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. I I . [ . - Director Ponty said the unknowns included Area 8 fire protection services which has recently been resolved although there is a loss of $50,000 in revenue; the results of the - police staffmg study are yet to be determined; and it is still unknown what if any revenues will be retumed by the State to cities under the Educational Revenue Augmentation Funds (ERAF.) Director Ponty described ERAF, the property tax reduction taken by the State from California cities, counties and special districts, and the range of possible revenues to be returned by the state, between $100 million to $280 million. Director Ponty said the state has returned some funds under Proposition 172 which retained the statewide Y, cent sales tax, but the net loss was still over $1.7 Billion statewide. The proposed $280 million, the most optimistic expectation, is still far from making up the net loss experienced by the cities, counties and special districts in the State. Director Ponty said "Redwood City is about $2.3 million poorer, $2.3 million less revenue to work with as a result ofERAF. We do receive about $440,000 per year... which still leaves us with a $1.9 million net loss. There is still quite a way to go for the state to make the cities whole." Director Ponty showed an overhead of an optimistic view of the bottom line for the next five years (pages 14 and 15 of the Report.) He said it did not incorporate the effects of the new contract for fire protection services in Area No.8, which would result in a projected deficit of around $45,000. In the year 2000/2001 the total budget deficit projected is $212,000, which is one tenth of one percent to one half of one - percent of projected revenues. Director Ponty said, "It is as close to balanced, realistically, as we could expect at this point." Director Ponty showed an overhead of Sales Tax by Economic Category (page 3 of the Report) through the 4th quarter of 1996. He reminded the Council of the jump in sales tax from business to business sales that occurred in the 2nd and 3'd quarters of 1996, the slight decrease in the 4th quarter, and again explained that this category is extremely volatile and unpredictable. He explained that these sales represent software sales between businesses, and said that the new service of selling and distributing software through downloading over the Internet rather than handling disks would significantly cut into sales tax revenues, permanently. Director Ponty advised that the "State Board of Equalization has taken the position that this process is not an exchange of tangible property, and therefore it is exempt from sales tax." Efforts are underway to have the Board reassess its original decision and reinstate the sales tax for these types of sales. In response to Council questions regarding the originally projected larger deficits in the out years, Director Ponty said the changes affecting the long term projections have been on the revenue side. "We have revisited the development projections. Initially we thought much of the build-out would occur much sooner... We expected more of - that revenue to be coming in sooner. What we have actually done, instead of it coming in at a peak, it has flattened out. It is spread over the four or five year period. We ADJOURNED REGULAR COUNCIL MEETING MINUTE BOOK NO. 55 JUNE 23, 1997 MINUTES Page No. 411 PAGE 9