AgdaPkt 2018-02-26 Joint SA PFA - Laserfiche WebLink

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7.A - Page 8 The Financial Sustainability Plan seeks to protect essential City services and address fiscal challenges, including flat revenue sources and a statewide pension problem that requires local solutions. In addition, the City must prepare for inevitable contractions in the local economy by taking a balanced and strategic approach to addressing these challenges over time, while still maintaining a 15 percent General Fund reserve balance. Fiscal Challenges Flat Revenue Sources Sales taxes account for approximately 17.5 percent of the City's General Fund budget. Redwood City, like all cities in California, experiences volatility of sales tax revenues as economic cycles ebb and flow. The City is currently experiencing a slowing of sales tax revenue, and sales taxes are projected to remain flat in the ensuing fiscal years. This is a result of several factors. Residents are spending more of their disposable income on non-taxable items than before, like housing, medical care, and education. The Consumer Price Index reveals that in the last couple of years, the prices of these items have increased rapidly, while the cost of many taxable items has dropped. Additionally, burgeoning trends toward online purchasing impact the City's sales tax revenue, since the method of distributing the tax varies. For purchases made at physical establishments located in Redwood City, sales tax is distributed based on "point of sale." For online purchases, the tax is treated as a "use" tax. A use tax is charged on goods sold to California customers from out-of-state retailers. Use tax is allocated to countywide pools where the goods are used. The tax is distributed proportionately countywide based on the City's pro rata share of sales tax. Ultimately, increasing online sales will reduce local sales tax revenues. Changing consumer preferences affect City sales tax revenues as well. New automobile leases (rather than purchases) cause the stream of sales tax revenues to be realized over the life of the lease (typically several years) rather than at the time of purchase. Finally, the preferences of younger consumers who are more frequently purchasing "experiences" (generally not taxable), rather than goods, has a negative effect on sales tax revenue. In addition, although the current economic boom and downtown development has increased certain City tax revenues, particularly property taxes, it is not enough to offset stagnant sales tax revenue and still keep up with operating cost increases. Property Tax is the largest contributor to the City's revenue stream, representing 40.4 percent of the City's General Fund budget. Staff anticipates increases in property tax revenue of three to four percent over the next few fiscal years (detailed in the Preliminary Five -Year Forecast section of this report).