To: Honorable Mayor and Members of City Council
From: Steve Potter, City Manager
Prepared By: Julie Lucido, Public Works Director
TITLE:
Title
Informational Briefing on Financial Analysis and Polling
LABEL
RECOMMENDED ACTION:
Recommendation
Receive an informational presentation regarding revenue analysis and polling; and direct staff to conduct outreach and return to City Council in June 2024 with additional information for consideration of a local sales tax measure for the November 2024 municipal election.
Body
DISCUSSION:
Budget Context
The City of Napa is a full-service local government agency providing a broad range of municipal services. With nearly 80,000 residents and over 500 dedicated staff, we have a vibrant community that depends on the high-quality City services, programs, and projects.
The City general fund revenues support critical operations such as police, fire, public works, parks and recreation, community development functions and the general government support for administration, city management, finance, legal, and human resources. The general fund revenues are anticipated to reach $122M in the current fiscal year. Over 50% of the general fund budget supports the public safety departments, almost 14% goes to the administrative functions (including legal, finance, human resources, and city manager’s office), 13% for public works, 8% for parks and recreations, and just under 5% for the community development department. The remainder supports the general government functions, including citywide expenditures, reserves, and fund transfers to programs including capital improvements, infrastructure and technology.
This report will focus on the City’s general fund budget, but it is important to note that there are other critical services provided by the City that are supported by special funds and not part of the general fund budget. Several examples are water and solid waste and recycling services that are funded through utility bills and housing assistance provided through the Housing Authority funded through various state, federal and local programs.
The three largest contributors to the general fund revenues are property tax at approximately 36%, transient occupancy tax at approximately 28% and sales tax at approximately 19%. Sales tax declined in fiscal years 2020 and 2021 due to the pandemic but has rebounded quickly. Moderate growth is anticipated into the future, but at a slower rate than in the last two years. The transient occupancy tax (TOT) had an initial and severe drop beginning in March 2020 but had an accelerated comeback in 2021 and 2022. However, that growth became more moderate in 2023 and like sales tax, TOT is also expected to grow but at a slower pace due to a return to normal travel demand levels and no new hotel properties nearing completion to add new rooms to the existing inventory. Property tax growth is also anticipated to slow due to a reduction in property sales associated with increased interest rates.
While the general fund revenues are expected to grow at a modest rate, the City costs for existing staffing and service levels are increasing more sharply. Cost increases for vehicles, materials, insurance, and labor are some of the primary drivers. The City’s long-term financial forecast anticipates a structural deficit for providing current staffing and service levels because steep cost increases are outpacing the forecasted general fund revenues. This means that the City will likely be facing a structural budget deficit towards the end of the projection period and would not be able to afford existing service levels and programs. It also means that expansions for City services, programs, and associated staffing levels would not be possible without limiting other services and programs.
Additional revenue will be necessary to maintain current service levels, to be able to consider expanding targeted programs and staffing levels in the future, and to be able to address important community infrastructure projects and Council priorities. For FY2023/24 and FY2024/25, the City Council named public infrastructure as a priority area for focus. Many of the City’s streets, sidewalks, parks, and buildings are in poor condition and there is significant community demand for expanded parks and recreation options. While progress is being made to make needed repairs, the needs far exceed the funding available and there is limited ability to expand offerings. Only a small fraction of projects can be funded at the current investment levels.
Revenue Analysis
With this budget context, to better understand potential options for revenue enhancement that could be used to address the growing needs and projected structural budget deficit, staff engaged a firm specializing in local government fiscal and economic matters. The work included a review of a broad range of approaches, identified potentially feasible options, and developed analyses. A general sales tax measure was the alternative identified that would generate funding levels in the amount that would support the City services, programs, and projects and that could garner the required community support.
A 1¢ sales tax measure would generate approximately $21 million annually and would require 50% voter approval on a general municipal election. Over 80% of general sales tax measures, totaling almost 200 measures, have passed statewide as part of the last four general municipal elections held in November 2016, November 2018, November 2020 and November 2022.
The City of Napa sales tax rate is currently 7.75%, which is one of the lowest rates in the Bay Area, where sales tax rates range up to 10.75%. Rates within the surrounding North Bay counties are up to 9.25% in both Solano County and Marin County and up to 9.50% in Sonoma County. The state minimum is 7.25% with only 1% of that amount provided to the local city or county jurisdiction general fund. Within Napa County an additional 0.5% is designated for local road maintenance to combine for the existing rate of 7.75%.
Polling and Communication
To gauge potential support within the community for a sales tax measure, a research firm conducted voter polling in September 2023 through phone calls, text messaging and email to a sample of likely November 2024 voters. The language used for the polling was:
To protect and maintain funding for City of Napa services that the State cannot take such as repair potholes, streets/sidewalks; water quality; fire protection; parks/recreation; cleaning up encampments/abandoned vehicles; connecting homeless residents to mental health services; 911 emergency response times; senior and youth programs; constructing essential public safety/city facilities; and general government use; shall the City of Napa measure be adopted levying a 1¢ sales tax, raising $21 million dollars annually, until ended by voters, including yearly audits?
The results indicate a strong starting point with more than 50% of the respondents providing positive responses for supporting the measure. The survey also showed that services and programs supporting a safe, clean and healthy community increase the level of support.
Prior to the polling efforts, discussions with the leadership for each of the City’s employee bargaining groups were held to provide information before the research firm began reaching out to community members. There was additional communication with these groups, along with several close City partners over the last few weeks, prior to this City Council presentation. An informational meeting was also offered for City employees to give an overview of the presentation being made to City Council and as an opportunity for City employees to ask questions.
Potential Other Measures in November 2024
At this time, there are two local and regional revenue related measures identified that will potentially be on the November 2024 ballot. A local City sales tax measure would not be expected to be in competition with these other potential measures.
The Napa Valley Transportation Agency (NVTA) has expressed the intention to place a countywide ballot measure on the election that would not increase the sales tax rate. The measure would modify the expenditure plan and extend the tax duration. The Bay Area Housing Finance Authority (BAHFA) has also expressed the intention of placing an affordable housing bond on the ballot for the nine-bay area county region. The bond, if passed, would be paid by property owners on property tax bills and would not impact the sales tax rate.
Recommended Action
To further the exploration of a sales tax measure, additional work would be necessary. Additional efforts would include executing a robust plan for communication with partners and community members. A tracking poll should also be completed in the spring to gauge support as the election draws closer. These additional conversations and data will be important for future consideration of a local tax measure.
The recommended action is to direct staff to continue the work and return to the City Council in June 2024 with additional information to consider placing the sales tax measure on the November 2024 ballot.
FINANCIAL IMPACTS:
The recommended action would result in costs to conduct polling and develop a draft ordinance for future consideration. Sufficient funding is available within the current budget.
CEQA:
The Public Works Director has determined that the Recommended Action described in this Agenda Report is not subject to CEQA, pursuant to CEQA Guidelines Section 15060(c).
DOCUMENTS ATTACHED:
ATCH 1 - Presentation
ATCH 2 - Frequently Asked Questions
NOTIFICATION:
None.