October 19, 2004

SUBJECT: Introduction of an Ordinance to Amend Chapter 5.04 of the Sunnyvale Municipal Code related to Business License Tax to Allow for a Two Year Licensing Period and Adoption of a Resolution to Increase the Business License Application Fee to $54.00 and the Business License Renewal Fee to $23.00.

Staff recommends that the language in the Business License Tax ordinance be modified by allowing for a tax period of two years instead of the current one-year business license tax period and that a resolution be adopted to increase the new application processing fee and the renewal processing fee. These changes are being made in response to direction provided at the August 10, 2004 Council meeting where Council directed staff to implement a two-year business license tax period and adjust the processing fees accordingly to fully recover costs. These changes will be effective with the 2005 tax year.

During the deliberations on the FY 2003/2004 Budget, Council directed staff to develop recommendations to improve the process used to issue and renew business licenses. The scope of work for this process improvement project identified three objectives: to redesign the process and any sub-processes, to increase Business License Tax revenues and to provide a Report to Council (RTC) to present finding and recommendations. Project staff completed a process map outlining the steps completed by staff in issuing an initial business license to a business either located in or operating in Sunnyvale and the steps involved in renewing a business license. Two key areas that staff focused on were a change in the timing of the renewal process and recovering the full cost of services. Staff presented findings to the Council at the August 10, 2004 Council meeting. Council directed staff to proceed with increasing the processing fee to $54.00 for new businesses and $23.00 for renewing businesses to recover full costs of services and go to a two-year cycle for business license taxes.

Implementing a two-year business license tax requires an amendment to the Municipal Code. Staff is also recommending other minor clarifications to the Municipal Code. For example, the Municipal Code requires that we obtain the residence information on businesses located outside of Sunnyvale as well as corporate entities. This is not public information and since the Business License Tax is strictly for revenue purposes and not regulatory, staff has no means to verify the accuracy of this data. The proposed amendment would make this information voluntary rather than mandatory. The Municipal Code is also being revised to include another section of the California Business and Professions Code that exempts disabled veterans from the processing fee and the tax.

At the June 10, 2003 Council meeting (Update of the Business License Tax Ordinance RTC#03-203) the City Council approved an amendment to Chapter 5.04 of the Sunnyvale Municipal Code relating to the implementation of two new fees: a processing fee for new business license applications and a processing fee for all business license renewals. The proposed fee was set at $27.00 for new applications and $17.00 for renewals, based upon a time and motion study conducted by Finance staff during FY 2002/2003.

Unlike the Business License Tax, which is solely for revenue purposes and cannot be increased without voter approval, the Business License Processing Fee is a charge for the service of handling a new application or a renewal of a business license. As such, the fee should be calculated and reviewed each year to ensure that it is covering the cost of the service but no more.

Based on the hours and dollars budgeted for the business licensing activity in FY 2004/2005, the projected actual receipts from processing fees are essentially recovering the City’s full costs for providing the services. However, the budgeted hours are not representative of the real costs of performing the licensing services. As part of the budget reduction package for FY 2003/2004, Council approved a reduction in hours for the Business License activity in the Finance Department. This amounted to a reduction of approximately 600 hours. The primary reason that the hours were reduced was because we believed we could improve the renewal process through potential improvement opportunities. While staff was able to reduce the total number of hours required for business license activities, it was not possible to reduce by the full 600 hours anticipated.

At the August 10, 2004 Council Meeting, staff recommended and Council approved a temporary increase of 380 clerical support hours in order to convert to a two year renewal cycle and an increase to $54.00 for the new application processing fee and $23.00 for the renewal processing fee in order to fully recover costs.

This action is consistent with the City of Sunnyvale’s Fiscal Sub-element Action Statement 7.1A.1i: Establish user charges and fees at a level closely related to the cost of providing those services.

During the deliberations on the FY 2003/2004 Budget, Council inquired what process improvement activities the Finance Department had considered to reduce the processing fees and when the Finance Department would be prepared to bring recommendations back to the Council. Staff responded that they were looking at alternatives (including two-year renewals to deal with the staff reduction and new processing fees) and would report back to Council before the next renewal period in January 2004.

Staff came back to Council on January 13, 2004 (Status Report of Business License Process Improvement-For Information Only RTC #04-021) to request more time to work on reducing the renewal processing fee and the process improvement study to evaluate potential solutions to effectively process the business license renewals in upcoming years with the reduced staff.

During FY 2003/2004 the Deputy City Manager worked with Finance Department staff to develop recommendations to improve the processes used to issue and renew business licenses. There was little or no opportunity to generate significant, additional cost savings through further work hour reductions, given the remaining work hours assigned to this activity as discussed above. Therefore, the project focused on other potential process improvement opportunities.

The scope of work for this process improvement project identified three objectives: to redesign the process and any sub-processes, to increase Business License Tax revenues, and to provide a Report to Council (RTC) to present findings and recommendations. These findings and recommendations were presented to Council at the August 10, 2004 Council Meeting (Business License Process Improvement Project RTC #04-270).

To summarize, project staff completed a process map outlining the steps completed by staff in issuing an initial business license to a business either located in or operating in Sunnyvale, and the steps involved in renewing a business license. The process map identified several potential ways these processes could be improved. Two areas that staff focused on included: changes in the timing of the renewal process and recovering the full cost of services.

Council approved implementing a two-year renewal cycle and an increase to the processing fees in order to fully recover costs. The table below illustrates those costs.

Business License Processing Costs by New and Renewal

Two-Year Renewal Cycle

Moving to a two-year renewal cycle would involve a temporary increase of 380 hours of clerical support to the Treasury program for FY 2004/2005 at an additional cost of approximately $16,413. Because of vacancies this year, staff believes that resources can be reallocated within the existing Finance Department budget.

Currently, licenses are issued for one year. Allowing everyone to renew their license every two years would create the same workload problems with the reduction in staff that we currently have except that it would only occur every two years. In order for this alternative to be workable, it would be necessary to stagger the renewal schedule so that half of the licenses expire in one year and half expire the next year. Implementation of this option would require a one year transition period wherein half of the businesses would receive a one-year license for the first year only, and then would be on a two-year renewal cycle after that. The remaining half of the businesses would receive a full two-year renewal. Beginning the second year, the workload would be balanced with alternating two-year expiration periods.

For example, in late November or early December 2004, all businesses in the database will receive a renewal form. Currently there are about 8,500 active records in the business database that would receive renewal notices. Historical experience has shown that about 82% of these are still in business (about 7,000), while about 18% represents turnover (1,500). Under the two-year renewal proposal, approximately one-half of the businesses would receive a one-year license. The other half would receive a two-year license. In December 2005, the businesses with the one-year license would now renew their license for a two-year term. They would not be charged a processing fee for this two-year license since they were already assessed a processing fee with their one-year license. The end result would be that every year, beginning in FY 2005/2006, total licenses paid would now be 5,000 instead of 8,500 (1,500 new applications and 3,500 renewals).

When the two-year cycle is fully implemented, beginning in the second year, staff would only be processing about 50% of the previous renewals and savings in hours would occur. The 380 hours added to Fiscal Year 2004/2005 in order to implement this plan could be reallocated from this program in Fiscal Year 2005/2006 and there would be an additional 26 hours of savings that could be reallocated from this program due to this process improvement for a total of 406 hours as described in the August 10, 2004 Report to Council.

Implementing a two-year business license tax requires an amendment to the Municipal Code. Staff is also recommending that Council approve minor changes to the Municipal Code. Most of the changes are clarifications. However, two changes are more substantive in nature. First, the Municipal Code requires that we obtain the residence information on businesses located outside of Sunnyvale as well as corporate entities. This is not public information and since the Business License Tax is strictly for revenue purposes and not regulatory, staff has no means to verify the accuracy of this data. The proposed amendment would make this information voluntary rather than mandatory. Second, the Municipal Code is being updated to include another section of the California Business and Professions Code that exempts certain disabled veterans from the processing fee and the tax.

Moving to a two-year renewal cycle would involve adding 380 hours of clerical support to the Treasury program for FY 2004/2005 only at an additional cost of approximately $16,413. These resources can be reallocated within the existing Finance Department budget because of existing staff vacancies.

When implementation is complete, the two-year renewal cycle would provide for the smoothing of the workload beginning in FY 2005/2006 and allow for a reversal of the 380 hours added to the FY 2004/2005 budget and the reduction of an additional 26 hours due to process improvements resulting from going to a two year renewal.

The impact to a new business over a two-year period is that instead of paying $27.00 for the first year and $17 for the second year, the cost will be $54.00 for the two years, or an increase of $10 above existing fees. This increase, however, reflects the fact that a new application is actually more expensive to process than the current fees indicate.

The impact to a renewing business over a two-year period is that instead of paying $17.00 for the first year and $17.00 for the second year, the cost will be $23.00 for the two years, or a decrease of $11.00 from existing fees.

As a result of Council direction at the August 10, 2004 Council meeting, staff is prepared to increase the existing processing fees for new businesses to $54.00 and to $23.00 for renewals to ensure that full cost of the service is recovered and migrate to a two-year renewal cycle for business license taxes. These changes will be effective with the 2005 tax year.

PUBLIC CONTACT

Public Contact was made through posting of the Council agenda on the City’s official notice bulletin board, posting of the agenda and report on the City’s web page, and the availability of the report in the Library and City Clerk’s Office.

1. Adopt an ordinance to amend Chapter 5.04 of the Sunnyvale Municipal Code related to Business License Tax and adopt a resolution to increase the processing fees to $54.00 for new applications and $23.00 for renewing applications.

2. Adopt an ordinance to amend Chapter 5.04 of the Sunnyvale Municipal Code related to Business License Tax and do not adopt a resolution to increase the processing fees to $54.00 for new applications and $23.00 for renewing applications.

3. Do not adopt an ordinance to amend Chapter 5.04 of the Sunnyvale Municipal Code related to Business License Tax and do not adopt a resolution to increase the processing fees to $54.00 for new applications and $23.00 for renewing applications.

Staff recommends that Council approve Alternative #1 in order to migrate to a two-year renewal cycle and increase the processing fees to fully recover costs per Council’s previous direction on August 10, 2004.

Prepared by:

Therese B. Balbo,
Finance Manager

Reviewed by:

Mary J. Bradley Director,
Finance

Approved by:

Amy Chan
City Manager

1. Ordinance amending Chapter 5.04 of the Sunnyvale Municipal Code related to Business License Tax (.pdf format)
2. Resolution amending the City’s Fees, Rates and Charges Resolution pertaining to Business License Fees (.pdf format)