TO: Honorable Mayor and Members of the City Council
FROM: Tom Kisela, City Manager
1. Subject
title
City of Orange Public Safety/City Services Local General Transactions and Use Tax (Sales Tax) Measure and Presentation from Fairbank, Maslin, Maullin, Metz & Associates on the results from a citywide tracking survey.
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2. Summary
On March 12, 2024, the City Council approved an agreement with Fairbank, Maslin, Maullin, Metz & Associates to conduct a citywide tracking survey, measuring the efficacy of public education/outreach efforts regarding our City’s financial deficit. Separately, on June 11, 2024, the Orange City Council directed staff to bring back a package of transactions and use tax (commonly referred to as a sales tax) options for consideration and discussion. This presentation will review the survey results while also considering and discussing transactions and use tax options.
3. Recommended Action
recommendation
1. Receive and file a presentation from Fairbank, Maslin, Maullin, Metz & Associates on the results of the citywide tracking survey that studied the feasibility of potential revenue measures and budget/service priorities.
2. Discuss the results from the citywide tracking survey and select the transactions and use tax rate and expiration date to be incorporated into Resolution No. 11559 and Resolution No. 11561.
3. Adopt Resolution No. 11559. A Resolution of the City Council of the City of Orange ordering the submission to the qualified electors of the City a certain measure relating to a local general transactions and use tax (Sales Tax) at the November 5, 2024, General Municipal Election as called by Resolution No. 11545.
4. Identify Members of the City Council to file arguments for or against the measure and adopt Resolution No. 11561. A Resolution of the City Council of the City of Orange Setting Priorities for filing written arguments regarding a City measure and directing the City Attorney to prepare an impartial analysis for the measure to be submitted to the voters at the General Municipal Election to be held on Tuesday, November 5, 2024.
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4. Fiscal Impact
The County of Orange Registrar of Voters estimates it will cost $8,000 to place the measure on the November 5, 2024, ballot which will be funded through the General Fund (100). Dependent on City Council direction, if Orange voters approve a measure, it would generate locally controlled revenue not subject to State interference.
5. Strategic Plan Goals
Goal 2: Be a Fiscally Healthy Community.
a. Analyze future fiscal needs and potential revenue opportunities.
6. Discussion and Background
Citywide Tracking Survey
On October 24, 2024, the Orange City Council approved an agreement with Fairbank, Maslin, Maullin, Metz & Associates (FM3) to conduct a citywide survey studying the feasibility of potential revenue measures and budget/service priorities. FM3 presented the results at the February 27, 2024, City Council meeting.
Per the City Council’s direction on February 27th, at the March 12, 2024, City Council meeting, the City Council approved agreements with Pivotal Strategies to provide public education/outreach services and FM3 to conduct a citywide tracking survey. The tracking survey’s intent was to measure the efficacy of the outreach efforts over the past few months.
FM3 released the survey in late-May, collected/analyzed the results, and Dr. Richard Bernard of FM3 has prepared a presentation detailing the tracking survey’s findings.
Our City’s Budget Crisis - How We Arrived Here
The City of Orange is a premier Orange County city. Incorporated in 1888, it is one of Orange County’s largest and historic cities. Despite our City’s size, Orange is often described as a “big city with a small town feel” - an attribute that can only be credited to the residents and businesses we serve. Although Orange’s history makes it unique, it presents challenges typical in older, full-service cities.
With cost increases and lagging revenues, our City was facing a $19.1 million operating deficit as we prepared for Fiscal Year 2024-2025 (FY25). The deficit was not an abrupt crisis, but a gradual development compounded by external events resulting in revenue losses that include:
When looking at historical General Fund revenue and expenditure averages, General Fund revenues have not kept pace with the expenditures needed to maintain the services our residents have come to expect.
Cost Reductions
Nevertheless, our City made concerted efforts over the past decade to “to do more with less,” including:
Of these totals, some of these reductions included:
• Furloughs, freezing, or eliminating positions while keeping non-public safety salaries below the Orange County median.
• Deferring annual funding needed to maintain streets in “good condition” (per a third-party pavement management report).
• Operating with numerous vacancies, including police officers and firefighters.
• Reducing library hours.
• Deferring investment in technology that would have helped us meet our community’s needs or improve our City’s efficiency.
• Over $20 million in maintenance/improvements to City facilities and vehicles, including public safety vehicles.
• Deferring $4 million in improvements to City parks.
• Deferring $600,000 in ongoing traffic and streetlight maintenance.
• Worked with City labor groups so employees pay more into their retirement.
Revenue Enhancements
In addition to these efforts, our City reviewed ways to increase revenues.
• Fee Increases: For many years, Orange has been devoted to keeping costs/fees down for our community. However, with rising costs to provide services, our City will need to ensure full cost recovery to minimize service subsidies. This is expected to generate $250,000.
• Parking Enforcement: Our City is implementing a new parking enforcement effort that will improve our residents’ quality of life while generating an estimated $8-10 million in revenues over a five-year period.
• Grants/Earmarks: Our City has also worked with a third-party consultant to secure grant and earmark proceeds, which last year alone, included over $4 million in one-time (and project specific) revenue.
Our City has also revamped our Economic Development program. With volatile revenue trends over the past decade, one of the $86 million reductions included Economic Development. Last year, our City restored this much needed program with the following initiatives/projects moving forward:
• Implementing a Shop Local Program with the Orange Chamber of Commerce.
• Working with local hotels to create a Tourism Improvement District to promote Orange as a visitor destination.
• Working with consultants to attract high-quality retailers to Orange.
• Developing a design concept in the West Katella Avenue corridor to serve as a gateway to Orange.
• Working with the County of Orange to form an enhanced infrastructure financing district to fund capital projects to attract businesses and promote economic growth.
• Deploying a micro transit and shuttle service in and around Old Towne Orange with much of the funding expected to come from outside sources.
Despite these efforts, there are limitations and time constraints. Economic Development is vital, but the benefits of these efforts may not be realized for several years.
Additionally, while it is important to ensure cost recovery, these fees cover the cost to provide the service. They reduce subsidies, but do not generate excess revenue. The projected revenue will help, but it will not generate sufficient annual revenue necessary to close our City’s deficit or sustain City operations.
Lastly, as staff continues to seek grant opportunities, it should be recognized these revenue sources are not certain, are often one-time, may require matching funds, and demand more personnel time through grant administration.
Overall, if our City does not identify additional and sustainable revenue sources, our City’s reserves will diminish and the General Fund deficit will grow.
Fiscal Year 2024-2025 Budget
In recognizing the budget crisis at hand, the City Council formed a budget ad-hoc committee (Ad-Hoc Committee) to identify service reductions to close the estimated $19.1 million budget deficit.
With public safety comprising nearly 70% (see details below) of the General Fund budget, the City Council considered multiple reduction options (including public safety) on June 11, 2024.
Ultimately, the City Council voted to increase fees and enhance parking citation efforts, which combined with the $3 million in one-time revenue, equals a $4.5 million revenue increase in FY25.
Additionally, the City Council voted to reduce approximately $5 million in expenditures. Among others, this included freezing employee vacancies (including five firefighter positions), eliminating the crossing guard program, eliminating maintenance/clean-up along Santiago Creek, and reducing Orange Public Library operations.
With these measures in place, our City is adopting a budget with an estimated $7-11 million deficit, requiring use of our City’s catastrophic reserves - an appropriation that will need to be paid back in two years.
Our City’s Proposed Sales Tax Measure
To preserve the events and public safety/city services that define Orange, the City Council deferred many potential program and service reductions to December 2024 and directed staff to bring back options for a transactions and use tax (sales tax) measure.
Per the City Council’s direction on June 11, 2024, some options included:
|
Proposed Tax Rate |
Proposed Expiration Date |
|
1% |
20 Years |
|
1% |
15 Years |
|
1% |
10 Year |
|
0.75% |
20 Years |
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0.75% |
15 Years |
|
0.75% |
10 Years |
Additionally, staff is also presenting an additional option that was studied in the citywide tracking survey.
|
Proposed Tax Rate |
Proposed Expiration Date |
|
1% |
Until Ended by Voters |
Regardless of the sales tax rate or sunset date identified by the City Council, the proposed resolution and ordinance assumes a general-purpose measure. This means two-thirds of the City Council (5/7) would need to vote in favor of placing a measure on the ballot. Thereafter, it is up to Orange voters to approve any increase with a 50% plus one voter threshold.
Sales Tax Projections
Provided below are two fiscal projections extending into FY44.
The tables illustrate two scenarios. First, the expected FY where a deficit begins without considering funding of deferred maintenance and restoring budget reductions. Second, expected FY where a surplus begins after considering funding of deferred maintenance and restoring budget reductions.
Table I: Fiscal Projection without Funding of Deferred Maintenance and Restoring Budget Reductions.
|
Sales Tax Rate |
Projected Fiscal Year Where Deficit Begins |
|
1% |
N/A - No Ongoing Deficit through FY44 |
|
*0.75% |
N/A - No Ongoing Deficit through FY44 |
|
0.5% |
Ongoing Deficit Beginning in FY29 |
*It is projected that with a 0.75% sales tax increase, our City will close FY25 with a deficit, but will realize surpluses thereafter.
Table II: Fiscal Projection with Funding of Deferred Maintenance and Restoring Budget Reductions
|
Sales Tax Rate |
Projected Fiscal Year Where Surplus Begins |
|
1% |
FY36 |
|
0.75% |
N/A - Ongoing Deficit through FY44 |
|
0.5% |
N/A - Ongoing Deficit through FY44 |
Sales Tax Mechanics
Sales tax in Orange is currently 7.75%. Of this amount, our City receives 1%. The remaining amount is collected/received by the County of Orange and the State of California.
State law authorizes cities and counties to adopt local sales taxes in addition to the base amount our City currently receives (i.e., the 1% share). The local portion of the sales tax that a city and county can levy together is capped at 2%.
With voters having approved Measure M (0.5% sales tax), 1.5% is available for other local sales tax increases. If the County of Orange or other local districts passed additional local sales tax measures, those would apply to the cap.
If the 2% cap is reached due to other agencies (i.e. Orange County), Orange voters would be unable (absent State legislation) to implement a local sales tax measure to support City services.
How Sales Tax is Collected and What is Not Taxed
For illustrative purposes, if our community increased the local sales tax rate from 7.75% to 8.75%, the sales tax would cost an additional .01¢ per $1.00 spent on taxable goods or .10¢ for every $10 spent. The proposed sales tax increase would exclude unprepared groceries (roughly 20%-30% of grocery store sales are taxable), personal services, and rent.
Locally Controlled Revenue
Any revenue generated from a sales tax increase would be constitutionally protected, meaning it would stay in Orange and cannot be taken by the State of California or Orange County for other uses.
For example, at a 1% sales tax rate increase, if someone made a $100 purchase, our City would receive $2.00 as opposed to the current $1.00 with the County of Orange and State of California share remaining the same.
Current Sales Tax in Orange County
In 2022, 70 agencies across the State of California pursued sales tax measures, and if Orange voters approved a sales tax rate increase, this would align with 10 other Orange County cities that have increased their respective sales tax rates including:
• La Habra - 8.25%
• Fountain Valley - 8.75%
• Garden Grove - 8.75%
• La Palma - 8.75%
• Placentia - 8.75%
• Seal Beach - 8.75%
• Stanton - 8.75%
• Westminster - 9.25%
• Los Alamitos - 9.25%
• Santa Ana - 9.25%
Should Orange voters approve a sales tax increase, it is anticipated a little over a 1/3 of the increased revenue will derive from non-Orange residents.
Accountability and Transparency
Per City Council direction, the measure includes fiscal accountability/transparency controls including an Independent Citizens’ Advisory Committee (Committee). As drafted, this Committee would be comprised of seven individuals. Experience and background (e.g., banking, financial, and/or accounting backgrounds) will be detailed by resolution at a future City Council meeting. The Committee will be a public Brown Act body, meet quarterly, review audit reports related to the sales tax measure against an adopted Citywide fiscal policy, and make at least one written report to the City Council at a public meeting.
Next Steps
To give Orange voters the option to consider a sales tax increase, two-thirds of the City Council must vote in favor. By adopting Resolution Nos. 11559 and 11561 (after identifying a sales tax rate and expiration date), the City Council will submit to the voters the following question on the November 5, 2024, ballot (dependent on City Council action):
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City of Orange Public Safety/City Services Measure Shall the measure providing funding for City of Orange’s general government use such as maintaining 911 response, fire/police protection/paramedic services; recruiting/retaining well-trained police/firefighters; preventing property crimes/thefts; addressing homelessness; keeping public areas/parks safe/clean; maintaining safe routes to school; repairing streets/potholes by establishing a X% transactions and use tax (sales tax) providing approximately $XX,XXX,XXX annually until ended by voters or expiring after X years; requiring audits, spending disclosure, all funds benefit City of Orange residents, be adopted? |
Yes |
|
|
|
No |
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Conclusion
In a recent survey, Orange residents reported public safety (e.g., maintaining 911 response, fire protection, preventing property crimes, etc.), addressing homelessness, ensuring children have a safe place to play, and repairing streets/pot holes were some of the highest budget priorities.
Our community also made clear they would like all funds to benefit Orange residents. In considering our City’s fiscal position coupled with our residents’ priorities, a sales tax increase provides locally controlled funds to help meet these needs. In addition, a sales tax increase would help our City achieve specific goals, including but not limited to:
• Funding a Real-Time Crime Center - Estimated at $1.7 million to provide Orange Police Officers with real-time information so they may respond to calls more efficiently and with improved operational intelligence.
• Continue our City’s agreement to utilize Flock Safety Cameras - Estimated at $377,280 to deter crime and assist the Orange Police department in solving crimes that occur in our community.
• Acquire new Urban Search and Rescue Rig (one of five available in Orange County) - Estimated at over $2 million to assist with confined space rescues, trench rescues, vehicle into structure incidents, and structure fires.
• City Hall Seismic Retrofit - Estimated at $25 million to ensure Orange City Hall can withstand a significant earthquake.
• Fire Stations 2, 3, 4, and 5 Replacements - Estimated at $7-$10 million (per station) to replace these early 1960’s-built stations which are past their useful life.
• Fund an additional $2 - $3 million in street maintenance annually to ensure our City streets are deemed to be in “good condition” as evaluated by a third party pavement management consultant.
• Citywide fiber optic buildout- Estimated at $7.5 million for citywide fiber and internet services.
• Continue Axon Enterprise Agreement - Estimated to cost $9 million to extend the contract in six years after it expires for tasers, body worn and in-car video, CAD/RMS systems, drones, evidence tracking, and unlimited cloud storage.
• Improvements to City parks - Estimated at $4 million for improvements that include repairs to park restrooms, court lighting at El Camino Park, playground improvements, and resurfacing of sports courts at various parks.
• Fund expected public safety vacancies in the future (e.g., expected firefighter retirements after 2025).
• Rebuild our City’s General Fund reserve levels to ensure our City’s long-term fiscal health.
Should Orange voters not increase the sales tax rate (if placed on the ballot by the City Council), our City will continue to engage our community to find means to provide services while considering additional City service and public safety reductions in December to ensure balanced budgets in future fiscal years.
7. ATTACHMENTS
• Resolution No. 11559
• Resolution No. 11561