June 21, 2005
SUBJECT: Potential Increase to the Transient Occupancy Tax - Proposed Tax Structure, Call for November 8, 2005 Municipal Election Regarding the Transient Occupancy Tax, and Examination of Related Ballot Measure Language
REPORT IN BRIEF
With the adoption of the FY 2004/2005 Budget, the City Council approved for study a broad array of fiscal strategies to achieve cost savings or enhance revenues. These strategies are the continuation of a multi-year effort to address an on-going, structural gap in the City’s budget that emerged with the economic recession in late 2001. Through a series of carefully planned actions including expenditure/service level reductions, cost saving measures and fee increases to more fully recover cost of service, the structural gap has been significantly reduced. In keeping with prudent fiscal policy, additional strategies, including potential tax increases, must be considered to ensure that ongoing and long-term structural integrity of the City’s General Fund is secured and maintained.
Among the opportunities for revenue generation is the potential to increase the Transient Occupancy Tax (TOT), a major General Fund revenue source. Sunnyvale’s TOT rate is 8.5%, and is the lowest in the region. Sunnyvale’s TOT rate is lower than the 10.0% charged by most neighboring jurisdictions, suggesting that a proposed ballot measure to increase the TOT rate to that of surrounding communities would be justified.
In developing its recommendation, staff attempted to strike a balance between the City’s need for additional revenues to help maintain fiscal stability, the relatively low tax rate currently enjoyed by Sunnyvale hoteliers, and the specific challenges faced by this segment of the City’s business community. Staff therefore recommends that the Council move forward with a November 8, 2005 ballot measure to gradually increase the TOT by a total of 1.0% as follows: No increase (0%) for the remainder of 2005 and throughout 2006; 0.5% increase effective January 1, 2007; no additional increase in calendar year 2008; and an additional 0.5% increase effective January 1, 2009, provided that the average citywide hotel/motel occupancy rate is at least 60% for the 9-month period from January 1, 2008 through September 30, 2008. Should the occupancy rate be below 60% for this time period, staff recommends that the final 0.5% increase be effective January 1, 2010. Though staff initially envisioned a recommendation to increase the TOT rate from 8.5% to 10.0% (an increase of 1.5%), a more measured approach with a total increase of 1.0% over a multi-year period is being recommended, based in large part on the ongoing discussions with hotel/motel industry representatives.
It should be noted that the impact of this proposed tax increase on a daily hotel room rate of $100.00 would be $1.00 per day when the full 1.0% increase takes effect in 2009 or 2010. Any proposed increase to an existing tax would need voter approval. Since the TOT is a general tax, the election must be held with a regularly scheduled election of City Councilmembers.
Should the Council decide to propose a ballot measure to Sunnyvale voters, State election law requires that steps be taken to call an Election to be held in conjunction with the General Municipal Election scheduled for November 8, 2005. The required Council actions consist of: calling the election; accepting or modifying the wording of the ballot question and proposed amendments to the Sunnyvale Municipal Code; deciding on the preparation of the ballot argument for the measure; and authorizing the City Attorney to prepare the impartial analysis. As required by the County Registrar of Voters, these actions must be taken by August 12, 2005. Attached for Council consideration is a proposed resolution (Attachment A) to call the election. A more detailed discussion of the election requirements, as well as the proposed ballot language, appears in the Discussion section of this report.
BACKGROUND
Just four years ago, Sunnyvale experienced the worst fiscal crisis in its history. The City Council responded through a series of actions to reduce expenditures and enhance revenues. The structural budget gap in the General Fund was approximately $15 million at the end of FY 2001/2002. Beginning in FY 2004/2005, the gap had been narrowed to approximately $5 million on an annualized basis. (See RTC No. 05-038, January 31, 2005) Though the structural budget gap has been significantly narrowed (mainly through service level and other expenditure reductions), additional corrective action is needed.
As Council is aware, the Recommended FY 2005/2006 Budget, though in balance, is based on a “bare bones” approach that will require a $1.1 million ongoing decrease in expenditures or increase in revenue in the City’s General Fund beginning in FY 2006/2007. In addition, the Community Recreation Fund requires a $650,000 decrease in expenditures or increase in revenues starting in FY 2006/2007 in order to continue to be in balance and not draw further on the General Fund (which increases the annual General Fund gap to $1.75 million). Finally, some $444 million in unfunded capital projects has been identified. The Recommended FY 2005/2006 Budget includes a number of fiscal strategies from the current fiscal year to address the structural deficit in the General Fund. These strategies are based on a three-pronged approach: continuous improvements within the organization, expenditure reductions, and revenue enhancements, the latter including the potential to increase the Transient Occupancy Tax by presenting a ballot measure to Sunnyvale voters.
At the regularly scheduled meeting of June 7, 2005, the City Council approved a November 8, 2005 ballot measure to propose to Sunnyvale voters a three-year phased increase to the Business License Tax, with implementation beginning for the tax due January 1, 2007. If approved, it is estimated that the total additional annual General Fund tax revenue will increase by approximately $825,000, but not until the third year of implementation in 2009. Should the Council pursue a ballot measure to increase the TOT as proposed by staff, and if it is approved by the voters, an additional $600,000 in annual General Fund revenue would result, but not until at least 2009. Even if both ballot measures are approved, they would not produce enough revenue to cover the now estimated General Fund gap of $1.75 million.
As a general tax, an increase to the Sunnyvale TOT would require a majority public vote (50%, plus one) for passage in a general municipal election of City Councilmembers. For Sunnyvale, these elections are held in November of odd-numbered years. Should the Council wish to pursue this option, the earliest opportunity to present such a measure for voter approval would be the next regularly scheduled general election for City Councilmembers on November 8, 2005. Additional special election dates are possible, but this would require designation of the TOT as a special tax, which carries greater restrictions, mainly in terms of voter requirements (2/3 v. majority vote). Costs are also substantially higher for a separate special election, but there is much greater flexibility for election dates.
In late FY 2002/2003, the Council created an Ad Hoc Advisory Committee to study potential tax increases for voter approval. The Committee was comprised of business and other community members, including three Councilmembers (See Attachment C for the full list of Committee members). While the Committee recommended against tax increases at that time, it indicated that the Transient Occupancy Tax was one of the best options to present to the voters. The Ad Hoc Committee’s final report was presented to Council at the July 15, 2003 meeting (RTC No. 03-239). Council accepted the report, then approved in concept the placement of two measures regarding increases to the Business License Tax and the Transient Occupancy Tax on the November 4, 2003 ballot. After further deliberation at a Special Meeting dated August 6, 2003, the Council ultimately decided not to pursue ballot measures.
During February and March 2005, the Mayor held three roundtable meetings, two with hotel/motel industry representatives and one with general business community representatives/former members of the Ad Hoc Revenue Committee. The roundtable meetings were held as a first step in the outreach process to discuss this potential tax increase proposal. These meetings were meant to not only hear the issues/concerns of business and industry professionals, but to discuss the City’s general financial condition and the need to examine all available strategies to help close the structural budget gap.
The Mayor and City Manager have also been conducting site visits to specific businesses to further discuss potential tax increase measures for the TOT and the Business License Tax. Additionally, the City has engaged hotel/motel industry representatives in ongoing discussions. Finally, the City’s Economic Development staff included information on the potential tax increase/roundtable meetings in the Winter 2005 Edition of the Business Page Newsletter, which was sent to all Sunnyvale businesses. Email notification was also sent to those businesses on the City’s email distribution list. The Spring 2005 Newsletter was similarly mailed to all Sunnyvale businesses (and emailed to the distribution list), specifically to ensure that all current licensees were notified of this public hearing item.
As the Council considers proposing a TOT increase to the voters, other important factors should be taken into consideration, such as historical information on the tax, and the various State laws that have placed restrictions on municipal revenue raising authority.
Historical Information on Sunnyvale TOT
The Transient Occupancy Tax, or TOT, was adopted by ordinance in 1965 and became operative in 1968. The tax is assessed by hoteliers on behalf of the City on transients who occupy lodging establishments for 30 days or less. Sunnyvale currently has 34 hotels operating within City limits. Although the City’s TOT revenue has dropped by more than 50% since the economic downturn began in 2001 ($10.7 million in FY 2000/2001), it is still a major source of annual General Fund revenue, accounting for approximately 5%, or $5 million. Sunnyvale’s TOT is considered a general purpose revenue that supports General Fund services. As such it is defined as a general tax, which has important distinctions for potential tax increases that are more fully discussed below.
Historically, the TOT was increased from 5% to 6% in 1978, to 7% in 1989, to 8% in 1990 and was last increased in 1995 to a rate of 8.5%. (RTC No. 94-516) The last increase was approved by Council to offset a projected revenue loss due to granting an exemption to federal and state governmental employees (mostly federal) that was largely recommended and supported by the lodging industry as a crucial tool to remain competitive in the marketplace. Government business represented on average 20% of the industry’s business at that time. The Council was prepared to consider an additional 0.5% increase to 9% in 1996 if additional revenue loss occurred. This additional tax increase was never adopted. The ability to increase the TOT rate is now contingent on voter approval.
State Laws Affecting Local Taxes
Over time the relative ability of cities to levy taxes has been significantly restricted through the passage of state laws, most notably the voter-approved initiatives of Proposition 13 in 1978, Proposition 62 in 1986, and Proposition 218 in 1996. While many other state laws have been enacted that impact local government revenue raising authority, these three initiatives have produced the most substantive changes relative to new tax levies.
Differences Between General and Special Taxes
The passage of Propositions 13, 62 and 218 created important distinctions between types of taxes and the voter approval needed to enact such taxes, and imposed additional procedural requirements. The first major change created the distinction between general and special taxes. Since 1978, all local taxes fall into either one of these categories. A general tax refers to any tax imposed for general governmental purposes. Some examples of this tax include the Business License Tax, Sales and Use Tax, Property Tax, Transient Occupancy Tax and Utility Users Tax.
A special tax is any tax imposed for specific purposes. Examples of special taxes include Benefit Assessments, Special Taxes or Parcel Taxes for Library or Public Safety services, Paramedic Taxes, and Mello-Roos Community Facilities Districts.
Voter Requirements for General and Special Taxes
This distinction between general and special taxes also created specific voter requirements needed to enact either type of tax. To enact a general tax, a majority vote (50%, plus one) is required. The vote on general taxes must be consolidated with a regularly scheduled general election of City Councilmembers. The Council election requirement may be suspended in emergency situations declared by a unanimous vote of the City Council, although this has rarely occurred. Most of Sunnyvale’s existing taxes are general taxes. To enact a special tax, a 2/3 majority (66.7%) is required. The vote on a special tax may be held either in conjunction with or outside of the regular Council general election process at a special election.
EXISTING POLICY
The Fiscal Management Sub-Element of Sunnyvale’s General Plan contains several goals, policies and action statements that address the City’s revenue base, including, but not limited to the following:
Policy 7.1A.1 – Maintain a diversified and stable revenue base for the City
DISCUSSION
As Council and staff continue to closely monitor the City’s structural fiscal condition, it is essential that all available strategies are reviewed, including potential tax increases. In considering this particular option, it would be appropriate to outline the relative pros and cons of proposing an increase to the TOT, as defined and discussed by the 2003 Ad Hoc Revenue Committee, the 2005 Mayor’s Roundtable meeting participants, and the Mayor’s recent business visits. While staff is recommending a ballot measure to increase the TOT, it is important to outline for Council consideration both the positive and negative aspects to tax increases as identified by the participants involved in the various outreach efforts that have occurred over the past two years.
Advantages of TOT Increase
Sunnyvale’s TOT rate is the lowest among neighboring cities, and below the statewide average of 9.3% and median of 10.0%. As the table below indicates, most cities in the area have TOT rates of 10%, while Sunnyvale’s rate has been 8.5% for the past ten years.
|
City |
TOT Rate |
|
Santa Clara |
9.5% |
|
San Jose |
10% |
|
Mountain View |
10% |
|
Palo Alto |
10% |
|
Cupertino |
10% |
|
Milpitas |
10% |
|
Sunnyvale |
8.5% |
As the cost of service provision has increased for Sunnyvale, taxes such as the TOT have not been increased to keep pace. Because of this, the revenue generation potential for many of Sunnyvale’s taxes has eroded over time. Increasing the TOT to 9.5% would bring the tax closer to parity with neighboring jurisdictions and help ensure its viability as a General Fund revenue generator. This point was highlighted by the Ad Hoc Revenue Committee.
An increase to the TOT was also cited by the Committee as one of the most likely to gain a majority vote and the most palatable to Sunnyvale voters, as the tax would largely be assessed on visitors to the City. This assertion is supported by the historical voting record for ballot measures to increase local taxes. For example, in the November 2004 elections, there were 20 ballot measures to increase the TOT statewide, 50% of which were approved by voters. Conversely, there were 6 proposals to increase local Utility Users Taxes (UUT) and all failed. Further, only 1 of 7 proposals for a new UUT passed. In March 2004, 4 of 6 TOT increases were approved by voters, and 1 new UUT proposal failed. In November 2002, 12 of 16 proposals to increase TOT passed (75%), while 6 of 7 proposals for new or increased UUTs failed.
Another positive indicator to increasing the TOT pertains to Resident Satisfaction Surveys conducted by the City in 2000, 2001 and 2002, where residents preferred to increase taxes rather than reduce services, by a slim majority over a three-year period, as identified in the table below.
Survey Question: "All local governments are receiving less state and federal funding these days. To make up for the shortage of funds, what action should the City take?"
|
|
2000 Survey |
2001 Survey |
2002 Survey |
|
Increase local taxes |
58% |
51% |
53% |
|
Keep taxes at current levels, but reduce the level of service provided |
42% |
|
47% |
In April 2003, the City conducted an additional survey to gauge resident preferences on potential service level reductions for 45 existing services. This particular survey was conducted in direct response to the City’s unprecedented budget crisis in order to identify the degree to which residents would favor either substantially or moderately reducing City services, maintaining service levels and raising fees, or dropping services altogether. In addition, the survey contained a question about the degree to which residents would support raising fees, charges, or local taxes.
The results of the 2003 survey indicated that, when faced with an array of potential service cuts, 73% of residents would support an increase to fees, charges, or local taxes in order to maintain services and service levels. Significantly, these results represented a marked shift in support for increasing fees/taxes over the 2000-2002 survey results. Of the 73%, 42% of respondents supported a minor increase (<5%), 26% supported a moderate increase (5-10%), and 5% supported a significant increase (>10%). Conversely, 27% of respondents did not support any increase in fees/taxes.
Another Resident Satisfaction Survey will be conducted in June or July 2005 that will include questions similar to those used in the 2000, 2001 and 2002 surveys.
In May 2005, the Mayor and City Manager conducted specific business visits with representatives from Sunnyvale auto dealers and some of Sunnyvale’s largest employers including Advanced Micro Devices, Applied Materials, Juniper Networks, and Lockheed Martin. Generally, the representatives felt that an increase to the TOT would not significantly impact their companies, e.g., the cost of corporate travel could be managed effectively and would not be determined based on the TOT rate. Additional visits are planned with Network Appliance, Northrup Grumman and Trimble Navigation, and staff will update the Council as to positive or negative comments that result from these meetings.
Summary of Advantages to TOT Increase
-
Bring tax rate into parity with neighboring jurisdictions
-
Help ensure viability as a General Fund revenue generator
-
More palatable to voters than other taxes such as UUT
-
Residents support tax increase over further cuts
-
Does not appear to have major impacts on some larger businesses
Disadvantages to TOT Increase
While Sunnyvale’s TOT may be the lowest in the area, several concerns were raised by the hotel/motel industry and other business community representatives at the recent roundtable meetings as to why a tax increase should not be pursued. Some of the major issues centered around the fact that Sunnyvale is not a “destination point” for travelers. Roundtable participants expressed concern about increasing the TOT without additional incentives that would attract travelers to the community. Specifically, they cited the lack of an attractive downtown with restaurants and other amenities for guests. They recommended no increase in the TOT until the redevelopment of downtown is completed.
Hotels are predominantly occupied by “middle-of-the-week” business employees, whose corporations look closely at the bottom line hotel costs. An increase in the TOT would increase the costs for some local businesses who have contracts with Sunnyvale hotels and motels, and would potentially cause business travelers to stay in other locations.
Additionally, some Sunnyvale hotel properties are older with fewer amenities than hotels in other surrounding cities, making it more difficult to attract patrons (higher quality hotels are purported to offer competitive pricing as well). Given that hotel business in Sunnyvale has dropped by 50%, any increase in TOT, it was argued, would cause Sunnyvale hotels to reduce rates to stay competitive, possibly eroding or even negating the effects of a tax increase. Staff does not express an opinion on whether this will in fact occur, and knows of no studies or surveys that support or deny this assertion. However, it seems unlikely that a 1% TOT increase, implemented over a multi-year period, would have a significant impact on competitiveness. Such an increase would equate to an additional $1 on a $100 daily hotel room rate. It seems much more likely that needed infrastructure improvements that would improve the attractiveness of facilities or increase amenities would have a much greater impact on overall competitiveness.
In 2003, the Ad Hoc Committee opined that a TOT increase would unfairly burden the hotels and a few large businesses. This concern was echoed at the Mayor’s roundtable meetings, e.g., a tax increase should be fair, equitable and assessed on the entire Sunnyvale community, such as the Utility Users Tax, which would be applied to residents and businesses alike.
Summary Disadvantages to TOT Increase
-
Unfairly burdens hotels and large businesses who contract with Sunnyvale hotels/motels
-
Sunnyvale not a destination point for tourists; hotels dependent on business travel, which could potentially decrease if tax is increased
-
Some Sunnyvale hotel properties older with fewer amenities than in other cities; difficult to attract patrons
-
Hotels may need to reduce rates, possibly eroding effects of tax increase
Principles for Evaluating Need for Tax Increase Measure
As the 2003 Ad Hoc Revenue Committee began to consider potential tax increases, they developed a set of seven criteria to frame their discussion, as identified in the table below. The Committee then numerically determined whether the tax options as identified Met or Did Not Meet the criteria.
|
Criteria |
Supporting Statement |
|
Impact: |
Is the impact of the proposed tax appropriate given the City services that are provided to residents, businesses and visitors?
|
|
Efficient: |
Can the proposed tax be efficiently collected and enforced?
|
|
Effectiveness: |
Will the proposed tax generate sufficient revenues, both now and in the future, to justify its establishment?
|
|
Health, Safety and Welfare: |
Will the proposed tax promote the health, safety and welfare of the community?
|
|
City Competitiveness: |
Will the proposed tax maintain the City’s competitiveness to attract and retain residents, businesses and visitors?
|
|
Voter Acceptance: |
Is the proposed tax easy to communicate to Sunnyvale voters and likely to pass?
|
|
Legality: |
Can the proposed tax be legally established by the City? (Used as pass/fail test to see if a particular option would be researched further)
|
While the Committee ultimately recommended the Council not pursue tax increases at the time, using the above criteria they ranked the TOT as one of the most likely options to increase through a proposed ballot measure.
Proposed TOT Increase
Should the Council decide to pursue a ballot measure to increase the TOT, staff recommends that a phased and staggered, two-step increase be proposed to the voters. If the ballot measure is approved, the first 0.5% rate increase to 9.0% would not become effective until January 1, 2007. Staff additionally proposes that no increase occur in calendar year 2008. Provided that the average citywide occupancy rate is at least 60% for the 9-month period January 1, 2008 through September 30, 2008, an additional 0.5% increase to 9.5% would become effective January 1, 2009. If the average citywide occupancy rate is not at least 60% for this timeframe, then the additional 0.5% increase would become effective January 1, 2010. A measured and phased approach would allow the lodging industry to absorb the increase over a period of several years, thus lessening the impact of an immediate 1.0% increase to the TOT.
Though staff initially envisioned a recommendation to increase the TOT rate from 8.5% to 10.0% (an increase of 1.5%), a more measured approach with a total increase of 1.0% over a multi-year period is being recommended, based in large part on the ongoing discussions with hotel/motel industry representatives.
Timetables for Tax Measures
Should Council wish to pursue increasing the TOT, there are a number of procedural requirements set in State law and by City Charter that specify timetables (among other things) for elections held in Santa Clara County. It is important to note that, should Council wish to pursue increases or modifications to any existing general taxes, the opportunities to do so are restricted to a regularly scheduled general election of City Councilmembers. This means that November 2005 is the City’s first and only opportunity until November 2007 to propose a ballot measure to increase a general tax before the voters.
Sunnyvale’s next general municipal election will be held on November 8, 2005. This election must be consolidated with Foothill-DeAnza Community College District, Sunnyvale School District and Cupertino Union School District. Should Council wish to pursue a tax increase measure on the November 8, 2005 ballot, the deadline to file the appropriate information with the County to “call” the election is August 12, 2005. This means that the Council must call the election prior to August 12th at a regular or special meeting. The process would also require Council approval of the ballot measure wording and proposed amendments to the Sunnyvale Municipal Code, and to decide on the preparation of the ballot argument for each measure (as more fully described at the end of this report). These are the actions proposed at this meeting. Given the summer recess schedule, additional opportunities for Council action are limited to the regularly scheduled meetings of July 12 and 19, or August 9. A special meeting could also be scheduled prior to the August 12 County filing deadline.
Election Requirements and Ballot Language
The attached resolution calls an Election to be held in conjunction with the General Municipal Election on November 8, 2005, to vote on a ballot measure which would amend the Sunnyvale Municipal Code to increase the City’s Transient Occupancy Tax. In addition to calling the election, a series of actions must be taken prior to the election. First, the City Council must approve the ballot question that will be presented to Sunnyvale voters. Second, Council must consider amendments to the Municipal Code to incorporate the proposed tax structure changes. Third, Council must decide who will draft the ballot argument for the measure. Fourth, the Council may authorize the City Attorney to prepare the impartial analysis.
The proposed ballot question and summary of Municipal Code amendments are outlined below. The last subsection discusses the Council options for preparing the ballot arguments.
Transient Occupancy Tax – Ballot Question
Working in conjunction with City staff, the City Attorney has prepared the following ballot question relating to the Transient Occupancy Tax. The ballot question may not exceed 75 words, and should be presented in clear and concise fashion so that it is clearly understandable to the electorate:
CITY OF SUNNYVALE MEASURE _____
Shall the Sunnyvale Municipal Code be amended to increase the transient occupancy tax (commonly called the “hotel tax”) which is charged only on persons who occupy hotel or motel rooms in the City for 30 days or less, from the current 8.5% to 9.5%, over a 2-year period, which is lower than that charged in San Jose, Palo Alto, Mountain View, Milpitas and Cupertino, in order to help maintain basic City services?
Transient Occupancy Tax – Municipal Code Amendments
The proposed increase to the Transient Occupancy Tax would require modifications to the Sunnyvale Municipal Code. If approved by the Sunnyvale voters, the tax rate increase would be implemented over a multi-year period beginning with an increase from the current 8.5% to 9.0% effective January 1, 2007; no increase in calendar year 2008; to 9.5% effective January 1, 2009, provided that the average citywide hotel/motel occupancy rate is at least 60% for the 9-month period from January 1, 2008 through September 30, 2008. If the average citywide occupancy rate is not at least 60% for this timeframe, the increase to 9.5% will become effective on January 1, 2010. The proposed code changes are detailed in Attachment B.
Ballot Arguments For and Against
The State elections code provides for the filing of arguments for or against each ballot measure. If submitted, one argument “For” and one argument “Against” the measure will be printed with the sample ballot.
Ballot arguments may be filed with the City Clerk by the City Council, by any member or members authorized by the City Council, or any combination of voters or associations. Rebuttal arguments are allowed only if expressly authorized by the City Council. In previous elections the City Council has not authorized rebuttal arguments and, consistent with that policy, the attached resolution does not authorize the filing of rebuttal arguments.
Arguments for or against may not exceed 300 words in length. The form of ballot arguments and certain restrictions on the content are set forth in State Elections Code Section 9282. No more than five signatures appear on the argument. If any argument is signed by more than five persons, the signatures of the first five are used.
Elections Code Section 9286 requires that the City Clerk fix a date for the submittal of ballot arguments for or against, based on the time reasonably necessary to prepare and print the arguments and sample ballots and to permit the required public examination period. According to the election calendar produced by the County of Santa Clara, the date for submittal of ballot arguments is August 17, 2005, no later than 5:00 PM. Arguments already filed may be changed or withdrawn by their proponents up until the filing deadline.
If more than one argument for or against any measure is submitted, the City Clerk is required to select one of the arguments for printing. Preference is given to arguments submitted in the following order:
1. Argument submitted by the City Council or members of the City Council authorized by the Council;
2. The individual voter or bona fide association of citizens who are the bona fide sponsors or proponents of the measure;
3. Bona fide associations of citizens;
4. Individual voters.
If the City Council desires to submit an argument on the proposed measure, it may so indicate or provide authorization to one or more of its members to prepare the argument either for or against the measure. The City Council may wish to do that at this time or simply to give notice of its intent to do so to avoid unwarranted effort on the part of other persons who may wish to prepare such an argument.
Elections Code Section 9280 provides that the City Attorney may be directed to prepare an impartial analysis of the measure, which is not to exceed 500 words. The impartial analysis is due August 24, 2005. Direction to prepare such an analysis is included in the resolution.
Outreach Efforts to Date
To date, the City has conducted three roundtable meetings with business and industry members, and the Mayor/City Manager have made several additional business visits to discuss the potential tax increase measures. At least two additional site visits are planned. These meetings are being held to discuss business and industry concerns related to increased taxes and to review the City’s financial condition, including the need to examine all available strategies to ensure the ongoing and long-term structural integrity of the City’s General Fund. Additionally, the City has engaged hotel/motel industry representatives in ongoing discussions.
The City’s Economic Development staff also included information on the potential tax increase/roundtable meetings in the Winter 2005 Edition of the Business Page Newsletter, which was sent to all Sunnyvale businesses, and also sent email notification to those businesses on email distribution. Additional information on the potential tax increase was also included in the Spring 2005 newsletter.
Other Options
Alternatively, if the Council desired to change the nature of the TOT from a general tax supporting general services to a special tax to fund all or a portion of a specific purpose, then a public vote could take place at any established election. As discussed, special taxes carry a 2/3 voter threshold, and are inherently more difficult to pass, and the costs are significantly higher as well, ranging from approximately $150,000 for a special primary election to approximately $450,000 for a stand-alone election to consider a ballot question.
FISCAL IMPACT
Staff estimates that each 0.5% increase in TOT would result in approximately $300,000 in additional annual revenue at today’s level, e.g., the first 0.5% increase would produce $300,000 in additional annual revenue beginning January 2007, and an additional $300,000 beginning in either 2009 or 2010. This amount should increase as the economy continues to rebound, and would likewise decrease or stay constant if the economy remained sluggish.
The costs associated with a public vote on a ballot measure at the November 8th Municipal Election are estimated to be $25,000-$30,000.
Conclusion
As Council and staff continue to closely monitor the City’s structural fiscal condition, it is appropriate to review all available strategies, including potential tax increases. Absent corrective action, the structural imbalance in the City’s General Fund will continue to persist, and may lead to additional service reductions.
Council has the opportunity to review the fiscal benefit of an increase to the TOT to help ensure that the highest quality services continue to be provided to the residents of Sunnyvale. In considering this option, the relative pros and cons should be carefully weighed so that the most informed decision can be made that is of maximum benefit to the Sunnyvale community.
The Transient Occupancy Tax was originally enacted to provide the City of Sunnyvale with revenue to fund city services. Sunnyvale’s TOT is the lowest in the area at 8.5% and could be brought closer to parity with surrounding jurisdictions (the TOT rate for most cities in the area is 10.0%). An increase to the TOT would help ensure the continued provision of excellent services to the community.
In proposing a TOT increase lower than might otherwise be recommended, staff has attempted to strike a balance between the City’s need for additional revenues to help maintain fiscal stability, the relatively low tax rate currently enjoyed by Sunnyvale hoteliers, and the specific challenges faced by this segment of the City’s business community.
Though the Council has approved a November 8, 2005 ballot measure to increase the Business License Tax, the revenues derived from such an increase would not be fully realized until FY 2009/2010, if the measure passes. Staff has estimated that an additional $1.75 million in ongoing decreases in expenditures or increases in revenue will be needed beginning in FY 2006/2007 to maintain structural balance in the City’s General Fund and Community Recreation Fund.
PUBLIC CONTACT
Public contact was made through posting of the Council agenda in public places, on the City’s web page, and the publication of the Council agenda in the San Jose Mercury News and the availability of the report in the Library and the City Clerk’s Office. An advance copy of this report has also been provided to business and industry representatives and the Sunnyvale Chamber of Commerce through the Economic Development Division’s email distribution list.
ALTERNATIVES
There are several alternative actions that City Council could take at this time:
1. Approve the placement of a ballot measure on the November 8, 2005 ballot to propose to the voters a 1.0% graduated increase to the Transient Occupancy Tax consisting of 0.5% beginning January 1, 2007; no additional increase in calendar year 2008; and 0.5% beginning January 1, 2009, provided that the average citywide hotel/motel occupancy rate is at least 60% for the 9-month period January 1, 2008 through September 30, 2008. If the average citywide occupancy rate is not at least 60% during this timeframe, the final 0.5% increase will become effective January 1, 2010.
2. Approve the placement of a ballot measure on the November 8, 2005 ballot to propose to the voters an increase to the TOT rate not to exceed 10% upon completion of the mall redevelopment in downtown Sunnyvale.
3. Approve the placement of a ballot measure on the November 8, 2005 ballot to propose to the voters an initial increase to the TOT of 0.5% and, upon completion of the mall redevelopment in downtown Sunnyvale, additional increases of 0.5% per year not to exceed 10%.
4. Approve the placement of a ballot measure on the November 8, 2005 ballot to propose to the voters an increase to the TOT other than as stated.
5. Direct staff to perform further study for future Council consideration.
6. Take no action.
7. Adopt the attached resolution calling for an Election regarding the Transient Occupancy Tax (Attachment A).
8. Do not approve the attached resolution. If the resolution is not adopted by August 12, 2005, the Election will not be called.
9. Amend then adopt the resolution and/or ballot measure question.
10. Determine whether the City Council wishes to (a) exercise its right to draft a ballot argument for the measure and authorize a representative or representatives to proceed with preparation, or (b) decline to prepare a ballot argument in favor of the measure.
RECOMMENDATION
Staff recommends Alternatives 1, 7, and 10 (a).
The City has continued to engage hotel/motel industry representatives in ongoing discussions that have centered around two main concerns (in the context of potential negative impacts of a TOT increase): The current economic conditions faced by the hotel/motel industry and the age/condition of many Sunnyvale hotels as compared to local competitors. These concerns must be balanced with the City’s need to maintain fiscal stability for the long-term to minimize the further negative impacts to Sunnyvale residents that could result from additional service and/or service level reductions.
Staff recognizes that ultimately it is in the best long-term interest of the City to work collaboratively with the business community (and vice versa) to achieve the mutually beneficial goal of improving the quality of life in Sunnyvale. Such efforts can help ensure continued and shared successes. Given this, staff recommends that the Council propose to the voters on November 8, 2005 a 1.0% measured TOT increase based upon a phased and staggered approach over the next several years, as follows:
· 0% increase for the remainder of 2005 and throughout 2006
· 0.5% increase beginning January, 2007
· No increase in calendar year 2008
· An additional 0.5% increase beginning January 2009, provided that the average citywide hotel/motel occupancy rate is at least 60% for the 9-month period January 1, 2008 through September 30, 2008
· If the occupancy rate is not at least 60%during this timeframe, the additional 0.5% increase will be deferred until January, 2010.
This gradual approach will allow the hotel/motel to absorb the increase over a period of several years, in which time the economy will continue to rebound and the redevelopment of the downtown mall will be completed, which should have a positive impact on hotel/motel occupancy rates. It is hoped that this approach will also help encourage business investment by the hotel/motel industry to make needed capital improvements to its aging infrastructure and amenities.
Prepared by:
Pete Gonda
Senior Management Analyst, Finance
Reviewed by:
Mary J. Bradley
Director, Finance
Approved by:
Amy Chan
City Manager
Attachments
A. Proposed Resolution to call the Election for an increase to the Transient Occupancy Tax (with Exhibit A) (.pdf format)
B. Proposed Amendments to Municipal Code for the Transient Occupancy Tax (.pdf format)
C. Members and Alternates of the Ad Hoc Advisory Committee to Consider Increasing Existing and/or Establishing New Local Taxes (.pdf format)