TO: Honorable Mayor and Members of the City Council
FROM: Tom Kisela, City Manager
1. Subject
title
Consider potential sales tax measure scenarios and provide direction to City staff.
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2. Summary
On May 14, 2024, the City Council directed staff to bring back information on different sales tax measure scenarios, including potential sales tax rates at 1%, 0.75%, and 0.5% as well as sunset dates at 10-years,15-years, and 20-years. Staff is seeking direction from the City Council on how to proceed.
3. Recommended Action
recommendation
Consider potential sales tax measure scenarios and provide direction to City staff.
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4. Fiscal Impact
None.
5. Strategic Plan Goals
Goal 2: Be a Fiscally Healthy Community.
b. Analyze future fiscal needs and potential revenue opportunities.
6. Discussion and Background
To address the Fiscal Year 2024-2025 (FY25) $19.1 million General Fund deficit, on May 14, 2024, the City Council discussed potential budget balancing proposals for the FY25 budget. During the City Council’s discussion, potential revenue enhancements including a transaction and use tax (sales tax) were considered.
Ultimately, the City Council voted for 1) the budget ad-hoc committee to bring forward a service/program reduction and revenue enhancement package for consideration at the May 28th City Council meeting (hereinafter collectively referred to as “budget balancing proposals”) to help close the budget deficit, and 2) for staff to bring back information on varying sales tax measure scenarios, including:
1. Financial forecasts with sales tax rates at 1%, 0.75%, and 0.5% with sunset dates ranging from 10, 15, to 20 years.
2. Information on voter thresholds for special taxes.
3. Information on a fiscal oversight committee should a potential measure pass.
Each item is reviewed in turn.
Financial Forecasts
Staff worked with HdL Companies to identify the estimated revenue for the different sales tax rates and scenarios.
Chart Descriptions
Charts illustrating the projected annual General Fund revenue and expenditure changes are attached to the report. All three scenarios assume the budget balancing proposals are implemented in FY25, and that expenditures are not restored in subsequent FYs.
The projected revenues in the bar graph incorporate the budget balancing proposals along with existing General Fund revenues (e.g., property taxes, transient occupancy taxes, etc.) including the Bradley-Burns sales tax revenues our City is already receiving. The projected revenues are adjusted 3% annually.
The projected expenditures in the bar graph assume the budget balancing proposals. The projected expenditures are then adjusted 3.5% annually. It should be noted that if the City Council voted to restore funding levels, the 1% sales tax increase is the only sustainable and sufficient scenario.
The trend line above the bar graph illustrates changes in projected General Fund revenues if Orange voters approved a sales tax measure (i.e., General Fund revenues as shown in the bar graph + additional revenue generated from a sales tax measure).
Should Orange voters approve a sales tax measure in November 2024, the City could potentially see 3-4 months of additional sales tax revenue in FY25. This would result in a surplus under all three scenarios. However, this once again assumes the budget balancing proposals have been implemented for FY25.
1% Sales Tax Rate
With a 1% sales tax rate increase, the City would generate approximately $38,800,000 -$40,000,000 in additional revenue per year. Assuming consistent annual sales tax revenues, and no significant changes to revenues/expenditures, it is estimated the City’s General Fund revenues would exceed General Fund expenditures in FY25 (assuming the budget balancing proposals for FY25 are incorporated) and continue through FY44.
0.75% Sales Tax Rate
With a 0.75% sales tax rate increase, the City would generate approximately $29,100,000 - $30,000,000 in additional revenue per year. Assuming consistent annual sales tax revenues, and no significant changes to revenues/expenditures, it is estimated the City’s General Fund revenues would exceed General Fund expenditures in FY25 (assuming the budget balancing proposals for FY25 are incorporated) and continue through FY44 at a smaller margin than at the 1% sales tax rate.
0.5% Sales Tax Rate
With a 0.5% sales tax rate increase, the City would generate approximately $19,400,000 - $20,000,000 in additional revenue per year. Assuming consistent annual sales tax revenues, and no significant changes to revenues/expenditures, it is estimated the City’s General Fund revenues would exceed General Fund expenditures by FY25 (assuming the budget balancing proposals for FY25 are incorporated).
However, budget deficits (or near budget deficits) are projected in the immediate FYs with an anticipated $7.6 million General Fund deficit by FY41.
Assumed Funding Levels
Once again, all three scenarios assume the budget balancing proposals have been implemented in FY25, and that expenditures are not restored going forward. If the City Council voted to restore funding levels, the 1% sales tax increase is the only sustainable and sufficient scenario.
Voter Threshold for Special Taxes
Proposition 13 (1978) and Proposition 218 (1996) differentiated and clarified the differences between special and general taxes. Special taxes are taxes imposed for a specific purpose (e.g., tax revenues that exclusively fund parks or public safety). General taxes are taxes imposed for general government purposes.
Article XIII C, Section 2, Subdivision B and D of the California Constitution provides that General Taxes cannot be imposed unless approved by majority vote of the electorate (Subdivision B). Special taxes cannot be imposed unless approved by two-thirds vote of the electorate (Subdivision D).
Financial Oversight Committee
In Orange County, residents in 10 cities have voted to increase their sales tax rates above 7.75% with the lowest at 8.25%, the highest at 9.25%, and a majority at 8.75%. Of the cities whose residents have voted to increase their respective sales tax rates, some have created citizen oversight committees to monitor revenues/expenditures generated from the sales tax measure.
While each city incorporated different elements and responsibilities, there are distinct similarities across each agency. For example, the oversight committees generally serve as an advisory body to the City Council. Additionally, each city directed the oversight committee to review the expenditures/revenues deriving from the sales tax measure and to draft a report to their city councils on the use of sales tax measure funds.
Where the oversight committees generally differ is the type of analysis and reporting they are charged with producing. In some instances, oversight committees review expenditures/revenues against an adopted standard/policy and provide recommendations.
In other cases, the oversight committee is tasked to simply provide a report on how the funds are used. A spreadsheet detailing the nuances of each oversight committee is attached to this report along with supporting documents.
7. ATTACHMENTS
• Graphs Depicting Different Sales Tax Scenarios
• Citizen Oversight Committee Comparisons
• Citizen Oversight Committee Supporting Documentation