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Petaluma explores new tax measures

Facing down an impending budget shortfall, mounting pension costs and unmet infrastructure needs, Petaluma officials took initial steps Monday to place tax measures on the June 2018 ballot.

Though no formal action was taken, the city council expressed interest in asking voters to approve a 2 percent increase in the city’s transient occupancy tax, which is charged for stays in hotels and short term rentals. The city will also explore asking residents to vote for a bump in the real property transfer tax, which is levied on property and homes sold within the city.

City officials will now embark on an educational campaign and begin outreach with industry leaders, City Manager John Brown said. The city will conduct polling to help inform decisions about issues like bundling the two tax increases into a single ballot measure and the amount to increase the transfer tax, he said. More discussions will occur before a formal vote is taken to put the measures on the ballot, which will happen around March 2018, Brown said.

Rather than a sales tax increase, those two measures are viewed as a way to shift the burden from the backs of the bulk of residents while still boosting the city’s ailing budget. Hotel taxes are levied on out-of-towners, while the transfer tax only impacts residents involved in real estate transactions.

“These … cause the least amount of pain to the least number of people financially, but allow the most number of people to continue to enjoy the benefit of levels of the service we currently provide,” Mayor David Glass said.

At a workshop in April, the city council contemplated a sales tax measure, though Brown said that option was tabled after a lack of consensus among decision makers. In 2014, Measure Q, a general sales tax measure was defeated. Last year a specific tax focused on roads failed to capture enough support in early polling.

A 2 percent increase to the transient occupancy tax would bring Petaluma’s rate to 12 percent – equal to highest rates charged in Sonoma County. Healdsburg, Windsor and Rohnert Park currently have a 12 percent bed tax, while Santa Rosa’s is the lowest, at 9 percent.

An increase in that tax could generate an additional $650,000 a year on top of the current $2.75 million in revenues, according to staff projections. The city will also see an estimated $500,000 increase in revenue when the Marriott at the Riverfront development and the Silk Mill Hotel open.

All told, a tax increase and the new hotels could boost the city’s annual revenues by $1.15 million. Plans for three additional hotels in Petaluma are taking shape – developments that have the potential to add $1.3 million in overall tax revenue.

Petaluma currently charges $2 per $1,000 of value in real property transactions, which will bring in an estimated $1.15 million in this fiscal year. Increasing that tax by $1 would add $635 to the average cost of a home sale while netting $600,000 annually for the city. A $2 bump would add $1,270 to the transaction costs while bringing in $1.2 million, according to the city’s projections.

Officials say these measures are necessary as the city is staring down a budgetary shortfall in two years. Despite attempts to quell pension costs, which are mostly tied to former city employees, costs are anticipated to increase by $1 million each year for the next 10 years after changes to California Public Employees’ Retirement System at the state level. Legislators may consider tactics that would alter the pension issue, but relief isn’t guaranteed.

“We might as well just call this thing what it is – if we’re going to keep operating at the same levels to protect the core services … at the rate they are today, at what I think is a curtailed rate, we’re going to need a tax increase and I think that money will be spent on pensions in order to keep people on the job and doing the jobs we need them to do as residents of this community,” Brown said.

The city is projected to spend $12.96 million on benefits in the current fiscal year – up nearly 4 percent from the previous budget.

“We have people talk about pensions as if they are a separate line item that we can reject in a given year and we have an option to say no. The reality is that the obligation to pay CalPERS the bill when it comes due exists year in and year out regardless of whether any individual tax measure passes,” Councilman Dave King said.

Brown outlined money saving measures the city has taken while attempting to preserve core services –including cutting staff and holding off on infrastructure projects. This year’s budget reflects a series of belt tightening measures throughout the city’s various departments to stave off the shortfall.

“Those are just band aids, not the surgery we need to be performing,” Brown said.

In the next 30 years, the city is also looking at as much as $466 million in unmet infrastructure needs, according to a staff report.

“We have infinite obligations for finite resources,” Mayor Glass said.

While the two tax measures will provide some relief for the imbalance that’s estimated to rack up to $37.1 million by fiscal year 2026, it’s not enough to solve the city’s problems, Brown said. A sales tax measure could be considered in the future to bridge the gap, Brown said.

The council favored the idea of a making both measures general taxes, meaning that the revenue can be spent for a variety of uses to meet the city’s most pressing needs.

Kathleen Stafford, a founding member of Petaluma Parents Against Drugs, urged officials to focus on public safety and infrastructure projects as the city grapples with the legalization of marijuana.

“Our public safety needs to be prioritized now, I’m hoping we can put part of this money, if it’s passed ... toward what really needs to be put in place for the future,” she said.

The city will work with county election officials to help pin down exact costs of the election, but historic costs have ranged from $20,000 to more than $60,000.

(Contact Hannah Beausang at hannah.beausang@arguscourier.com.)