In view of the “fiscal cliff” lying ahead for the City of Scotts Valley, the city council is keeping its promise of looking for every possible way to improve the city’s fiscal situation. At last week’s city council meeting, these efforts included a workshop on city fees, aimed at getting closer to cost recovery for some city services, and a discussion about raising the Transient Occupancy Tax (TOT) or “local hotel room tax” from 10 percent of hotel room charges to 12 percent.
Back in March, a Fiscal Sustainability Plan detailed a “fiscal cliff” of projected budget deficits that will exhaust general fund reserves by FY 2021/22, and “structurally” increase to more than $2.16 million by FY 2026/27. Two primary factors created the “fiscal cliff”- a sharp reduction in revenues due to the expiration of a special sales tax that ScottsValley voters approved in 2013, Measure U, scheduled to expire in 2022, and the spiking of CalPERS pension liability costs for city employees.
The city council responded to the dire predictions in March by directing staff to engage in a fee study for improved cost recovery of some city services, particularly planning, building and engineering permit fees, and getting prepared to increase the TOT on local hotel rooms by way of a ballot measure for the General Election in November.
Meanwhile, the city council is expected to approve the FY 2018/19 city budget at their next meeting on June 20th. Described as a “status quo” budget, “The proposed budget maintains service levels to ensure Scotts Valley’s high quality of life, but will require the City to draw down on its General Fund reserves by approximately $1.2 million in FY 2018/19,” according to the City Manager’s Budget Message in May.
One of the key drivers of the deficit spending and reserve withdrawals both in the current fiscal year, estimated at $417,800, and next fiscal year is the sharp increase in CalPERS pension liabilities for city employees. The FY 2018/19 budget includes an increase in pension liability cost of $220,048 more than the current fiscal year, ending on June 30.
General fund budgets of many cities and counties in California are reeling from the 2016 decision of the CalPERS Board of Directors to decrease expected returns from its investment portfolio from 7.5 percent to 7.0 percent, thus escalating the on-going pension liability costs to public sector employers across the state.
According to the Budget Message sent to the City Council last month by City Manager Jenny Haruyama , “Pension obligations will increase the City’s contribution to CalPERS by over $839,000 (cumulatively) …by FY 2022/23 based on projected FY 2018/19 levels.”
“I am fundamentally ‘pro’ city employee,” Council Member Jack Dilles said. “I value our city employees and believe we made a deal with them regarding their pensions – a deal we have to keep. But, we have no choice but to deal with these fiscal issues,” Dilles said.
Current general fund reserves are just barely able to cover the $1.2 million draw for the FY 2018/19 budget and maintain a council-directed minimum of 17 percent of the overall general fund budget in reserves. The council is motivated to back fill the withdraw from reserves in the coming fiscal year by increasing revenue sources where possible- including raising city fees for some services where appropriate and increasing the TOT tax.
The fee study showed the Planning Department is currently getting reimbursed for only about 35 percent of its total cost by way of fees charged for plan check and planning services and the Building Department is only receiving about 55 percent of its costs through construction plan review and building permit fees. Bringing these two fee schedules up to 71 and 85 percent of full cost recovery respectively could raise almost $300,000 in additional revenue for the city, according to the fee study.
“We’re not here to make sure developers make a profit. We’re here to make sure they can be successful, but not to have other tax payers subsidize their bottom lines,” Council member Stephanie Aguilar said at the fee workshop. Council Member Randy Johnson cautioned against aiming at full cost recovery as a goal and raising fees too high, which could divert proposed development to other jurisdictions, or encourage homeowners to do projects without proper permits.
As a general use tax, an increase in TOT requires a simple majority of voter approval, which the city council hopes to get for a TOT ballot measure currently under discussion for the November general election. Scotts Valley currently has a 10 percent TOT, as does the City of Capitola, compared to 11 percent in both the city and county of Santa Cruz. Both the City of Capitola and the City of Santa Cruz are currently considering raising their local hotel tax.
The long-term fix for the looming “fiscal cliff” appears to be asking Scotts Valley voters for approval of an extension of the Measure U sales tax, which raised sales taxes in Scotts Valley from 8.25 percent 8.75 percent until 2022, and accounts for about $1.2 million in revenue each year. The City Manager’s Budget Message recommends extending the sales tax “at least until FY 2027/28,” via a ballot measure that should be considered by voters no later than 2019. City Council members have discussed possible polling of ScottsValley tax payers to determine the right amount and right number of years a new sales tax might best be presented to voters.
