With budget reinforcements incoming, Santa Rosa council members look to rely less on sales tax

With reinforcements to Santa Rosa’s ailing budget all but assured, some Santa Rosa City Council members are turning their attention to a new challenge: forcing the city to rely less on sales taxes.

That conversation picked up Tuesday during a council study session on the future of the budget — a discussion that did not focus on the tens of millions of dollars in aid to the city’s budget that’s arrived within the past year or is expected soon. That includes $95 million in settlement money from PG&E — $40 million of which already has been set aside for preventing spending cuts — as well as $36 million in federal funds from the recent COVID-19 relief act and another $40.7 million the city hopes to receive from the Federal Emergency Management Association in reimbursement for recent wildfire damage.

The clarity of the city’s budget picture will increase in an upcoming budget hearing in May and will clear still further as the City Council prepares to formally adopt next year’s spending plan in mid-June.

Meanwhile, after hearing a lengthy long-term budget forecast from a city finance consultant, Management Partners, council members repeatedly voiced support for moving away from volatile sales tax revenues.

The pandemic, which led to a sharp decrease in local business activity because of restrictions on socializing and operating, put a crimp in economic activity, decreasing the city’s sales tax revenue and forcing Santa Rosa to tap into its budget reserves.

But Bob Leland with Management Partners characterized that impact as more of a “minor slowdown” and not as severe as originally feared. City officials Tuesday could not say specifically how sales taxes through March compared to last year’s initial expectations, though the deputy finance director, Alan Alton, pointed to increased online sales revenue as a key reason Santa Rosa’s budget fared better than predicted.

“Some sales tax sectors were hit hard, but overall, we fared better than expected,” Alton said. “And I think that was Bob’s point – based on past experience, we dodged a bullet due to our ability to collect online sales tax revenue.”

Councilman Jack Tibbetts floated putting a “net-neutral” measure before Santa Rosa voters that would restructure how the city collects tax revenue. Currently, sales taxes make up a third of the city’s $164.3 million general fund, with property taxes comprising nearly one-fifth and other taxes, fees, charges and transfers making up the balance.

That could include a new parcel tax, increasing the city’s cellphone tax, or other measures “to try to avoid having a significant recession in the next recession as well,” Tibbetts said.

Councilwoman Victoria Fleming cast the idea of restructuring the tax base as a good idea not just for future stability but for improving equity, since sales taxes by their nature are regressive and disproportionately impact lower-income households.

“Every time we put a sales tax measure on the ballot, I hold my nose,” Fleming said, “and this year has been so difficult on the lowest-income earners.”

Councilman John Sawyer also lent his support to the proposal, explaining that it made him nervous to rely on sales taxes compared to the relative stability of property taxes.

“It is difficult to get those property taxes increased,” Sawyer said. “But I wish there a way to get the community to understand the value as far as provision of services to depend more fully on property tax than sales tax.”

The council’s conversation comes less than a year after members unanimously voted to put a sales tax extension on the 2020 ballot, a measure consolidating two 0.25%-sales taxes and delaying their expiration until 2031 that city voters approved in November.

The city continues to have a structural deficit in which rising personnel costs are expected to continually drive spending above revenue for years to come, and a third quarter-cent sales tax measure, a 2018 initiative to support police and firefighting costs, remains on track to expire in 2025.

Management Partners on Tuesday, without counting on the two-thirds vote necessary to extend the public safety sales tax measure, proposed a five-year hiring freeze for most positions, a policy the city already has adopted in response to the pandemic.

Councilman Tom Schwedhelm called for more discussions on an alternative to vacant positions, potentially including cutting them from the budget.

“Part of the argument is, if you kept that position vacant for five years, do you really need it?” Schwedhelm said.

City Manager Sean McGlynn, who is set to leave the city for a job in Southern California in May, concurred.

“Holding vacant positions doesn’t help the organization move forward,” McGlynn said. ”We need to restart some of these conversations.“

You can reach Staff Writer Will Schmitt at 707-521-5207 or will.schmitt@pressdemocrat.com. On Twitter @wsreports.