South Pasadena city officials are hopeful a local sales tax measure of ¾ cents, in front of voters in November, will gain approval to generate a revenue stream to help close an anticipated budget shortfall over the next five years.
In a city report on long-term financial sustainability strategy, City Manager Stephanie DeWolfe says the sales tax hike will not be sufficient to maintain services in the long term unless it increases over time due to expansion of tax generating businesses.
If the tax dose not pass, she says there would be no funding for adequate compensation to employees and the city will face significant challenges in filling critical positions, including police and fire department personnel.
With expenses increasing every year, along with flat or declining revenues, DeWolfe says the current structure of services is not sustainable.
“The costs of staffing rises every year along with the costs of materials and professional services,” she explained in the city report. “However, revenue sources are not rising at an equal rate, creating a structural deficit in the future. Property tax increases are minimal, UUT (utility users’ tax) revenues are declining, and sales tax revenue is flat or declining.”
New revenue sources are a must, she stressed, or the city will be forced to function with significantly less staff, downsizing or eliminating some programs and services.
“Expense reduction strategies alone would require additional cuts every year, creating a compounding impact,” explained DeWolfe in the report. “Several revenue enhancement alternatives scored high in popularity in a recent community survey, including redevelopment of city properties, the facilitation of a small hotel and implementation of a hotel tax, and the consideration of a local sales tax measure.”
A majority of the city’s revenue comes through property taxes, resulting in 54% of the general fund dollars. “While the property values are strong in South Pasadena,” noted DeWolfe, “increases in revenue to the city are only realized when properties are sold and reassessed. The city has seen increases of only 4-6% in property tax in recent years, a lower-than-average rate due in part to the relatively low turnover rate of properties in South Pasadena. With housing prices flattening this year, this increase may be less in future years than in recent history.”
The UUT is the second largest source of revenue in the city’s general fund, bringing in about 12% or $3.4 million. The current sales tax is the third largest source of revenue at 8%.
“South Pasadena’s business districts have struggled to sustain a vibrant mix of businesses and a full range of services and amenities to serve local residents,” DeWolfe explained. “As a result, residents often travel to neighboring cities for dining, shopping and entertainment, leaving sales tax revenue to the city flat in most years.”
She says economic development programs can serve to strengthen the city’s business districts and enhance sales tax revenue through business recruitment outreach, tenant mix strategies, streetscape improvement, parking and signage strategies, and branding and marketing.
Levy of the ¾ of a cent tax approved by residents in November would return 100% to the city.
Users fees for recreation programs and rental of properties like the Scout House in Garfield Park or the War Memorial Building are another significant source of revenue for the city’s general fund, adding roughly 4%, say city officials.
When it comes to the city, the largest cost is personnel. “People are the city’s greatest asset and make the delivery of high quality services possible,” noted DeWolfe in the city report. Cost for personnel include salary, medical benefits, pension costs and training.
Infrastructure continues to be a significant burden on the city’s coffers. Since 2012, $2 million or more has been spent to make repairs to South Pasadena streets. “The uncharacteristically large general fund infusion came after many years of deferred maintenance and strong demands from residents to better maintain the roads,” DeWolfe explained. “Continuing this high rate of funding has had a significant impact on the general fund. However, much deferred maintenance remains, and it [road work] continues to be one of the top priorities of residents.”
Capital expenses, added the city manager, must be made to aging city buildings and facilities, along with parks, that are in need of repair. A capital improvement project prepared a year ago and recently updated lists more than $150 million in needs. Funding, say city officials, is only available for about half that amount.
“While only a portion of funding will need to come from the general fund (the majority paid through grants), it remains a significant cost factor in future budgets,” DeWolfe said, looking at a growing number of projects facing the city.
On a positive note, she said the city is planning for the evolution of technology, services and amenities in the future. “To remain relevant and meet the demands of its customers, an organization must keep pace with trends in customer service,” explained DeWolfe. “This often requires investments in technology and/or new programs and services. For example, many cities now have a customer service smartphone application that allows residents to snap a photo of an issue or concern and send it to the city with one click. This streamlines the service request process for residents and creates a clear tracking system for staff to ensure timely response.”
DeWolfe says customers often ask for an app of this kind, citing the benefits after seeing how it works effectively in other cities. “While the benefits are undeniable, the costs of developing and maintaining this kind of new technology are considerable and must be factored into future budgets,” she said.
Occupying much of DeWolfe’s time these days is identifying a budget shortfall of more than $1million in fiscal year 2019-20 which began on July 1 and is projected to increase to nearly $2 million in five years. “This estimate includes minimal increases in compensation for personnel and maintains the $2 million in general fund revenue directed to capital projects, as well as limited funding for new initiatives such as economic development,” she noted in the city report. “It does not include the results of labor negotiations (pending) or additional undefined increases in California Public Employees Retirement System (CalPERS).”
Going forward, DeWolfe stressed that additional revenue must be identified to maintain city services. Earlier in the year, the city conducted seven public meetings and three with staff to present the budget forecast and received feedback on potential solutions for increasing revenue. Parking meters in the business district and a retail cannabis store once suggested are off a list of potential ways to raise revenue while redevelopment of city properties, building a small hotel, increasing user fees on city properties and short term rentals are on the front burner.
DeWolfe said residents expressed concern with the current facilities in the Arroyo and were supportive of creating improved amenities that would bring additional dollars into the city. Over the years, there’s been talk about building a banquet center at Arroyo Golf Course. Residents also expressed interest in developing public parking lots to improve the revenue stream.
South Pasadena has several Bed & Breakfast Inns, but does not have a hotel. The city manager said residents have verbalized the need for a local hotel to serve both business and personal/family needs, citing their frustration of sending individuals to Pasadena or other surrounding cities to find overnight stays. The city would garner revenue from a hotel tax, on restaurant and bar services and hotel rooms. A hotel tax would need the approval by South Pasadena residents after being placed on the ballot.
Short-term rentals are currently prohibited in the city, but DeWolfe noted they are extremely difficult and expensive to enforce. “A quick search on a given day may reveal more than 50 sites in South Pasadena just on AirBnB,” said DeWolfe. “If legalized, a hotel tax could also be applied to these rentals. A conservative estimate of revenue for 50 properties with a limited number of room nights is about $50,000 annually.”
To make this happen, DeWolfe said the zoning code would have to be changed to permit short-term rentals and the hotel tax would have to be approved on a ballot.
The proposed sales tax measure of ¾ cent is a solid first step, which the City Council believes will raise approximately $1.5 million in annual revenues if approved by voters.
The tax increase, coupled with other financial strategies and future economic development, are critical steps as DeWolfe and the council are undertaking efforts for a prosperous future, saying: “Studies show that the city has opportunities to capture business that is currently being diverted to other shopping areas. Investments in more vibrant business districts would engender better sustainability for small businesses that characterize South Pasadena, would create more local amenities for residents, and would ultimately result in more revenue to support city services.”