) Section 1204.2 – Electric Utility Revenue which states “The proceeds shall be used to maintain local general purposes as the City Council may by budget or other appropriation direct such as 9-1-1 response, fire, paramedic, police, street repairs, parks, senior services, homelessness and other general services.” DISCUSSION:
What is the General Fund Transfer (GFT)?
The General Fund Transfer (GFT) is the City's annual budgetary transfer from its electric utility and water utility to its general fund for general revenue purposes. The combined General Fund Transfer or GFT for the electric utility and the water utility amounts to $50.5 million to the general fund for fiscal year ended June 2023. The source of authority resides in the City Charter subsections 1204.1 and 1204.2. The voters established the GFT by way of a ballot measure in 1907. Over the past 116 years, voters have approved 6 ballot measures in support of the GFT with the most recent ballot measure approval in 2021.
GFT Use
The City of Riverside provides a range of different services in support of the community. Services provided by the City include, but are not limited to, the following:
City Services
Police
Water
Recreation
Fire
Electricity
Afterschool Programs
Streets
Parking
Senior Services
Parks & Trails
Planning
Festivals & Events
Voting & Civic Engagement
Refuse & Sewer
Library & Museums
311
Community Centers
...and much more
The GFT brings resources that are important to help maintain infrastructure, maintain safety, and improve the economy, quality of life and protect the environment.
GFT Impact on General Fund
The GFT serves as an invaluable and unrestricted revenue source for the City's General Fund. The General Fund’s three largest revenue sources are Sales Tax, Property Tax, and the GFT; these three revenue sources accounted for 66% of the General Fund’s FY 2022/23 revenue. The GFT accounted for 15%-17% of total General Fund revenues over the past five fiscal years. In fiscal year 2022/23, the GFT provided approximately $50.5 million to the General Fund.
GFT Helps to Stabilize General Fund
As the third-largest revenue source, the GFT plays a distinctive role in maintaining the fiscal health and stability of Riverside. Sales and property tax can experience fluctuations and vulnerabilities tied to economic cycle, while the GFT is a dependable funding stream that remains comparatively insulated from external market volatility. Following the Great Recession that spanned a 19-month period from late 2007 to mid-2009, the City’s sales tax revenue took 9 years to regain pre-recession levels, and property tax took 6 years to recover. The decline in Sales and Property Tax revenues following the Great Recession resulted in a total General Fund revenue loss of $160.5 million compared to a scenario in which revenue had remained flat during those years. Despite budget balancing measures taken during those years, the cost of City services continued to increase, further eroding the health of City finances.
Over the past four decades, California municipalities have faced a growing challenge in their ability to raise revenue, largely due to the constraints imposed by Propositions 218 and 26. These voter-approved initiatives, passed in 1996 and 2010, respectively, have significantly restricted local governments' capacity to generate funds through taxes, property-related fees, and assessments on property. Proposition 218 mandates that new taxes and property-related fees be approved by voter majorities and super-majorities, making it more challenging for municipalities to implement revenue-generating measures. Proposition 26 expanded the definition of taxes to include many charges that were previously considered fees, making it harder for local governments to impose and collect certain charges. The combined effect of these propositions has limited the revenue-raising options available to municipalities, leading to increased reliance on a narrower set of revenue sources.
In addition to the challenges posed by Propositions 26 and 218, other State legislation negatively impacted municipal revenues, placing a strain on local budgets. The dissolution of redevelopment agencies in 2011 resulted in the loss of tax increment funds and the redirection of property tax revenues to other local agencies, disrupting planned economic development projects. Changes in the distribution of vehicle license fee revenue, sales tax revenue, and the establishment of programs like the Educational Revenue Augmentation Fund (ERAF) further reshaped the landscape of municipal revenues. These cumulative legislative changes have tested the financial resilience of California municipalities, impacting their budgets, services, and the economic development potential of their communities.
These challenges, alongside slow revenue recovery following the Great Recession and other periods, led to the City facing a structural deficit as its revenue growth failed to keep pace with rising costs. To address this fiscal imbalance, the City took the strategic step of presenting Measure Z, a one-cent sales tax measure, to voters in 2016 to prevent the necessity of reducing essential services. The measure received approval from Riverside voters, providing crucial additional revenue that alleviated the General Fund's strain. This funding allowed the City to achieve a balanced budget, safeguard City services, tackle pressing needs such as street projects, and introduce new initiatives like the Public Safety and Engagement Teams. By FY 2022/23, Measure Z revenue had exceeded $84 million. For FY 2023/24, these funds will be allocated towards covering approximately $52 million in ongoing expenses for vital City services, primarily in the Police and Fire departments, along with other safety programs. The FY 2023/24 allocation also encompasses $12.6 million in issued and anticipated debt obligations and $35.5 million in one-time expenses, including street projects, parks capital projects, and other capital outlays. This funding allocation strategy is intentionally designed to expend accumulated reserves through FY 2027/28, after which spending initiatives will need to be reassessed to ensure that allocations do not exceed the annual revenue collected.
The General Fund’s collective revenue and the stability of its revenue sources has implications for the City's credit rating, its ability to secure loans, and its overall financial stability. A city's credit rating is a measure of its creditworthiness and ability to repay debts. The GFT, as a consistent and substantial revenue source, bolsters the City's ability to meet its financial obligations, such as repaying bonds and loans. If the GFT were lost, the City's credit rating could be downgraded, making it more expensive to borrow money and potentially limiting its capacity to invest in infrastructure and essential services. Additionally, the GFT's removal would challenge the City's borrowing capacity as well as impact its ability to satisfy current obligations. When the GFT is a dependable revenue source, lenders are more willing to provide favorable terms and conditions on loans. Without it, the City would face difficulties in securing loans for necessary projects, infrastructure improvements, and investments in the community. Furthermore, the GFT is intricately linked to the City's overall financial stability. Its loss would necessitate significant budget cuts and could potentially result in the reduction or elimination of essential City services. This, in turn, could have broader economic and social consequences, affecting the quality of life for residents and the City's ability to attract businesses and investment.
General Fund Expenditure Budget
The General Fund budget is comprised of departmental operating budgets; debt service; pension (retirement) costs; operating contributions to the Special Districts Fund and entertainment venues such as the Convention Center, Cheech Marin Center, and The Fox; and a relatively small amount of funding for facilities maintenance. The General Fund also charges about $43 million to other City funds through the cost allocation plan (the allocation of citywide internal support services) and direct charges for services, such as staff costs for federally funded capital projects.
General Fund FY 2023/24 Adopted Budget
Personnel & Retirement
256,744,172
Non-Personnel Operating Costs
77,699,015
Minor Capital/Facilities Maintenance
1,301,613
Debt Service
28,878,510
Operating Contributions
5,453,990
Subtotal
370,077,300
Charges to Others
(42,989,845)
General Fund Budget
327,087,455
Impact of a Total GFT Loss
Any General Fund revenue loss must be absorbed by the City’s sixteen (16) General Fund departments through a reduction of services to the public and internal support services. A loss of the combined electric and water utility GFT, approximately $50.5 million per year, would require significant service reductions provided through the General Fund. Utilizing Measure Z revenues to buffer the loss of the GFT would require the discontinuation of some Measure Z spending initiatives, which may be in the form of service cuts, or capital allocations such as street repairs and parks projects. Furthermore, Measure Z is a temporary funding source set to expire in 2036.
The City has nine (9) internal support departments and seven (7) public-facing departments. A reduction in public-facing departments would result in a reduction in required internal support. Alternatively, budget reductions cannot be confined to internal support departments, as these are foundational to the ongoing operations of public facing departments. In addition, funding for Internal Support Departments is allocated citywide including to enterprise funds such as public utilities; as a result of the allocation, for each $100 budget reduction in an internal service department budget, the General Fund would realize approximately $60 in savings. If a total loss of the GFT were to occur and budget cuts were applied equally to all General Fund departments, that would translate to a budget cut of nearly one-quarter of each City department’s budget, including Police and Fire.
FY 2023/24 General Fund Department Budgets
Public-Facing Departments
Police
$ 100,615,618
Fire
56,634,580
Public Works
17,459,449
Community & Economic Development (CEDD)
15,658,212
Parks & Recreation
11,640,368
Library
5,845,356
Museum
1,590,324
Total Public-Facing Departments
$ 209,443,907
Internal Support Departments
Innovation & Technology
9,332,333
Finance
7,256,678
City Attorney
6,007,508
City Manager
4,922,766
Human Resources
4,393,700
General Services
3,816,498
City Council
1,488,342
City Clerk
1,267,526
Mayor
792,462
Total Internal Support Departments
$ 39,277,813
Total General Fund Departments
$ 248,721,719
Water GFT
The Water GFT provided $8.2 million to the General Fund in FY 2022/23 and is projected to provide approximately $8.6 million in FY 2023/24. On September 19, 2023, with the adoption of the water rate plan, the City Council directed staff to place all future Water General Fund Transfer collections into a reserve account pending the outcome of litigation. As a result, the City will be required to reduce its total expenditure budget by approximately 2.6% in future fiscal years. This budget cut is nearly equivalent to the combined budgets of the City's five smallest departments or the entire Finance or IT department in comparison. If applied to all General Fund departments equally, the budget cut would equate to 3.4% for each department. This would be particularly impactful to departments heavily reliant on personnel, such as the Fire departments, whose personnel budget represents more than 90% of its operating budget, with the balance largely allocated to the maintenance of safety apparatus and staff training. The following chart details the budget reduction per department.
DEPARTMENT
BUDGET
GFT REDUCTION 3.4% (rounded)
Police
$ 100,615,618
($ 3,465,131)
Fire
56,634,580
(1,950,455)
Public Works
17,459,449
(601,291)
CEDD
15,658,212
(539,258)
Parks & Recreation
11,640,368
(400,886)
IT
9,332,333
(321,399)
Finance
7,256,678
(249,915)
City Attorney
6,007,508
(206,894)
Library
5,845,356
(201,310)
City Manager
4,922,766
(169,537)
Human Resources
4,393,700
(151,316)
General Services
3,816,498
(131,437)
Museum
1,590,324
(54,770)
City Council
1,488,342
(51,257)
City Clerk
1,267,526
(43,653)
Mayor
792,462
(27,292)
TOTAL
$ 248,721,720
($ 8,565,800)
Electric GFT
The Electric GFT provided $42.3 million to the General Fund in FY 2022/23 and is projected to provide approximately $44.6 million in FY 2023/24. This is approximately 13% of total General Fund revenues. The loss of this revenue source would be equivalent to eliminating nearly 11 of the City’s smallest departments or, for example only, all the “Quality of Life” departments (Parks, Library, Museum, Public Works) and the Finance department. Any elimination without replacement of the Electric GFT results in a significant reduction of the City’s budget and services to the community. If applied to all General Fund departments equally, the budget cut would equate to 17.9% for each department.
DEPARTMENT
BUDGET
GFT REDUCTION 17.9% (rounded)
Police
$ 100,615,618
($ 18,056,843)
Fire
56,634,580
(10,163,847)
Public Works
17,459,449
(3,133,336)
CEDD
15,658,212
(2,810,079)
Parks & Recreation
11,640,368
(2,089,023)
IT
9,332,333
(1,674,814)
Finance
7,256,678
(1,302,310)
City Attorney
6,007,508
(1,078,129)
Library
5,845,356
(1,049,029)
City Manager
4,922,766
(883,457)
Human Resources
4,393,700
(788,509)
General Services
3,816,498
(684,923)
Museum
1,590,324
(285,405)
City Council
1,488,342
(267,103)
City Clerk
1,267,526
(227,475)
Mayor
792,462
(142,218)
TOTAL
$ 248,721,720
($ 44,636,500)
The combined elimination of the GFT from both the water and electric utility combined (estimated at $53,202,300 for FY 2023/24) is approximately 21% of the budget above or equivalent, for illustrative purposes, to the budget of all general fund departments except for Police, Fire, Public Works and CEDD.
Examination of Alternatives
Legal Considerations
The option to continue the City’s legal defense in the Court of Appeals remains an option for City Council consideration along with the following alternatives.
Ballot Measure
The loss of the Electric GFT would require the City to seek revenue replacement, likely through a sales or parcel tax measure which requires voter approval. The existing Measure Z 1% sales tax is currently producing approximately $84.5 million annually. Using that as a measure, a sales tax measure of at least 0.625% would be required to replace the Electric GFT if the revenue source was eliminated. (Sales taxes must be imposed in increments of 1/8 percent.) Based on revenue income from the recently expired Measure I parcel tax, which was a $17/per parcel tax to support Library services, a parcel tax of at least $600 per property would be required to replace the Electric GFT. Furthermore, the parcel tax would need to be adjusted annually to keep pace with the rising cost of the provision of City services. The lack of such an adjustment would result in future budget deficits and service reductions.
Interim Measure
During the Public Hearing to consider adoption of a new 5-year water rate plan at the September 19, 2023, City Council meeting, a City resident and past General Manager of the Public Utilities department, Mr. Tom Evans, suggested, in public comment, an interim solution while the legal proceedings continued in the Simpson v. City of Riverside case relating to the GFT from the water utility. He suggested that the revenues generated from the GFT rate charged to the water utility customers be kept in the water utility instead of deposited into an escrow account of the general fund. The proceeds of the GFT (approximately $8M) could be used for purposes such as reducing the proposed water rate increase and supporting the declining cash reserve levels of the utility. This proposal could realize temporary financial benefits to the utility but will not solve the issue of mitigating the negative effects of general fund revenue loss and would possibly subject the utility rates to challenges based on Proposition 218. Additionally, since the Charter requires that a transfer “shall” take place each year, it is not in the discretionary authority of the City Council to defer its implementation. The City Council does have the authority instead to reduce the amount of the GFT from the current level of 11.5% to 0.0% or any level in between.
Utility Users’ Tax
In 1970, the City approved Ordinance 3720 – Utility Users Tax Ordinance. This ordinance created a utility users tax (UUT) charge to all retail customers served by telephone, gas, electric and water utilities. It applied to customers that were served by private and municipal-owned utilities. The UUT was implemented on July 8, 1970, for electric and water customers served by Riverside. The initial UUT rate was approved at 5% and later amended to the current rate of 6.5%. The one benefit of considering this alternative is that there is no cap to the amount of UUT which can be charged; however, the ballot measures and voting requirements of Prop. 218 and Prop. 26 now apply. It is a theoretical yet viable replacement option for the current GFT practice; however, since UUT is a tax, it must be approved by the voters. An additional consideration for discussion is that the UUT applies to all water customers whether served by City of Riverside Public Utilities or the Western Municipal Water District (WMWD). Conversely, WMWD customers do not pay the water GFT rate. Because UUT has refund and low-income provisions where the GFT does not, further analysis is required to determine the appropriate rate to be charged to generate the same level of revenues for the general fund. The replacement of revenue losses from the GFT with additional UUT is significant. A replacement of lost revenues from the elimination of the GFT with additional voter approved UUT is estimated to require the existing UUT rates to triple. This would take them to levels significantly higher than those existing in another City and may not be politically viable.
A Balanced Approach
Adopting a “Balanced Approach” to addressing the issue of replacing potential revenue losses from the GFT is an important consideration. The approach would aim to ensure fiscal sustainability of the City while factoring in the municipal service needs of City residents and businesses. The approach could include a mix of various actions to meet the goal. The following are some ideas to consider in a Balanced Approach model.
Identify need and establish a goal and target in financial and functional terms Evaluate available capacity in existing revenue streams Can existing fees be adjusted if below market or cost of service? Can new fees be adopted for services previously funded by the General Fund to establish a “user pays” model? Consider the value of Public-Private Partnership in the delivery of specific services Prioritize initiatives that promote new development (residential, commercial, industrial) and economic growth with job creation.
North Side Specific Plan
Innovation District
Infill and Revitalization
Leverage existing City assets and resources to stimulate local economic activity which generate general fund revenues.
Greenbelt Specific Plan
River District
Regional Open Space
Conduct a comprehensive review of City expenditures and programs to identify areas for potential savings, create internal efficiencies and reduce costs Programmatic reviews
Strategic hiring plan
Overhead reductions where possible
Leverage technology for increased efficiencies
Create Community Engagement process
Revenue Enhancement Taskforce
Hire temporary Information Officer or Initiative Leader to be Liaison throughout community Utilize energy and talents of existing neighborhood groups and City boards/commissions for advisory recommendations City staff, in conjunction with various stakeholders, have already identified many areas of opportunity for revenue enhancement during the “CalPERS Challenge”. Many of these ideas can be used as starting points for this process.
Next Steps
This report is designed to provide background information and history to support a discussion on the options and opportunities that could be considered by the City Council regarding this important issue. Providing adequate funding is critically important to operating an effective municipal government organization. The legal challenges against the GFT raise important public policy issues for consideration such as whether funding for general government purposes should be generated based on the amount of utilities consumed, whether the procedural process for GFT approval was conducted legally, whether the correlation between higher GFT revenues derived from higher utility bills from rate increases or greater consumption is fair and how to best fund the municipal services provided by the City.
In conclusion, one additional consideration for discussion to aid the decision-making process of the City Council is to conduct a study on the impact of all the local taxes charged to residents and businesses in Riverside. All tax revenues to fund almost all of the City’s general operations are generated from residents, businesses, and visitors of the City of Riverside through property, sales, transient occupancy, and utility users’ taxes in addition to the GFT. Studying, through an independent economic evaluation, the combined impacts of potential increased taxes and fees to replace the GFT in conjunction with elimination of existing GFT charges to utility ratepayers can help to ensure all decisions to be made by the City Council are equitable, and do not have unintended consequences to specific customer classes. City staff from all departments could support the independent analysis with data based on the scope and purpose set by the City Council to provide important supporting information for the decisions yet to be made.
STRATEGIC PLAN ALIGNMENT:
The report aligns with the following of the City’s Cross-Cutting Threads as described below:
Community Trust – The report and discussion supports building community trust by conducting transparent public discussions of the current and future issues with the GFT.
Equity – The report and discussion provide an open forum for all City residents and stakeholders to participate in the public policy discussion.
Fiscal Responsibility – The important funding provided by the GFT supports the City general fund activities and discussion about the strategy to properly fund City services is critically important to the financial stability of the City.
FISCAL IMPACT:
There is no fiscal impact with the workshop discussion. Any direction provided to the City Manager for changes to the General Fund Transfer rate or related matters would necessitate additional analysis and reporting for the specific fiscal impact of the directive(s).
Prepared by: Todd M. Corbin, Utilities General Manager
Certified as to
availability of funds: Kristie Thomas, Finance Director/Assistant Chief Financial Officer Approved by: Rafael Guzman, Assistant City Manager Approved as to form: Phaedra A. Norton, City Attorney
Attachment:
Presentation
Excluding one-time American Rescue Plan Act funds, as well as accounting entries that reflect changes in financial positions or reclassifications of existing balances (e.g., the unrealized gain on investments recorded to adjust the investment portfolio to current market value).
Workshop to Discuss the General Fund Transfers from Public Utilities Department