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AGENDA REPORT
November 8, 1999
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TO: MAYOR YOST AND
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MEMBERS OF THE CITY COUNCIL
FROM: KEITH TILL,
CITY MANAGER
SUBJECT: Utility Tax Exemptions
SUMMARY OF REQUEST:
City Council to approve a motion providing that the senior citizen utility tax exemption
be modified to substantially conform to the California Senior Citizens Property Tax
Assistance program, and that assistance be provided now rather than July 1, 2000.
In the alternative, City Council to adopt Ordinance No. , making the existing senior
citizen utility tax exemption effective now rather than July 1, 2000.
BACKGROUND:
Dramatic changes to the state's income index for senior citizen property tax relief has
resulted in 1,370 new utility tax exemption applications received as of November 3rd. Of
the applications received, 115 meet the current annual income standard of$13,200 or
less, and these have been processed and sent to the utility companies.
It is estimated that utility tax income will be down between$105,000 and$155,000 with
the exemption forms:filed so far. If it were assumed 2/3 of Leisure World households are
eligible and would eventually file,projected revenue losses would reach between
$335,000 and$515,000 annually. Eligible senior citizens in other parts of the City could
also impact these projections.
However, only about 20% of the households have applied so far, with the public
information effort having been active since August. Although applications continue to
come in, it appears possible that they may level off at about 1/3 of the households, at least
for the near term. If that holds true, the city's revenue losses would level out at between
$167,000 and$257,000 per year.
Still,this occurs in the context of a substantial reduction in utility tax revenues to the city
previously estimated for the 1999/00 fiscal year. Even without the senior citizen tax
exemptions, income from the utility tax has declined $438,000—more than 10% -- since
1996/97. Also,the Strategic Financial Plan presented to City Council in January of this
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year set a target of reducing the utility tax by a minimum of$182,000 in December,
2001.
Obviously,the magnitude of this revenue loss will require action to avoid service
reductions, deficits and/or depletion of hard-earned reserves. The urgency is mitigated
somewhat by the county assessors' projected$200,000 increase in property tax income
this year. Our situation is also improved by reductions in PERS retirement costs. You will
recall, however,that half the $400,000 savings was budgeted for payments to the liability
attorney, and the other half to meet reserve requirements. With the legislative proposals
in Sacramento, we can expect new mandates to begin eating away at PERS savings in the
very near future.
POSSIBLE MITIGATION:
The City Code in 1993 stipulated that any individual 65 or older is exempt from the
utility tax if their household income qualifies for California Senior Citizen Property Tax
Assistance. The income limit for the State program at that time was $13,200. This year it
was raised to $33,132.
It is important to note that the state program does not provide for exemptions, but rather
reductions in property taxes. The greater one's income, the less property tax assistance
(relief)the state provides. Once one reaches $33,133 in income, he/she is ineligible for
any property tax reduction.
The key point is that the state has a sliding scale for its tax relief program; the City, since
1994 has provided a complete exemption even if the income level is near the top end of
the scale for the state program. Prior to that,the City Council in 1982 had adopted a
phased senior citizen exemption of up to$12,000.
It's not at all clear whether the City's approach in 1994 anticipated circumstances such as
these, where a sudden 250% increase to the eligible income level would abruptly nullify
the entire tax for such a large percentage of the population. Based on these conditions, a
fairly simple code amendment could be enacted to mirror the California Senior Citizen
Property Tax Assistance schedule. It would be recommended to go a step further by
continuing to provide for complete exemptions for incomes below$13,200.
The effect would be to provide a reduction of 4% of the utility tax to those with incomes
between$31,753 and the top amount to be eligible, $33,132. For those with incomes
between$13,200 and $18,775, the utility tax would be reduced by 41%. For those
earning less than$13,200 the total exemption would continue as in the past. The
complete sliding scale is shown on the attached schedule, which is part of the state form
required for the Senior Citizen Property Tax Assistance program.
Since the existing utility tax exemption is tied to the California Senior Citizen Property
Tax Assistance eligibility requirement, it's reasonable that the same sliding scale would
(or should) apply. While some persons might object to a modification of the ordinance, it
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would seem at least questionable that a total exemption should apply here when it doesn't
apply in the state's program.
The other policy question is whether it is equitable to shift the tax burden from one
household to another, which may well be the effect over time as the city attempts to
adjust for the losses. In fact, it is possible that tax and assessment burdens may increase
to pay off bonds to deal with infrastructure problems such as the sewer projects currently
lacking funds.
Another consideration, however, is the fact the program has been widely publicized as a
complete exemption from the utility tax, and residents have been led to believe they are
eligible immediately. It wasn't until October 25 that the City received a legal opinion
that, absent an ordinance modifying the existing Code,the exemptions would properly be
granted in July 2000 rather than now. It is appropriate for City Council to weigh all of
these factors in determining a course of action.
ALTERNATIVES TO CONSIDER:
OPTION 1: No Action—This would have the effect of allowing complete utility tax
exemptions to seniors with incomes up to $33,132, but with the exemptions not taking
effect until July 1, 2000 under the existing code. Presumably,the intent in creating a 6-
month period before implementing an exemption schedule was to allow time to adjust the
budget accordingly. However, the community has been led to believe they are eligible to
receive the exemptions immediately.
OPTION 2: Implement exemptions now—Council may enact an ordinance amending the
city code to implement the complete exemptions immediately. Note that the utility
companies would then have up to 60 days to remove the tax from their billings as
provided in the City Code.
OPTION 3: Implement exemptions now in accordance with the California Senior
Citizen Property Tax Assistance schedule—Council may enact an ordinance that would
allow immediate reductions rather than waiting until July 1, 2000, and also bring the
schedule into conformance with the index used by the state. The effect would be
reductions to, rather than elimination of, the utility tax, although any seniors with
incomes below $13,200 would continue to be exempted entirely.
FISCAL IMPACT:
The annual revenue loss from 1,500 exemptions is estimated at between$115,000 and
$177,000. Implemented half way through the current fiscal year, the loss is estimated at
between$57,500 and$88,500. Reasonable projections indicate the loss could increase to
anywhere from$250,000 to $500,000 a year over the next several years.
Revised estimates for property tax receipts this year indicate that an$88,500 loss for the
remainder of this year should not create a deficit. However,the utility tax is the one
revenue source under local control. Property tax revenue—the second most important
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revenue source to the city after the utility tax -- is controlled by the state. It was the
state's seizure of local property taxes that created the need for the utility tax increase in
1993, continuing to this day.
The potential loss of future property tax revenue, vehicle in lieu revenues and other
sources controlled by the state places greater emphasis on income sources that are
controlled by the city. Additionally, future mandates for the Public Employee Retirement
System and collective bargaining may well offset any increases in property tax income.
With uncertainty over future sales tax income from the Bixby Towne Center,the city is in
precarious financial condition. This situation arises at a time when the city has just
identified a serious backlog of unfunded infrastructure projects—now totaling an
estimated$28 million.
RECOMMENDATION:
Council to approve Option 3 and direct the city attorney to draft the necessary ordinance.
Alternatively, Council to adopt Ordinance No. implementing the full exemptions
immediately.
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