Report to the City Council

The City of San Diego Report to the City Council DATE ISSUED: June 7, 2017 REPORT NO: ATTENTION: Honorable Members of the City Council SUBJECT: Consideration of a Proposed Ballot Measure to Authorize an Increase to the Transient Occupancy Tax and the Related Issuance of Bonds for Placement on a Municipal Special Election Ballot on November 7, 2017 REFERENCE: N/A REQUESTED ACTIONS: Introduce and adopt the ordinance; and adopt the resolutions. Sub-Item A: Adoption of a resolution stating for the record that the Council has reviewed and considered the information contained in the February 2014 Addendum to the Final Environmental Impact Report for the Convention Center expansion and Hilton Hotel expansion project and concurs with the conclusions in the Addendum. Sub-Item B: Introduction and adoption of an Ordinance submitting to the qualified voters of the City of San Diego, at the Municipal Special Election to be held on November 7, 2017, one measure to authorize an increase to the Transient Occupancy Tax and the related issuance of bonds. Sub-Item C: Adoption of a resolution: Directing the City Attorney to prepare a ballot title and summary, and an impartial analysis, of the proposed ballot measure for inclusion in the voter pamphlet and to deliver the ballot title and summary, and the impartial analysis, to the Office of the City Clerk, Elections Section, no later than August 21, 2017; Directing the Independent Budget Analyst, working with the Mayor (or the Mayor s designee) and the City Auditor, to prepare a fiscal impact analysis of the proposed ballot measure for inclusion in the voter pamphlet, and to deliver the analysis to the Office of the City Clerk, Elections Section, no later than August 21, 2017; Authorizing to sign and file a written ballot argument in the ballot measure for inclusion in the voter pamphlet, and to deliver the argument to the Office of the City Clerk, Elections Section, no later than August 24, 2017; and

Page 2 Providing that, as the ballot measure does not exceed 50 pages in length, the City Clerk will direct the Registrar of Voters to publish the text of the measure in its entirety in the voter pamphlet. Note: Sub-Item C is not subject to the Mayor s veto. STAFF RECOMMENDATION: Approve the requested actions. EXECUTIVE SUMMARY OF ITEM BACKGROUND: During his State of the City Address in January of 2017, the Mayor proposed a ballot measure to increase the Transient Occupancy Tax to address three of San Diego s most critical issues - the Contiguous Phase III Convention Center Expansion, road repairs, and homelessness. On April 5, the Rules Committee unanimously directed the City Attorney s Office to work with the Mayor s Office to prepare a draft ordinance for consideration by the City Council in June to place on the ballot during a special election in November of 2017. As such, the Mayor s office has been working with the City Attorney s Office to develop the ordinance language and further refine the details of the proposal based on feedback from the City Council, Independent Budget Analyst and the public at the April 5 Rules Committee hearing and the May 22 Council meeting. Today s action includes placing the proposed measure on a special election in November of 2017. Proposed TOT Increase: The City s current Transient Occupancy Tax (TOT) assessment is levied at 10.5 cents per dollar on taxable rent for a transient s stay of less than one month. An additional 2.00% Tourism Marketing District (TMD) assessment is applicable to lodging businesses with 70 or more rooms. TOT applies to all properties located within the City of San Diego that are rented to transients, defined as any person who exercises occupancy or is entitled to occupancy for less than one month. The proposed ballot measure will increase the City s existing transient occupancy tax (TOT) up to 1, 2 and 3% by tax boundary, generating revenues to be used exclusively for (1) the contiguous expansion and modernization of the Convention Center facility, to include the ongoing maintenance, operation, and repair of the Convention Center, and programs supporting Convention Center business development; (2) street improvements, repairs, and maintenance in the City; and (3) homelessness programs in the City. The proposed 3-2-1 structure is as follows: (i) In Tax Zone 1, defined as the portion of the City s territory located generally north of the alignment of California State Route 56 and generally south of the alignment of California State Route 54, the TOT will increase by 1%; (ii) In Tax Zone 2, defined as the portion of the City s territory that does not comprise Tax Zone 1 or Tax Zone 3, the TOT will increase by 2%; and (iii) In Tax Zone 3, defined as the portion of the City s territory located generally in the downtown area, the TOT will increase by 3%. The proposed TOT increase will commence April 1, 2018, and would be levied up to 40 years from the issuance of long term bonds for the Convention Center expansion. If those long term bonds have not been issued by March 31, 2028, the imposition of the TOT increase will

Page 3 cease, except as may be necessary to generate tax revenue to pay any outstanding bonds issued before March 31, 2028, for Convention Center improvements (short term bonds only), street repairs or homelessness programs. Funds will be deposited into three separate dedicated revenue accounts for the Convention Center, street repair and homelessness program components. The proposed measure contains various transparency and accountability features, including all of the features recommended by the Office of the Independent Budget Analyst (IBA) during the May 22 Council meeting. Those features include the limitation of tax revenue expenditures for the identified special purposes of each revenue account (Sections 35.0203 and 35.0205), the approval of annual budgets for each revenue account (Section 35.0207), the approval of five-year implementation plans for street repairs and homelessness programs (Section 35.0208), the completion of annual reports regarding the collection and expenditure of tax revenues in each revenue account (Section 35.0209), and the completion of performance audits of each revenue account on a rolling three-year basis (Section 35.0210). The measure includes the IBA s recommendation to impose a cap on the annual allocation of tax revenues toward Convention Center support activities and Convention Center business development programs (Section 35.0207(d)-(e)). The proposed measure specifies that the additional TOT tax revenues will be allocated 64% to the Convention Center revenue account, 18% to the street repair revenue account, and 18% to the homelessness program revenue account (Section 35.0204(b)). It also provides that, commencing in Fiscal Year 2038, the Mayor may propose, and the Council may approve, a revised allocation that results in a lesser percentage being allocated to the Convention Center revenue account and a greater percentage being allocated to the street repair revenue account or the homelessness program revenue account, or both (Section 35.0204(c)). San Diego Convention Center Expansion The City is responsible for managing, operating, maintaining and promoting the San Diego Convention Center per the Management Agreement with the San Diego Unified Port District (Port District). The City and the Port District have engaged in extensive efforts over the past decade to advance a Contiguous Phase III Expansion to the Convention Center to meet global demand. The San Diego Convention Center hosts on average more than 150 primary events each year and more than 780,000 attendees annually. However, the Convention Center has reached maximum occupancy and a lack of available space is the number one reason clients are not able to bring business to San Diego. As a result, these conventions go to other cities and San Diego loses significant economic benefit. The proposed Phase III Contiguous Convention Center Expansion will: Add another 400,000 square feet of rentable exhibit, ballroom and meeting space to the existing facility (the total current space is 816,091 square feet); Allow the Convention Center to retain large conventions the Center s top five largest conventions have a regional economic impact of approximately $397 million annually; Allow the Convention Center to attract approximately 50 more annual events and 334,000 attendees, bringing the average total attendance to over 1.1 million; Generate $509 million in direct spending at local businesses, and have a regional impact of $860 million; Generate over 380,000 new hotel room nights annually for the San Diego market from convention attendees, providing millions annually in additional TOT to the City s General Fund for critical public benefits and core city services like public safety, parks and libraries; Generate thousands of construction jobs and nearly 7,000 permanent jobs; and

Page 4 Provide numerous public benefit features including a sustainably designed 5-acre rooftop public park with views of the City and Bay, increased public access to the waterfront, and the rerouting of truck traffic away from pedestrians and visitor vehicles along the waterfront. Phase III of the San Diego Convention Center build-out has been approved by the California Coastal Commission, Port District, City of San Diego and San Diego Convention Center Corporation Board. The project is currently included in the Port Master Plan, per the Port District s Board approval of the Port Master Plan Amendment in 2012. The project also received unanimous approval by the California Coastal Commission in 2013. On January 25, 2017, the San Diego Superior Court issued a ruling denying San Diego Navy Broadway Complex Coalition s legal challenge to the California Coastal Commission s approval of the Convention Center contiguous expansion under the California Coastal Act and the California Environmental Quality Act. In 2012, the City Council approved the formation of the Convention Center Facilities District to allow the levying of a special tax under the Mello-Roos Community Facilities Act of 1982 to finance the Phase III Contiguous Expansion, and then authorized the issuance of special tax bonds to finance a portion of the contiguous expansion. However, in 2014, the Court of Appeal, Fourth District, Division One issued a decision invalidating the Convention Center Facilities District special tax on the basis that two-thirds of registered voters, not two-thirds of landowners on which a hotel is located, were required to approve the special tax. As such, the next step in realizing this landmark civic project is to pursue financing for the Phase III Contiguous Expansion. In August 2013, Clark/Hunt Joint Venture provided an estimate of $518 million for the Phase III Expansion project using a construction midpoint of October 2017. In March 2017, Fentress Architects provided an updated cost estimate of $685 million for the same design and construction project scope, using a construction midpoint of August 2021. The project cost estimate increased by $167 million over 46 months (October 2017 to August 2021), which is an average increase of $3.6 million per month. Any additional construction project delay beyond an estimated completion date of March 2023 could result in a continuing increase in construction costs. The proposed TOT increase will create a dedicated revenue stream for the Convention Center, allowing the City to finance all eligible design and construction costs for the Contiguous Expansion project. A concept plan of finance for the Phase III Convention Center Expansion has been prepared by Debt Management and is included as Attachment 2. This plan provides details regarding the financing costs associated with the financing measure. In general, the costs of issuance are expected to be in line with the City s past bond issuance transactions. The City will establish reserve funds for TOT revenue stabilization to protect the General Fund during cyclical downturns in the tourism sector. Excess revenues above debt service dedicated toward the Convention Center will be allocated for the facilities net capital and operating and maintenance costs, other capital improvements intended to modernize the Convention Center, the City s annual support payments to the San Diego Convention Center Corporation and Convention Center business development activities. The City s annual support payment are used for operation of a permanent dewatering system at the Convention Center, certain marketing and promotion activities and fulfilling the Convention Center s most critical capital needs.

Page 5 Repairing Roads The City s highest infrastructure priority remains street repair. Since taking office, Mayor Faulconer has worked with the City Council to more than double the City s funding for road repair. The City is currently on track to repair roughly one-third of the City s entire street network 1,000 miles over a five year period. The first full assessment of the City s street conditions was conducted in 2011, which resulted in an Overall Condition Index (OCI) of 59 or fair status. In September 2016, the Transportation and Storm Water Department released an updated condition survey that determined that 60 percent of the City streets are in good condition, 34 percent are in fair condition and 6 percent are in poor condition. This resulted in an improved OCI of 72, exceeding the Mayor and City Council s goal of OCI 70. The proposed measure will create a new fund dedicated to repairing roads to meet or exceed an OCI of 70 in every San Diego neighborhood and for addressing critical road infrastructure, including but not limited to: Slurry seal; Asphalt paving/overlay/inlay; Concrete replacement; Street reconstruction; and General road infrastructure and right-of-way improvements. The City relies on debt financing for a majority of its capital road repair work and general road infrastructure, and this revenue stream could leverage bonds for capital road repair work. A dedicated and sustainable revenue stream for road repair will be critical as the City s capacity to issue debt is limited and prioritizing streets for our debt financing reduces capacity to finance other critical infrastructure needs. The City will continue to make decisions based on needs to either finance capital improvements and/or utilize cash for maintenance which can t be financed. Road repair revenues will be allocated during the City s annual budget process. Reducing Homelessness According to the 2017 Point-in-Time Count, an estimated 9,116 homeless individuals and families live in the San Diego region, 5,621 of them unsheltered. The City has taken action to help address this challenge through (1) a region-wide collaborative approach with the County, the SD Housing commission and the Regional Task Force on the Homeless; (2) implementation of policies and best practices; (3) and the dedication of personnel and financial resources to programs, services and access to housing opportunities. Despite these efforts, homelessness remains a regional crisis due to a number of major policy changes and significant events, including: The State s elimination of the redevelopment program in 2012 which drastically cut a needed funding stream for the construction of affordable housing; The Great Recession, which left many low-income earners and those already homeless with a host of new financial, health, housing and transportation obstacles; The rising cost of housing in the San Diego region, coupled with historically low vacancy rates; The loss of Single-Room Occupancy (SRO) housing units as properties were renovated for other purposes; and Limited federal funding due to an outdated formula - San Diego County has the 4th largest homeless population in the nation yet the amount of federal funding for this region is 22nd in the United States.

Page 6 The proposed measure will create the City s first dedicated revenue stream to address homelessness, helping to offset these limited resources. Funding will support long-term regional efforts to address homelessness as well as immediate interventions for some of our most vulnerable homeless families and individuals and efforts to reach and prevent those atrisk of becoming homeless. The ballot language will also provide the ability to leverage this revenue stream to issue bonds. Revenues will fund activities including, but not limited to: Increasing affordable housing and permanent supportive housing inventory through leverage of private development dollars, tax credits, bond financing and other public, private and philanthropic revenue sources; Creation of Support Services Assessment Center(s), immediate temporary beds for our most vulnerable individuals, triage and assessment, and bridge housing opportunities; Prevention and diversion initiatives; Rental assistance, landlord incentive payments and security deposits; Rapid re-housing initiatives; Homeless outreach, housing and case navigation services; Programs and services for homeless individuals experiencing substance abuse and mental health challenges; Support for an overarching regional ecosystem that maps out clear centralized homeless services delivery using the Regional Task Force on the Homeless Coordinated Entry System and the Homeless Management Information System. The proposed measure will require the City Council to approve, beginning in FY 2018, fiveyear implementation plans describing how the City will allocate the projected homelessness program funds. Projected Revenue: The current growth rate for TOT during this recent period of strong economic growth in San Diego is 5 to 6%. Future TOT growth over the long term is difficult to project, however Debt Management has used a moderate annual growth rate assumption of 3.3% based on an analysis of historical TOT growth over 30 years. Revenue assumptions include new hotels expected to come online through Fiscal Year 2018. Attachment 1 provides projected funding by tax component (Convention Center, Street Repair and Homelessness Programs). The three dedicated revenue accounts will: Support debt service for the Phase III contiguous expansion; Provide additional revenue to support additional capital needs to modernize the existing facility, operating and maintenance at the entire Convention Center facility, and Convention Center business development activities; Provide more than three times the amount of General Funds the City spends on homeless programs annually in the first year alone; Generate approximately $950 million in total revenues for homelessness programs over 40 years; and Generate approximately $950 million in total revenues for street repair over 40 years. Revenue generation for homelessness programs and street repairs could increase above these estimates if the Mayor and the Council, commencing in Fiscal Year 2038, decide to allocate a greater percentage of the additional TOT tax revenues to those two purposes. The proposed measure authorizes the City to issue up to an aggregate total of $1,490,000 in bonds for the identified purposes, including up to $690 million for Convention Center improvements and up to $400 million each for street repairs and homelessness programs.

Page 7 Conclusion: Given the rising costs for construction of the proposed Convention Center expansion, estimated at $3.6 million per month, as well as the urgent need to address the homeless crisis and repair roads, placing this measure on the ballot as soon as possible is in the best financial interest of the City and in the best civic interest of San Diego s neighborhoods. As such, this action is to place the measure on the ballot during a special election in November 2017. CITY STRATEGIC PLAN GOAL(S)/OBJECTIVE(S): Goal # 2: Work in partnership with all of our communities to achieve safe and livable Neighborhoods Objective #3: Invest in infrastructure Objective #4: Foster services that improve quality of life Goal 3: Create and sustain a resilient and economically prosperous City Objective #1: Create dynamic neighborhoods that incorporate mobility, connectivity, and sustainability Objective #3: Diversify and grow the local economy Objective #5: Enhance San Diego s global standing FISCAL CONSIDERATIONS: Per Municipal Code Section 27.0506, after the matter is placed on the ballot the Mayor, Independent Budget Analyst, and the City Auditor will prepare a fiscal impact analysis. Costs associated with a special election are estimated at $5 million and are included in the Mayor s Proposed Budget. EQUAL OPPORTUNITY CONTRACTING INFORMATION (if applicable): N/A PREVIOUS COUNCIL and/or COMMITTEE ACTIONS: On April 5, the Rules Committee unanimously directed with City Attorney s Office to work with the Mayor s Office to prepare a draft ordinance to increase the TOT up to 1, 2 and 3% to fund a contiguous Phase III Convention Center Expansion, initiatives to reduce homelessness and road repairs, for consideration by the City Council in June. ENVIRONMENTAL IMPACT: In general (with one exception described below), the ballot measure for the transient occupancy tax increase on the special election ballot is not a project under CEQA Guidelines section 15378(b)(4), and therefore is not subject to review under the California Environmental Quality Act (CEQA), because the ballot measure, if approved by the voters, would create a government funding mechanism that does not involve a commitment to any specific project. The City will be required to achieve CEQA compliance for any future projects that receive funding as the result of a successful ballot measure. However, with the exception of the Convention Center expansion project, the ballot measure only identifies general categories of potential future projects that will benefit from the additional tax revenues and does not identify any specific projects with sufficient detail to permit meaningful review of potential environmental impacts at this time. The ballot measure, if successful, would create a substantial funding mechanism for the Convention Center expansion project. The Council has already reviewed and considered certain CEQA documentation for the expansion project. Specifically, the Council, acting in its

Page 8 capacity as the responsible agency under CEQA, adopted Resolution R-307705 (Oct. 3, 2012) stating for the record that the Council has reviewed and considered the information contained in the Final Environmental Impact Report (Final EIR) for the expansion project and adopted findings pursuant to CEQA related to the expansion project. After 2012, the Port District and the California Coastal Commission approved relatively minor modifications to the design of the expansion project. As the lead agency under CEQA, the Port District prepared and approved an Addendum to the Final EIR dated February 2014 (Addendum), reflecting that the minor project modifications will not create any new significant environmental impacts or substantially worsen or increase the severity of environmental impacts already identified in the Final EIR. In its capacity as the governing body of the responsible agency under CEQA, the Council must now adopt a CEQA resolution in connection with the Addendum before the Council takes a discretionary action with respect to the ballot measure. The Final EIR, the related 2012 Council resolution, the Addendum, and the proposed CEQA resolution are included in the backup materials for this item. COMMUNITY PARTICIPATION AND OUTREACH EFFORTS: The Phase III Contiguous Convention Center Expansion has been approved by the California Coastal Commission, Port of San Diego, and San Diego Convention Center Corporation Board. KEY STAKEHOLDERS AND PROJECTED IMPACTS: The TOT increase will expand the San Diego Convention Center to create thousands of jobs, retain and attract large conventions, and fund programs and projects that reduce homelessness and repair roads in neighborhoods across San Diego. Additionally, the expansion will generate significant economic benefit to the City, providing more revenue to the City for core services. Office of Mayor Kevin Faulconer Originating Department Deputy Chief/Chief Operating Officer Attachment(s): 1. Projected Funding by Tax Component (FY 2019 2060) 2. Concept Financing Plan 3. Special Lodging Tax Zones Map 4. Convention Center Expansion Analysis for the San Diego Convention Center, April 11, 2017, prepared by HVS Convention, Sports & Entertainment Facilities Consulting (HVS Report) Proposed Ballot Language 5. Redline of Proposed Ballot Language from May 22 Informational Hearing 6. Ordinance to submit to voters, at the Municipal Special Election to be held on November 7, 2017, one measure to authorize an increase to the Transient Occupancy Tax and the related issuance of bonds 7. Resolution to provide direction regarding the ballot title and summary, impartial analysis, fiscal impact analysis and ballot arguments 8. Resolution regarding the February 2014 Addendum to the Final Environmental Impact Report for the Convention Center expansion and Hilton Hotel expansion project, and related documents