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HomeMy WebLinkAboutItem B: School/Youth Services Funding ECC UGENE ITY OUNCIL AIS GENDA TEM UMMARY Work Session: School/Youth Services Funding Meeting Date: April 18, 2007 Agenda Item Number: B Department: Library, Recreation and Cultural Services Staff Contact: Renee Grube www.eugene-or.gov Contact Telephone Number: 682-6065 ISSUE STATEMENT The purpose of the work session is to solicit City Council interest in pursuing potential revenue alternatives to support local school districts and out-of-school youth services provided by the City. BACKGROUND City Council Action and Litigation History On November 7, 2000, Eugene voters passed Ballot Measure 20-37, a two-year, $3.5 million local option tax levy to fund youth activities. The levy expired on June 30, 2003. On November 5, 2002, Eugene voters passed Ballot Measure 20-67, a four-year, $0.86/$1,000 of assessed value local option levy expected to raise approximately $8.0 million for youth and school- based services. This levy will expire June 30, 2007. The current levy was challenged in Tax Court in the Urhausen v. City of Eugene case, where the petitioners asserted that the portion of the levy used to fund youth services provided by Eugene and Bethel (93% of levy) school districts should be counted as part of the Measure 5 tax rate limit of $5 per $1,000 of assessed value for schools rather than the general government $10 tax rate limit. On February 16, 2006, the Tax Court agreed with the petitioners that Measure 5 requires that a portion of the levy should be counted toward the $5 limit. On August 31, 2006, the Supreme Court affirmed the Tax Court’s decision that 93% of the proceeds—those dedicated to funding school-based services—should be categorized as school taxes for purposes of Measure 5. This reduced the estimated net amount of the levy in FY07 from $8.5 million to $6.8 million. On June 26, 2006, the council held a work session on the potential of a future youth/school-based services local option levy. Staff recommended not going forward with the renewal of the levy as both school districts had developed alternative strategies to fund programs that were receiving levy funding. This recommendation was also consistent with the discussion of the Budget Committee and the council around the library local option levy. As a result, the council decided not to renew the youth/school- based services levy. At the state level, the Governor’s proposed budget includes $6.06 billion for K-12 schools, which is a 14.2% increase over 2005-07 funding levels. Each of the two local school districts has a different budget situation: L:\CMO\2007 Council Agendas\M070418\S070418B.doc The Eugene School District’s local option levy is projected to provide approximately $13.7 ? million in 2007-08, which is a 13% increase over 2006-07 revenues. That increase may not be sustained, however, due to state limits on local option levy revenue for schools. Any school local option revenue above the state limit is included in the school funding formula and reduces state aid to the district. The exclusion is the lesser of three limitations: the amount actually received by the district from local option taxes, 15% of the combined total of state general purpose, transportation and facilities grants, or $750 per weighted student. Given the district’s declining enrollment trend, local option levy revenue is expected to begin declining in 2009-10, the year after the $750 per pupil cap is reached. Bethel School District is able to fund activities this year due to higher tax turnovers and prior ? year adjustments, but anticipates a shortfall in the future with the loss of the 20-67 levy, with the defeat of its own levy, and with current student enrollment levels. Youth services currently provided by the City include prevention-based programs such as RecZone After School Programs, Fun For All, Youth Leadership and Community Service Opportunities, Teen Court, Project Rising Expectations and special neighborhood events. These services, which total approximately $1.3 million per year, are funded with a combination of levy and grant funding. At the June 26, 2006, work session, the council directed the City Manager to seek a recommendation from the citizen members of the Budget Committee to fund some or all of the City’s core youth services within the General Fund rather than through a local option levy. The citizen committee met in the fall of 2006, recommending to continue all existing programs and to expand programs and services to meet unmet needs. Alternative Revenue Sources Staff has provided information on two revenue alternatives: income taxes and business license fees. These revenue sources are flexible and may be used for any governmental purpose. Unlike the categorization issue the court ruled on in the Urhausen case, the revenues raised by these alternatives can be used by the schools and are outside Measure 5 limits. Set out below is a brief summary of each of the alternatives. Revenue templates for each alternative are included as appendices. Personal Income Tax A personal income tax could be imposed on the income of Eugene residents and nonresidents earning income in Eugene. No Oregon cities levy a personal income tax, although local governments do levy personal income taxes in other states. Based upon 2001 Eugene economic data, a Eugene income tax surcharge of 3% (levied as a percentage of the taxpayer’s state income tax liability) would raise approximately $8 million. Lane County Commissioners placed a public safety income tax proposal on the May 15, 2007, ballot to provide funding for the services previously funded through the Secure Rural Schools and Self- Determination Act of 2000. The Lane County public safety income tax proposal includes the following provisions: ?Imposition of a tax on personal, non-resident and business income at 1.1% rate ?Dedication of taxes (after collection) to public safety only ?Funding of 2006-07 service levels, no new activities ?Requirement of a dedicated fund and a reserve of 10% annual income tax revenue L:\CMO\2007 Council Agendas\M070418\S070418B.doc ?Inclusion of a rate reduction if the federal government continues the federal timber fund replacement by June 1, 2007 ?Application to tax years starting January 1, 2007 Corporate Income Tax A corporate income tax could be applied to the income of corporations doing business in Eugene. Alternatively, a surcharge could be applied to the state corporate income taxes owed by corporations doing business in Eugene. Based upon 2001 Eugene economic data, a 4.5% state corporate income tax surcharge would generate approximately $8.1 million. The only local corporate income tax in Oregon is levied by Multnomah County. Multnomah County’s Business Income Tax includes the following provisions: ?Assessed on all entities conducting business activity in Multnomah County ?Based on net business income and may be apportioned if the business has activity outside the County ?Rate is 1.45% of net income after allowable deductions and apportionment with no minimum tax In 1998, a one-year temporary increase to the rate was imposed on taxpayers who owed more than $100. This 0.5% increase was directed to assist schools in Multnomah County and raised approximately $10.5 million in revenues. Multnomah County’s income tax generated $50.9 million in FY06, and is expected to generate $57 million in FY07. Revenues currently generated from this tax are used for county general fund purposes. The City of Portland charges the County an administration fee of approximately $700,000 per year for collecting this tax. Business License Fee A business license fee could be imposed on any person, partnership, corporation or similar entity for the privilege of conducting business within the City of Eugene. Revenues generated would depend on the structure of the fee. The City of Portland imposes a business license fee as follows: ?Applies to all entities conducting business within the City of Portland (or earning income from sources within the city boundary) ?Imposes a license fee based on net business income. Business income may be apportioned if the licensee has business activity outside Portland. ?Imposes a 2.2% rate of net income after allowable deductions and apportionment. Roughly one- half of the businesses pay the minimum $100 annual business license fee. Portland’s fee generated $62 million in FY06, and is expected to generate $63.5 million in FY07. Revenues are used for General Fund purposes, which do not include funding for schools. The administration cost to the City of Portland for this fee is approximately $2.5 million per year. Portland is considering some changes to this fee in fiscal year 2008-09, including increasing the limit for the gross receipts exemption from $25,000 to $50,000, and changing the minimum annual fee to a tiered structure, possibly based upon gross receipts or number of employees. L:\CMO\2007 Council Agendas\M070418\S070418B.doc RELATED CITY POLICIES The Budget Committee has adopted Financial Management Goals and Policies that guide financial decisions of the organization. The policies include statements related to municipal service priorities and non-dedicated revenues such as not earmarking non-grant revenues for specific purposes. COUNCIL OPTIONS 1. The council may provide direction to revisit this issue in the fall after the legislature has adjourned with an enacted budget, and the results of the Lane County Income Tax proposal known. 2. The council may provide direction to prepare a proposal for an income tax option to provide funding for the Eugene 4J and Bethel 52 school districts and City youth services. 3. The council may provide direction to prepare a proposal for other potential revenue options, including a business license fee to provide funding for the Eugene 4J and Bethel 52 school districts and City youth services. 4. The council may take no action. CITY MANAGER’S RECOMMENDATION The City Manager recommends no action. SUGGESTED MOTION No motion is suggested. ATTACHMENTS A. Personal income tax revenue template B. Corporate income tax revenue template C. Business license fee revenue template FOR MORE INFORMATION Staff Contact: Renee Grube Telephone: 682-6065 Staff E-Mail: Renee.L.Grube@ci.eugene.or.us L:\CMO\2007 Council Agendas\M070418\S070418B.doc Updated 02-07, based Personal Income Tax upon 09-01 economic data Brief Description A tax on income of residents of Eugene and nonresidents earning income in Eugene. of Funding Option Prior City A personal income tax on incomes above $100,000 to fund public safety services was Actions and considered and rejected by City Council in July of 1996. History In the Fall of 1997, City Council formed the Council Committee on Finance to review multiple revenue sources that would stabilize the General Fund after the impact of Measure 50. The committee reviewed multiple revenue sources and ultimately recommended that Council direct staff to develop an implementation plan for a business and personal income tax. Although Council took no action on the recommendation, this effort contributed to the allocation of Urban Renewal funds to the new library and the successful passage of the Parks and Open Spaces Bond Measure. Experience in Although there are no personal income tax precedents in Oregon, local governments do Other levy personal income taxes in other states. Jurisdictions In November 1999, Lane County proposed an 8% income tax surcharge to support public safety needs. In Lane County, the measure failed 74% - no, 26% - yes; in Eugene it failed 68% -no, 32% - yes. In November of 2006, Lane County proposed a 1.4% annual tax on income to support public safety needs. In Lane County and Eugene the measure failed 51% - no, 49% - yes. Lane County has placed an income tax measure on the May 15, 2007 ballot. The proposal would tax personal, nonresident, and business income at a rate of 1.1%, with revenues dedicated to public safety. Calculation Base The tax could be a percentage tax on Adjusted Gross Income or alternatively the tax and Typical could be levied as a percentage of the taxpayer’s state income tax liability. Rates Estimated Based upon the following 2001 data, a Eugene surcharge of 3 % would raise about $8 Revenue Yield million: assuming that approximately 68% of Lane County income is earned within Eugene or by Eugene residents, a 1 % tax on Adjusted Gross Income would generate $43 million. Alternatively, a Eugene income tax could be levied as a percentage of the taxpayer’s state income tax liability. A Eugene surcharge of 10 % would raise about $27 million for fiscal year 2002-03. Will the tax be practical to administer : If the Lane County income tax is enacted, the Administrative City could piggyback on the County piece or potentially contract with the State and Effort and piggyback on the state income tax. Efficiency What are the estimated costs to administer : To be determined based upon collection method. Updated 02-07, based Personal Income Tax upon 09-01 economic data The City has the authority to levy an income tax. Legal Defensibility All Eugene residents earning income regardless of employer or source location and Incidence (who possibly non-residents earning income in Eugene. pays?) Residents/non-residents : Based upon how the tax is structured, non-residents might or Fairness/Equity might not be affected. Issues Business/residences : Only residences would be subject to this tax. Low income vs. higher income citizens : Generally designed to be progressive, but the structure can increase or decrease progressivity. Would mirror the progressivity of Oregon State Income Taxes if established as a surcharge to state income tax liability. Are revenues adequate, timely and stable : Tax revenues would fluctuate with Financial changes in personal income and mirror current economic conditions. Feasibility and Is this an on-going or a one-time revenue : On-going Stability Will this revenue option be perceived as fair : While an income tax is generally Politically progressive and could be seen as fair (those with higher income pay more), there is a Supportable large portion of the community that likely wouldn’t support a local income tax, as has been seen in past elections. The Personal Income Tax and the Gross Receipts Tax were the two highest rated (i.e. preferred) taxes identified by the City Club of Eugene Study Group on Alternative Revenue Sources for the City of Eugene in 1994. Will this revenue option be easily understood by citizens : Yes, as they already pay federal and state income tax. This tax could potentially affect household and business location decisions if imposed Potential only on City residents. Economic Impacts Updated 02-07, based Corporate Income Tax upon 09-01 economic data Brief Description A tax on the income of businesses or persons earning business income within the City of Funding of Eugene. Option Prior City The City has not previously enacted a corporate income tax. Actions and History The Multnomah County Business Income Tax requires that all businesses or persons Experience in earning business income within the County pay 1.45% of net income after allowable Other deductions and apportionment. The Tax generated approximately $50.9 million for the Jurisdictions Multnomah County General Fund in FY2006. Calculation Base A corporate income tax could be applied to the income of corporations doing business and Typical in Eugene. Alternatively, a surcharge could be applied to the state corporate income Ratestaxes owed by corporations doing business in Eugene. Estimated Based upon 2001 data, a 4.5% state corporate income tax surcharge would generate Revenue Yield about $8.1 million: a 1% tax on the income of corporations doing business in Eugene would generate approximately $2.7 million in FY03. A 10% State corporate income tax surcharge would generate approximately $1.8 million in FY03. Will the tax be practical to administer : If the Lane County tax is enacted, the City Administrative could piggyback on the County piece or potentially contract with the State and Effort and piggyback on the state corporate income tax. Efficiency What are the estimated costs to administer : To be determined based upon collection method. The City has the authority to levy an income tax. Legal Defensibility A corporate income tax would only apply to incorporated businesses earning income Incidence (who from activities within City limits. If it were deemed necessary to treat incorporated pays?) businesses similarly to other businesses, a corporate tax may be accompanied by a business tax on non-corporate businesses. Alternatively, a personal income tax could be enacted to maintain equity between individuals and corporations. Some portion of the tax could reasonably be expected to be passed on to customers. Residents/non-residents : Not applicable. Fairness/Equity Business/residences : This would tax business. Issues Low income vs. higher income citizens : Not applicable. Are revenues adequate, timely and stable : Tax revenues would mirror current Financial economic conditions. Feasibility and Is this an on-going or a one-time revenue : On-going Stability Will this revenue option be perceived as fair : The business community would likely Politically not support this proposal. The corporate income tax was vigorously opposed by the Supportable Chamber of Commerce in the Report on Alternative Revenue Sources for the City of Eugene, City Club Study Group, 1994. Will this revenue option be easily understood by citizens : Yes Updated 02-07, based Corporate Income Tax upon 09-01 economic data Depending on the rate, this tax could affect corporate business location decisions. Potential Economic Impacts Updated 02-07, based Business License/Regulatory Fee/Tax upon 09-01 economic data Brief Description A fee for the privilege of conducting business within the City of Eugene. It could be of Funding imposed on any person, partnership, corporation or similar entity doing business in the OptionCity of Eugene. Prior City The City has not previously enacted a business license fee. Actions and History Experience in The Portland Business License Law requires that all business or persons earning Other business income within the City pay a fee of 2.2% of net income after allowable Jurisdictionsdeductions and apportionment, with a $100 minimum. Because the fee is paid in advance of a business earning the associated revenue, it is considered an operating license fee, rather than an income tax. The Business License Fee generated approximately $62 million in General Fund revenue in FY06. In November of 2000, the City of Salem proposed a Business Registration Tax to voters with a graduated scale based on the number of employees. The proposal was defeated 64% - no, 36% - yes. Calculation Base The fee calculation could take various forms: a fixed amount per business, a flat and Typical percentage of income earned in the City of Eugene, a fixed fee levied on businesses Ratesaccording to their employment size. It is typically paid prior to engaging in business, paid on an annual basis, and does not necessarily imply a regulatory relationship. Estimated Based on Oregon Employment Department records, there were roughly 5,800 Revenue Yield businesses registered in Eugene area zip codes on 2001. Based on Salem’s proposed fee schedule and estimate of business size distribution, a business registration tax would generate an estimated $1.4 million per year in Eugene. Will the tax be practical to administer : As there is no existing business license fee, Administrative there would be considerable administrative resources needed to implement and collect a Effort and business license fee. Efficiency What are the estimated costs to administer : Exact costs are unknown administration costs of a Business License program would be fairly high and labor intensive. Start-up cost estimates would also need to include the cost to implement a technology based tracking system for affected businesses. The city has legal authority to impose a business license fee. Legal Defensibility While the fee would be paid by businesses, some portion would likely be passed on to Incidence (who customers. This fee is not related to business profitability. The equity of the fee would pays?) depend on its structure. A flat fee per business would be a greater burden on smaller businesses. Residents/non-residents : Not applicable Fairness/Equity Business/residences : This would be a fee on businesses. Issues Low income vs. higher income citizens : Not applicable Updated 02-07, based Business License/Regulatory Fee/Tax upon 09-01 economic data Are revenues adequate, timely and stable : Growth of revenue would depend on fee Financial structure but would fluctuate with the area economy. Feasibility and Is this an on-going or a one-time revenue : On-going Stability Will this revenue option be perceived as fair : The business community would likely Politically be unsupportive of this proposal. Supportable Will this revenue option be easily understood by citizens : Yes. This fee may affect location or service area decisions of affected businesses. Potential Economic Impacts