Measure RR: Redwood City Essential Services Protection Measure

No. Parks, transportation and water and sewer projects are almost entirely funded by dedicated funding sources such as developer fees, gas taxes and water and sewer rates. Essential City services such as public safety, parks and library services are funded primarily by sales and property taxes, in the City’s General Fund. 

By law, the State cannot take revenue from a sales tax measure. All local sales tax dollars would stay local to fund local services in Redwood City. 

Staff projects an operating balance of approximately $2.3 million for Fiscal Year 2017-18. These one-time funds are primarily due to holding staff positions vacant. $2.3 million is approximately 1.7% of the operating budget. The City Council has directed the use of these one-time funds to pay down long-term liabilities and to support City Council priorities such as homelessness prevention efforts.

No. Since 1999, Redwood City has had a reserve policy of setting aside 15-20% of General Fund revenues. The current reserve balance is $21.4 million. This reserve is set aside to ensure that the City has money for a crisis such as an economic crash or a catastrophic event such as an earthquake that would require funds to rebuild critical infrastructure. In recent years, when revenue has exceeded expenses, and the City’s reserves are funded, the City has made additional payments toward unfunded liabilities. The City’s reserves cannot solve the structural deficit, and one-time funds cannot cover the cost of ongoing services, like public safety services and library programs.

Though property tax has increased over time and sales tax revenue from Downtown businesses has increased, the City’s overall sales tax revenue has been flat. Additionally, though the City has taken many steps to manage retirement obligations, the City faces an annual ongoing operating budget deficit that is projected to reach more than $12 million annually within five years and will only keep growing from there. The rising cost of pensions is a statewide problem and all cities throughout California are experiencing similar challenges.

After assessing the City’s financial practices, Moody’s Investors Service on July 27, 2018 announced their assignment of an Aa1 rating to the City of Redwood City. This is the second highest rating Moody’s assigns. A high investor rating means that when the City needs to borrow money it can do so at lower interest rates, providing annual cost savings. The median rating for US cities is AA3, so Redwood City’s rating is two steps above the average.

Moody’s high credit rating is a direct result of the City Council’s strong financial management practices including having substantial reserves in place for a potential economic downturn, addressing pension costs and other unfunded liabilities, and ensuring an overall healthy financial position.

To view the credit opinion go here.  

One solution is to place a measure on the ballot to increase the City’s local sales tax rate, which is paid both by residents and visitors who work or shop in Redwood City. A sales tax measure would provide locally controlled revenue to help prevent cuts to essential City services like police, fire and paramedics, library services and recreation and community services including after school programs.

Locally controlled revenue from a sales tax could help preserve many essential City services, such as:

• Protecting the safety of Redwood City residents
• Maintaining rapid 911 emergency response times
• Supporting fire, paramedic and police services
• Providing recreation and after school programs
• Continuing library hours and programs 

Given that 60% of the City’s annual operating budget is dedicated to public safety (82.5% when including parks, recreation and libraries), the City cannot withstand this deficit (more than $12 million annually in five years and continuing to increase each subsequent year) without significant cuts. This could include slower 911 emergency response times, reduced library hours and fewer after school programs. 

Given that 60% of the City’s annual operating budget is dedicated to public safety (82% when including parks, recreation and libraries), the City will not be able to balance the budget without significant cuts to vital city services. These cuts could result in fewer on-duty police officers and firefighters for emergency response, reduced library hours and fewer afterschool programs.

This measure would increase the local sales tax rate by 0.5% and provide approximately $8 million annually to fund local city services and prevent cuts. This increase would add 50 cents to a $100 purchase. Groceries, medicine and other essential items are exempt from sales tax. By law, all funds from the measure must stay local and cannot be taken by the State or federal government.

Redwood City has balanced its budget consistently for many years but faces a structural deficit in the years ahead. This deficit, driven primarily by state-mandated increases in pension costs, is projected to reach more than $12 million annually in five years. The City has taken a proactive approach to addressing this through staffing cuts, increased employee contributions to pensions and maximizing fees charged to developers. Despite these steps, without additional revenue, the City will face significant cuts to services, including public safety, which comprises 60% of the operating budget.

Several factors contribute to this structural deficit. First, the cost of providing essential city services has increased significantly in recent years while revenues have not kept pace. Second, while property values have increased, Redwood City only receives 18% of property tax revenue. Third, even after proactive reforms, the City must sharply increase payments to the California Public Employees’ Retirement System to fund pensions for retired and current employees. With the costs of services and rising pension costs outpacing revenues, the City must raise locally controlled revenues or make even more significant cuts to core city services to balance the budget.

No, Redwood City employees are not a part of the Social Security system.

Yes. On July 17, 2018, the San Mateo County Grand Jury reported that all cities in the county are facing pension cost increases. To view the report go here. The League of California Cities also reported on the retirement system and challenges faced by most California cities. Go here for that report. 

Pulling out of the state public employee pension system would not relieve Redwood City of any pension obligations. Most of the City’s pension liability is for benefits for already-retired employees, and the City still needs to fund those benefits. 

In 2016, the City engaged John Bartel, a statewide expert, to independently project the City’s pension costs and recommend strategies to address cost increases. In 2017, the City Council approved the creation of a pension trust to help pay for future pension costs, and the City’s five year forecasts are based on his projections. To view a staff report on John Bartel’s analysis go here. 

Employees pay between 7- 18% of their salary towards their pension cost, depending on their bargaining unit and pension tier.  This is among the highest employee contribution rates in the Bay Area region and the State. Redwood City has a three-tier pension system where newer hires receive more modest benefits.

For background on these changes to the City’s pension benefits, go here for a 2017 Staff report to the City Council or here to the League of California Cities report on pensions. 

The City of Redwood City offers a three-tier pension benefit program to its employees. The benefit package offered by the City is both comprehensive and competitive. Eligible employees are full-time and part-time employees working a minimum of 20 hours per week.

Below is a brief overview of the available pension tiers for eligible employees.

1st Tier (employees hired after 10/13/2011)

Membership in the California Public Employee’s Retirement System (CalPERS).

• Single highest year of compensation formula.
• 3%@50 – Fire
• 3%@50 –Police
• 2.7%@55 – Miscellaneous

2nd Tier (employees hired after 10/13/2011)

Membership in the California Public Employee’s Retirement System (CalPERS).

• Three highest years of compensation formula.
• 3%@55– Fire
• 3%@55–Police
• 2%@60– Miscellaneous

3rd Tier (for all NEW CALPERS members hired after 1/1/2013)

Membership in the California Public Employee’s Retirement System (CalPERS).

• Three highest years of compensation formula.
• 2.7%@57– Fire
• 2.7%@57–Police
• 2%@62– Miscellaneous

For more about the City’s employee benefits, go here. 

Redwood City has been a leader in the State by proactively addressing pension cost increases. Redwood City employees now contribute up to 18% of their salary to help cover their pension. This is among the highest employee contribution rates in the Bay Area region and the State. Redwood City has a three-tier pension system where newer hires receive more modest benefits. Redwood City has also created a local pension trust to help cover future pension liabilities. 

Approximately 15% of the General Fund is spent on employee pension costs.  Approximately 9% of the City’s total budget (including the General Fund and enterprise funds such as the water and sewer funds) is spent on employee pension costs.

No. By law, essential purchases like these are exempt from sales tax.

On a $100 purchase made at a physical store in the City, the City receives $1. On a $100 purchase made online by a retailer that collects sales tax, the City receives $0.14.

The United States Supreme Court recently ruled that internet retailers can be required to collect sales taxes even in states where they have no physical presence. In light of the Court’s ruling, each state will be deciding how to distribute the sales tax that will be generated from online retailers. California has not determined how online sales tax will be distributed so it is not known at this time how much new revenue will come to the City.

The City Council has placed a half-cent sales tax measure for voter consideration on the November 2018 ballot. If approved, this would add an extra 50 cents to a $100 purchase of taxable goods.

Redwood City’s current sales tax rate is 9.75%.

Five other communities recently approved sales tax rate increases.

Yes, sales tax is paid by anyone who shops in Redwood City. This ensures that both residents and visitors contribute revenue for the roads, public safety services and other resources they utilize while in our City.

The City has increased fees it charges to developers. This year, the City expects to receive $2 million to recover costs associated with new development applications. Fee revenue will vary annually depending on the number of development applications.

No. The increased tax revenue from Downtown development has been used to support essential City services downtown and throughout the entire city. 

Of the top 25 sales tax generators in 2017, 21 of those businesses were in the top 25 list in 2012. Two auto dealers left the list of top generators and two other auto dealers were added.

Property tax from downtown development rose from $2 million per year to $7 million per year over the last five years. 

Sales tax generated downtown rose from $6 million per year to $8 million per year over the last five years.

Sales tax is paid on cars where they are registered, not where they are purchased, so a local sales tax would not hurt business for local car dealers.

Redwood City’s major sales tax generators include auto dealers and big box retailers. 

Redwood City businesses pay property taxes, business license tax, and employees may contribute sales tax by buying goods in Redwood City, even if they do not live here.

There is no evidence that increases to sales tax rates discourage patrons from supporting local businesses. Research suggests that an extra 50 cents per $100 spent is not enough incentive for a consumer to change their buying habits. Many other cities on the Peninsula have recently passed sales tax measures and have not reported any adverse effects on local businesses.

Community input is a critical component of this process. Please provide feedback to help the City Council and staff develop a plan for our community. Visit the City’s dedicated webpage at www.RedwoodCity.org/FiscalUpdate to learn more.

The City receives $2.5 million annually from the business license tax. To generate $8 million in new revenue, the City would need to nearly quadruple the business license tax rate. 

The City has 21,047 parcels at this time. To generate $8 million, an annual parcel tax of $380.10 would be needed.