CITY OF SAN MATEO
CITY OF SAN MATEO
Agenda Report
City Hall
330 W. 20th Avenue
San Mateo CA 94403
www.cityofsanmateo.org
Agenda Number: 2 Section Name: STUDY SESSION Account Number: 10-2021 File ID: 25-10253 TO: City Council
FROM: Alex Khojikian, City Manager
PREPARED BY: Finance Department
MEETING DATE: August 18, 2025
SUBJECT:
Revenue Enhancement Options — Informational
RECOMMENDATION:
Consider General Fund revenue enhancement options, many of which will require a ballot measure, and provide staff with direction on which option(s) to move forward for additional review.
BACKGROUND:
At the June 16 meeting to adopt the FY 25-26 Citywide budget, the City Council adopted a General Fund budget that anticipated a budget deficit of $11.9 million. This was a decrease from the originally proposed budget deficit of $15.2 million, and less than the currently estimated deficit of $13.9 million. City staff has revised its estimated budget deficit since the adoption of the budget because the State’s adopted budget only included about 70 percent of the total Vehicle License Fee (VLF) backfill owed to the City in FY 25-26. Due to this estimated budget deficit and the anticipated budget deficits projected over the next 10 years as part of the General Fund 10-year forecast, the City has implemented a Fiscal Sustainability Plan. As part of this plan, staff continues to review opportunities to reduce general fund expenditures, improve cost recovery and cost allocation, pursue grant opportunities, and strategize on Citywide economic development. Another key component of this plan is to review revenue enhancement options to both bring in new funding to offset the expected structural operating deficit of $5 -$7 million per year and find funding for significant unfunded capital improvement projects.
Transactions and Use Tax
The City can add a transactions and use tax, also known as a district or local add-on sales tax, on top of the regular sales tax. A transactions and use tax applies to merchandise that is delivered within a jurisdiction and does not apply to grocery items or prescriptions medicines. San Mateo voters approved Measure S, a transactions and use tax, in November 2015, which extended Measure L, a 1/4 cent transactions and use tax. Since the passage of Measure RR in November 2020 to support Caltrain operations, the sales tax rate in the City of San Mateo has been 9.625 percent. The State of California imposes a limit of two (2) percent above the statewide base sales tax rate, thus the City has 1/4 cent of capacity left before reaching the limit. If another entity places a sales tax measure on the ballot before the City uses its cap, the City may no longer have the option to add a 1/4 cent sales tax for local funding. While it may be possible for a local 1/4 cent sales tax to proceed along with the regional transportation tax measure under the current wording of proposed Senate Bill 63, that will depend on the final bill language if and when it passes the legislature and is signed into law. In any event, City staff will continue to review the legal ramifications of the City proposing a sales tax measure at the same time as another entity in the County.
Historically speaking, sales tax measures have a high likelihood of passing. Of the 512 transactions and use tax ballot tax measures from California cities and counties between 2002-2024, that were structured as general taxes and were new or increased the sales tax rate, 402 passed and 110 failed, a pass rate of over 79 percent. If San Mateo voters were to
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pass a revenue ballot measure for an additional 1/4 cent transactions and use tax, the impact would be equivalent to Measure S. Measure S generated approximately $6.7 million in FY 24-25 and is projected to generate $6.8 million in 2025-26.
Parcel Tax
Pursuant to Article XI §5 of the California Constitution, a special non-ad valorem (non-value based) tax can be levied on parcels of property generally based on either a flat-rate per parcel or a variable rate depending on the size, use and/or number of units on a parcel. A parcel tax cannot be based on the value of real property. Parcel taxes are typically used for special purposes or new facilities and can be levied on all those who receive that service or have access to that facility. Parcel taxes are considered special taxes and require a 2/3 voter approval. Given the 2/3 voter threshold, parcel taxes are not as common as other locally imposed taxes.
Since 2008, 20 non-school parcel taxes appeared on the ballot in Santa Clara and San Mateo counties. 80 percent of the measures passed, 16 out of 20, but this does not necessarily indicate success for San Mateo based on the small data set. In San Mateo County, most of the City’s that passed a parcel tax were smaller cities with a very specific purpose such as libraries or Police and Fire. Given the need to fund ongoing operating revenues and unfunded capital needs in San Mateo, City staff asked Urban Futures Inc. (UFI), our Municipal Advisor, to evaluate raising either $7 or $14 million in parcel taxes. They developed three different types of parcel taxes to reach each funding target and determined that a single-family residence would pay between $159 and $484 per parcel based on the scenario. The analysis for these scenarios is summarized in Attachment A. In general, this level of parcel tax is more than other local jurisdictions the size of San Mateo that have passed.
Utility Users Tax
Also pursuant to Article XI §5 of the California Constitution, a Utility Users Tax (UUT) may be imposed by a city on the consumption of utility services, including (but not limited to) electricity, gas, water, sewer, telephone (including cell phone and long distance), sanitation, and cable television. The tax would be levied by the City, collected by each utility as a part of its regular billing processes, and remitted to the City. As an approximation of the potential revenue impact of a UUT, Finance Department staff analyzed utility consumption metrics from the utility providers and applied a UUT rate of 5 percent for natural gas and electricity, and 4 percent for telecommunication and cable television services, which is the rate in place in the city of Redwood City. Based on this previous analysis on utility consumption by the San Mateo community between April 2020 through March 2021, passage of a UUT ballot measure would generate approximately $5.9 million in UUT revenues per year. If the City exempted public agencies and PG&E customers enrolled in the California Alternate Rates for Energy (CARE), the additional UUT would be approximately $5.4 million.
UUT is often disfavored because it burdens essential services needed by every household. In addition, UUT does not fare well at the ballot box in California. Of the 87 UUT ballot measures that were structured as a general tax for a new UUT from 2002 – 2024, 28 passed, and 59 failed, a 32 percent pass rate.
Benefit Assessment
A benefit assessment is another revenue generating option that levies a special assessment or charge on real property to fund either a specific public improvement or an expanded/new public service benefiting those properties assessed. This type of revenue enhancement is not designed to fund existing operating costs. Benefit assessments are often associated with an assessment district in which a fixed area receives the benefit of the assessment such as a lighting or landscaping assessment district or a property and business improvement district. A special assessment is approved through the Proposition 218 process and is subject to a ballot vote of those impacted by the assessment. An Engineer’s Report is typically needed to determine the amount of the assessment and the subject properties.
Since a special assessment is typically for new or expanded services or a new public improvement, it may not be the most suitable tool for addressing the City’s current operating deficit. At this time, staff has not developed a recommended type of assessment or estimated value to be raised through the assessment. However, it remains a viable revenue enhancement option to keep in mind within the City’s broader list of strategies and could be appropriate for later financing needs, especially since the Proposition 218 process provides more flexibility and does not need to be approved
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by the voters at a general election.
General Obligation Bond
Another specific type of revenue enhancement that the City could pursue is a General Obligation (GO) bond. A GO bond requires 2/3 voter approval and once approved authorizes the City to sell bonds based on a levy or tax on real and personal property within the City limits. A GO bond is backed by the City’s General Fund and the credit of the City. For a GO bond, the voters approve a maximum bond issuance amount and the use of the bond proceeds, but not a specific tax rate or annual payment. Revenues from a GO bond can only be used for approved infrastructure improvements and not for operating expenses. Thus, this revenue source is appropriate for addressing the City’s unfunded capital improvement needs.
The City’s municipal advisor, UFI, analyzed three scenarios for potential GO bond issuances. In each scenario they developed what the tax rate per $100,000 of assessed value would be for a parcel, based on an estimated total amount of bond proceeds being approved. Table 1 outlines the estimated tax rates and bond proceeds.
Table 1
As shown, property owners would pay approximately $30 per $100,000 of assessed valuation on their property per year if the City got approval to bond $325 million, close to the amount currently estimated in unfunded infrastructure needs.
Revenue Measure Ad Hoc Committee
City staff reviewed these options with the Revenue Measure Ad Hoc Committee at a meeting on August 6. The committee posed questions on some of the revenue enhancement options and ultimately agreed with staff’s recommendation. First, to study taking a 1/4 cent transactions and use tax to San Mateo voters in 2026 and second to study interest within the community for a General Obligation Bond.
Next Steps
Based on City Council feedback on the revenue enhancement options, City staff will work with a polling consultant to study interest in the proposed revenue measures. Once the polling is completed, City staff will return to the City Council with a summary of the results, most likely in November.
BUDGET IMPACT:
To best address the anticipated ongoing deficit of $5 - $7 million, to maintain essential services and to provide for capital improvement funding above the current $25 million set aside in the Capital Investment Reserve, this revenue enhancement study session considered the following tax revenues, and the potential additional revenue that could be generated:
Transactions and Use Tax: $6.8 million (operating)
Parcel Tax: $7-14 million (operating and capital)
Utility Users Tax: $5.4 million (operating)
General Obligation Bond: $162 - $325 million in bond proceeds (capital)
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ENVIRONMENTAL DETERMINATION:
This study session is not a project subject to CEQA, because it is an organizational or administrative activity that will not result in direct or indirect physical changes in the environment. (CEQA Guidelines Section 15378(b)(5).)
NOTICE PROVIDED
All meeting noticing requirements were met.
ATTACHMENTS
Att 1 – Parcel Tax Scenarios
STAFF CONTACT
Abby Veeser, Deputy Director of Finance
[email protected]
(650) 522-7102