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RPVCCA_CC_SR_2014_08_19_07_UUT_Collection_Suspension_ResolutionCITY OF RANCHO PALOS VERDES MEMORANDUM TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: CAROLW. LYNCH, CITY ATTORNEY AND DENNIS MCLEAN, DIRECTOR OF FINANCE DATE: AUGUST 19, 2014 SUBJECT: ADOPT A RESOLUTION AUTHORIZING THE INDEFINITE SUSPENSION OF COLLECTION OF UTILITY USERS TAX BY TELECOMMUNICATION PROVIDERS FROM THE CITY'S TAXPAYERS REVIEWED: CAROLYNN PETRU, ACTING CITY MANAGER RECOMMENDATIONS: 1) ADOPT RESOLUTION NO. 2014-_: A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF RANCHO PALOS VERDES AUTHORIZING THE INDEFINITE SUSPENSION OF COLLECTION OF UTILITY USERS TAX BY TELECOMMUNICATION PROVIDERS FROM THE CITY'S TAXPAYERS UNTIL SUCH TIME AS REVISIONS TO THE CITY'S UTILITY USERS TAX ARE APPROVED BY THE CITY'S VOTERS AND CREATING A SE PARA TE ACCOUNT COMMITMENT ENCUMBRANCE OF THE GENERAL FUND REFERRED TO AS THE "UTILITY USERS TAX TELECOMMUNICATION CLAIM ACCOUNT"; 2) If the City Council adopts the Resolution described above, direct Staff to timely send notification letters to all telecommunication providers that serve taxpayers in the City directing them to immediately discontinue collecting 3% Utility Users Tax on telecommunication services; 3) Direct Staff to determine an estimate of the total Utility Users Tax collected by telecommunication providers from taxpayers in the City during the twelve 7-1 (12) month period beginning August 13, 2013, transfer such amount, as well as all Utility Users Tax received from telecommunication providers thereafter and deposit such amounts in the Commitment encumbrance of the General Fund referred to as the "Utility Users Tax Telecommunication Claim Account"; and 4) Direct Staff to return with proposed budget adjustments in the General Fund for FY14-15 totaling the estimated amount of the expected reduction of Utility Users Tax revenue from telecommunication providers in order to maintain a balanced budget in accordance with the City Council Reserve Policies 41 and 45. BACKGROUND: The following Background was included in the Staff Report to the City Council, dated July 15, 2014, July 29, 2014 and August 5, 2014: ~ In 1993, the City Council adopted the City's Utility Users Tax ("Tax" or "UUT"). The amount of the Tax is 3%. It is imposed on City residents who use telephone service, electricity, co-generated electricity, natural gas, and water. ~ Subsequently, the voters of the State of California adopted Proposition 218. ~ To comply with Proposition 218, in 2004, the City Council placed the Tax on the ballot, and the voters ratified the existing Tax at the same 3% rate. ~ The City's Tax originally was imposed upon all telephone services that were subject to the Federal Excise Tax ("FET"). In response to litigation, in 2006, the Internal Revenue Service issued a ruling stating that the FET does not apply to most common telephone billing plans. This invalidated the basis for the City's Tax as applied to telephone service. ~ In response to these events, some cities, including Rancho Palos Verdes, amended their ordinances without voter approval to delete the reference to the FET and replaced it with other terms to cover telephone services that had been subject to the FET. Other cities placed their UUT measures on the ballot, and some cities took no action. Subsequent litigation and court rulings clarified that such changes to the UUT ordinances require voter approval. ~ Since 2006, many changes have occurred with respect to telephone services that have caused the definitions in the UUT to become outdated. Some types of telephone services currently are not subject to the tax, while 2 7-2 others are. This inequity cannot be corrected without placing revisions to the Tax on the ballot for approval by the voters. ~ Recently, new legal challenges and claims have been filed against other cities that did not place their amended utility user taxes on the ballot. Attorneys in those cases have claimed damages and substantial attorney's fees. 0fVe understand that Chula Vista paid $2 million in attorneys' fees to the attorneys who filed a lawsuit challenging that city's utility user tax.) Staff presented a recommendation to the City Council over several meetings to place an ordinance on the November 2014 ballot to protect future UUT revenues from legal challenge and to modernize the UUT. The Council did not cast the unanimous vote necessary to place an ordinance before the voters on either the November 2014 or on the March 2015 ballots. Afterwards, the Mayor requested that the possible indefinite suspension of collection of Utility Users Tax for telecommunication services provided to the City's . taxpayers be agendized for consideration at this Council meeting. On August 13, 2014, the City received the attached Claim For Refund And Other Relief Regarding Certain Telephone Services from the law firm of Marks Finch, on behalf of City resident Sharon Yarber. Prior to completion of this Staff Report, Mayor Duhovic advised Staff that he would like to explore the mechanics of providing refunds to City residents for the UUT that was collected on telecommunications services over the twelve month period preceding the date of the claim. Staff agrees with the Mayor's idea and would like to promptly investigate several UUT refund methods described immediately above and provide additional information to the City Council at tonight's meeting or at a subsequent City Council meeting. DISCUSSION: Utility Users Tax Telecommunication Claim Account Under Section 3.24.030 of the City's Municipal Code, a claim for refund of a tax that has been improperly collected or paid to the City must be presented to the City within one year of the date of the accrual of the claim. In light of the claim filed August 13, 2014, and subject to approval of the proposed Resolution by the City Council, Staff will determine an estimate of the total Utility Users Tax collected by telecommunication providers from taxpayers in the City and remitted to the City during the twelve (12) month period beginning August 13, 2013. Once the total is determined, Staff would transfer such amount, as well as all Utility Users Tax received from telecommunication providers thereafter, and deposit such amounts in the Commitment encumbrance of the General Fund referred to as the "Utility Users Tax Telecommunication Claim Account" (the ""UUT Claim Account"). 3 7-3 In late 2011, the City Council unanimously approved a settlement brought by the Sipple class action lawsuit regarding collection of UUT by AT&T on telecommunication services they provided City taxpayers. Although the claim was for nearly five (5) years, the settlement included refunds for one year of UUT collected for AT&T services in accordance with the Municipal Code 3.24.030. As a part of the settlement, AT&T and the plaintiff agreed to continued collection of a portion of telecommunication services billed by AT&T going forward. If the City Council decides to indefinitely suspend UUT on all telecommunication services, it should suspend UUT that is being collected by AT&T as well, notwithstanding the terms of the previous settlement. To create the UUT Claim Account, the City Council would pass the attached Resolution that will encumber (set-aside) the monies for payment using one of the followihg methods: (1) future claims for refund by the City's taxpayers (the method used by the City of Chula Vista to pay similar claims); or (2) providing credits as refunds to City taxpayers directly by the telecommunication providers on future bills; or (3) coordinating refund checks to the City taxpayers of record with · telecommunication providers or any other efficient and fair combination of the three refund methods. Staff also would like to timely research the merits of outsourcing the refund process to an independent third party with industry experience. If the City Council adopts the attached Resolution to establish a UUT Claim Account, the funds would not be available for use for any other purpose until taxpayer claims for refunds are paid and the subsequent approval of another resolution by the Council to transfer any remaining funds back to General Fund reserves. The commitment to set aside of monies in the UUT Claim Account for taxpayer refunds by resolution of the City Council is the highest form of reservation of funds in accordance with generally accepted accounting principles. It is the same process that would be followed by the City Council to establish a fiduciary fund (e.g. for a pension plan or a special assessment district). This proposed accounting methodology was discussed with the audit partner of Vavrinek, Trine & Day, LLP, the City's independent auditors, who validated this proposed accounting treatment. FY14-15 Budget Decreases The discontinuance of the collection of the UUT on telecommunication services indefinitely would lead to a significant, annual loss of about $700,000 of UUT revenue to the General Fund -about 3-4% of the total annual General Fund operating budget. If the City Council adopts the proposed Resolution, it would be prudent for the City Council to immediately direct Staff to promptly develop revisions to the FY14-15 Budget to restore a balanced budget in accordance with City Council Policy No. 45 -Balanced Operating Budget. There are two City Council policies to consider when making the adjustments. 4 7-4 1. Policy No. 41 -Reserve Policies requires Transient Occupancy Tax (TOT, a recurring revenue) be transferred to the Capital Improvement Projects (CIP) Fund. Policy No. 41 also requires the prior year General Fund expenditure variance be transferred to the CIP Fund. Therefore, General Fund money that has been transferred to the CIP Fund pursuant to this policy and has been used to fund one-time FY14-15 appropriations should not be considered to balance the structural budget. However, these resources, as well as the General Fund Reserve (rainy day fund) may be considered by the City Council to provide a one-time emergency stop-gap for either a temporary loss of UUT or claims for past collections of UUT. 2. Policy No. 45 -Balanced Operating Budget requires that recurring expenditures do not exceed recurring revenues. Therefore, reducing one- time FY14-15 appropriations should not be considered to balance the structural budget. Again, these one-time resources may be considered to . provide a one-time emergency stop-gap. The City Council could elect to set-aside City Council Policy No. 45. However, the City's former Financial Advisor previously expressed caution that setting aside . newly established fiscal policies could be viewed unfavorably by municipal debt rating agencies, if and when the City's initial debt rating is pursued. With City Council direction, Staff will promptly prepare a Staff Report with a menu of potential FY14-15 budget adjustments, including revenue proposals, such as a possible increase of facility-use fees. As reported with the 2014 Five-Year Financial Model and on July 15, 2014, Staff anticipates a number of challenges associated with balancing the structural budget in the future. The challenges include increasing costs to comply with clean water law, increasing costs of residential street rehabilitation, anticipated subsidies for right-of-way maintenance, sunset of the storm drain user fee, and the increased contribution to the Los Angeles County Sheriff's liability trust fund. Nothing has been included in the structural budget for any future adjustments to employee compensation and benefits. The Staff Report could also include a review of 2014 City Council Goals including programs and services that are not funded in the FY14-15 budget for the General Fund. Attachments: Draft Resolution Staff Report, Dated July 15, 2014 Staff Report, Dated July 29, 2014 Staff Report, Dated August 5, 2014 Claim For Refund And Other Relief Regarding Certain Telephone Services from the law firm of Marks Finch on behalf of City resident Sharon Yarber 5 7-5 RESOLUTION NO. A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF RANCHO PALOS VERDES AUTHORIZING THE INDEFINITE SUSPENSION OF COLLECTION OF UTILITY USER TAX BY TELECOMMUNICATION PROVIDERS FROM THE CITY'S TAXPAYERS UNTIL SUCH TIME AS REVISIONS TO THE CITY'S UTILITY USER TAX ARE APPROVED BY THE CITY'S VOTERS AND CREATING A SEPARATE ACCOUNT COMMITMENT ENCUMBRANCE OF THE GENERAL FUND REFERRED TO AS THE "UTILITY USERS TAX TELECOMMUNICATION CLAIM ACCOUNT" WHEREAS, in 1993, the City Council adopted the City's Utility Users Tax ("Tax" or "UUT"). The amount of the Tax is 3%. It is imposed on City residents who use telephone service, electricity, co-generated electricity, natural gas, and water; and WHEREAS, subsequently, the voters of the State of California adopted Proposition 218;and WHEREAS, to comply with Proposition 218, in 2004, the City Council placed the Tax on the ballot, and the voters ratified the existing Tax at the same 3% rate; and WHEREAS, the City's Tax originally was imposed upon all telephone services that were subject to the Federal Excise Tax ("FET"). In response to litigation, in 2006, the Internal Revenue Service issued a ruling stating that the FET does not apply to most common telephone billing plans. This invalidated the basis for the City's Tax as applied to telephone service; and WHEREAS, in response to these events, some cities, including Rancho Palos Verdes, amended their ordinances without voter approval to delete the reference to the FET and replaced it with other terms to cover telephone services that had been subject to the FET. Other cities placed their UUT measures on the ballot, and some cities took no action. Subsequent litigation and court rulings clarified that such changes to the UUT ordinances require voter approval; and WHEREAS, since 2006, many changes have occurred with respect to telephone services that have caused the definitions in the UUT to become outdated. Some types of telephone services currently are not subject to the tax, while others are. This inequity cannot be corrected without placing revisions to the Tax on the ballot for approval by the voters; and WHEREAS, recently, new legal challenges and claims have been filed against other cities that did not place their amended utility user taxes on the ballot. Attorneys in those cases have claimed damages and substantial attorney's fees; and WHEREAS, on August 13, 2014, City resident Sharon Yarber filed a claim against the City in the amount of $5 million regarding UUT that the City has collected since 2006; 7-6 WHEREAS, Section 3.24.030 of the City's Municipal Code states: a claim for refund of a tax that has been improperly collected or paid to the City must be presented to the City within one year of the date of the accrual of the claim. NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF RANCHO PALOS VERDES DOES HEREBY FIND, RESOLVE AND ORDER AS FOLLOWS: SECTION 1. The City Council hereby orders City Staff to notify providers of telecommunications services within the City to cease collecting the City's Utility User Tax from the City's taxpayers until such time as revisions to the City's Utility User Tax are approved by a majority of the City's voters. SECTION 2. The City Council hereby orders City Staff to establish a separate Commitment encumbrance of the City's General Fund, which shall be referred to as the "Utility User Tax Telecommunication Claim Account or "UUT Claim Account." City Staff is directed to determine an estimate of the total Utility User Tax collected by telecommunication providers from taxpayers in the City and remitted to the City during the twelve (12) month period beginning August 13, 2013. Once the total is determined, Staff shall transfer such amount, as well as all Utility User Tax received from telecommunication providers after August 19, 2014, into the "UUT Claim Account." SECTION 3. The City Council hereby orders that funds that are held in the UUT Claim account shall only be available for payment of claims or refunds relating to Utility User Tax payments that were paid previously to the City; said funds shall not be available for use for any other purpose until taxpayer claims for refunds are paid and until another resolution is approved by the City Council authorizing the transfer of any remaining funds back to General Fund reserves. PASSED, APPROVED and ADOPTED this_ day of August 2014. Mayor ATTEST: CITY CLERK -2-7-7 STATE OF CALIFORNIA ) COUNTY OF LOS ANGELES )ss CITY OF RANCHO PALOS VERDES ) I, Carla Morreale, City Clerk of the City of Rancho Palos Verdes, hereby certify that the above Resolution No. _was duly and regularly passed and adopted by the said City Council at a regular meeting held on _, 2014. -3-7-8 CrrYOF RANCHO PALOS VERDES MEMORANDUM TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: CAROLW. LYNCH, CITY ATTORNEY DATE: JULY 15, 2014 suaJECT: ORDINANCE REDUCING THE UTILITY USER TAX RATE FROM 3% TO 2.75% AND MODERNIZING THE CITY'S UTILITY USER TAX AND EMERGENCY RESOLUTION AUTHORIZING THE CITY COUNCIL TO CALL AN ELECTION ON NOVEMBER 4, 2014 TO REQUEST THE VOTERS TO APPROVE THE ORDINANCE REVIEWED BY: CAROLYNN PETRU, ACTING CITY MANAGER© RECOMMENDATIONS 1. ADOPT RESOLUTION NO. 2014-_; A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF RANCHO PALOS VERDES, UNANIMOUSLY DECLARING AN EMERGENCY IN CONNECTION WITH THE PLACEMENT OF A MEASURE THAT MODERNIZES THE CITY'S UTILITY USER TAX AND DECREASES THE RATE OF THE TAX ON THE BALLOT FOR A SPECIAL MUNICIPAL ELECTION TO BE CONSOLIDATED WITH THE NOVEMBER 4, 2014 ELECTION 2. INTRODUCE ORDINANCE NO. _; AN ORDINANCE OF THE PEOPLE OF THE CITY OF RANCHO PALOS VERDES, REDUCING THE RATE OF THE CITY'S UTILITY USER TAX FROM 3% TO 2.75% AND MODERNIZING THE CITY'S UTILITY USER TAX BACKGROUND In 1993, the City Council adopted the City's Utility Users Tax ("Tax" or "UUT"). The amount of the Tax is 3%. It is imposed on City residents who use telephone service, electricity, co-generated electricity, natural gas, and water. Subsequently, the voters of the State of California adopted Proposition 218. Even though the City's Tax had been in effect prior to the adoption of Proposition 218, in order for the City to continue to collect the Tax legally, voter approval was 7-9 required. Accordingly, in 2004, the City Council placed the Tax on the ballot, and the voters ratified the existing Tax at the same 3% rate that had beerr adopted by the City Council. Like many utility users taxes, the telephone portion of the City's Tax originally was imposed upon telephone service that was subject to the Federal Excise Tax ("FET"), because, at that time, it was believed that the FET could be imposed upon the broadest categories of telephone services. The FET was used routinely by municipalities as the basis for imposing a utility user tax, so those locai taxes also would be imposed on the broadest range of telephone services. However, a decision by a federal court invalidated a portion of the methodology that was used in the FET. Subsequently, in 2006, the Internal Revenue Service issued a ruling stating that the FET does not apply to most common telephone billing plans, such as one-rate plans that charge a flat rate for all calls. (The California Municipal Law Handbook Section 5.50.) Thus, like most utility users taxes in the state, the basis of the imposition of the City's Tax, as applied to telephone service, was no longer valid. In response to these events, some cities put their utility taxes on the ballot for voter approval of new definitions of telephone services upon which to impose the utility users tax; others did not amend their ordinances, which still contain the reference to the FET; and others, like Rancho Palos Verdes, amended their ordinances without voter approval to delete the reference to the FET and added a different definition of the telephone services upon which the UUT would be imposed. In taking this latter approach in 2006, the City Council made fin.dings that the intent of the changes to the Tax was not to expand the Tax to any new categories ·of telephone service that had not been taxed previously, so that voter approval should not be required. The City Council took this action, rather than placing the Tax on the ballot again, because the City's voters had ratified the City's Tax fairly recently, and it was unclear whether changing the definition of the telephone service upon which the Tax could be imposed would require voter approval. Subsequent cases have addressed that issue and have clarified that the option that clearly is legally defensible is to place any definition changes and updates to the UUT on the ballot for approval. Since 2006, many changes have occurred with respect to telephone services that have caused the definitions in the UUT to become somewhat outdated. Accordingly, some types of telephone services currently are not subject to the tax, while others are. This is not completely fair to City residents who use telephone services and currently are subject to the City's UUT. Accordingly, Staff proposes placing an ordinance on an upcoming ballot that will modernize the UUT. In. addition, at the June 17, 2014 City Council meeting, Council Member Campbell suggested that the City Council should consider reducing the R6876.0001/1720561 v2 2 7-10 rate of the City's UUT. The ordinance that modernizes the UUT also could reduce the rate of the City's UUT below the current rate of 3%. The Ordinance that is attached to this staff report proposes a reduction of the current tax rate of 3% to 2.75%. Of course, another tax rate also could be selected by the City Council and presented to the voters. History of UUT Approximately $2.6 million of UUT is deposited into the City's General Fund annually. About $0.7 million of this amount is based upon telecommunications services (telephone land line, long distance, and cellular service), and the remainder is based upon electricity, gas and water service. A five-year history of UUTfollows: ·~ .,.,.,. .v,, ..... ,· ' . ' ....• ,-.·.· ....... ·,···. ~~·.· ........ \.·,·.··" · .... ~· .•. •' .. , .... · ,·, .· ·-···· ........ , .·. ,., ~-.,.,, ·' .~ .,, .· • .. ·.-· ,., ,, -·· .· ..•. l ! $3,000,000 ! $2,500,000 ! ' ~ ! $2,000,000 i $1,500,000 ! · l $1,000,000 ! $500,000 S- Utility Users' Tax FY09-10 FYl0-11 FY11-12 FY12-13 11!!1 Electricity, Gas & Water ""Telecommunications Loss of UUT -Budget Impact FY13-14 The FY14-15 General Fund revenue budget is $26.5 million. A net expenditure of about $19.2 million represents the City's operating budget; and $7.3 million will be transferred to the Capital Improvement Projects (CIP) Fund for infrastructure repair, replacement and improvement. Based upon the operating and capital needs of the City, the City Council has determined that the UUT rate of 3% continues to be a necessary General Fund revenue source. The FY14-15 General Fund budget is balanced by a thin margin. If the General Fund were to lose a revenue source such as UUT, the impact to the current level of service would be significant. Even if there is no loss of UUT, Staff expects that the General Fund budget will become more difficult to balance in future years. • As reported with the 2014 Five-Year Financial Model, Staff expects that the accumulated Street Maintenance Fund balance will be depleted, and R6876.0001/1720561 v2 3 7-11 the General Fund will be required to resume large subsidies for right-of- way maintenance beginning in FY15-16. • The Los Angeles County Sheriffs Department has notified the City to expect additional increases to the required liability trust fund contribution in FY15-16. • Staff expects that expenditures will increase over the next couple of years to keep pace with the latest storm water quality mandates from the state and federal governments. Due to conservative budget management, the City's General Fund does have a history of favorable expenditure variances, which have averaged about $1.0 million annual over the last 10 years. However, due to the increased need to improve the City's aged infrastructure and the limited availability of restricted revenue dedicated to infrastructure, the City Council recently modified its Policy No. 41 -Reserve Policies to transfer favorable General Fund expenditure variances to the CIP Fund for additional infrastructure funding. There are currently 3 components of infrastructure subsidies from the General Fund: 1. Annual transfer for the residential street rehabilitation program (FY14-15 budget of $3 million); 2. Annual transfer equivalent to the City's transient occupancy tax revenue (FY14-15 budget of $4 million; and 3. Annual transfer of the prior year expenditure variance (most recent was $1.7 million FY12-13 variance transferred in FY13-14). Over 10 years through FY14-15, General Fund transfers total more than $16.7 million for street improvements and $18.4 million for storm drain improvements. However, even with the large General Fund subsidies for infrastructure, projects with estimated costs totaling at least $28 million have been identified in the 2014 Five-Year Capital Improvement Plan that remain unfunded over the next five years. Fiscal Impact of Rate Reduction As part of a potential UUT modernization ballot measure, the City Council may consider a proposed reduction to the UUT rate, as suggested by Councilmember Campbell. The annual fiscal impact of the proposed quarter-percent reduction (from 3% to 2.75%) is a revenue decrease of about $221,675. r·-······--·-·-· .. ·-· .. ·--·-····-····-·-·-·-.. ---.. -... --···--·· .. -·--···-,.... .. _.,, ... _. ____ -... -... -... ·-·. FY14-15 Budgeted UUT 3% $2,660,100 ..fl..:..15% Reduction (from 3% to 2.85%) $ 133,005 0.25% Reduction (from 3% to 2. 75%) $ 221,675 .Q:..?.~B~~ .. 1:1 .. ~i-~-~.Jfr<? .. ~~% _to ~:.?~1.-·--· -·~----·¥_3,3?.Q~ The fiscal impact of the City Council's alternatives are as follows: R6876.0001/1720561 v2 4 7-12 1. If the City Council takes no action to propose a UUT modernization ballot measure, the City could lose up to $0.7 million of annual UUT based upon telecommunications service, until a measure is brought before the voters for approval. 2. If the City Council proposes a UUT modernization ballot measure, the following outcomes are possible: a. The ballot measure fails, and the City loses about $0.7 million of annual UUT revenue; b. A ballot measure with no proposed rate reduction prevails, and the City's UUT revenue remains intact; or c. A ballot measure prevails with a proposed rate reduction of a quarter-percent, and the City loses an estimated $221,675 of annual UUT. Staff recommends that the City Council include a reduction of the rate of the UUT from 3% to 2.75% in the ordinance that is presented to the voters because that reduction will benefit the residents while still providing the majority of the current revenue stream from the UUT to the City to fund City services. DISCUSSION The benefit to the City's residents of placing the City's UUT on the upcoming November ballot is obvious. If the voters were to approve an ordinance that modernizes the City's UUT at a reduced rate, such as 2.75%, the residents will receive the benefit of the reduction of the rate of the UUT. In addition, by modernizing the UUT, newer telephone-related services will be treated the same, so that telephone users in the City are treated alike. In addition, by placing the measure on the ballot at the earliest possible election date, which is November 2014, any dispute about the UUT on telephone services will be resolved a year earlier than if the City waits to place such a measure on the ballot in November 2015, when the next regular City Municipal election will occur. If the City Council wishes to place the UUT on the November 2014 ballot, the City Council must adopt a resolution setting forth an emergency that justifies the election being held prior to an election date that is different from the date of the City's regular municipal elections in November of odd numbered years. Staff believes that there are facts upon which the City Council may rely in declaring an emergency and calling the election in November 2014, instead of waiting until November 2015. Those facts are set forth in the attached resolution and are reiterated here: · 1. Continuous State takeaways over the last few years, including the state's recent elimination of redevelopment agencies, have resulted in significant R6876.0001/1720561 v2 5 7-13 reductions in revenues that the City intended would be used to repay the City for loans made previously to the Rancho Palos Verdes Redevelopment Agency for expenditures to address landslide damage and increase land stability within former Redevelopment Project Area No. 1. 2. The Portuguese Bend Landslide is a large active landslide that continues to move and adversely affects public infrastructure, including Palos Verdes Drive South, a major arterial street in the City. The constant damage caused by the landslide requires constant and increased City expenditures to maintain PVDS as a viable arterial street. 3. During the recession, the State took money monies that previously were allocated to cities to reduce the State's budget deficit .• and it is expected that similar actions will occur again in the future in response to downturns . in the economy. 4. ·The cost to the City of complying with state and federal clean water rules continues to increase each year. 5. The City has many unfunded important infrastructure projects, which are discussed above, totaling more than $28 million, including unfunded projects to improve City streets ($4. 7 million), and storm drains ($9.4 million). 6. The City of Rancho Palos Verdes seeks to maintain current levels of public safety and police services within the City, even though the cost of such services continues to increase, including the City's contribution to the County liability trust fund for law enforcement services, which the City has been notified will increase again in fiscal year 15-16. 7. The cost saving measures the City has employed in recent years to maintain a balanced City budget will not be sufficient to avoid future cuts to services provided by the City to the community, which would have a negative impact upon public safety and the character of the community in Rancho Palos Verdes. If the City Council concurs with the above findings and that the ordinance reducing the rate of the UUT and modernizing its provisions should be placed on the ballot for the upcoming election in November 2014, instead of having to wait until the next regular City election in November 2015, then the City Council should adopt the attached resolution; the adoption of the resolution requires a unanimous vote. CONCLUSION In addition to adopting the attached resolution, the City Council should review the attached ordinance and determine if the City Council agrees with Staff's recommendation that the current rate of the UUT should be reduced from 3% to 2.75% or if another rate should be chosen instead. Attachments: Draft Resolution Draft Ordinance Public Correspondence R6876.0001/1720561 v2 6 7-14 CrrYOF RANCHO PALOS VERDES MEMORANDUM TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: CAROLW. LYNCH, CITY ATTORNEY DATE: JULY 29, 2014 SUBJECT: ORDINANC.E REDUCING THE UTILITY USER TAX RATE FROM 3% TO 2.75% AND MODERNIZING THE CITY'S UTILITY USER TAX AND EMERGENCY RESOLUTION AUTHORIZING THE CITY COUNCIL TO CALL AN ELECTION ON NOVEMBER 4, 2014 TO REQUEST THE VOTERS TO APPROVE THE ORDINANCE REVIEWED: CAROLYNN PETRU, ACTING CITY MANAGE~ RECOMMENDATIONS: 1) ADOPT THE ATTACHED RESOLUTION: A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF RANCHO PALOS VERDES UNANIMOUSLY DECLARING AN EMERGENCY IN CONNECTION WITH THE PLACEMENT OF A MEASURE THAT DECREASES THE RATE OF THE CITY'S UTILITY USER TAX FROM 3% TO 2. 75% AND MODERNIZES THE TAX ON THE BALLOT FOR A SPECIAL MUNICIPAL ELECTION TO BE CONSOLIDATED WITH THE NOVEMBER 4, 2014 ELECTION, AND 2) INTRODUCE THE ATTACHED ORDINANCE: AN ORDINANCE OF THE PEOPLE OF THE CITY OF RANCHO PALOS VERDES REDUCING THE RATE OF THE CITY'S UTILITY USER TAX FROM 3% TO 2.75% AND MODERNIZING THE ·CITY'S UTILITY USER TAX. 7-15 INTRODUCTION: The purpose of this report is to augment the report that was provided to the City Council on July 151h, based on the discussion that occurred at that meeting. A copy of that report is attached to this report for ease of reference. BACKGROUND: > In 1993, the City Council adopted the City's Utility Users Tax ("Tax" or "UUT"). The amount of the Tax is 3%. It is imposed on City residents who use telephone service, electricity, co-generated electricity, natural gas, and water. };> Subsequently, the voters of the State of California adopted Proposition 218. > To comply with Proposition 218, in 2004, the City Council placed the Tax on the ballot, and the voters ratified the existing Tax at the same 3% rate. > The City's Tax originally was imposed upon all telephone services that were subject to the Federal Excise Tax ("FET"). In response to litigation, in 2006, the Internal Revenue Service issued a ruling stating that the FET does not apply to most common telephone billing plans. This invalidated the basis for the City's Tax as applied to telephone service. };> In response to these events, some cities, including Rancho Palos Verdes, amended their ordinances without voter approval to delete the reference to the FET and replaced it with other terms to cover telephone services that had been subject to the FET. };> Since 2006, many changes have occurred with respect to telephone services that have caused the definitions in the UUT to become outdated. Some types of telephone services currently are not subject to the tax, while others are. This inequity cannot be corrected without placing revisions to the Tax on the ballot for approval by the voters. > Recently, new legal challenges and claims have been filed against other cities that did not place their amended utility user taxes on the ballot. Attorneys in those cases have claimed damages and substantial attorney's fees. (We understand that Chula Vista paid $2 million in attorneys' fees to the attorneys who filed a lawsuit challenging that city's utility user tax.) };> Staff proposes placing an ordinance on the November 2014 ballot, to . protect future UUT revenues from legal challenge and to modernize the UUT so that it will apply to new and formerly undefined types of telephone services, such as prepaid mobile telephones. R6876.000 l/1732852v2 2 7-16 );> The proposed ordinance does not increase the UUT or expand the Tax to other types of utilities, and does not afford the City Council ability to do so in the future. Thus, video, cable and trash services, for example, still would not be subject to the City's UUT. );> Staff recommends that the City Council include a reduction of the rate of the UUT from 3% to 2.75% in the ordinance that is presented to the voters because that reduction will benefit the residents while still preserving the majority of the current revenue stream from the UUT to the City to fund City services. );> If the Ordinance is approved by the City Council and the City's voters, pursuant to the State Constitution, the Tax cannot be increased, and the · . utilities and services that are subject to the Tax cannot be expanded without voter approval of those changes. DISCUSSION: By placing the measure on the ballot at the earliest possible election date, which is November 2014, any dispute about the City's ability to collect the UUT on telephone services will be resolved a year earlier than if the City waits to place such a measure on the ballot in November 2015, when the next regular City Municipal election will occur. In other words, if approved by the City Council and the voters, the ordinance will protect future UUT revenues from a successful legal challenge. In addition, if the voters were to approve an ordinance that modernizes the City's UUT at the reduced rate of 2.75%, the residents will receive the monetary benefit of the reduction of the rate of the UUT. In addition, by modernizing the UUT, newer types of telephone-related services will be treated the same, so that telephone users in the City are treated alike. If the City Council wishes to place the UUT on the November 2014 ballot, the City Council must unanimously adopt a resolution setting forth an emergency that justifies the election being held prior to an election date that is different from the date of the City's regular municipal elections in November of odd numbered years. Staff believes that there are facts upon which the City Council may rely in declaring an emergency and calling the election in November 2014, instead of waiting until November 2015. Those facts are set forth in the attached resolution and are reiterated here: 1. Litigation and claims have been filed against other cities that have not placed their UUT ordinances on the ballot for voter approval, specifically R6876.0001/l 732852v2 3 7-17 addressing the elimination of the Federal Excise Tax on telephone services, causing the loss of that important revenue stream and the payment of a significant amount of attorney's fees. The City of Rancho Palos Verdes seeks to protect future revenues from its UUT from such claims and lawsuits and avoid unnecessary legal expenses and exposure. 2. Continuous State takeaways over the last few years, including the state's recent elimination of redevelopment agencies, have resulted in significant reductions in revenues that the City intended to be used to repay the City for loans made previously to the Rancho Palos Verdes Redevelopment Agency for expenditures to address landslide damage and increase land stability within former Redevelopment Project Area No. 1. 3. The Portuguese Bend Landslide is a large active landslide that continues · ·to move and adversely affects public infrastructure, including Palos Verdes Drive South, a major arterial street in the City. The constant damage caused by the landslide requires constant and increased City expenditures to more than $500,000 annually to maintain PVDS as a viable arterial street. 4. During the recession, the State took monies that previously were allocated to cities to reduce the State's budget deficit. It is expected that similar actions will likely occur again in the future in response to downturns in the economy. 5. The cost to the City of complying with state and federal clean water rules continues to increase significantly each year. 6. The City has many unfunded important infrastructure projects, which are discussed above, totaling more than $28 million, including unfunded projects to improve City streets ($4. 7 million), and storm drains ($9.4 million). 7. The City of Rancho Palos Verdes seeks to maintain current levels of public safety and police services within the City, even though the cost of such services continues to increase, including the City's contribution to the County liability trust fund for law enforcement services, which the City has been notified will increase again in fiscal year 15-16. 8. The City has made cost reductions to the City's Capital Improvement (infrastructure) Program in recent years in order to maintain a balanced budget. However, similar cost reductions alone will not be sufficient to avoid future cuts to services if future revenue from the UUT is lost due to legal challenges. Therefore, the loss of significant future revenue from R6876.0001/1732852v2 4 7-18 UUT would have a negative impact upon public safety and the character of the community in Rancho Palos Verdes. CONCLUSION: If the City Council concurs with the above findings and that the ordinance reducing the rate of the UUT from 3% to 2.75% and modernizing its provisions should be placed on the ballot for the upcoming election in November 2014, then the City Council should adopt the attached resolution and vo~e to approve the ordinance. The adoption of the resolution requires a unanimous vote by the Members of the City Council, and the proposed ordinance requires an affirmative vote by four Members of the City Council. · Attachments: Draft Resolution Draft Ordinance July 15, 2014 Staff report Public Correspondence R6876.0001/1732852v2 5 7-19 CITY OF MEMORANDUM TO: FROM: DATE: SUBJECT: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL CAROL W. LYNCH, CITY ATTORNEY AND )B DENNIS MCLEAN, DIRECTOR OF FINANCE 'tf}lt:::::> AUGUST 5, 2014 ORDINANCE REDUCING THE UTILITY USER TAX RATE FROM 3% TO 2.75% AND MODERNIZING THE CITY'S UTILITY USER TAX AND EMERGENCY RESOLUTION AUTHORIZING THE CITY COUNCIL TO CALL AN ELECTION ON NOVEMBER 4, 2014 TO REQUEST THE VOTERS TO APPROVE THE ORDINANCE REVIEWED: CAROLYNN PETRU, ACTING CITY MANAGE~ RECOMMENDATIONS: 1) ADOPT RESOLUTION NO. 2014-_: A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF RANCHO PALOS VERDES UNANIMOUSLY DECLARING AN EMERGENCY IN CONNECTION WITH THE PLACEMENT OF A MEASURE THAT DECREASES THE RATE OF THE CITY'S UTILITY USER TAX FROM 3% TO 2.75% AND MODERNIZES THE TAX ON THE BALLOT FOR A SPECIAL MUNICIPAL ELECTION TO BE CONSOLIDATED WITH THE NOVEMBER 4, 2014 ELECTION, AND 2) INTRODUCE ORDINANCE NO : AN ORDINANCE OF THE PEOPLE OF THE CITY OF RANCHO PALOS VERDES REDUCING THE RATE OF THE CITY'S UTILITY USER TAX FROM 3% TO 2.75% AND MODERNIZING THE CITY'S UTILITY USER TAX. 7-20 INTRODUCTION: The purpose of this report is to augment the reports that were provided to the City Council on July 15, 2014 and July 29, 2014, based on the discussion that occurred at both meetings. Copies of both reports are attached to this report for ease of reference. Although time was limited since the Council meeting conducted on July 29, 2014, and publishing the report for this meeting, staff has provided the following additional information requested by Council member Campbell: ../ A red-line version of the proposed Ordinance comparing it to the current provisions in the Municipal Code; ../ The complaint in the litigation involving Chula Vista's UUT; ../ Sample UUT modernization ballot measures and ordinances of other California cities; and ../ Recent UUT modernization ballot results. BACKGROUND: The following Background was included in the Staff Report to the City Council, dated July 29, 2014: )> In 1993, the City Council adopted the City's Utility Users Tax ("Tax" or "UUT"). The amount of the Tax is 3%. It is imposed on City residents who use telephone service, electricity, co-generated electricity, natural gas, and water. )> Subsequently, the voters of the State of California adopted Proposition 218. » To comply with Proposition 218, in 2004, the City Council placed the Tax on the ballot, and the voters ratified the existing Tax at the same 3% rate. )> The City's Tax originally was imposed upon all telephone services that were subject to the Federal Excise Tax ("FET"). In response to litigation, in 2006, the Internal Revenue Service issued a ruling stating that the FET does not apply to most common telephone billing plans. This invalidated the basis for the City's Tax as applied to telephone service. )> In response to these events, some cities, including Rancho Palos Verdes, amended their ordinances without voter approval to delete the reference to the FET and replaced it with other terms to cover telephone services that had been subject to the FET. » Since 2006, many changes have occurred with respect to telephone services that have caused the definitions in the UUT to become outdated. Some types of telephone services currently are not subject to the tax, while R6876.000 l/1732852v2 2 7-21 others are. This inequity cannot be corrected without placing revisions to the Tax on the ballot for approval by the voters. >-Recently, new legal challenges and claims have been filed against other cities that did not place their amended utility user taxes on the ballot. Attorneys in those cases have claimed damages and substantial attorney's fees. (We understand that Chula Vista paid $2 million in attorneys' fees to the attorneys who filed a lawsuit challenging that city's utility user tax.) >-Staff proposes placing an ordinance on the November 2014 ballot, to protect future UUT revenues from legal challenge and to modernize the UUT so that it will apply to new and formerly undefined types of telephone services, such as prepaid mobile telephones. >-The proposed ordinance does not increase the UUT or expand the Tax to other types of utilities, and does not afford the City Council ability to do so in the future. Thus, video, cable and trash services, for example, still would not be subject to the City's UUT. >-Staff recommends that the City Council include a reduction of the rate of the UUT from 3% to 2.75% in the ordinance that is presented to the voters because that reduction will benefit the residents while still preserving the majority of the current revenue stream from the UUT to the City to fund City services. >-If the Ordinance is approved by the City Council and the City's voters, pursuant to the State Constitution, the Tax cannot be increased, and the utilities and services that are subject to the Tax cannot be expanded without voter approval of those changes. DISCUSSION: Recommended Action -Unanimously Adopt a Resolution Setting Forth an Emergency That Justifies the Election in November 2014 The recommended action and the proposed Resolution are identical to the recommendation and Resolution presented to the City Council on July 29, 2014. By placing the proposed measure on the ballot at the earliest possible election date, which is November 2014, any dispute about the City's ability to collect the UUT on telecommunication services will be resolved a year earlier than if the City waits to place such a measure on the ballot in November 2015, when the next regular City Municipal election will occur. In other words, if approved by the City Council and the voters, the ordinance will protect future UUT revenues from a successful legal challenge. R6876.0001/1732852v2 3 7-22 In addition, if the voters were to approve an ordinance that modernizes the City's UUT at the reduced rate of 2.75%, the residents will receive the monetary benefit of the reduction of the rate of the UUT a year earlier. In addition, by modernizing the UUT, newer types of telephone-related services will be treated the same, so that telephone users in the City are treated alike. If the City Council wishes to place the UUT on the November 2014 ballot, the City Council must unanimously adopt a resolution setting forth an emergency that justifies the election being held prior to an election date that is different from the date of the City's regular municipal elections in November of odd numbered years. In its Staff Report, dated July 29, 2014 (copy attached), Staff outlined the facts upon which the City Council may rely in declaring an emergency and calling the election in November 2014, instead of waiting until November 2015. Those facts are set forth in the attached resolution and are reiterated here: 1. Litigation and claims have been filed against other cities that have not placed their UUT ordinances on the ballot for voter approval, specifically addressing the elimination of the Federal Excise Tax on telephone services, causing the loss of that important revenue stream and the payment of a significant amount of attorney's fees. The City of Rancho Palos Verdes seeks to protect future revenues from its UUT from such claims and lawsuits and avoid unnecessary legal expenses and exposure. 2. On May 28, 2014, the City received a Public Records Act request from a law firm seeking records relating to the City's Utility User Tax. 3. Continuous State takeaways over the last few years, including the state's recent elimination of redevelopment agencies, have resulted in significant reductions in revenues that the City intended to be used to repay the City for loans made previously to the Rancho Palos Verdes Redevelopment Agency for expenditures to address landslide damage and increase land stability within former Redevelopment Project Area No. 1. 4. The Portuguese Bend Landslide is a large active landslide that continues to move and adversely affects public infrastructure, including Palos Verdes Drive South, a major arterial street in the City. The constant damage caused by the landslide requires constant and increased City expenditures of more than $500,000 annually to maintain PVDS as a viable arterial street. 5. During the recession, the State took monies that previously were allocated to cities to reduce the State's budget deficit. It is expected that similar actions will likely occur again in the future in response to downturns in the economy. R6876.0001/1732852v2 4 7-23 6. The cost to the City of complying with state and federal clean water rules continues to increase significantly each year. 7. The City has many unfunded important infrastructure projects, which are discussed above, totaling more than $28 million, including unfunded projects to improve City streets ($4.7 million), and storm drains ($9.4 million). 8. The City of Rancho Palos Verdes seeks to maintain current levels of public safety and police services within the City, even though the cost of such services continues to increase, including the City's contribution to the County liability trust fund for law enforcement services, which the City has been notified will increase again in FY15-16. 9. The City has made cost reductions to the City's Capital Improvement (infrastructure) Program in recent years in order to maintain a balanced budget. However, similar cost reductions alone will not be sufficient to avoid future cuts to services if future revenue from the UUT is lost due to legal challenges. Therefore, the loss of significant future revenue from UUT would have a negative impact upon public safety and the character of the community in Rancho Palos Verdes. Several Questions and/or Ideas Regarding Staff's Recommended Action Discussion Regarding the Conduct of an Election in March 2015 or June 2015 Election At the City Council meeting on July 29, 2014, the City Council discussed the possibility of conducting a municipal election in March 2015, or June 2015, to enable the voters to decide whether to approve the proposed reduction of the rate of the UUT, as well the modernization of the UUT ordinance, as an alternative to the proposed November 2014 election. In response to an inquiry made by staff, the County responded that it will not be conducting an election in either March or June of 2015. However, the City of Los Angeles will conduct an election in March 2015. Although the City could utilize the election resources of the City of Los Angeles, the cost of conducting a special election in March 2015 would be approximately $20,000 more than the cost estimated by the County to conduct the consolidated election in November 2014. Furthermore, the March 2015 election relates to open seats on the LAUSD and El Camino College District Boards. If broad voter participation is desired, unfortunately, voter turn-out is typically very low city-wide for this election. R6876.0001/l 732852v2 5 7-24 Discussion Regarding the Conduct of an Election to Modernize the Utility User Tax Ordinance While Maintaining the Current 3% Utility User Tax Rate Several Council Members questioned whether the proposed ballot measure should only modernize the UUT ordinance and continue to maintain the 3% UUT rate. Staff subsequently discussed this alternative with Tim Mclarney of True- North, the City's polling advisor, who expressed a caution about the possibility of failure of the ballot measure without a reduction of the UUT rate. Only one recent UUT modernization ballot measure with a rate reduction failed before voters. As of June 2013, four other modernization ballot measures that attempted to maintain the same UUT rate failed over the last several years. During the most recent election cycle that included UUT modernization ballot measures (November 2013), the ballot measure that included a rate reduction passed, and the modernization ballot measure that attempted to maintain the same UUT rate failed. Staff has attached a report prepared by Michael Coleman a/k/a CaliforniaCityFinance.com, the League of California Cities expert, titled UUT Facts, the source of recent UUT ballot results. The voters' decision is more straightforward when asked about a rate reduction, rather than focusing solely upon the legalistic terms and conditions of the modernization of the telecommunication provisions of the ordinance. Questions Regarding Tax Administrator's Powers Included in Current and Proposed Modernization UUT Ordinance To the best of Staff's knowledge, neither the current Director of Finance, nor any of his predecessors, (acting as the Tax Administrator), have ever made any administrative tax rulings. None would be made without the knowledge of the City Manager, City Attorney, or the City Council. Likewise, there have never been any appeals to the City Council of a determination by the Tax Administrator. Alternatives -If the Resolution to Declare Emergency Not Adopted by City Council Alternative 1 -Continue Collection of UUT by Telecommunication Providers - Escrow Such Collections -Reconsider UUT Modernization Ballot Measure in November 2015 If the City Council does not place the ballot measure on the November 2014 ballot, it could direct Staff to prepare a resolution whereby the future UUT that is collected by telecommunication service providers would be segregated ("escrowed") from all other UUT revenues and other unrestricted General Fund monies, into a "Committed" Reserve of the General Fund (or a similar restriction), thus prohibiting the use, encumbrance or appropriation of such collections without further action of the City Council. Such future collections of UUT by telecommunication providers would be set-aside for payment of any future claims, or cost thereof. Alternative 1 R6876.000 l/1732852v2 6 7-25 is intended to include reconsideration of placing a UUT modernization ballot measure before the voters as early as November 2015. Alternative 2 -Temporarily Suspend Collection of UUT by Telecommunications Providers -Reconsider UUT Modernization Ballot Measure in November 2015 Instead of "escrowing" UUT funds collected going forward, the City Council could immediately suspend the collection of the UUT from telecommunication services (a "tax holiday") until an election to modernize the UUT ordinance is conducted in November 2015, while maintaining the current 3% UUT rate. However, based upon a discussion with the City's polling advisor, the voters would likely consider the "tax holiday" as a tax reduction, and if soon followed by a ballot measure to approve the modernization of the UUT tax for telecommunications (possibly November 2015), to allow the City resume collection of the tax, it would be perceived as a tax increase and would likely fail. Alternative 3 -Indefinitely Suspend Collection of UUT by Telecommunications Providers Suspend the collection of the UUT on telecommunication services indefinitely. Alternative 3 provides the City's UUT taxpayers with a tax decrease, but would likely lead to a significant, permanent loss of about $700,000 of UUT revenue to the General Fund annually -about 3-4% of the total annual General Fund operating budget. Alternatives 1-3 Require FY14-15 Budget Decreases Alternatives 1-3 would require Staff to promptly develop revisions to the FY14-15 Budget in lieu of the proposed "escrow of' or suspension of the City's UUT collected from telecommunication services to restore a balanced budget for FY14- 15 in accordance with City Council Policy No. 45 -Balanced Operating Budget. If adopted, any of the three Alternatives 1-3 would have an impact on the future structural budget and will necessitate the City Council to make decisions regarding what immediate adjustments should be made to FY14-15 General fund budget for on-going programs, services and operating expenditures. There are two City Council policies to consider when making the adjustments. 1. Policy No. 41 -Reserve Policies requires Transient Occupancy Tax (TOT, a recurring revenue) be transferred to the Capital Improvement Projects (CIP) Fund. Policy No. 41 also requires the prior year General Fund expenditure variance be transferred to the CIP Fund. Therefore, General Fund money that has been transferred to the CIP Fund pursuant to this policy and has been used to fund one-time FY14-15 appropriations should not be considered to balance the structural budget. However, these resources, as well as the General Fund Reserve (rainy day fund) may be R6876.000 l/1732852v2 7 7-26 considered by the City Council to provide a one-time emergency stop-gap for either a temporary loss of UUT or claims for past collections of UUT. 2. Policy No. 45 -Balanced Operating Budget requires that recurring expenditures do not exceed recurring revenues. Therefore, reducing one- time FY14-15 appropriations should not be considered to balance the structural budget. Again, these one-time resources may be considered to provide a one-time emergency stop-gap. The City Council could elect to set-aside City Council Policy No. 45. However, the City's Financial Advisor previously expressed caution that setting aside newly established fiscal policies could be viewed unfavorably by municipal debt rating agencies, if and when the City's initial debt rating is pursued. With City Council direction, Staff will prepare a list of potential FY14-15 appropriations to adjust. The list may include one-time items to allow for an emergency stop-gap, as well as recurring items to allow for a rebalancing of the structural budget. Items for consideration may include: ~ The one-time general liability insurance refund in the amount of $231,306 that was transferred to the CIP Fund (and may be transferred back to the General Fund); ~ Recurring budget programs and services (e.g. dewatering well rehabilitation, park and facility maintenance); ~ Recurring new services that were added to the FY14-15 budget, including the City Council Liaison employee position, and additional part-time Recreation hours to staff park sites such as Abalone Cove Beach and the open gym program at Miraleste Intermediate School; and ~ Potential proposals to increase facility-use fees, such as temporary- use parking at Point Vicente Park/Civic Center and park-site rentals. As reported with the 2014 Five-Year Financial Model and on July 15, 2014, Staff anticipates a number of challenges associated with balancing the structural budget in the future. The challenges include increasing costs to comply with clean water law, increasing costs of residential street rehabilitation, anticipated subsidies for right-of-way maintenance, sunset of the storm drain user fee, and the increased contribution to the Los Angeles County Sheriff's liability trust fund. Finally, nothing has been included in the structural budget for any future adjustments to employee compensation and benefits. Additionally, the City has considered other programs and services as a part of the 2014 City Council Goals and the FY14-15 budget process that are not funded in the FY14-15 budget for the General Fund, including: ~ Creation of a joint powers agency for emergency management for the Peninsula; R6876.000 l/1732852v2 8 7-27 ~ Placement of surveillance cameras at City entrances and/or purchase of additional Automated License Plate Recognition (ALPR) technology; ~ Programmed maintenance and rehabilitation of dewatering wells for Portuguese Bend and Abalone Cove Landslide areas; ~ Community workshops for issues such as safe school routes, cross- walks, updates to the Parks Master Plan & Coast Vision Plan, park/preserve improvements, etc.; and ~ Expansion of public outreach programs to familiarize residents and businesses about City services, etc. (citizen survey, town hall meetings, leadership academy, etc.). In summary, a loss of approximately $700,000 of UUT revenue annually, either in the .short term or long term, will have a significant impact on the City's ability to provide a desired level of service and maintain a structurally balanced budget. CONCLUSION: If the City Council concurs with the above findings and that the ordinance reducing the rate of the UUT from 3% to 2. 75% and modernizing its provisions should be placed on the ballot for the upcoming election in November 2014, then the City Council should adopt the attached resolution calling for the special election in November 2014 and vote to approve the ordinance. The adoption of the resolution requires a unanimous vote by the Members of the City Council, and the proposed ordinance requires an affirmative vote by four Members of the City Council. If the City Council does not adopt the resolution placing the measure decreasing the rate of the City's Utility User Tax from 3% to 2.75% and modernizing the tax on the November 4, 2014 ballot, then the City Council should decide whether to select among Alternatives 1-3 and direct Staff to promptly return with proposed adjustments should be made to the FY14-15 General fund budget and/or on-going programs, services and operating expenditures. Attachments: Draft Resolution Draft Ordinance Redline of Draft Ordinance revision July 15, 2014 Staff report July 29, 2014 Staff report Public Correspondence Utility Users Tax Facts by CaliforniaCityFinance.com, August 2013 Sample UUT modernization ballot measures of other California cities Chula Vista complaint R6876.0001/1732852v2 9 7-28 ( Marks Finch Stephen J. Schultz sschultz@marksfinch.com Attorneys at Law August 13, 2014 VIA NORCO OVERNITE CERTIFIED AND ELECTRONIC MAIL Clerk of the City Council City of Rancho Palos Verdes 30940 Hawthorne Boulevard Rancho Palos Verdes, California 90275 cityclerk@tj:>v.com VIA NORCO OVERNITE CERTIFIED AND ELECTRONIC MAIL Director of Finance I Tax Administrator City of Rancho Palos Verdes 30940 Hawthorne Boulevard Rancho Palos Verdes, California 90275 dennism@rpv.com Re: Rancho Palos Verdes Utility Users Tax On Certain Telephone Services: Claim For RefYnd And Other Relief To the City Clerk of the City Council of Rancho Palos Verdes: l. Name And Address Of Claimants File 2044.002 Our client, Sharon Yarber, a resident of , Rancho Palos Verdes, California 90275, on behalf of herself and all similarly situated taxpayers (whether individuals or any entity of any form) in the City of Rancho Palos Verdes ("City"), respectfully requests the immediate cessation of the collection of the Utility Users Tax ("UUT") on telephone services, described below, and the return of all monies to her and the persons and entities from whom the UUT was collected on those services. 2. Notices Or Correspondence Concerning This Matter Should Be Sent To: Stephen J. Schultz, of Counsel Marks, Finch, Thornton & Baird, LLP 4747 Executive Drive -Suite 700 San Diego, California 92121-3107 3. Circumstances Giving Rise To Claim In 1993 the City imposed a 3% tax upon telephone services as defined in the City's Municipal Code section 3.30.020 (hereafter RPVM § _) The "tax imposed ... shall be collected from the service user by the service supplier." RPVM§ 3.30.100.A. The amount of the tax collected in one month shall be remitted to the City in the next month. Id. The UUT is automatically added to the monthly mobile phone bill of City taxpayers and because the UTT is embedded in billing statements of service providers, most taxpayers are unaware of the UUT or the fact that it has been illegally collected. Marks, Finch, Thornton & Baird,... 4747 Executive Drive, Suite 700 San Diego, CA 92121 T 858.737.3100 F 858.737.3101 marksfinch.com 7-29 City of Rancho Palos Verdes August 13, 2014 Page 2of5 The Federal Excise Tax is imposed upon, among other services, "toll telephone service," which is defined, in relevant part, as telephone communications "for which ... there is a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication. 1.R.C. § 4252(b)(l)(A). Telephonic communications that are billed at rates that do not vary with both distance and transmission time, therefore, both fall outside of the Federal Excise Tax, and hence, the UUT. The City by incorporation adopted the Federal Excise Tax definition. On May 25, 2006, the Internal Revenue Service ("IRS") announced in Notice 2006-50 that it would cease collecting the Federal Excise Tax on amounts paid for time only service after July 31, 2006 and that it would refund taxes improperly collected from February 28, 2003 through July 31, 2006, the date by which service providers were required to cease collecting the tax on non-taxable service. The services that the IRS acknowledges are non-taxable included bundled service, where local and long distance are not separately billed (including landline and cellular telephone service), and all long distance service. As the City adopted the Federal Excise Tax definition, any charges for telephone services that are not taxable under the Federal Excise Tax cannot be taxed by the City. After July 31, 2006, the City's UUT imposed upon telephone services not based on time and distance was illegal and unlawful. Thus, the IRS's position that such services are not taxable under the Federal Excise Tax is conclusive as to the applicability of the City UUT here. However, the IRS's statement is not necessarily a prerequisite to a finding that the City UUT is inapplicable to telephone service charged by time only. Under the plain language of the Federal Excise Tax, charges for telephone services that do not vary by time and distance have never been taxable. Thus, it is no defense that the UUT only became improperly applied subsequent to the issuance of IRS Notice 2006-50. In fact, even the IRS acknowledges that the Federal Excise Tax was never properly applied to time-only service by granting taxpayers a refund of all taxes improperly collected since February 2003. Accordingly, the City UUT, by its terms, does not apply to (1) mobile phone services; (2) services which include long distance telephone service where the charge varies only by time; and (3) charges for "bundled service." "Bundled service" is service that combines local and long distance and is provided under a plan that does not separately state the charge for the telephone service and can include cellular service, landline service, prepaid telephone card service, and voice-over internet protocol service. See IRS Notice 2006-501. There is no question that the City UUT has been improperly applied and collected. Claimant and all other taxpayers are entitled to a refund of all UUTs improperly collected from at least August 1, 2006 to the present, together with interest. The California Government Code§ 53723 ("Government Code§ 53723") prevents the application of a tax without voter approval. Specifically, Government Code§ 53723 provides that "[n]o local government, or district, whether or not authorized to levy a property tax, may impose any general tax unless and until such general tax is submitted to the electorate of the local government, or district and approved by a majority vote of the voters voting in an election on the issue." Marks, Finch, Thornton & Baird LL• 4747 Executive Drive, Suite 700 San Diego, CA 92121 T 858.737.3100 F 858.737.3101 marksfinch.com 7-30 City of Rancho Palos Verdes August 13, 2014 Page 3of5 In support of this principle, in November 1996, California voters passed Proposition 218, the "Right to Vote on Taxes Act." California Constitution, Article XIII, § C. This constitutional amendment protects taxpayers by limiting the methods by which local governments can impose, extend, or increase taxes, fees and charges without taxpayer consent. Proposition 218 requires voter approval prior to an imposition, increase, or extension of general taxes, assessments, and certain user fees. In or about September, 2006, the City, in an attempt to cover up the unlawful continued imposition of the UUT, passed Ordinance No. 443. This Ordinance was an attempt to confuse and misrepresent the status ofUUT charges on telephone services not based on time and distance, which includes cell phone and landline services. Ordinance No. 443 amended RPVMC § 3.30.020.1 by striking the incorporation of the Federal Excise Tax reference contained in RPVMC § 3.30.010. The effect of this amendment thereby constituted a tax by a local government that was "imposed, extended or increased" without voter approval as is ~eqµired by the California Constitution Article XIII,§ C, Government Code§ 53723, and Proposition 218. The implementation of Ordinance No. 443 and its continued application to Claimant and the City's taxpayers violated and continues to violate, the Government Code§ 53723, the California Constitution Article XIII, § C, and Proposition 218 whereby voters should have had the opportunity to vote upon the implementation of the changes to the UUT. No such vote has taken place. Therefore, since the implementation, the UUT has been unlawfully assessed against Claimant and all other similarly situated regarding the telephone services described herein. The City's continued imposition and collection of the UUT on said telephone services is an ongoing violation, constituting a new violation upon each collection. On July 15, 2014, and thereafter, the City Attorney recommended that the City Council adopt a Resolution to call a special municipal election to be held on November 4, 2014 to consider a proposed ordinance. The proposed ordinance seeks to amend the telephone UUT to "modernize" the language of the UUT. This was an extremely belated attempt to repair the faulty ordinance and to come into compliance, for the first time, with Government Code§ 53723, the California Constitution Article XIII,§ C, and Proposition 218. In the words of the City Attorney, after the IRS 2006 Notice, "the basis for the imposition of the City's [UU] Tax, as applied to telephone services, was no longer valid." See July 15, 2014 Memorandum of City Attorney to the Mayor and City Council. Despite this acknowledgment by the City that the UUT is out of compliance with Government Code § 53723, the California Constitution Article XIII, § C, and Proposition 218, the City Council in August, 2014 voted against a Prop 218 election in November, 2014, and the City continues to assess and collect the UUT from Claimant and all others similarly situated. 4. General Description Of Damages Claimant and all other similarly situated taxpayers have paid and continue to pay, the telephone UUT imposed, extended or increased in violation of Proposition 218, Article XIII C, § 2 (b) of the California Constitution and Government Code§ 53723. Marks, Finch, Thornton & Baird LLP 4747 Executive Drive, Suite 700 San Diego, CA 92121 T 858.737.3100 F 858.737.3101 marksfinch.com 7-31 City of Rancho Palos Verdes August 13, 2014 Page 4of5 Thus, the City is in the position of a bailee or trustee with respect to these specific monies and would be unjustly enriched by retaining them. Claimant, on behalf of herself and all similarly situated taxpayers in the City, hereby respectfully requests the immediate return of these monies. 5. Names Of Public Employees Causing The Damages The City's public employees causing the damage include the City Tax Collector and/or Administor, the Mayor and members of the City Council responsible for adopting Ordinance 443 amending the UUT and the current City Council for the continuing collection of the UUT on telephone service. 6. Amount Claimed The City is able to determine the identities of all relevant taxpayers and the specific monies due to each of them; however, upon information and belief the total amount exceeds $5,000,000. As to the amount claimed for the Claimant and all others similarly situated, the documents supporting the amount include the July 15, 2014 Memorandum of the City Attorney stating at page 5 that the annual amount is "up to" $700,000 per year. Further, upon information and belief, this claim, if filed as a civil action, would not be a limited civil case as that term is defined in California Code of Civil Procedure§ 86. The violations specified above commenced in at least 2006 and are continuing to date. (Attached as Exhibit 1 are the oldest and most recent billings paid by Claimant herself; attached as Exhibit 2 is the July 15, 2014 Memorandum of the City Attorney.) The billings back to 2006 for the Claimant are available from provider(s). All the billings in Claimant's possession are submitted as hard copy by separate mailing. 7. Conclusion Accordingly, Claimant, on behalf of herself and all similarly situated taxpayers in the City, further respectfully requests the immediate cessation of collection of the illegal and unlawful UUT on these services and return of all monies to the persons and entities from whom the UUT was illegally collected on those services from August 1, 2006 to the present. Claimant has been a customer of AT&T and Verizon. She has been charged UUT's on those services. By filing this claim, our clients do not admit or concede that California Government Code, Sections 910 et seq. apply to this claim or that said Sections 910 et seq. are the exclusive remedy for these claims. Marks, Finch, Thornton & Baird • ..,. 4747 Executive Drive, Suite 700 San Diego, CA 92121 T 858.737.3100 F 858.737.3101 markslinch.com 7-32 City of Rancho Palos Verdes August 13, 2014 Page 5of5 [f you do not respond within the time allowed by law, we will assume that you have denied these claims. Enclosures SJS:axm/3785832.DOCX Very truly yours, .4~ Louis J. Blum, Partner Stephen J. Schultz, of Counsel Marks, Finch, Thornton & Baird, LLP Attorneys for Sharon Yarber VERIFICATION I, Sharon Yarber, have read the facts regarding my cell phon perjury under the Jaws of California, that they are true and correc belief, l believe them to be truJ' D~d' 4!, ( p ~/ ~ By' Mark•, l'lnch, Thornton & Baird"' 4747 61<ecutive Drive, Suite 700 San Diego, CA 92121 T 858.737.3100 P 858.737,3101. ma•~afinch.com 7-33 FILE WITH: CITY CLERK'S OFFICE City of Rancho Palos Verdes 30940 Hawthorne Blvd. Rancho Palos Verdes, CA 90275 ( CLAIM FOR DAMAGES TO PERSON OR PROPERTY INSTRUCTIONS 1. Claims for death, Injury to person or to personal property must be flied not later than six months after the occurrence. (Gov. Code Sec. 911.2.) 2. Claims for damages to real property must be flled not later than 1 year after the occurrence. (Gov. Code Sec. 911.2.) 3. Read entire claim form before filing. 4. See Page 2 for diagram upon which to locate place of accident. 5. THIS CLAIM FORM MUST BE SIGNED ON PAGE 2 AT BOTTOM. 6. Attach separate sheets, If necessary, to give full detalls. SIGN EACH SHEET. TO: CITY OF RANCHO PALOS VERDES Name of Claimant Sharon Yarber ('• RESERVE FOR FILING ST AMP CLAIM NO. Ol01&.f-o8 RECEIVED CITY OF RANCHO PALOS VERDES AUG 13 2014 CITY CLERK'S OFFICE Date of Birth of Claimant Not Applicable Occupation of Claimant - Not Applicable When did DAMAGE or INJURY occur? Date Au9us11, 2oos to date Time .,...;Nl_A -..,----,.--- If claim ts for Equitable Indemnity, give date claimant served with the complaint: Names of any city employees Involved In INJURY or DAMAGE See Claim Letter dated August 13, 2014. Cate Where did DAMAGE or INJURY occur? Describe fully, and locate on diagram on Page 2. Where appropriate, give street names and address and measurements from landmarks: See Claim Letter dated August 13, 2014 submitted herewith . • Describe In detail how the DAMAGE or INJURY occurred. See Claim Letter dated August 13, 2014. submitted herewith. Why do you claim the city Is responsible? See Claim Letter dated August 13, 2014 submitted herewith. Describe In detail each INJURY or DAMAGE. See Claim Letter dated August 13, 2014 submitted herewith. This Claim Must Be Signed on Page 2 7-34 \ ··. The amount claimed, as of the date of preeentatJon of this claim, la computed as {allows: Damages Incurred to date (exact): Estimated prospective damages a& far as known: Damage to property , ••••.••..•.. , •••... $ Future expenlff for medical and hospital care . $. ___ _ Expense& for-medlcai and.hospital.care ••• $ Futunt l.°'8 otfamlna-, •••••••••..••.•••••• $:--- Loas of earnings ..... · ................. $ Other prospective special damages .......... $ ___ _ Special damages for ................... $ Proepectlve general damage& ............... $. ___ _ Total aatlmate pl'09pecttve damages •••.••• $. __ _ General damage& ••• , , • , ••••••• , , .• , ••• $ 100,000 ,,..!"!" Total damagve lncurnKI to date. , • , ••• , $ 11,GOJl,IN)O pi..-. Total amount claimed aa of date of prffentatlon of Ihle claim: $ 5,600,QOO plue Interest and atmmeys' fees Was damage and/or Injury lnv.sttgated by police? No If so, what clty? .... ~-"'-------------- Were paramedics or ambulance called? 11o If ao, name city or ambulance .:.:Nt.::.:""------------- lf Injured, state date, time, name and addreae of dolrtor of your flrst visit .:.NIA:::...---------------- WITNESSES to DAMAGE or INJURY: Llat all persona and addnmles of persona known to have lnfonnatlon: Name CllYAllllm"Y Addf98s 30940-.BMLR1ncaoP11oovon1oo, et.tom Phone_,.1 ... i_m..,u;...••-• ----- Name ~IY"' Addr988 ~ HaWutocne-.11tnc11oP_ ........._ CAllll2'1s Phone . ..:;r.i;.:.:10l:.::llll2-&038=;;;:;...---- Name a1yCouno1 Addl9SS 30940--.-Po .... V•-CM0211 Phone,.,,<4;.;;2A;:..;l2:.;;0M:...:.:.;1so=----- DOCTORS and HOSPITALS: Hospital ... lll_,A _________ __,Addresa ____________ --'Date Hospitalized Doctor 1111. Addreas Date of Treatment:-------- Doctor -NIA Addrevs Date of Treatment------ READ CAREFULLY . For all accident claims place on following diagram namff your vehlckt when you first eaw City vehicle: location of of ltreets, lneludlng North, Eaet, South, and West; Indicate City vehicle at time of accident by "A·1" and location of place of aecldent by "X" and by showing house numbers younielf or your vehicle at the time of the accident by or distances to street comel'8. If City Vehicle wae "B·1" and tl;ia point of Impact by "X." NOTE: If diagrams Involved, dealgnate by letter "A" location of City Vehicle below do n·ovflt the eltuatlon, attach hereto a proper when you first saw It, and by "B" location of youreelf or diagram signed by the claimant. CURB Signature of Claimant or person filing on hie behalf lvlng rela1lonahlp to Claimant: SIDEWALK PARKWAY SIDEWALK Typed Name: Stephen J. Schultz, Esq. L CURS Date: August Ji, 2014 7-35 EXHIBIT ''1'' EXHIBIT "1" 7-36 ~ --- -!!!!!!!!!!!!!: iiiiiiiii - Invoice Number Account Number Date Oue Page -• -··------•-••• -. ·---• • ' T" 0 • ... 0~~10/14 ~-~f~_. -• m 0 ' I Monthly-Charges, continued Verizon Wireless' surcharges+ Regulatory Charge Administrative Charge CA State PUC Fee Taxes, Governmental surcharges and Fees+ CAS1Bte911 Fee CA Teleconnect Fund surchg CA S1Bte High Cost Fund (A) Lifeline Surcharge ,_ CA CA Advanced Srvcs Fund (CASF} CA Relay Srvc/Comm Device Fund Rancho Palos Verdes City UUT Total current Charges foli•••• +Percentage-based 1aXes, tees, and surchafll&S apply to charges for !his tine, inc!Udlng overage charges, plus !his llne's share of account charges. .21 .88 .08 $2.44 .24 .14 .04 .29 .11 $36.33 Summary for Sharon Yarber: ••••I Your Plan MORE EVERY UNL TLK&m 1GB (see pg 3) Have more questions about your charges? Get details for usage charges at www.verizonwireless.com. Sign into My Verizon to View Online Bill and click on calls, Messages & Data. Monthly Charges Tablet Line Access 07116-08115 10.00 $10.00 Usage and Purchase Charges Data IAllowancel Us9tl I Billable j COSt Unbilled Usage from Previous Months Megabyte Usage megabytes I .332 current Data Usage Megallyla Usage Total Data $.00 Total Usage and Purchase Charges $.00 Verizon Wlreless' Surcharges+ Regulatory Charge .02 Administrative Charge .06 $.08 Total currantChargesf $10.08 •Percentage-ba911d taxea, fees, and surcharges apply to charges for tlis line, including overage charges, plus this llne'a shars ot account charges. 7-37 Invoice Number Account Number ~ Page ·----· ---------~-~-·. ·-_·--_·· ~~··=----·· =-~==--=--·1o103--~~3;;;4---~-' . . . Summary for Sharon Yarber:••• Your Calling Plan America's Choice 11900 Any Unllm N&W and Unllm IN CllDng $59.99 0407 $59.99 monthly access charge 900 monttlly general allowance minutes $.40 per minute after allowance NATL IN Calllng-Unlfm Unlimited IN Calling minutes Uni Night & Weekend Min Unllmitsd OFFPEAK Charges MonthJy Access Charges current catllng Plan 04116 -05/15 Usage Charges Voice Verizon Wlntlass' Sumttarges Fed Universal se!Vlce Charge Regulatory Charge Administrative Charge CA Stale P.U.C. Fee Taxes, Govarnmenlal Surcharges and Fees CA Slate 911 Fee CA Slate High Cost Fund (B) CA Teleconnect Fund SUrohg CA State High cost Fund (A) Lifeline surcharge -CA CA AdVanced Svrcs Fund (C~F) CA Relay Srvc/Comm Device Fund Rancho Palos Verdes City UUt Total currvnt Cflargesfo••••• Usage Charges Voice !Allowance calling Plan minutes 900 INCaUlng mlnutss unlimited NightJWeekend minutes 411 Connect calls - Used BUI able 458 -- 'Z37 - 123 -- 4 4 59.99 5.96 $5.96 1.46 .07 .70 .12 .34 .16 .09 .09 .76 .16 .13 c.11, . $2.44 $70.74 COst -- - -- 5.96 Total Voice $5.96 Total Usage Charges $6.96 I View yolU' bOI and call details onllne for FREE. Log into My Accowrt llt www.~rfzonwlrelesr.cam. 7-38 EXHIBIT ''2'' EXHIBIT "2" 7-39 CITY OF RANCHO PALOS VERDES MEMORANDUM TO: FROM: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL CAROL W. LYNCH, CITY ATTORNEY DATE: JULY 16, 2014 1 SUBJECT: ORDINANCE REDUCING THE UTILITY USER TAX RATE FROM 3% TO 2.75% AND MODERNIZING THE CITY'S UTILITY USER TAX AND EMERGENCY RESOLUTION AUTHORIZING THE CITY COUNCIL TO CALL AN ELECTION ON NOVEMBER 4, 2014 TO REQUEST THE VOTERS TO APPROVE THE ORDINANCE REVIEWED BY: CAROLYNN PETRU, ACTING CITY MANAGER© RECOMMENDATIONS 1. ADOPT RESOLUTION NO. 2014-_; A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF RANCHO PALOS VERDES, UNANIMOUSLY DECLARING AN EMERGENCY IN CONNECTION WITH THE PLACEMENT OF A MEASURE THAT MODERNIZES THE CITY'S UTILITY USER TAX AND DECREASES THE RATE OF THE TAX ON THE BALLOT FOR A SPECIAL MUNICIPAL ELECTION TO BE CONSOLIDATED WITH THE NOVEMBER 4, 2014 ELECTION 2. INTRODUCE ORDINANCE NO. _;AN ORDINANCE OF THE PEOPLE OF THE CITY OF RANCHO PALOS VERDES, REDUCING THE RATE OF THE CITY'S UTILITY USER TAX FROM 3% TO 2.75% AND MODERNIZING THE CITY'S UTILITY USER TAX BACKGROUND In 1993, the City Council adopted the City's Utility Users Tax ("Tax" or "UUT"). The amount of the Tax is 3%. ltis imposed on City residents who use telephone service, electricity, co-generated electricity, natural gas, and water. Subsequently, the voters of the State of California adopted Proposition 218. Even though the City's Tax had been in effect prior to the adoption of Proposition 218, In order for the City to continue to collect the Tax legally, voter approval was 6-1 7-40 required. Accordingly, in 2004, the Cfty Council placed the Tax on the ballot, and the voters ratified the existing Tax at the same 3% rate that had beerr adopted by the City Council. Like many utility users taxes, the telephone portion Of the City's Tax originally was imposed upon telephone service that was subject to the Federal Excise Tax ("FEr'), because, at that time, it wat:J believed that the FET could be Imposed upon the broadest categories of telephone services. The FET was used routinely by municipalities as the basis for imposing a utility user tax, so those loca'I taxes also would be imposed on the broadest range of telephone services. However, a decision by a federal court invalidated a portion of the methodology .. that was used in the FET. Subsequently, fn 2006, the Internal Revenue Service issued a ruling stating that the FET does not apply to most common telephone billing plans, such as one-rate plans that charge a flat rate for all calls. ~ California Mynloioal Law Haodbook Section 5.50.) Thus, lfke moat Utility users taxes in the state, the basis of the imposition of the City's Tax, as applled to telephone service, was no longer valld. In response to these events, some cities put their utility taxes on the ballot for voter approval of new definitions of telephone services upon which to impose the utility users tax; others did not amend their ordlnanQes, which still contain the reference to the FET; and others, like Rancho Palos Verdes, amended their ordinances without voter approval to delete thQ reference to the FET and added a different definition of the telephone services upon which the UUT would be imposed. In taking this latter approach in 2006, the City Council made findings that the intent of the changes to the Tax was not to expand the Tax to any new categories -of telephone service that had not been taxed previously, so that voter approval should not be required. The City Council took this action, rather than placing the Tax on the ballot again, because the City's voters had ratified the City's Tax fairly recently, and it was unclear whether changing the definition of the telephone service upon which the Tax could be Imposed would require voter approval. Subsequent cases have addressed that issue and have clarified that the option that clearly is legally defensible Is to place any definition changes and updates to the UUT on the ballot for approval. Since 2006, many changes have occurred with respect to telephone services that have caused the definitions in the UUT to become somewhat outdated. Accordingly, some types of telephone services currently are not subject to the tax, while others are. This is not completely fair to City residents who use telephone services and currently are subject to the City's UUT. Accordingly, Staff proposes placing an ordinance on an upcoming ballot that will modernize the UUT. In . addition, at the June 17, 2014 City Council meeting, Council Member Campbell suggested that the City Council should consider reducipg the R6876.000l/1720S61v2 2 6-2 7-41 rate of the City's UUT. The ordinan~ that modernizes the UUT aJso could reduce the rate of the C.ity's UUT below the current rate of 3%. The Ordinance that is attached to this staff report proposes a reduction of the current tax rate of 3% to 2.75%. Of course, another tax rate also could be selected by the City Council and presented to the voters. History of UUT Approximately $2.6 million of UUT is deposited into the City's General Fund annually. About $0. 7 million of this amount is based upon telecommunications services (telephone land line, long distance, and cellular service), and the remainder is based upon electricity, gas and water service. A five-year history of uut follows: J. ...... • .................... -~ ............. w .. •·•o\.'.• .• ~ .... -•.•..• ¥ ....... ~ •• -.,, ................. ,., ... -~· ·"" ... .~ ........... ........ ... ·-.. . I . ! Utitlty User:;' Tax I $3,ooo,ooo I l $2,500,000 l i $2,000,000 ! l Sl,500,000 I I $1,000,000 - ! l $500,000 FYO!l-10 FVW-11 FY11-12 FY12·13 •Electricity, Gas& Water RTefecommunlcations {_ ' ..... ~ .... ,. .. ,.~-· ·~--···· .......... -.... _ ...... ,. ........ ,. ....... -...... -........... '""·--·· ...... -······ . _ ............ .?_ .... ~ ... . Losa of UUT -Bud•t Impact FY13-14 The FY14-15 General Fund revenue budget is $26.5 million. A net expenditure of about $19.2 million represents the City's operating budget; and $7.3 million will be transferred to the Capital Improvement Projects {CIP) Fund for infrastructure repair, replacement and improvement. Based upon the operating and capital needs of the City, the City Council has determined that the UUT rate of 3% continues to be a necessary General Fund revenue source. The FY14-15 General Fund budget is balanced by a thin margin. If the General Fund were to lose a revenue source such as UUT, the Impact to the current lever of service would be significant. Even if there is no loss of UUT, Staff expects that the General Fund budget will become more difficult to balance In future years. • As reported with the 2014 Five-Year Financial Model, Staff expects that the accumulated Street Maintenance Fund balance will be depleted, and R6876.000111720561 v2 3 6-3 7-42 the General Fund will be required to resume large subsidies for right-of- way maintenance beginning In FY15-16. • The Los Angeles County Sherfff s Department has notified the City to expect additional increases to the required liabiltty trust fund contribution in FY15-16. • Staff expects that expenditures Will increase over the next couple of years to keep pace with the latest storm water quality mandates from the state and federal governments. Due to conservative budget management, the City's General Fund does have a history of favorable expenditure variances, which have averaged about $1.0 million annual over the last 1 O years. However, due to the Increased need to .. improve the City's aged infrastructure and the limited availability of restricted revenue dedicated to infrastructure, the City Council recently modified its Policy No. 41 -Reserve Policies to transfer favorable General Fund expenditure variances to the CIP Fund for additional infrastructure funding. There are currently 3 components of infrastructure subsidies from the General Fund: 1. Annual transfer for the residential street rehabilitation program (FY14-15 budget of $3 million}; 2. Annual transfer equivalent to the City's transient occupancy tax revenue (FY14-15 budget of $4 million; and 3. Annual transfer of the prior year expenditure variance (most recent was $1.7 million FY12-13 variance transferred in FY13-14). Over 10 years through FY14-15, General Fund transfers total more than $16.7 million for street improvements and $18.4 million for storm drain improvements. However, even with the large General Fund subsidies for infrastn,rcture, projects with estimated costs totaling at least $28 million have been Identified in the 2014 Five-Year Capital Improvement Plan that remain unfunded over the next five years. Fiscal Impact of Rate Beductlon As part of a potential UUT modernization ballot measure, the City Council may consider a proposed reduction to the UUT rate, as suggested by Councflmember Campbell. The annual fiscal Impact of the proposed quarter-percent reduction (from 3% to 2.75%) Is a revenue decrease of about $221,675. --··· FY14-15 Budgeted UUT 3% $2,660,100 0 •. 15% Reduction (from 3% to 2.85%} $ 133,005 0.25% Reduction (from 3% to 2.75%} $ 221,675 0.5% Reduction (from 3% to 2.5%} $ 443,350 The fiscal impact of the City Council's alternatives are as follows: R6876.0001/1720561 v2 4 6-4 7-43 1. If the City Council fakes no action to propose a UUT modernization ballot measure, the City could lose up to $0.7 million of annual UUT based upon telecommunications service, until a measure is brought before the voters for approval. 2. If the City Council proposes a UUT modernization ballot measure, the following outcomes are possible: a. The ballot measure fails, and the City loses about $0.7 million of annual UUT revenue; b. A ballot measure with no proposed rate reduction prevails, and the City's UUT revenue remains Intact; or c. A ballot measure prevails with a proposed rate reduction of a quarter-percent, and the City loses an estimated $221,675 of annual UUT. Staff recommends that the City Council Include a reduction of the rate of the UUT from 3% to 2.75% In the ordinance that is presented to the voters because that reduction will benefit the residents while still providing the majority of the current revenue stream from the· UUT to the City to fund City services. DISCUSSION The benefit to the City's residents of placing the City's UUT on the upcoming November ballot is obviol.ls. If the voters were to approve an ordinance that modernizes the City's UUT at a reduced rate, such as 2.75%, the residents will receive the benefit of the reduction of the rate of the UUT. In addition, by modernizing the uur, newer telephone-related services will be treated the same, so that telephone users in the City are treated alike. In addition, by placing the measure on the ballot at the earliest possible election date, which is November 2014, any dispute about the UUT on telephone services will be resolved a year earlier than if the City waits to place such a measure on the ballot in November 2015, when the next regular City Municipal election will occur. If the City Council wishes to place the UUT on the November 2014 ballot, the City Council must adopt a resolution setting forth an emergency that justifies the election being held prior to an election date that is different from the date of the City's regular municipal election~ in November of odd numbered years. Staff believes that there are facts upon which the City Council may rely in declaring an emergency and calling the election in November 2014, instead o.f waiting until November 2015. Those facts are set forth in the attached resolution and are reiterated here: · 1. Continuous State takeaways over the last few years, including the state's recent elimination of redevelopment agencies, have resulted in significant R6876.0001/172056Iv2 5 6-5 7-44 reductions in revenues that the City intended would be used to repay the City for foans made previously fo the Rancho Palos Verdes Redevelopment Agency for expenditures to address landslide damage and increase land stability within former Redevelopment Project Area No. 1. 2. The Portuguese Bend Landsllde is a large active Jandslide that continues to move and adversely affects public infrastructure, Including Palos Verdes Drive South, a major arterial street in the City. The constant damage caused by the landslide requires constant and increased City expenditures to maintain PVDS as a viable arterial street 3. During the recession, the State took money monies that previously were allocated to cities to reduce the State's budget deficit, and it is expected that similar actions will occur again in the future In response to downturns in the economy. 4. · The cost to the City of complying with state and federal clean water rules continues to increase each year. 5. The City has many unfunded important infrastructure projects, which are discussed above, totaling more than $28 million, including unfunded projects to improve City streets ($4.7 million), and storm drains ($9.4 million). 6. The City of Rancho Palos Verdes seeks to maintain cum:mt levels of public safety and police services within the City, even though the cost of such services continues to increase, including the City's contribution to the County liability trust fund for law enforcement services, which the City has been notified will increase again in fiscal year 15~16. 7. The cost saving measures the City has employed in recent years to maintain a balanced City budget will not be sufficient to avoid future cuts to services provided by the City to the community, which. would have a negative impact upon public safety and the character of the community in Rancho Palos Verdes. If the City CounciJ concurs with the· above findings and that the ordinance reducing the rate of the UUT and modernizing its provisions should be placed on the ballot for the upcoming election in November 2014, instead of having to wait until the next regular City election in November 2015, then the City Council should adopt the attached resoJution; the adoption of the resolution requires a unanimous vote. CONCLUSION In addition to stdopting the attached resolution, the City Council should review the attached ordinance and determine if the City Council agrees with Staffs recommendation that the current rate of the UUT should be reduced from 3% to 2.75% or if another rate should be chosen instead. Attachments: Draft Resolution Draft Ordinance Public Correspondence R6876.000I/1720S61v2 6 6-6 7-45