The selling of the UMA

There is something very troubling about the way in which the City, through its ballot arguments and mailers, is marketing the “Utility Modernization Act” to Alameda voters.

For those of our readers familiar only with the rent-related items on the November ballot, we direct your attention to Measure K1, aka the Utility Modernization Act.  This ballot measure would re-write both the ordinance imposing a utility users’ tax on local residents and the Charter provision authorizing transfers of funds to the City from Alameda Municipal Power.

Here’s our gripe:  It seems to us that the proponents of the UMA are, on the one hand, obfuscating the financial impact on the public if Measure K1 passes and, on the other, exaggerating the fiscal harm to the City if it fails.

And that’s a shame, since a case can be made for the UMA on its own merits.  Forget the sales pitch and stick to the facts and a voter might conclude that Measure K1 is worth voting for after all.

The UMA grew out of an effort initiated in October 2015 by then-Interim City Manager Liz Warmerdam to explore ways to increase tax revenue for the City.  At the time, Council members were falling over themselves to find projects on which to spend the “surplus” in the General Fund, but, as Ms. Warmerdam and other staff members understood, the “surplus” had been caused by “one-time events.”  Looking ahead, staff was projecting operating deficits extending as far as the eye (or at least Finance Director Elena Adair’s eyes) could see.  Unless the City found new sources of revenue, it would have to cover these deficits out of “reserves.”

So staff engaged a consulting firm to survey Alameda residents about their potential support for three tax-increase proposals.  Based on the results, the consultants recommended that Council consider placing a measure “modernizing” the Utility Users Tax on the November ballot.

Enacted in 1972 and revised in 1995, the UUT levies a 7.5 percent tax on charges paid by Alamedans for electricity, gas, cable television, and “intrastate, interstate, and/or international telephone services.”  The tax is owed by the users, but collected by the providers, of the specified services.

The UUT is the fourth largest source of tax revenue for the General Fund, generating $8.33 million in Fiscal Year 2014-15.  But UUT revenue has been declining since FY 2007-08, and staff and its consultants thought they knew why:  the ordinance, as written, didn’t cover the, ahem, broad band of telecommunications and video services now being used by Alamedans.  (Is VoIP a “telephone” service?  You tell us.)

The proposed solution was simple:  re-write the ordinance to expand the list of services to which the tax applied.  By updating and broadening the scope of the UUT, the City would collect more revenue even if the tax rate stayed the same.  Initially, staff pegged the additional tax revenue at $1.6 million a year.

Sound reasonable? Well, it did to Council, too, and in March it directed staff to prepare a ballot measure.

Which staff did.  But the proposal that came back to Council contained another item:  In addition to replacing the existing UUT ordinance with a revised version, the ballot measure also would re-write the provision in the Charter relating to payments to the City by AMP.

Since 1937, the Charter has required the Public Utilities Board to transfer to the General Fund the annual earnings, if any, of the electric company above the amount set aside as a reserve.  But there came a time – we can’t pinpoint the date – when the Board decided to keep transferring funds every year even though the utility had not actually generated “excess” earnings.  Beginning in 2009, the PUB fixed the subsidy at $2.8 million a year.

Naturally, the City has come to rely on this annual gift from AMP – as well as on two other annual transfers of funds called “Payment in Lieu of Taxes” and “Return on Investment,” which totaled $1.36 million in FY 2014-15.  Altogether, AMP’s “contribution” to the City that year amounted to about five percent of total General Fund revenue.  (And we’re not counting the $900,000 value of street lighting provided by AMP to the City at no charge.)

No one had challenged the legality of any of these transfers until October 2015, when a class action suit was filed – by “southern California lawyers,” according to the staff presentation – attacking the annual $2.8 million subsidy as an illegal tax because it had not been approved by the voters.  (For some reason, the PILOT and ROI payments apparently were OK.)  Staff’s reaction was to hire a prominent San Francisco law firm to defend the case – and to urge re-writing the Charter provision “in an abundance of caution.”

Under the proposal, the existing provision directing the transfer of “excess” earnings would be deleted.  In its place would go an unconditional obligation by AMP to make an annual payment of $3.7 million to the City, followed by an explicit authorization to the PUB to “fix rates in an amount sufficient to cover the cost of the annual transfer. . . .”  With this change, the City could argue in court that the voters had approved the subsidy – at least prospectively.  Take that, Dodger fans.

Council agreed to the proposed addition and unanimously voted in June to submit what became Measure K1 to the voters.

And then the marketing campaign began.

Even when the idea for a ballot measure involved only the UUT, the City’s consultant had warned Council that “public education” would be needed to induce voters to pass the measure.  According to the consultants, a bare majority – 52 percent – of survey respondents favored a hypothetical proposal to “modernize” the UUT, but, after a “short explanation,” the yes votes rose to 68 percent.  The percentage in favor then dropped to 64 percent after voters were presented with the pro and con arguments.

At staff’s recommendation, Council agreed to hire a “community outreach and education consultant” to pitch the UMA.  City Chief Information Officer Sarah Henry told us that the City awarded the $48,000 contract to an outfit called Clifford Moss, which bills itself as a “dynamic political strategy and public affairs firm.”  In June, Clifford Moss put together a one-page mailer (with a return card) that cost the City $17,603.11 (including tax) to design, print, and mail.  The firm also produced a video, for which the City paid $5,000 directly to the videographer, that was posted on the City website (until it was taken down at the request of Mayor Spencer).

More recently, staff itself composed a second mailer and the City sent 26,000 copies to Alameda voters.  This one cost taxpayers $16,648.66 to design, print, and mail.

Our problems with the marketing campaign for the UMA center on three statements, two in the mailer and one in the ballot argument, all of which are, at best, misleading.

The first, topping the left-hand column of the brochure in red type, declares:  “The UMA will not raise taxes or rates.”

Actually, it will.

Under the UMA, the utility users’ tax rate indeed will remain at 7.5 percent.  But an unchanged tax rate does not mean that every utility user’s tax liability will stay the same.

Think about it for a minute.  The staff report recommending putting the UMA on the ballot predicts that the new ordinance will produce an additional $1.5 million in tax revenue annually for the General Fund.  (Interestingly, neither this figure nor any other dollar estimate appears in the ballot arguments or the mailer.)  But where’s this additional revenue going to come from?  It can only come from higher taxes.  And who’s going to pay these higher taxes?  Utility users,  of course.

But not all of them.  According to the ballot argument, “Customers whose providers are currently applying the tax correctly will not see any increase in their bills.”  This implies that customers whose providers aren’t applying the tax “correctly” will see an increase.  If so, we’d like to know more about just which companies fall into which category (and what, if this was the problem, the City has been doing all these years to bring the errant companies into line).

So we asked Ms. Henry.  “[W]e are not sure how each company is applying the tax,” she replied.  “It is clear that some companies are applying the tax more broadly than others, and that, depending on how your provider is applying the tax, people with the same services are paying different amounts.”  She then gave an example comparing an AT&T bill with a Verizon bill to illustrate her point.

Well, we persisted, if the City doesn’t know how the individual cell phone providers are applying the current tax, how can it say that the new ordinance will produce $1.5 million annually in new revenue?  “The $1.5 million in revenue is an estimate,” Ms. Henry replied, “based on what other cities in Alameda County that have modernized their language have been able to capture.”

This week, at the risk of exhausting Ms. Henry’s patience – and she has been not only patient but indulgent – we asked her to confirm the key point:  the City does not know which telecommunications providers will charge their customers more for the UUT if the UMA passes, nor does it know how much more any specific telecommunications provider will charge.  “Yes,” Ms. Henry replied, “these statements are true.”

Since that’s the case, we really don’t think the City should be promising voters that the UMA will not raise utility users’ taxes.  Moreover, we also have our doubts about assuring voters that there will be no increase in electricity rates.  According to the ballot argument, the annual subsidy is an “existing part of the AMP budget,” so the UMA won’t lead immediately to higher electric bills.  But the re-written Charter provisions authorize the Public Utility Board to set rates high enough to cover the subsidy.  Who knows what might happen in the future?

Our next problem arises from another statement in the mailer.  In response to the question, “What will happen if the UMA doesn’t pass?”, the brochure states:  “If the UMA doesn’t pass, the City of Alameda is at risk of losing over $5 million that go to core City services like public safety, street and road repair, park maintenance, and more.”

Actually, it isn’t.

In the first place, neither the revenue generated by the UUT nor the annual subsidy paid by AMP is dedicated, formally or informally, to paying for specific municipal services.  The money goes into the same pot as all of the other General Fund revenues collected by the City, and it is up to Council to decide how to spend it.  It is as true to say that the two revenue sources included in the UMA fund the legal services provided by the City Attorney’s office as it is to say that they fund the emergency services provided by cops and firefighters.  But we doubt many voters would be persuaded to vote for the UMA by a plea to keep a full crew of attorneys and paralegals on the job.

The emphasis in the sales pitch on “public safety, street and road repair, and park maintenance” is no accident.  As part of the survey conducted last year, the consultants asked how the money raised by a hypothetical tax measure should be spent.  The top two priorities were maintaining police and fire emergency response times.  In addition, 71 percent of respondents thought street repair was “extremely” or “very” important, and 64 percent said the same for park maintenance.  Since all General Fund revenue is fungible, why not portray the UMA as giving voters what they say they want?

In any event, the City is not going to lose $5 million – to pay for “core” services or anything else – if the UMA doesn’t pass.  The existing UUT ordinance will remain in effect, and the City still will collect millions in utility users’ taxes every year.  (The UUT revenue estimate for FY 17-18 is $7.91 million.)  Likewise, staff has informed Council that, regardless of the outcome of the ballot measure, AMP intends to “continue the practice” of voluntarily transferring $2.8 million to the City every year.  The only hitch would arise if the City loses the class action suit – a result the City is paying Farella Braun & Martel an undoubtedly hefty fee to avoid.

In fact, the only direct financial harm resulting from a defeat of Measure K1 would be the loss of the potential additional tax revenue produced by a revised UUT.  But since no one appears to know just how much that amounts to, the extent of this harm is hard to evaluate.

Finally, we understand why the proponents of the UMA called the measure the “Utility Modernization Act” – only Republicans would oppose progress – and “modernization” may be as good a word as any to describe revising the UUT ordinance to reflect the technological changes that have occurred over the last 20 years.  But we don’t think that characterization fits the proposed Charter changes, and, in particular, we object to statements like this in the rebuttal ballot argument:  “Measure K1 protects this practice [of annual subsidies] by simply reinforcing existing law.”

Actually, it doesn’t.

The revisions to the Charter provisions relating to AMP do more than re-affirm existing law; they change the law.  Under the current Charter, the Public Utility Board must transfer “excess” earnings to the City; if no “excess” exists, no transfer is due.  Under the revised provision, the PUB must transfer a fixed amount – $3.7 million a year – to the City, regardless of whether the utility has any “excess” earnings – or, for that matter, any earnings at all.

Essentially, the UMA turns what has become a discretionary practice into an unconditional obligation.  What’s more, it specifically authorizes the Public Utility Board to set rates at a level sufficient to enable it to meet this obligation.  Imposing a new duty, and conferring a new power, creates a new law, not “reinforces” an existing one.

By criticizing the way in which the UMA is being marketed, we don’t mean to suggest that Measure K1 has no merit.  For an objective account of the pros and cons, we refer you to Irene Dieter’s piece in this week’s Alameda Sun – and to City Attorney Janet Kern’s “impartial analysis” in the ballot pamphlet.  (That’s right – the Merry-Go-Round just praised Janet Kern).  And for a typically down-to-earth argument in favor of Measure K1, read Alameda icon Lil Arnerich’s op-ed piece, also in this week’s Sun.

Even if Measure K1 has been oversold, a voter may well conclude that the UMA meets the basic Hippocratic test:  it does no harm.  If so, maybe she should vote yes after all.

Sources:

Measure K1: measure-k1-ballot-summary-arguments

Ballot measure survey: fm3-ballot-measure-feasibility-survey

Staff reports on proposed ballot measure: 2016-03-01-staff-report-re-revenue-survey2016-06-07-staff-report-re-tax-measure2016-07-05-staff-report-re-utility-modernization-act

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
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10 Responses to The selling of the UMA

  1. “The revisions to the Charter provisions relating to AMP do more than re-affirm existing law; they change the law.”

    “Changing the law,” “reaffirming the Charter,” “revising the Charter,” are all euphemisms for levying a tax.

    In a nutshell, structuring electricity rates so as to generate $3.7 million a year that will be transferred to the city’s general fund is a tax. It is a tax under the definition in Propositions 218 and 26 because the funds are not being paid for a service provided by the utility. They are being collected solely in order to be transferred to the general fund. It is indistinguishable from other tax revenue flowing to the general fund. Unfortunately, this is a tax masquerading as a charter amendment.

    If the city had placed a separate electricity tax measure on the ballot, whose intent was to continue the accumulation and transfer of funds to the city general fund, it would have easily complied with the state constitution, in my opinion. The measure before voters, however, bends over backwards to avoid using the word “tax” when asking voters for approval of the fund transfer. The term “charges” is used when referencing the transfers from Alameda Municipal Power (AMP). The term “taxes” is used only in reference to telephone service.

    The issue at hand is first and foremost the setting of electricity rates so as to create the surplus in the first place, which then is transferred from AMP to the city general fund. If voters approve the utility measure on the ballot, they will, for all intents and purposes, be approving a tax on electricity bills. The lawsuit against the city – Ginsburg v. City of Alameda – alleges that the current fund transfer from AMP to the city general fund is a tax not authorized by voters. The city is now seeking that authorization from voters. Hence, the voters are being asked to approve a tax.

    I’m not, on principle, opposed to the tax – our electricity rates are already on the low side. I am opposed to the amateurish, sloppy, and less-than-honest appeal to voters for support. It’s truly mind boggling that people get paid money to package a mess like this.

  2. carol says:

    IT would also be more honest & transparent if they had labeled it the “Utility TAX Modernization Act”. No modernization of utilities will happen. Shame on those who misuse the language to achieve their objective.

  3. Linda says:

    Thanks for your clear description of the subject!

  4. Travis Wilson says:

    You might also consider linking to the 37-page presentation that the consultants prepared after they completed their phone poll. It’s a nice, colorful, clear slide deck that ought to shut down any notion that K1 isn’t designed to create tax revenue: https://alameda.legistar.com/gateway.aspx?M=F&ID=caeb7caa-6b21-46a7-8695-e43ca8205d05.pdf

    It also has the completely accidental side effect of providing statistically valid public opinion about what’s popular and unpopular in Alameda.

  5. Steve Gerstle says:

    The City should not be using tax dollars to influence an election for more tax dollars. The City is not a neutral actor providing information; the City is clearly seeking to influence the outcome of the election. They keep digging themselves in deeper and losing something far more valuable than money: Trust and goodwill.

  6. RJS says:

    When I received the first mailer from the City
    – about ‘Modernizing’ the UUT, I was irritated, if not outraged, that the city would mis-represent the issue. What they want to do is to change the language of the UUT to ‘capture’ the $1.5M that they believe is missing from the present UUT. Even this is questionable, as the revenue drop for the last reported year FY2014/2015 as $1.0M. The idea presented to City Council was that ‘some vendors – looking askance at cell-phone providers) are not collecting this tax on their services’. ‘Which ones?” they were asked. “We don’t know.” – was the reply.
    Look at the video for item 6-A of the City Council on 6/7/16 – really incredible. Then, I looked at the modernization act itself, and find that not only are services expanded to include those that may have been missed, but there are some troubling additions, like self-generated electricity. Do you know that if you have solar panels installed on your house, that the output of these will be taxed at the same rate as AMP under the new measure?
    Talk about being blind-sided. I expect better treatment from our city officials. Their salaries are partially paid for by these very taxes, so they should be a great deal more forthcoming.
    I wonder if they are going to track the ‘new’ revenue generated by their modernization push. Should be interesting to see just what happens here.
    I am all for good roads and parks (and think our first responders are FAR overpaid, but that’s just me) – and will probably vote for the UMT – but certainly don’t like how it was handled.

  7. Steve Gerstle says:

    The California Apartment Association PAC wrote a $5000 check to pass the K-1 utility tax.
    Checks were also written by the Firefighters’ PAC and Bonta’s PAC.
    http://docs.ci.alameda.ca.us/weblink8/0/doc/444348/Page1.aspx

    Very interesting alliance between public employee unions, politicians and the real estate industry. A web of wealth and influence.

    • Anonymous says:

      Of course . . . since the vast bulk of new money collected from K1 goes to . . . police and fire! And on top of the K1 money collected and siphoned to police and fire, their pay gets raised even more to boot!

  8. carol says:

    Read the SF Chronicle article against the UMT by Debra Saunders. She makes good points.

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