Agenda Item Number: __8___
CITY OF SEBASTOPOL
CITY COUNCIL
AGEND ITEM
Meeting Date: May 16, 2023
To: Honorable Mayor and City Councilmembers
From: Ana Kwong – Administrative Services Director
Subject: Fiscal Sustainability Study
Recommendation: That the City Council Receive the Report from NHA of Fiscal Sustainability Study Funding: Currently Budgeted: ___X____ Yes _______ No _____ N/A General Fund Cost: N/A | Water Fund Cost: N/A | Sewer Fund Cost: N/A Account Code/Costs authorized in City Approved Budget (if applicable) ____AK_____ (verified by Administrative Services Department INTRODUCTION:
The item tonight is to present to the City Council and community a presentation from NHA on Fiscal Sustainability Study.
BACKGROUND:
The City of Sebastopol (City) hired NHA Advisors, LLC (NHA) to help evaluate the City’s current financial position, including to identify current and future financial challenges and discuss potential strategies to address these financial challenges. Over the last five years, the City has maintained unassigned reserves above its minimum target (15% - 20% of annual operating expenditures); however, these reserves have been bolstered by one-time funds that are not expected to recur in the future. As a result of one-time funds likely disappearing and operating expenditures projected to outpace operating revenues in the future, the City’s $0.9 million structural deficit in FY 2022-23 is projected to widen to $2.6 million in FY 2023-24 and increase up to $3.0 million in FY 2028-29. Unassigned reserves are projected to be depleted in FY 2024-25 based on the City’s current General Fund forecast. The Fiscal Sustainability Report (Attachment A) includes detailed information related to various revenue enhancements, as well as cost management strategies (specifically to address rapidly rising pension costs) that the City can consider in an effort to address the structural deficit and enhance long-term financial sustainability and resiliency.
NHA met with the City’s Budget Committee in Fall 2022 to discuss the scope, objectives, and timing for delivery of the Fiscal Sustainability Report. City staff and NHA collaborated to review and analyze the City’s financial data, including the City’s General Fund forecast model, FY 2021-22 audited financial statements, FY 2022-23 budget (adopted and amended), and draft FY 2023-24 budget prior to any proposed reductions. A first draft of the Fiscal Sustainability Report was presented to the Budget Committee in a public meeting on April 5, 2023. Following this Budget Committee meeting, NHA revised the Fiscal Sustainability Report to reflect adjustments to the City’s FY 2022-23 budget and draft FY 2023-24 budget, as well as comments from the Budget Committee and City staff.
DISCUSSION:
5-Year General Fund History: The City’s unassigned reserves have been decreasing over the past few years due to a structural deficit. The City’s unassigned reserve balance decreased 39% from FYE 2019 ($5.0 million) to FYE 2022 ($3.1 million), despite receiving approximately $3.0 million in one-time funds during this same period. The City does not expect to receive these one-time funds in the future. Without one-time funds over the past few years, there would Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
Agenda Item Number: __8___
have been a significant risk that the City’s unassigned reserves would become depleted. The following chart provides a graphical depiction of revenue, expenditures, and unassigned reserve levels over the past five years.
General Fund Forecast: Based on the City’s General Fund forecast (visually depicted at the top of the next slide), which was recently revised to reflect an adjusted FY 2022-23 budget and the draft FY 2023-24 budget, the City’s structural deficit is projected to widen from $0.9 million in FY 2022-23 to $2.6 million in FY 2023-24, and up to $3.0 million in FY 2028-29. These projected deficitswould cause reservesto be depleted in FY 2024-25. Asthe Fiscal Sustainability Report shows in Section 2, the City would need approximately an additional $2 million to $3 million annually to maintain the minimum unassigned reservestarget of 15% of annual operating expenditures. Details on the key revenue and expense growth assumptions used in the forecast can be found in Section 2 of the Fiscal Sustainability Report.
43.4% 56.5% 32.7% 22.9% 27.6%
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
FY 2017-18 FY 2018-19 FY 2019-20 FY 2020-21 FY 2021-22
Millions
General Fund Revenues, Expenditures, and Unassigned Fund Balance FY 2017-18 through FY 2021-22
Unassigned Reserves Balance
Total Resources Available:
(Revenues & Transfers In)
Total Resources Used:
(Departmental, Other Expenditures & Transfers Out)
Policy Reserve Level (15%)
Includes one-time funds
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
Agenda Item Number: __8___
CalPERS Pension Costs: One of the fastest growing expenses and largest debts of the City isthe City’s CalPERS Unfunded Accrued Liability (UAL). A UAL occurs when the current pension plan assets are not projected to be sufficient to pay total pension costs in future years. The City’s UAL is not repaid all at once but amortized over time with the City paying down a portion each year (principal and 6.80% interest). The City’s UAL balance nearly doubled from $7.9 million at FYE 2014 to $14.7 million at FYE 2020 and is currently estimated to increase to $16.9 million at FYE 2023, due to CalPERS’s investments underperforming and other CalPERS assumptions changing over the years. As a result of recent underperformance, the City’s UAL
payments are projected to peak at
$1.9 million in FY 2031-32, which is
nearly 50% higher than the $1.3
million UAL payment paid by the City
in FY 2022-23, and 155% higher than
what was paid on this debt just five
years ago. The recent fluctuations in
the UAL debt and corresponding
payments to amortize the debt can
be seen in the chart to the right.
16.5% 3.1%
-16.3%
-28.4%
-41.0%
-55.4%
-71.6%
($12.0)
($10.0)
($8.0)
($6.0)
($4.0)
($2.0)
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
$16.0
FY 2022-23 FY 2023-24 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 Millions
General Fund Revenues, Expenditures, and Unassigned Fund Balance FY 2022-23 through FY 2028-29
Unassigned Reserves Balance
Total Resources Available:
(Revenues & Transfers In)
Total Resources Used:
(Departmental, Other Expenditures & Transfers Out)
Policy Reserve Level (15%)
$0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
$1.6
$1.8
$2.0 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 Millions 2023:
$16.9M
2022:
$15.8M
2021:
$10.5M
2020:
$14.7M
UAL
Balance
(FYE):
Returns: 4.7% 21.3% -7.5% 3.35% (est.)
UAL Payments (6/30/2021
Actuarial Valuation)
New UAL Payments from
-7.5% FY 2021-22 Returns
Historical UAL
Payments
New UAL Payments from
Hypothetical 3.35% FY
2022-23 Returns
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
Agenda Item Number: __8___
The City has taken prudent efforts to get ahead of rising pension costs, including setting aside funds in a pension reserve, which has a current balance of approximately $2.8 million. One of the recommendations in the Fiscal Sustainability Report is to transfer these funds to a Section 115 Trust, which would ensure the funds can only be used for pension expenses. The Section 115 Trust also enablesthe City to invest the fundsin a variety of investment vehicles, which would potentially earn more in
interest compared to the restricted
investments allowed in General Fund
reserves. In addition to the benefit of
increased investment potential, the
Section 115 Trust can be used to
“smooth out” higher UAL payments in
the future by withdrawing funds from
the Section 115 Trust to supplement
payments from the General Fund.
This stability will help enhance budget
predictability and future financial
resiliency and it’s one of the most
common strategies being used by
other cities in the state.
Setting up a Section 115 Trust can
take one to three months and consists
of (i) evaluating Section 115 Trust
providers, (ii) selecting the provider
and working with its investment
advisor to determine the preferred
investment portfolio, (iii) adopting the necessary documentation at a City Council meeting, and (iv) establishing and funding the Section 115 Trust.
Capital Improvement Project Funding: The City’s latest Capital Improvement Program (CIP) in its draft FY 2023-24 Budget identifies $30.8 million of capital expenditures for FY 2022-23 through FY 2027-28. About $27.3 million of the capital expenditures already have funding sources, leaving only $3.5 million unfunded. Note that this CIP does not include larger potential facility projects such as a fire station, library, City hall, or other larger facility. Capital funding options, including cash, various debt options, and grants are discussed in more detail in Section 3c of the Fiscal Sustainability Report. Given the current structural deficit, any larger capital projects would likely need to be funded from new revenue measures as opposed to being paid from current General Fund revenues.
FY 2022-23 FY 2023-24 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 Total Project Category Expenditures
Bikes, Pedestrians & Safety $48,500 $1,601,000 $3,411,000 $9,801,000 $0 $0 $14,861,500 Transition Plan ADA Projects $35,000 $338,500 $0 $0 $0 $0 $373,500 Housing Projects $0 $10,500 $402,000 $0 $0 $0 $412,500
Parks Projects $256,500 $779,000 $445,000 $0 $0 $0 $1,480,500 Paving Projects $472,400 $1,470,000 $2,577,500 $1,255,000 $0 $0 $5,774,900 Sewer/Wastewater Projects $79,000 $1,730,500 $581,500 $0 $0 $0 $2,391,000 Stormwater Projects $52,000 $202,000 $1,366,500 $400,000 $0 $0 $2,020,500 Water Projects $392,000 $635,000 $808,500 $1,642,000 $0 $0 $3,477,500 Arts Projects $6,500 $50,500 $0 $0 $0 $0 $57,000
Total $1,341,900 $6,817,000 $9,592,000 $13,098,000 $0 $0 $30,848,900 Unfunded $0 $205,500 $1,686,500 $1,655,000 $0 $0 $3,547,000 $-
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
$1.6
$1.8
$2.0 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 Millions Deposits to Trust
Projected UAL Payments (CalPERS Pension Outlook Tool)*
Net Payments (Incl. Deposits & Withdrawals)
*Assumes FY 2021-22 returns of -7.5%, FY 2022-23 returns of 3.35%, and 6.80% returns from FY 2023-24 onward.
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
Agenda Item Number: __8___
Future Considerations: Over the years, the City has been diligent about implementing various studies to help make policy and financial decisions (staffing study, fire department study, fee study, utility rate study, etc.). Despite these efforts, and given the structural deficit faced by the City, the City must evaluate additional strategies to close the funding gap through revenue enhancements and/or cost containment strategies.
Several revenue enhancement opportunities are discussed in the Fiscal Sustainability Report, including the following:
▪ Sales & Use Tax Increase
o City has capacity for 1% in new taxes (this capacity is shared with potential tax increases the County may implement)
o Every ¼ cent increase could generate an additional $700,000 per year o The City currently hasthe second highestsales & use tax rate in Sonoma County (9.25%), behind Cotati and Petaluma (9.50%)
▪ Utility Users Tax (UUT) Increase
o There was strong support (83.4% voted yes) for the City’s Measure N in November 2022, which maintained the City’s 3.75% UUT and removed the tax’s sunset clause o Santa Rosa has a UUT of 5.00%
o Increasing the City’s UUT from 3.75% to 5.00% could generate an additional $230,000 per year ▪ Transient Occupancy Tax (TOT) Increase
o The City has the second highest TOT in Sonoma County (12%), behind Healdsburg (14%) o Increasing the City’s TOT from 12% to 14% could generate an additional $80,000 per year ▪ Potential Parcel Tax (June 2024)
o A parcel tax is a special tax on a parcel/unit of real property o Parcel taxes may be imposed for any municipal purpose o Parcel taxes require two-thirds voter approval
▪ Local Cannabis Tax
o Five Sonoma County cities have a cannabis tax Voluntary Taxes Transaction and Use Tax
Business/Franchise Tax
Transient Occupancy Tax
Utility Users Tax
Studies
Fire Department Feasibility Study
(Completed 2023)
City-Wide Staffing Study (Completed 2023)
Fee Study (Completed 2020)
Utility Rate Study (Currently in progress;
previously completed in 2019)
Fiscal Sustainability Assessment (in
progress)
Actions for the Future
Potential Sales Tax Increase
Potential Utility User Tax Increase
Potential Transient Occupancy Tax
Increase
Potential Parcel Tax (June 2024)?*
Cost Allocation Study (Most recently
completed in 2000)
Cannabis Tax Feasibility Study
*Use of tax revenues to be determined
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
Agenda Item Number: __8___
o Annual tax revenue varies from $150,000 for Sonoma up to $1.8 million for Santa Rosa While the City can evaluate some or all these revenue measures, a hypothetical example of how the City can use these revenues measure to close a $2.5 million (approximate) funding gap is included in Section 4 of the attached Fiscal Sustainability Report. This hypothetical example includes a sales & use tax increase of 0.50%, a UUT increase of 1.25%, a TOT increase of 2.00%, and a parcel tax that generates $790,000 per year.
Final Takeaways: Without action or significant growth in revenues, the City’s projected structural financial deficit will reduce and potentially eliminate its unassigned General Fund reserves in the next few years. The City can take action using cost containment strategies and revenue enhancements. Transferring the City’s existing pension reserves to a Section 115 Trust is a cost containment strategy that could help enhance budget predictability and future financial resiliency, as well as generate net savings during the projected peak UAL payments in the next several years. Revenue enhancements, such as an increase to the City’s sales & use tax or a new parcel tax can add relatively large amounts of additional annual revenue.
PUBLIC COMMENT:
The City Council anticipates receiving public comment from interested parties following the publication and distribution of this staff report. Such comments will be provided to the City Council as supplemental materials at the meeting. In addition, public comments may be offered during the public hearing.
GOALS:
Goal 1: Maintain the long term financial stability and sustainability of the City of Sebastopol and Operate City government in a fiscally responsible and responsive manner
1.1.1 Create City Policy to Maintain Operating Reserves and Create Emergency Reserves which complies with the City’s Strategic Plan, provides for optimal staffing levels, minimizes service level reductions, and develops a plan for the General Fund to obtain long-term financial stability Goal 2: Maintain, Improve and Invest in the City’s infrastructure (Water, Sewer, Streets, Circulation, Park, Storm Drains and Public Facilities).
ENVIRONMENTAL REVIEW
Not applicable for this item.
PUBLIC NOTICE:
This item was noticed in accordance with the Ralph M. Brown Act and was available for public viewing and review at least 72 hours prior to the scheduled meeting date.
FISCAL IMPACT:
None by receipt of this report, but impact if any of these strategies are executed in the future would require outside consultant for ballot measures support, polling research and/or survey, and guidance on ballot measure strategies.
RECOMMENDATION:
That the City Council receive this report and provides guidance on next steps to pursue and evaluate. It is also requested that City Council provide direction for staff to begin the process of setting up a Section 115 Trust to address rising pension costs. While there isn’t any formal approval sought tonight for the 115 Trust, direction to continue moving forward with this strategy will enable staff and its team to continue evaluating the best provider and strategy for this trust, and present those findings to Council at a later date.
ATTACHMENTS:
Fiscal Sustainability Report (presentation). Pages with “star” has been identified to be key slides which consultant will focus their presentation on.
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
CITY OF SEBASTOPOL
FISCAL SUSTAINABILITY DISCUSSION
MAY 16, 2023
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
2 Project Objectives Assess current fiscal condition of City Understand key aspects of financial forecast Bonding options/feasibility for new projects Identify potential financial challenges and risks
Rising pension costs Inflation, labor, capital needs Legislative changes Discuss potential strategies to improve financial position Pension cost management Revenue enhancements
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
3 Table of Contents1. Key Aspects of Fiscal Sustainability2. Financial Snapshot3. Headwinds for City’s Financial Health A. Rising Pension Costs
B. StaffingC. Capital Improvement Project FundingD. Legislative/Political
4. Additional Revenue Sources5. Final Takeaways
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
4 Executive Summary City has maintained minimum unassigned reserve targets over last 5 years Over 22% of annual budget; unassigned reserve target of 15%-20% Reserves have been bolstered by one-time revenues (not recurring sustainable revenues) $0.9M FY 2022-23 structural deficit projected to widen to $2.6M in FY 2023-24, increasing to $3.0M by FY 2028-29 Unassigned reserves will be depleted by FY 2024-25 (based on the City’s current forecast) City can consider revenue enhancement and/or cost management strategies to balance budget and enhance resiliency to future economic shocks Pension Cost Management: Section 115 Trust to mitigate pension costs increases/volatility Revenue enhancement considerations: Sales Tax, TOT, UUT, Cannabis Tax, Parcel Tax Voter approved bonding options for capital: General Obligation, Parcel Tax Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
1. KEY ASPECTS OF FISCAL SUSTAINABILITY
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
6 Are City’s essential service levels at risk if there is an economic downturn or other “Black Swan” events (i.e., COVID, natural disaster)? Delivery of Essential Services
Economic environment; Reserve levels (At/above policy levels created through comprehensive evaluation of areas of specific risk); Revenue and expense historical trends and projections; Budgetary performance; Budgetary flexibility; Debt burden; Policies & practices Financial Health
Pay-as-you-go vs. Debt; Reserve levels; Bonding Capacity; Are critical assets being maintained to prevent potential catastrophic events and/or essential service disruptions? Capital Funding
Sustainability under financial and/or operational duress; 5-10-year forecasting; How would the City fare assuming a near-term recession or a catastrophic event? Resiliency
NHA’s Fiscal Sustainability Criteria
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
2. FINANCIAL SNAPSHOT
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
8 2022-23 General Fund Budget Revenues $12.1M Total Budget $9.3M (77%) derived from
taxes
Property Tax and Sales/Use
Taxes are the City’s largest revenue categories
$0.7M (6%) increase in total
revenues (including transfers
in) compared to FY 2021-22
Notable increase to
Intergovernmental revenue, due to one-time Covid-19 relief funds in FY 2022-23 Source: City of Sebastopol General Fund/Transaction & Use Fund History and Forecast Property Taxes
26.6%
Sales & Use Tax
20.4%
Measure T - 1/4 cent
6.7% Measure Y - 1/2 cent
13.4%
Utility
User
Tax
6.0%
Transient
Occupancy Tax
3.7% Franchise Fees
3.0%
Licenses & Permits
5.4%
Fines & Forfeitures
0.2%
Interest & Rents
Intergovernmental 0.6%
7.7% Charges for Current
Services
1.1%
Community Center
Fees
0.5%
Miscellaneous/Other
Income
3.8%
Transfers In:
0.8%
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
9 2022-23 General Fund Budget Expenditures $13.0M Expenditures $7.3M (56%) Public Safety
$2.0M (18%) increase in
total expenditures
(including transfers out) compared to FY 2021-22 Notable increases in public safety and public works
expenditures
Source: City of Sebastopol General Fund/Transaction & Use Fund History and Forecast City Council
3.7%
City Manager
1.8%
City Attorney
2.3%
City Clerk
3.1%
Finance
2.6%
Planning
4.6%
Building
1.4%
Engineering / Storm
Water
2.6% Fire
10.6%
Police
45.7%
Public Works
11.3%
Community Center
4.9%
Non Departmental
2.2%
Debt Service
2.0%
Total Transfers Out
1.2%
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
10 43.4% 56.5% 32.7% 22.9% 27.6%
$0.0$2.0
$4.0$6.0$8.0
$10.0$12.0$14.0
FY 2017-18 FY 2018-19 FY 2019-20 FY 2020-21 FY 2021-22
Millions
Unassigned Reserves BalanceTotal Resources Available:(Revenues & Transfers In)Total Resources Used:(Departmental, Other Expenditures & Transfers Out)Policy Reserve Level (15%) General Fund Revenues, Expenses, & Fund Balance5-Year History City has been operating with a
structural deficit for several years
Unassigned reserves have decreased by
39% (from $5.0M to $3.1M) over last three years, despite $3.0M in one-time funds Without one-time funds, reserves would have been depleted
One-time funds:
$900K of one-time ARPA funds FY 2021-22 City also received one-time funds FY 2019- 20 ($1.6M; State flood-related money + insurance reimbursement) and FY 2020-21 ($0.5M; County homeless initiatives + CARES Act) Source: City of Sebastopol General Fund/Transaction & Use Fund History and Forecast $3.9M
$5.0M
$4.0M
$2.7M $3.1M
Includes one-time
funds
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
11 16.5% 3.1%
-16.3%
-28.4%
-41.0%
-55.4%
-71.6%
($12.0)($10.0)
($8.0)($6.0)($4.0)($2.0)
$0.0$2.0$4.0$6.0$8.0
$10.0$12.0$14.0$16.0
FY 2022-23 FY 2023-24 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 Millions
Unassigned Reserves Balance Total Resources Available:
(Revenues & Transfers In)
Total Resources Used:(Departmental, Other Expenditures & Transfers Out) Policy Reserve Level (15%)
General Fund Budget + ProjectionResources Used projected to exceed Resources Available FY 2022-23 budget
deficit and
projected FY 2023-24 deficit decrease reserve levels to 3.1% by FYE 2024 Revenue decrease
for FY 2023-24 due to one-time funds (ARPA + donation) in FY 2022-23 Projected deficits
impact unassigned reserve balance ($11.3M) by FYE 2029 Source: City of Sebastopol General Fund/Transaction & Use Fund History and Forecast $2.1M $0.4M
($2.2M)
($3.9M)
($5.8M)
($8.3M)
($11.3M)
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
12 General Fund Budget + ProjectionKey Forecast Assumptions Forecasted revenues & expenses are based off
the FY 2023-24 proposed budget data
Projected deficits
exaggerated by inflationary expenditure assumptions compared to conservative revenue growth rates Annual Growth Rate (2025 - 2029)
Revenues:
Property Tax 2.00%
Sales & Use Tax 2.00%Measure T - 1/4 cent 2.00%Measure Y - 1/2 cent 2.00%Utility User Tax 1.50% Expenses:
Salaries 3.00%CalPERS Rates 7.70% - 25.70% (depending on plan)Health Insurance 5.00% - 12.00% (depending on provider)Materials & Supplies 5.00% Source: City of Sebastopol General Fund/Transaction & Use Fund History and Forecast Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
13 16.5% 3.1%
-16.3%
-28.4%
-41.0%
-55.4%
-71.6%
($12.0)($10.0)
($8.0)($6.0)($4.0)($2.0)
$0.0$2.0$4.0$6.0$8.0
$10.0$12.0$14.0$16.0
FY 2022-23 FY 2023-24 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 Millions
Unassigned Reserves Balance Total Resources Available:
(Revenues & Transfers In)
Total Resources Used:(Departmental, Other Expenditures & Transfers Out) Policy Reserve Level (15%)
General Fund Budget + Projection
Additional Revenue and/or Cost Containment Required to Maintain Reserves New Revenue of
$3.1M required by FY 2028-29
to maintain 15% reserve target
Strong Property
Tax and Sales Tax Revenue Growth (5% annually) would generate $1.4M/year by FY 2028-29 Source: City of Sebastopol General Fund/Transaction & Use Fund History and Forecast Additional Revenue to Maintain 15% Reserve Policy
$1.6M $2.7M $1.7M $2.0M $2.6M $3.1M
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
14 Credit Rating ScorecardEstimated “AA” Category GO Rating Using S&P Scorecard Strengths:
Economy: Median Household Income 127% of
national
Liquidity: $11.2M in governmental
cash/investments
Budgetary Flexibility***: $8.1M in General Fund
balance (74% of General Fund expenditures)
Debt & Contingent Liabilities: Low debt burden
Weaknesses:
Budgetary Performance***: Negative net result
in General Fund and total governmental funds
Pension Liability
*** Denotes potential area of credit concern – structural deficit (budgetary performance) could lead to weakening reserve levels (budgetary flexibility) S&P's Local Government GO Criteria (Issuer Credit Rating) Key Rating Factors Weight Score
Institutional Framework 10% 2.00 Economy 30% 1.50 Management 20% 3.00 Financial Measures
Liquidity 10% 1.00 Budgetary Performance 10% 3.00 Budgetary Flexibility 10% 1.00 Debt & Contingent Liabilities 10% 1.00 Estimated Score 1.85 Indicative Rating Outcomes
Estimated Score Indicative Rating
1.00-1.64 AAA1.65-1.94 AA+1.95-2.34 AA2.35-2.84 AA2.85-3.24 A+3.25-3.64 A3.65-3.94 ASource: City of Sebastopol 2022 ACFR Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
15 City’s Debt ProfileLow Debt Burden; CalPERS UAL Debt is Largest Debt on Balance Sheet *As of 6/30/2022** Energy conservation debt offset by energy savings Source: City of Sebastopol 2022 ACFR
Annual Debt Service as % of FY
2022-23 General Fund Budget
Source of
Repayment
Final Maturity
(FYE)
Outstanding
Debt Principal*Governmental Activities
Special Assessment Bonds (Improvements to Woodstone Center) $35,000 2023 Assessments N/ACapital Lease Agreement (Clean Renewable Energy Projects) $292,767 2025 General Fund 0.75%Lease Financing Agreements (Purchase of a Mobile Home Park) $308,102 2028 General Fund 0.50% $338,264 2026 General Fund 0.66% 2021 Refunding Lease (Refunds 2006 Financing Used for Various Projects, Including a Sewer Force Main, Skate Park, Water Booster Pump, Solar Panels, and more) $1,126,307 2037 General Fund 0.66% 2022 Finance Purchase Agreement (Energy Efficiency and Conservation Equipment and Improvements)** Total $2,100,440 --Business-Type Activities
$955,734 2035 Water Fund N/A 2021 Refunding Loan (Refunds 2015 Financing Used for Removal of Arsenic from Water Well Seven and its Treatment System)$487,375 2026 Water/ Wastewater N/A 2021 Refunding Lease (Refunds 2006 Financing Used for Various Projects, Including a Sewer Force Main, Skate Park, Water Booster Pump, Solar Panels, and more) $3,812,582 2037 Water/ Wastewater N/A 2022 Finance Purchase Agreement (Energy Efficiency and Conservation Equipment and Improvements)** Total $5,255,691 --CalPERS Pension Liability
General Fund/ 8% - 10% (FY 2022-23)
Water/Wastewater
Unfunded Accrued Liability (“UAL” – More Detail in Section 3A of Presentation) $15,770,000 2046 Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
16 Annual Operating Budget Policy• Maintain multi-year financial forecast
Capital Improvement Program• Maintain 5-year capital
improvement program
Revenue Policies• Maintain diversified and stable
revenue base
Expenditure Policies• Expenditures are to be budgeted
and controlled to not exceed estimated revenues
Cash Management/ Investment Policy• Investments will prioritize safety, liquidity, and return on investment, in that order
Debt Management Policy• City should plan and use debt in a manner that sustains financing payments at manageable levels Fund Balance Policies• Unassigned General Fund
balance of 15-20% of annual operating expenditures
• Maintain CalPERS Retirement &
OPEB Reserve
Financial Reporting Policy• City’s accounting and financial reports are to be maintained in conformance with GAAP
Security & Risk Practices• Having faced a cyber/fraud
incident in 2021, the City has recently implemented protective measures recommended by Kroll, a leading risk consultant.
Pension Funding Policy• Recommended; outlines longterm strategy for managing and stabilizing rising pension costs
Very Comprehensive City Policies & PracticesNew Pension Funding Policy Could be Considered This policy is a
recommendation and
has not yet been
approved by the City
Source: City of Sebastopol FY 2022-23 Budget
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
3. HEADWINDS FOR CITY’S FINANCIAL HEALTH
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
18 Headwinds for City’s Financial Health
Labor•CalPERS Costs: Poor CalPERS investment performance is projected to increase the City’s UAL by 50% or more
•Staffing: Additional
annual costs as new positions are added. Inflationary pressures and salary increases Capital Project Funding•Limited bonding capacity projected in the General Fund and Enterprise Funds •Due to weakened General Fund reserve levels, it is currently not feasible to use reserves to pay for various capital projects, especially large ones Economy•Current recessionary pressures •Sales Tax revenue, which makes up almost 40% of the City’s governmental activities revenue, can be volatile under recessionary pressures
•TOT revenue could
also be affected
Legislative/Political•Local or statewide legislation that impacts the City’s ability to raise revenues •California Business Roundtable Initiative (November 2024 Ballot) •City’s UUT would need to be readopted in compliance with the Initiative, if it passed Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
3A. HEADWINDS FOR CITY’S FINANCIAL HEALTH:
RISING PENSION COSTS
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
20 Background - Retirement Plans 2 CalPERS plans
Miscellaneous: 100 covered members Safety (Police & Fire): 61 covered members
PEPRA (2013) helpful to manage
long-term pension costs for new employees
99% of UAL is attributable to Classic
employees
Benefit Group # of Actives % of Actives Benefit FormulaMiscellaneous 18 64.3% 2.0% @ 55 PEPRA Miscellaneous 10 35.7% 2.0% @ 62
Total Active Members 28 100.0% -
Total Covered Members 100 - -
Benefit Group # of Actives % of Actives Benefit Formula Safety Fire 1 7.1% 3.0% @ 50
Safety Police 7 50.0% 3.0% @ 50
PEPRA Safety Fire 1 7.1% 2.7% @ 57
PEPRA Safety Police 5 35.7% 2.7% @ 57
Total Active Members 14 100% -
Total Covered Members 61 - -
MISCELLANEOUS PLANS
SAFETY PLANS
Source: City of Sebastopol CalPERS Actuarial Valuation Reports (June 30, 2021) Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
21 $39 Million
$55 Million
$17 Million
$-
$5
$10 $15 $20 $25 $30 $35 $40 $45 $50 $55
Millions
CalPERS Pension Funded Status
Background on How CalPERS WorksTwo Payments Made to CalPERS Annually (1) Normal Cost (“NC”) = Annual cost for current employees (2) Unfunded Accrued Liability (“UAL”): Annual payment to amortize the “debt” to CalPERS
CalPERS actuaries calculate how much the City is required to have in its account with them to pay out benefits to City’s retirees over the next 30-40 years (Actuarial Liability) CalPERS annually calculates the Market Value of City’s assets held on account with them; Most public agencies have less assets than required to meet Actuarial Liability This shortfall (i.e., the “UAL”) is not repaid all at once but amortized over time with the City paying down a portion each year (principal and interest) CalPERS uses a “discount (i.e., interest) rate” of 6.80% CalPERS annually adjusts this repayment schedule by adding a new “base” (i.e., layer) which adds to (in bad investment years) or lowers (good investment years) the overall repayment schedule Over the past 20 years, the addition of these “layers,” along with other CalPERS assumption changes, has created a very irregular repayment shape for most CalPERS public agencies Actual Market
Value of Assets
Actuarial
Liability
Shortfall (UAL)
Note: The numbers reported in this chart assume FY 2021-22 returns of -7.5%, FY 2022-23 returns of 3.35%, and 6.80% returns from FY 2023-24 onward.Due to rounding, amounts may not add up exactly.
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
22 Now … Sluggish returns outlook (<7%) Assumptions have changed/changing Discount Rate: 8.25% → 7.00% → 6.80% Inflation rate (prices going up) Mortality rates (people living longer) Actuarial ValuaSon → Market ValuaSon Shorter (20 year) amortization UAL payments have grown rapidly from
past changes, remain exposed to the effects from future poor investment returns and assumption changes Why CalPERS Costs have Trended Higher
Then (late 1990s)… Robust investment returns (10%+)
Retirement plans were “SuperFunded” through the late 1990s Earnings on funds were more than
adequate to cover retirement costs
Super-funded status induced
widespread retirement benefits enhancements….
Historical PERS
Returns
5-Year: 6.7%
10-Year: 7.7%20-Year: 6.9%30-Year: 7.7%
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
23 $0.0$0.2$0.4$0.6$0.8$1.0$1.2$1.4$1.6$1.8$2.0
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
Millions
Historical and Projected UAL Payment ScheduleCurrent Estimated Pension Debt Approaching $20 Million The City’s UAL balance had nearly
doubled from $7.9M in FYE 2014 to
$14.7M in FYE 2020
The City’s UAL balance as of FYE 2021 is
$4.2M lower than FYE 2020 but is expected to increase $5.3M in the next CalPERS valuation The City’s UAL balance could increase
another $1.1M if CalPERS earns 3.35% in FY 2022-23 (CalPERS’ investment returns as of end of March) City’s $0.8M UAL payment in 2018 has
increased to $1.3M in 2023. Projected payments peak at nearly $1.9M in 2032. Rapidly increasing impact to City’s budget Note that the UAL will fluctuate annually
moving forward based on future CalPERS investment returns & assumption changes 2023:
$16.9M
2022:
$15.8M
2021:
$10.5M
2020:
$14.7M
UAL
Balance
(FYE):
Returns: 4.7% 21.3% -7.5% 3.35% (est.)
UAL Payments (6/30/2021
Actuarial Valuation)
New UAL Payments from
-7.5% FY 2021-22 Returns
Historical UAL
Payments
Source: CalPERS Pension Outlook Tool. Assumes FY 2021-22 returns of -7.5%, FY 2022-23 returns of 3.35%, and 6.80% returns from FY 2023-24 onward.
New UAL Payments from
Hypothetical 3.35% FY
2022-23 Returns
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
24 UAL Cost-Containment Strategies – Not Mutually Exclusive (1) Prepay UAL early in Fiscal Year (≈ 3.3% discount)(2) Negotiate Cost Sharing With Employees • Require employees to pay their share; new employees already governed by lower cost/benefit PEPRA plans • Negotiated cost sharing of the City’s share
(3) Fresh Start Amortization offered by CalPERS
• Pros: Smooths payment, shortens repayment period; reduces overall interest paid from shorter amortization period • Cons: New structure “locked-in” + increased annual payments in near term; still amortized at discount rate (4) Use Cash Reserves to Pay Extra (two options)
• Section 115 Trust - Separate trust solely dedicated to pension/OPEB• ADP – Reduce UAL through direct lump sum payment to CalPERS • Choose optimal amortization bases to pay off
(5) Restructure All or Portion of Remaining UAL
• Restructure portion of UAL at lower bond interest rate and “smooth out” payments for enhanced budget predictability, near and mid-term potential savings, and preservation of cash for other critical projects Currently not
recommended;
Continue to
Monitor
Currently not
recommended
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
25 Use Cash Reserves: Section 115 Trust What is it? Dedicated (restricted to pension/OPEB) account managed by 3rd party Pros:
Potential for increased investment returns vs. current General Fund reserves General Fund investments restricted by Government Code (limits types of instruments and maturities) Flexibility – more investment options than CalPERS and the City can decide when and how to use Longer-Term: Trust funds can grow over time and pay off full UAL in the future Shorter-Term: Apply during challenging budget years or to “smooth” payment spikes in UAL and/or Normal Cost
Diversify asset management away from CalPERS Potential shock absorber for volatility from CalPERS investment performance & assumption changes
Cons:
Market risk (dependent on type of investment portfolio) Note: The Trust will show up as an asset on the City’s financial statements, but will not technically offset UAL until funds are transferred to CalPERS
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
26 What is it? City makes Additional Discretionary Payment (“ADP”) directly to CalPERS and designates which amortization base(s) / layer(s) shall be paid off CalPERS will eliminate payments associated with the portion of the UAL paid off, essentially giving the City credit at the discount/interest rate (currently 6.8%) Pros:
Reduced future payments Reduced UAL / higher CalPERS funding ratio Broader, less restrictive CalPERS investment portfolio has potential for higher returns Cons:
Re-investment and market timing risk with ADP funds No options for other investment portfolios like there is with a Section 115 Trust Use Cash Reserves: ADP
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
27 Section 115 Trust vs. CalPERS ADP Comparison
OPTION Section 115 Trust CalPERS ADP
No Yes Reduced UAL & UAL Payments with CalPERS
Yes No (but the Trust will show up as an asset on the City’s financial statements) Reduced Pension Liability in ACFR Control of Investment Strategy Yes NoFunds Managed By Trust Administrator CalPERS No Yes (annual pension or OPEB expense, ADP, OPEB, etc.) Flexibility in Uses Immediate; Length of time varies based
on which amortization component is
paid off (City's amortization bases
currently range from 1 - 27 years)
Varies; Depends on when City utilizes
funds to pay liabilities Savings
Enhanced Budgetary Flexibility Yes Limited
Historically, hundreds of ADPs made by
CA agencies annually
Hundreds of CA agencies maintain
Section 115 Trusts How Many Agencies in CA Have Used?
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
28 $-
$0.2 $0.4 $0.6 $0.8 $1.0 $1.2 $1.4 $1.6 $1.8 $2.0
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
Millions
Deposits to TrustProjected UAL Payments (CalPERS Pension Outlook Tool)*Net Payments (Incl. Deposits & Withdrawals) Considerations for Managing New 6.80% UAL Debt
Apply Section 115 Trust Assets to Smooth Out Peak UAL Payments Assumes City’s existing pension reserve of
$2.8M is transferred to a Section 115 Trust
A main benefit of moving funds to a Section 115
Trust is the increased potential for interest
earnings vs. current General Fund investments (especially in today’s inflationary environment) Assumes an additional total of $0.4M is
deposited in 2024 - 2025
Assumes a 4.50% long-term investment
returns rate**
Funds could be withdrawn from the Section
115 Trust during higher payment years to stabilize net impact to the General Fund Smooth annual payments at $1.4M Projected to generate $1.4M of savings, net of existing pension reserves and additional deposits
Budgetary savings during elevated UAL
payments in years 2027 – 2037 will help protect the City’s General Fund deficit from widening *Assumes FY 2021-22 returns of -7.5%, FY 2022-23 returns of 3.35%, and 6.80% returns from FY 2023-24 onward. **This long-term investment returns rate is not
fixed/guaranteed
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
29 Section 115 TrustOverview of Steps to Select the Provider and Establish the Trust Evaluate potential
Section 115 Trust
Providers
Select Provider and
work with its
Investment Advisor to
determine preferred
investment portfolio
Formal City Council
adoption of necessary
documentation
Trust established and
funded by City (if
desired at that time)
Establishment of the Trust can be completed in 30 – 90 days Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
3B. HEADWINDS FOR CITY’S FINANCIAL HEALTH:
STAFFING
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
31 Summary of City-Wide Staffing Study In the fall of 2021, the City engaged Regional Government Services (RGS) to conduct a City-wide staffing study Study completed in September 2022 City has approved a couple of the staffing changes recommended by RGS City staffing is a long-term solution that will continue to be discussed and evaluated
Additional annual staffing costs estimated by the study are not factored into the City’s forecast
Source: RGS City-Wide Staffing Study (2022)
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
3C. HEADWINDS FOR CITY’S FINANCIAL HEALTH:
CAPITAL IMPROVEMENT PROJECT FUNDING
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
33 Overview of City’s Capital Improvement Plan (CIP) $30.8M of CIP expenditures for FY 2022-23 through FY 2027-28 Expenditures concentrated in bikes, pedestrians & safety projects and paving projects Does not include larger potential facility projects such as a fire station, library, City hall, etc.
Source: City of Sebastopol 5-Year Capital Improvement Program from the DRAFT FY 2023-24 Budget
FY 2022-23 FY 2023-24 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 Total Project Category Expenditures
Bikes, Pedestrians & Safety $48,500 $1,601,000 $3,411,000 $9,801,000 $0 $0 $14,861,500 Transition Plan ADA Projects $35,000 $338,500 $0 $0 $0 $0 $373,500 Housing Projects $0 $10,500 $402,000 $0 $0 $0 $412,500
Parks Projects $256,500 $779,000 $445,000 $0 $0 $0 $1,480,500 Paving Projects $472,400 $1,470,000 $2,577,500 $1,255,000 $0 $0 $5,774,900 Sewer/Wastewater Projects $79,000 $1,730,500 $581,500 $0 $0 $0 $2,391,000Stormwater Projects $52,000 $202,000 $1,366,500 $400,000 $0 $0 $2,020,500Water Projects $392,000 $635,000 $808,500 $1,642,000 $0 $0 $3,477,500 Arts Projects $6,500 $50,500 $0 $0 $0 $0 $57,000Total $1,341,900 $6,817,000 $9,592,000 $13,098,000 $0 $0 $30,848,900 Unfunded $0 $205,500 $1,686,500 $1,655,000 $0 $0 $3,547,000 Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
34 Funding Options for Capital ProjectsPay-Go, Debt, & Grants Cash/
Pay-Go
•Pro: Minimize ongoing
cashflow (no debt payments)
•Con: Deplete cash
balance
Debt
•Pro: Maintain cash
balance and financial liquidity
•Con: Pay financing costs
and annual debt service
Grants
•Pro: Free/cheap money
•Con: Highly competitive;
timing of funds may be out of City’s control; “strings” sometimes attached Funding
Options
Lease Revenue Bond/COP
General Obligation Bond
General Fund repayment
(new/existing revenue
source)
Property tax repayment
(voter-approval required)
New revenue source
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
35 Funding Options for Capital Projects (Hypothetical $10M Project)Lease Revenue Bond, General Obligation Bond, Parcel Tax Lease Revenue Bond General Obligation Bond Parcel Tax
$750,000 $750,000 $750,000 Annual Debt Service (30-year repayment) Property Owners: ~$270 per
parcel per year
Property Owners: ~$34 per
$100K A.V. per year;
~$170 per $500K A.V. per year
Paid for by General Fund
No Yes – 2/3rds Yes – 2/3rds Voter Approval Required
Tax Formula N/A Based on % of Assessed Value Fixed Tax Formula Capital Improvements,
Programs or Services Capital Improvements Only Capital Improvements Only Use of Bond Proceeds Use of Tax Revenue N/A Debt Service Only Debt Service and OperationsKey Benefit No voter-approval required Lowest interest rate Most equitable tax distribution Higher homeowner tax
amount than GO Bond
No ability to fund operational
costs Key Negative General Fund Budget Burden
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
36 Capital Funding Capacity in Water & Wastewater Enterprise Funds Water/Wastewater Rate Study (Willdan 2019)
Water/Wastewater rates implemented in
FY 2019-20 through FY 2022-23
Water/wastewater revenues insufficient
to meet rising operating expenses
Net Revenues insufficient to generate
bonding capacity or fund CIP New debt will typically require debt service coverage of 1.20x
The City has authorized a contract for a
new utility rate study This rate study will propose new utility rate increases to support future capital
Wastewater Enterprise Fund
Actual
FYE 2019 FYE 2020 FYE 2021 FYE 2022
Net Revenues: $251,222 ($142,289) $6,037 ($377,713)Debt Service: $90,117 $89,132 $96,423 $72,852 Debt Service Coverage: 2.79x -1.60x 0.06x -5.18x Water Enterprise Fund
Actual
FYE 2019 FYE 2020 FYE 2021 FYE 2022
Net Revenues: $590,697 $255,283 $500,786 $143,907 Debt Service: $141,949 $142,515 $192,484 $158,197 Debt Service Coverage: 4.16x 1.79x 2.60x 0.91x Source: City of Sebastopol Annual Comprehensive Financial Reports Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
3D. HEADWINDS FOR CITY’S FINANCIAL HEALTH:
LEGISLATIVE/POLITICAL
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
38 Possible Legislative/Political Headwinds to Consider • Limits ability of voters and state and local governments to raise revenues for government services
• Revisions to local tax authority: Requires voter approval for taxes applied to territory that is annexed; Requires sunset date on all new taxes; General tax ballot label must say “for general government use” • Revisions to local fee authority: Fees must be
“reasonable to the payor”. “Actual cost” of providing the product or service for which the fee is charged is defined as the “minimum amount necessary to reimburse the government…” • Retroactive Window: Taxes and fees approved after
January 1, 2022, will sunset in December 2025 if not readopted in compliance with the initiative California Business Roundtable Initiative (Initiative #21-0042A1) Local initiatives to
terminate existing
transaction and use
tax measures
California Business
Roundtable
Initiative (November
2024 Ballot)
Any other legislation
impairing the City’s
current/future
revenue
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
4. ADDITIONAL REVENUE SOURCES
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
40 Voluntary Taxes
Transaction and Use TaxBusiness/Franchise TaxTransient Occupancy TaxUtility Users Tax Studies
Fire Department Feasibility Study (Completed 2023)City-Wide Staffing Study (Completed 2023)Fee Study (Completed 2020)Utility Rate Study (Currently in progress; previously completed in 2019)Fiscal Sustainability Assessment (in progress) Actions for the Future
Potential Sales Tax IncreasePotential Utility User Tax IncreasePotential Transient Occupancy Tax IncreasePotential Parcel Tax (June 2024)?*Cost Allocation Study (Most recently completed in 2000)Cannabis Tax Feasibility Study Sebastopol Has Done A Lot… What are Actions for the Future? *Use of tax revenues to be determined
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
41 Potential Revenue Enhancements$2.5M Hypothetical Funding Gap Goal Hypothetical $2.5M funding gap is filled in with the following:
Sales & Use Tax Increase of 0.50%
$1.40M/year
UUT Increase of 1.25% $0.23M/year
TOT Increase of 2.00% $0.08M/year
Potential Parcel Tax in June 2024
$0.79M/year
This $2.5M funding gap goal can be
reached in various ways E.g., larger parcel tax and lower sales & use tax increase; cost containment strategies
$1.40M
Sales & Use Tax
Increase (0.50%)
$0.23M
UUT Increase
(1.25%)
$0.08M
TOT Increase
(2%)
$0.79M
Parcel Tax
($790K/yr)
$0.00$0.25
$0.50$0.75$1.00$1.25$1.50$1.75$2.00$2.25$2.50
Millions
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
42 Sales & Use Tax Rate City sales & use tax rate (9.25%) 2nd highest within nine major Sonoma County cities Cotati/Petaluma (9.50%) Sales & use tax rate for Sonoma County, any of its
cities, and the Sonoma County Transportation Authority is currently capped at 10.25% CA Senate Bill 152 (2018) raised the cap from 2% to 3% above the State/local base sales & use tax rate of 7.25% The City currently has capacity for 1% in new taxes,
however future countywide taxes could utilize some of this capacity Increasing the City’s rate by 0.50% is projected to
generate an additional ~$1.4M/year
9.25%
9.00%
8.50%
8.50%
9.50% 9.00%
9.50%
9.00%
9.25%
Source: California Department of Tax and Fee
Administration
Sonoma County:
8.50%
Sales & Use Tax $1.10M Funding Gap
$0.00 $0.50 $1.00 $1.50 $2.00 $2.50
Millions
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
43 83.4%
16.6%
0%
10%
20%30%40%50%60%70%80%90%
100%
Yes No
Sebastopol Measure N (November 2022)
Utility Users Tax In the November 2022 election, the City’s Measure N passed, maintaining the City’s 3.75% Utility
Users Tax (“UUT”) and removing the tax’s sunset clause Primary Objective: Maintain City services including Police and Fire, 9-1-1 emergency services, park maintenance and repair, youth and senior recreation and for unrestricted general revenue purposes Revenue projection: $700,000/year
Santa Rosa UUT rate 5.00%
Measure N increase from 3.75% to 5.00% = an
additional ~$230K/year
Passed
Sales & Use Tax UUT $0.87M Funding Gap
$0.00 $0.50 $1.00 $1.50 $2.00 $2.50
Millions
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
44 Transient Occupancy Tax In the November 2018 election, the City’s Measure R passed, increasing the City’s Transient Occupancy Tax
(“TOT”) from 10% to 12% Revenue projection: $514K/year City’s TOT rate is 2nd highest (tied) of the nine major Sonoma County cities Healdsburg has the highest (14%)
Increasing rate to 14% is projected to generate an
additional ~$80K/year
Additional TOT revenue also possible from future hotel development, such as the anticipated Hotel Sebastopol
9%
14%
10%
12%
10% 10%
N/A
12%
12%
*Levied in Sonoma County at a rate of 12% for accommodations at lodging and camping facilities in the unincorporated areas of the County.Source: Sonoma County Economic Development Board Transient Occupancy Tax Report (Q3 2022) Sonoma County:
12%*
Sales & Use Tax UUT
TOT
$0.79M Funding
Gap
$0.00 $0.50 $1.00 $1.50 $2.00 $2.50
Millions
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
45 Parcel Tax A parcel tax is a special tax (similar to a CFD) on a parcel/unit of real property The tax differs from a property tax in that it is not based on the value of the property It is generally based on either a flat per-parcel rate or a rate that varies based on use or size of the parcel Parcel taxes may be imposed for any municipal purpose, such as funding services, improvements to infrastructure, streets or parks, and protection of open space Limitations of Use: A parcel tax may be levied as a general tax or restricted for a special purpose Procedure for implementation: Parcel taxes may be levied for general purposes or restricted to a particular purpose. Parcel taxes require two-thirds voter approval Potential levy as it relates to the City: Generating $790K in annual revenues (the amount remaining to fill the hypothetical funding gap goal) would require an annual ~$290/parcel levy The annual levy would need to be verified by a special tax consultant Sales & Use Tax UUT
TOT
Parcel Tax
$0.00 $0.50 $1.00 $1.50 $2.00 $2.50
Millions
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
46 Local Cannabis Tax Tax imposed on the sale, cultivation, distribution or manufacturing of cannabis
5 of 9 Sonoma County cities have Cannabis
Tax Sonoma County also has a Cannabis Tax
Cannabis Tax Revenue:
Cotati: $0.59M (FY 2020-21 actual) Santa Rosa: $1.8M (budgeted for FY 2022-23) Healdsburg: $0.5M (projected in ballot measure)
Sonoma: $0.15M (budgeted for FY 2022-23) Cloverdale: $0.27M (FY 2021-22 actual) YES
YES
YES
NO
NO YES
YES
NO
NO
Sonoma County:
YES
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
5. FINAL TAKEAWAYS
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023
48 Final Takeaways Without action or significant growth in revenues (not projected), the City’s projected structural financial deficit will reduce / eliminate its reserves over the next 3-5 years Recommended that the City of Sebastopol…
1. Identify economic development (i.e., increasing the tax base) opportunities
2. Evaluate and attempt to secure revenue enhancements (i.e., increasing the tax rate on existing tax base)
Sales Tax Increase, UUT Increase, TOT Increase, Potential Parcel Tax (June 2024), Cannabis Tax
3. Develop long-term pension funding strategy to manage CalPERS UAL, the City’s largest debt A Section 115 Trust can be created and dedicated towards stabilizing future pension costs
4. Identify cost containment opportunities
Agenda Item Number 8
City Council Meeting Packet of May 16, 2023