A half-sense sales-tax increase

If you like the way the Alameda City Council has been spending the taxpayers’ money for the last several years, the Merry-Go-Round has got a deal for you:

Just vote for the sales-tax-increase measure expected to be placed by Council on the November ballot and you’ll give our current elected officials (and their successors) an estimated additional $4.9 million per year to spend – on whatever they damn well please!

The proposed ballot measure to be considered by Council on July 10 calls for a half-cent raise in the sales tax paid on goods sold in Alameda.  The resulting 9.75% sales-tax rate will put the City in the top tier of East Bay cities.  (Even Berkeley and Oakland collect only 9.25% on sales.)  Of the 9.75% tax, 1.5% will go directly into the general fund.  (It’s now 1%.)

If our Council members are prudent, they’ll use the money to cover the annual operating deficits that are expected to occur beginning in Fiscal Year 2019-20 and grow to $4.7 million by FY 2021-22.  Indeed, this is the use Acting City Manager Liz Warmerdam and her staff want Council to make of the additional sales-tax revenue.

At the June 5 Council meeting, Ms. Warmerdam made the case for this approach using two charts, which we reproduce below.

The first chart shows the forecast of the City’s operating results for the next five fiscal years.  When the red line crosses the green, it means that the City will be spending more than it takes in.  By FY 2021-22, this deficit – which staff prefers to soft-pedal by calling it a “gap” – reaches $4.7 million.

GF 5-year forecast

(For those who prefer their data in numbers, the annual operating deficits are projected to be $8,000 in FY 2018-19, $576,000 in FY 2019-20, $2,918,000 in FY 2020-21, and $4,660,000 in FY 2021-22.)

The second chart reflects, according to staff, the effect of the additional revenue generated by a half-cent increase in the sales tax.  Mirabile dictu, the red line never crosses the green, the deficits disappear, and the “gap” for FY 2021-22 becomes zero.

GF 5-year forecast. with .5% tax

Ms. Warmerdam summed up the argument this way:  “There’s no one silver bullet to fill that gap [between expenses and revenues],” but the increase in sales-tax revenue “would be one way to help us balance our budget out five years.”

Everything Ms. Warmerdam said is true.  But let’s not lose sight of the bigger picture.  As we previously pointed out, the reason the City will incur operating deficits in the next four years is that existing sources of revenue won’t be enough to cover the City’s increased payment obligations to CalPERS and to pay for the raises guaranteed to public-safety employees during that period.  Essentially, the sales-tax-increase proposal amounts to asking all of the people who buy goods in Alameda in the future – including low-income families struggling to pay their rent – to bear the costs of the generosity extended by our politicians to their favored few in the past.

That being said, we would be more comfortable with the sales-tax-increase measure if we could be sure that our elected officials would heed the Acting City Manager’s advice.  But they don’t have to – and their own past actions raise doubts about whether they will.

Under California law, a sales tax can be either a “special tax” or a “general tax.”  The revenue generated by a “special tax” can be used only for specific purposes; the revenue from a “general tax” can be used for “any and all governmental purposes.”

The sales-tax increase being considered by Council is structured as a “general” tax – i.e., the revenue can be used for any purpose.  Why?  Because it takes only a majority vote to pass a “general tax” measure.  If the revenue was designated for specific purposes, the tax would be considered a “special tax,” and a two-thirds majority vote would be required to adopt it.

(This is the rule under current law.  A statewide initiative has been proposed to require a two-thirds majority on all local tax measures, but it has yet to qualify for the ballot.)

Structuring the ballot measure as a “general” tax shows that our politicians (or at least City staff) have learned their lesson from the last time Council tried to get voters to approve a sales-tax increase.

That occurred in 2012, when then-City Manager John Russo proposed, and Council agreed to, a ballot measure raising the sales-tax rate by a half cent.  What became known as Measure C was designed as a “special tax”; the revenues could be used only for four specific purposes:  “police, fire, and other public safety facilities and equipment; parks and recreation facilities and equipment; cultural facilities; and funding for one position to serve as Emergency Operations Coordinator.”

Measure C garnered 50.56% of the vote – not nearly enough to meet the two-thirds threshold for enacting a special tax.  (The failure didn’t deter the friends of the firefighters’ union on Council from accomplishing the measure’s main objective through the back door.  Despite not getting any additional sales-tax revenue, they managed to find the funds to build the new Emergency Operations Center and Fire Station No. 3 anyway – at a cost of approximately $14 million.)

By structuring the current measure as a general tax, staff and Council have avoided the problem of needing a super-majority to approve the sales-tax increase.  Moreover, if the measure passes, the Council members then in office will not be bound by any restriction on how they spend the money.

Which may be grounds for concern.

Over the last several years, as long as “unrestricted” money remains available in the general fund, the current Council often finds a way to spend it – even if the expense wasn’t budgeted.  (In their defense, our local elected officials probably aren’t unique in this regard.)  Sometimes, the spending can be justified as necessary to address a pressing societal problem – e.g., establishing the “rent-stabilization” program (for which Council appropriated $493,000 in April 2016) or delivering services like “intensive case management” to the homeless (for which Council appropriated $88,400 this April).  Other times, the spending appears calculated simply to cater to a political backer – e.g., creating two new positions for union firefighters to act as fire inspectors rather than hiring civilians to do the job, at an annual cost (including a captain to supervise the duo) of between $810,196 and $847,860 in FY 2018-19 (and more in later years).

Given this track record, one can readily imagine what the next Council might decide to use new unrestricted tax revenue for.  You know that $365,723-a-year Fire Marshall position or the $288,285-a year “Fire Training Captain” job the Alameda fire department has been pushing to add to its roster?  Thanks to Ms. Warmerdam and Councilwoman Marilyn Ezzy Ashcraft, these items didn’t make it into the FY 2018-19 budget.  But if the sales-tax-increase measure passes, the elected officials on the dais thereafter will have the money to create the slots.  And who knows what other lagniappe the public-safety unions will crave – or their retainers on Council will give them?

Actions like these would put the kibosh on Ms. Warmerdam’s goal of using the extra sales-tax revenue to eliminate operating deficits.  Her argument was based on the assumption that currently projected spending levels will stay the same.  If future councils instead indulge in additional spending on items benefiting their political benefactors, the deficits will increase and the new sales-tax revenue is unlikely to be enough to make up the difference.

Council could reduce this risk by putting an “advisory” measure on the ballot setting forth a list of projects on which the new sales-tax revenue could be spent.  (The First District Court of Appeal approved this practice in 1998, holding that the companion measure did not convert a “general” sales tax into a “special” tax requiring a two-thirds majority.)  But no such advisory measure has been proposed – are you listening, Ms. Spencer and Mr. Matarrese? – and it would not be legally controlling in any event.  Accordingly, there isn’t much ordinary Alamedans can do to limit a future council’s discretion if the sales-tax-increase measure passes.

But at least the public ought to know what the consequences of an affirmative vote are.  And, with all due respect to Ms. Warmerdam and her staff, we’re afraid this may not be the case.

Let’s focus on the ballot question – which is all that many voters read before they draw the connecting line for yes or no.  Obviously, a blunt description of the tax – such as, “The revenue can be spent on whatever Council damn well pleases” – would rub a lot of voters the wrong way.  So the trick is to find a description that will reassure the electorate that it is agreeing to pay higher taxes to get something it wants.

This is where the highly paid pollsters and consultants make their money.

Since 2015, the City has retained a firm known as Fairbanks, Maslin, Maullin, Metz and Associates (which calls itself “FM3”) to conduct polls to determine, among other things, what percentage of local voters would support a half-cent increase in the sales tax.  To get this information, the firm prepares its own ballot question, which it then reads to survey respondents and tallies their responses.

In a December 2015 telephone survey of 600 “likely” voters, the sales-tax ballot question drafted by FM3 got a positive response – definitely or probably yes – from 63% of respondents.  The firm then tweaked the language of the ballot question slightly, and, in July 2017, asked for reactions from 600 “randomly selected” voters.  This time, support jumped to 65%.

And what was the ballot question that nearly two-thirds of Alamedans said they’d vote for?   Here it is:

To maintain Alameda’s financial stability and provide funding for a variety of services, including police response to crimes/burglaries; 911 emergency medical/fire response; addressing traffic congestion; improving pedestrian/bicyclist safety; maintaining parks, storm drains, senior, youth, homeless programs; and other City services, shall the City of Alameda enact a half-cent sales tax until ended by voters, providing about $5 million annually in locally controlled revenues, requiring independent audits and public spending review?

Two features of this formulation leap out immediately.  First, it offers something for everybody.  Indeed, we can’t think of a policy objective that is omitted or a demographic group that is ignored.  If the revenue from the sales-tax increase truly would be used to keep the grab bag filled with these goodies, the wonder is not that 65% said they’d vote for the ballot measure, it’s that the measure didn’t get universal approbation.

The second point is that the ballot question doesn’t disclose that, if the sales-tax-increase measure passes, Council has the right not to spend the newly generated revenue for any of the enumerated purposes.  If, some time in the future, a group like BikeWalk Alameda were to complain that the City hadn’t used the cash raised by the measure to build more bike lanes, the elected officials would be within their rights to say, “Read the ordinance you voted for, Brian.  It says we can spend the money for ‘unrestricted general revenue purposes.’  You’ll just have to get in line with everybody else.”

The ballot question presented by staff on June 5 tracked the verbiage drafted by FM3 for the July 2017 poll exactly.  When Mayor Trish Spencer suggested a minor change to the language, her colleagues – including even Councilman Frank Matarrese – quickly shut her down.  “I don’t want to wordsmith this too much because this is what we polled,” Vice Mayor Malia Vella stated.  Ms. Ashcraft agreed:  “We would be foolish,” she said, “to go against what the polling showed voters understand and support.”

And yet . . . Between June 5, when Council voted to direct staff to prepare a ballot measure, and June 28, when the agenda for the July 10 meeting was posted online, staff retained a different consulting firm to massage the language in the ballot question even further and to conduct yet another poll.

Here’s what the firm known as TBWB Strategies came up with:

Shall the measure maintaining the City of Alameda’s financial stability and protecting services and infrastructure such as police response to violent crimes/burglaries; 9-1-1 emergency medical/fire response; maintaining neighborhood parks; repairing potholes/streets/protecting the Bay from pollution by enacting a 0.5% sales tax until repealed by voters, providing approximately $5,000,000 annually in locally controlled revenues for unrestricted general revenue purposes, requiring independent audits/public spending review, be adopted?

The way the question is written undoubtedly will make high-school English teachers cringe:  the verb (“be adopted”) is a long way from its subject (“the measure”), and the reader must wade through a pool of subordinate clauses to get there.  More substantively, the new version is notable for the changes it makes to the laundry list of uses for the additional sales-tax revenue:  park maintenance stays in, but bike and pedestrian safety improvements are out.  Also gone are “senior, youth and homeless programs.”  But now “protecting the Bay from pollution” is added to the list.  It’s almost as if someone decided that we don’t care about appealing to supporters of BikeWalk Alameda, the Mastick Senior Center, the Alameda Youth Committee, or the Alameda Point Collaborative – as long as we keep the members of the Sierra Club happy.

We can’t say that these changes will make any difference come election time, but we do know that the new ballot question got a lower percentage of yes votes than the previous iteration.  According to the staff report, in a tracking survey conducted June 22-24, 60% of Alamedans stated they would vote yes on the TBWB version of the ballot question.  That’s down from the 65% support for the FM3 version.  (Presumably, both firms still will be paid for their services.)

Given Council’s penchant for editing resolutions and ordinances on the fly, there’s no guarantee that even this latest version will make it into the voters’ pamphlet.  But the point to remember is this:  Whatever the ballot question may say, Council will have total discretion over how to spend the revenue the sales-tax-increase measure will generate if it passes.  And that means that none of the activities listed in the ballot measure may actually receive one dime of the money it raises.

If you trust the people sitting on Council now, and those running for election in November, this shouldn’t deter you from saying yes to a sales-tax increase.  Just make sure that, at the same time, you use your vote for Council candidates wisely.

Sources:

Polls: FM3 Ballot Measure Feasibility Survey; alameda_community_survey_-_final_public_report

Sales-tax-increase measures: Measure C ballot measure; 2018-05-18 Ex. 2 to staff report – Revenue Measures Report; 2018-06-05 staff report re tax ballot measure; 2018-06-05 Presentation; 2018-06-05 Ex. 2 to staff report – Sales Tax Ballot Languange; 2018-07-05 staff report re sales tax measure; 2018-07-05 Resolution

Additional spending: 2016-04-05 staff report re contract with AHA; 2018-03-20 staff report re homeless; 2017-04-18 staff report re adding new positions

“General” v. “special” taxes: LAO, Voter Approval Requirements for Local Taxes; Coleman v. County of Santa Clara_ 64 Cal. App. 4th 662

 

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
This entry was posted in Budget, City Council, Firefighters and tagged , , , , , , . Bookmark the permalink.

3 Responses to A half-sense sales-tax increase

  1. Steve Gerstle says:

    “Of the three main forms of state taxes—sales, property, and income—the sales tax hurts the poor most, says Gardner. State sales taxes are highly “regressive,” he says. That is, they end up taking a bigger chunk of change from people that have smaller sums of money and slower income growth.”
    https://www.citylab.com/life/2015/01/how-local-sales-taxes-target-the-poor-and-widen-the-income-gap/384643/

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