A City Finance Update

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League of California Cities Municipal Finance Institute Monterey 30 November 2016 A City Finance Update Michael Coleman 530.758.3952 coleman@muniwest.com www.facebook.

1 League of California Cities Municipal Finance Institute Monterey 30 November 2016 A City Finance Update Michael Coleman coleman@muniwest.com The California Local Government Finance Almanac 2017 League Strategic Goals 2 1. Increase Funding for Critical Transportation, Water Infrastructure. Streamline storm water regulations and CEQA to avoid duplication and reduce litigation. 2. Develop Realistic Responses to the Homeless Crisis. Increase state and federal funding and support to provide additional shelter, services. 3. Improve the Affordability of Workforce Housing and Secure Additional Funds for Affordable Housing. Increase state and federal funding, reduce regulatory barriers, provide additional incentives and local financial tools. 4. Address Public Safety Impacts of Reduced Sentencing Laws, Protect Local Priorities in the Implementation of AUMA, and Preserve City Rights to Deliver Emergency Medical Services. Provide tools and resources. Protect local priorities during implementation of the Adult Use of Marijuana Act. Preserve city rights to deliver emergency medical services.

State of the State 3 Prop30 Temporary Sales tax ends 12/31/2016 but state sales tax revenues will hold steady Operating Budget Debt progress but large unfunded employee retirement costs remain Prop

2 State of the State 3 Prop30 Temporary Sales tax ends 12/31/2016 but state sales tax revenues will hold steady Operating Budget Debt progress but large unfunded employee retirement costs remain Prop 55 Income Tax extension passes $6 billion/yr through 2028 if moderate economic growth continues much to reserves under Prop2, education under Prop98 Unmet needs: transportation, water, other infrastructure, poverty, housing, health care, Cap-and-Trade, etc. Uncertainties/Risks: health care (ACA), federal funding, pension funding, natural disasters. State General & Special Funds Spending UC/CSU Education K-12 and Community College Education General Fund $122 Billion Other Corrections Health and Social Services Health, Social Srvcs Special Funds $51 Billion Corrections Other Transportation Infrastructure, Debt

3 5 State Revenues Down $1.7 Billion From June 2016 Budget Act Assumptions State General Fund, LAO Projections (Dollars in Millions) State Projected to End With $11.5 Billion Reserve 6 State General Fund Condition, LAO Projections (In Millions)

4 Solid Growth in State Revenues Projected for State General Fund, LAO Projections (Dollars in Millions) Debt Service Ratio Expected to Decline Somewhat Throughout Forecast Period 8 Debt Service Costs as Share of Annual General Fund Revenues, LAO Projections

5 9 General Fund Surpluses, Reserve Deposits Under Economic Growth Scenario LAO Projections (In Billions) Reserve Covers Operating Deficits in Mild Recession Scenario 10 LAO Projections (In Billions)

Proposition 2* Provisions 11 Source: LAO Debts and Liabilities Eligible

Amount Start of 2016-17 Proposed Adopted PayDown 2016-17 Pay January

Settle-up Underfunding of Prop98 1,232 257 Repay Transportation Loans

Employee Pensions 43,291 0 Teacher Pensions 72,718 0 Judges Pensions

Retirement Liabilities UC Employee Pensions 10,786 171 UC Retiree Health

6 Proposition 2* Provisions 11 Source: LAO Debts and Liabilities Eligible for Accelerated Payments Under Prop2 12 Dollars in Millions Outstanding Amount Start of Proposed Adopted PayDown Pay January Down Budgetary Borrowing Repay Loans from Special Funds $ 1,806 $ 955 Settle-up Underfunding of Prop98 1, Repay Transportation Loans State Retirement Liabilities State Retiree Health 71,773 0 State Employee Pensions 43,291 0 Teacher Pensions 72,718 0 Judges Pensions 3,358 0 Deferred Payments to CalPERS University of California Retirement Liabilities UC Employee Pensions 10, UC Retiree Health 17,270 0 Total $ 223,683 $ $1,294 1,556 Source: Governor s Budget Summary 2016 Fig INT-02 12

7 13 The Clean-up Era Water Waste-water Transportation Sales Tax Decline Disruptive Economy ride sharing, home sharing Econ.Devpt after RDA Cap n Trade Marijuana.. Regulation, Taxation. Healthcare Marijuana in California Local Taxation and Regulation after Prop64(2016) Michael Coleman

15 Exemptions from Taxation of Marijuana under Proposition 64 effective 11/9/2016 Marijuana cultivated for personal use is exempt from the state cultivation tax (and is not a taxable sale subject to

Taxes and Fees on Marijuana under Proposition 64 Applies to non-medical only Applies to medical and non-medical 16 Sales and Use Tax 7.

8 15 Exemptions from Taxation of Marijuana under Proposition 64 effective 11/9/2016 Marijuana cultivated for personal use is exempt from the state cultivation tax (and is not a taxable sale subject to sales tax) Medical marijuana is exempt from state/local sales tax. but not state or local excise taxes. Taxes and Fees on Marijuana under Proposition 64 Applies to non-medical only Applies to medical and non-medical 16 Sales and Use Tax 7.25%+ retail price Effective November 9, 2016 State Marijuana Excise Tax State Cultivation Taxes 15% gross receipts of retail sale City* Marijuana Excise Tax if enacted/approved by voters XX% gross receipts or other basis (not a sales tax) $9.25/oz flowers $2.75/oz leaves Effective January 1, 2018 City* Marijuana Business Regulatory Fee if enacted To pay for regulation. Limited to cost recovery. *county if in unincorporated county

17 State Excise Taxes on Marijuana Allocation* under Proposition 64 *may be altered by

education, prevention and treatment 20% environmental cleanup, remediation 20% Reduce

bans cultivation, or outside personal cultivation, or the retail sale of marijuana, is

9 17 State Excise Taxes on Marijuana Allocation* under Proposition 64 *may be altered by majority vote of the Legislature after 1/1/ % youth programs, substance abuse education, prevention and treatment 20% environmental cleanup, remediation 20% Reduce DUI, reduce negative health impacts re: marijuana legalization A city (or county) that bans cultivation, or outside personal cultivation, or the retail sale of marijuana, is not eligible for grants. 18 Local Taxes and Bonds in California November 2016 Michael Coleman

19 Local Revenue Measures November 16 650+ local measures

3 Billion 135 city / county majority vote general purpose

taxes Including 12 non-school G.O bonds totaling $7.

10 19 Local Revenue Measures November local measures 430 taxes and bonds 184 school bonds $25.3 Billion 135 city / county majority vote general purpose taxes 117 two-thirds vote bonds, special taxes, parcel taxes Including 12 non-school G.O bonds totaling $7.3 billion Schools Special Districts Counties Cities 20 Local Revenue Measures November 16

Local Revenue Measures November 16 21 Local Revenue Measures passed/proposed

Nov2016 City General Tax (Majority Vote) 31/43 40/56 44/67 48/60 62/88 103/120 County

Vote) 18/34 11/21 7/11 5/15 14/23 19/33 County SpecialTax, GObond (2/3 Vote) 5/13 7/12

ParcelTax2/3 2/7 17/21 2/18 16/25 8/8 17/22 School Bond 2/3 0/0 2/3 0/0 1/1 0/1 2/7

11 Local Revenue Measures November Local Revenue Measures passed/proposed Gubernatorial and Presidential Elections 22 Nov2006 Nov2008 Nov2010 Nov2012 Nov2014 Nov2016 City General Tax (Majority Vote) 31/43 40/56 44/67 48/60 62/88 103/120 County General Tax (Majority Vote) 2/5 5/9 6/12 4/6 2/6 12/15 City SpecialTax,GObond (2/3 Vote) 18/34 11/21 7/11 5/15 14/23 19/33 County SpecialTax, GObond (2/3 Vote) 5/13 7/12 0/3 7/12 4/9 10/23 Special District (2/3) 19/35 10/19 6/17 7/16 10/21 21/33 School ParcelTax2/3 2/7 17/21 2/18 16/25 8/8 17/22 School Bond 2/3 0/0 2/3 0/0 1/1 0/1 2/7 School Bond 55% 55/67 85/92 47/63 90/105 91/ /177 Total 132/ / / / / /430

12 The Fuel Tax Swap of 2010 Federal gas tax 18.4 per gallon California gas tax Highway Users Tax Account HUTA 30.0 per gallon (drops to 27.8 /gal. on July 1) California U.S.T. fee 2.0 per gallon California sales tax 2.5% of sale value local rates only No 5% state sales tax on gasoline Any add-on sales taxes Countywide transportation tax rates Other local transactions and use tax rates

13 Highway User Tax Account HUTA Revenue Allocation 18 base rate 30.0 Per Gal Gasoline Transportation Debt Service State General Fund Relief *Effective July 1, Swap rate (adjusted annually) Str&Hwys State Highway Account Weight Fees ~$1 billion 44% Weight Fee Offset ~$1 billion Counties 22% Remainder Cities 22% Str&Hwys 2103 Motor Vehicle Fuel Taxes before 2010 $6 Revenues $6 Allocation $5 $4 State Sales Tax 5% of sale $5 $4 Public Transit Acct Prop42 Transit Acct Prop42 State Hwy Acct Prop42 City&Co $3 $2 Base Fuel Excise Tax 18 $3 $2 State Highway Acct $1 $1 City&Co HUTA $0 $0

Motor Vehicle Fuel Taxes Fuel Tax Swap of 2010 $6

Prop42 Transit Acct Prop42 State Hwy Acct Prop42

State Highway Acct $1 $1 City&Co HUTA $0 $0 Highway

14 Motor Vehicle Fuel Taxes Fuel Tax Swap of 2010 $6 Revenues $6 Allocation $5 $4 State Swap Excise Sales Tax 5% 18.0 /gal of sale (variable) $5 $4 Public Transit Acct Prop42 Transit Acct Prop42 State Hwy Acct Prop42 City&Co $3 $2 Base Fuel Excise Tax 18 /gal $3 $2 State Highway Acct $1 $1 City&Co HUTA $0 $0 Highway User Tax Revenues Proposed 2103 swap 2104 counties 2105 cities& counties cities estimated projected

it s time for a new vehicle Federal Fuel

Weight Fees Cap-n- Trade Funds State Fuel

Sales Tax Benefit Assessments and Mello-

15 it s time for a new vehicle Federal Fuel Taxes Vehicle Registration Fees Vehicle Weight Fees Cap-n- Trade Funds State Fuel Taxes Tolls Public Transit Fares Dedicated Sales Taxes incl. self help Local General Funds (incl. G.O. Bond Debt Service) State General Fund Local ¼% T.D.A. Sales Tax Benefit Assessments and Mello- Roos Taxes Developer Fees and Exactions Dedicated Parcel Taxes Redevelopment Tax Increment

Fuel tax revenues are flat /declining Per gallon rate is stagnate re inflation Shift to alternative fuels Price based rate has tanked

fees now fund transportation debt General fund owes $879 million to transp.

OPEB costs. Priorities 1. Make significant investment, 2. Focus: maintain / rehab current system, 3.

16 Fuel tax revenues are flat /declining Per gallon rate is stagnate re inflation Shift to alternative fuels Price based rate has tanked swap mechanism makes it worse Local sales taxes nearly tapped out extend but not increase State General Fund support is gone Weight fees now fund transportation debt General fund owes $879 million to transp. funds Local general funds squeezed by: other service demands, recession, state take-aways, flawed sales tax structure growing pension/ OPEB costs. Priorities 1. Make significant investment, 2. Focus: maintain / rehab current system, 3. New revenue into high priority goods movement, 4. Raise revenue across a broad range of options, 5. Split revenue equally btw state and local systems, 6. Strong accountability requirements, 7. Consistent annual funding levels. 32

17 Restore Lost Revenues Truck weight fees Restore to transportation over 5 yrs to $1 billion/yr Price-based gas tax Reset rate to 17.3 cents +$900 million/year Repay loans to transportation from General Fund New Revenues 33 Gas tax Increase by 12 to $1.8B/yr and index Cap and Trade $500M Diesel tax Increase by 11 $300M/yr and index Road access fee $65/yr $2B/yr Diesel sales tax 1.75% to 5.25% $300M/yr Zero emission vehicle fee $100/yr $10M/yr Reforms/Other Provisions Sensible CEQA reforms Office of Inspector General Reduce duplicative state/fed rules Increase Caltrans encroachment permit threshold Enact Advanced Mitigation Program Constitutionally protect existing & new revenues for transpt n Eliminate sunset on authorization of Public Private Partnerships Provide spending transparency and accountability Require measureable performance targets Require cities and counties to adopt a maintenance of effort Require CTC allocation of SHOPP support costs Provide Caltrans w flexibility re contracting out 34

18 Over-reliance on redevelopment revenues Over-reliance on land development revenue Unsustainable and Intractable employee compensation especially public safety pension and retiree health care Risky financing schemes Unsustainable Decline in Core Revenues Fear & Denial Toxic relationships Ceding of management and policy choices to others

19 Validate areas in which your city is fiscally healthy Identify problems, areas to improve Act to remedy problems before they get worse or unmanageable Avoid being blind-sided by problems Add credibility to your fiscal evaluation Help others (labor associations, taxpayers and other interested parties) understand your financial position Get it at www.

League of California Cities Policy Committee Meetings Sacramento 19 January State Budget and Legislation Update. State of the State

League of California Cities Policy Committee Meetings Sacramento 19 January 2017 State Budget and Legislation Update State of the State 2 Prop30 temporary sales tax ended 12/31/2016 but state tax revenues