HomeMy WebLinkAboutRESOLUTION 2007-49 - LEVY A RETIREMENT PROPERTY TAX FOR FISC Council/Agency Meeting Held: �o O
7ADpprove
rred/Continued to:
❑ QgnditiQnaf y Ap roved ❑ Denied 4 lZ'A�City Clerk's Signat
Council Meeting Date: 08/06/2007 Department ID Number: FN 07-007
CITY OF HUNTINGTON BEACH
REQUEST FOR CITY COUNCIL ACTION
SUBMITTED TO: HONORABLE MAYOR AND CITY COUNCIL MEMBER
SUBMITTED BY: PENNY CULBRETH-GRAFT, DPA, CITY ADMINISTRAT
PREPARED BY: DAN T. VILLELLA, CPA, FINANCE DIRECTOR
SUBJECT: ADOPT RESOLUTION TO ESTABLISH FISCAL YEAR 2007/2008 TAX
RATE
Statement of Issue,Funding Source,Recommended Action,Alternative Action(s),Analysis,Environmental Status,Attachment(s)
Statement of Issue:
Should the City of Huntington Beach adopt a tax rate to fund the portion of public safety
retirement costs that can be legally collected in accordance with court cases, state law, and
the City Charter?
For Fiscal Year 2007/08, it is proposed to levy a tax rate of $.0080 per $100 of assessed
valuation on secured values. This proposed tax rate would bring in an estimated $1,973,346
in tax revenue to be used for funding a portion of the cost of pre-1978 public safety employee
retirement benefits.
Funding Source:
Not applicable.
Recommended Action: Motion to:
Adopt Resolution Number 2007-49 'A Resolution of the City Council of the.City of
Huntington Beach Levying ay Retirement Property Tax for Fiscal Year 200712008 to pay for
Pre-1978 Public Safety Employee Retirement Benefits" of $.00800 per $100 of assessed
valuation.
Alternative Action(s):
1. Do not adopt a tax rate that will cause a reduction of$1,726,677 in estimated General
Fund revenues for FY2007/08.
2. Adopt a tax rate that will recover the entire allowable portion of the safety employer
contribution rate. This will result in an additional $5.3 million in General Fund revenue
for FY2007/08.
3. Adopt last year's tax rate of$.00700 per $100 of assessed valuation. -- B
4. Adopt an alternative less than the maximum rate. �-- 17
RCA ROUTING SHEET
INITIATING DEPARTMENT: FINANCE
SUBJECT: ADOPT RESOLUTION TO ESTABLISH FY2007/08
TAX RATE
COUNCIL MEETING DATE: August 6, 2007
RCA ATTACHMENTS STATUS
Ordinance (w/exhibits & legislative draft if applicable) Attached ❑
Not Applicable
Resolution (w/exhibits & legislative draft if applicable) Attached
Not Applicable ❑
Tract Map, Location Map and/or other Exhibits Attached ❑
Not Applicable
Contract/Agreement (w/exhibits if applicable) Attached ❑
(Signed in full by the City Attorney) Not Applicable
Subleases, Third Party Agreements, etc. Attached ❑
(Approved as to form by City Attorney) Not Applicable
Certificates of Insurance (Approved by the City Attorney) Attached ❑
Not Applicable
Fiscal Impact Statement (Unbudgeted, over$5,000) Attached ❑
Not Applicable
Bonds (if applicable) Attached ❑
Not Applicable
Staff Report (If applicable) Attached ❑
Not Applicable
Commission, Board or Committee Report (If applicable) Attached ❑
Not Applicable
Findings/Conditions for Approval and/or Denial Attached ❑
Not Applicable
'EXPLANATION FORM ISSI 'ATTACHMENTS
REVIEWED RETURNED FORW RDED
Administrative Staff ( }
Deputy City Administrator (Initial) kWr
City Administrator(Initial) ( ( }
City Clerk ( )
EXPLANATIION FOR RETURN OF ITEM:
(Below Space For City Clerk's Use Only)
RCA Author: Michael Solorza
REQUEST FOR CITY COUNCIL ACTION
MEETING DATE: 08/06/2007 DEPARTMENT ID NUMBER: FN 07-007
Analysis:
History of the Retirement Levy
The City receives a pro-rats (approximately 16 percent) of the one-percent basic levy
collected as property taxes on all real property within the City limits. In addition, the City can
legally levy taxes to recover costs related to pre-1978 retirement benefits.
The City has levied a retirement property tax since 1966, when a City Charter amendment
allowed the City to recover retirement costs. Section 607(b)2 of the City Charter states,
"There shall be levied and collected at the same time and in the same manner as other
property taxes for municipal purposes are levied and collected...tax sufficient to meet all
obligations of the City for the retirement system in which the City participates, due and
unpaid or to become due during the ensuing fiscal year." In 1978, after the passage of
Proposition 13, the City was still allowed to levy tax overrides above the one percent basic
levy. This authority was limited by Revenue and Taxation Section 96.31(a) (4), which
effectively set the City's maximum retirement tax rate at $.04930 per $100 of assessed
valuation.
In 1999, the Howard Jarvis Taxpayer's Association filed a lawsuit against the City concerning
the levying of these taxes. The court determined that the City could only levy taxes for
retirement costs that were in effect prior to 1978. Determining the exact amount of pre-1978
benefits in any given year requires an actuarial report. In 2004, the City commissioned a
report from an actuary, John Bartel of Bartel Associates, which made assumptions and
recommendations concerning how to determine these amounts. Subsequently, the
California Attorney General issued an opinion supporting the assumptions made by the City.
For FY2007/08, staff is recommending the City Council adopt a tax rate of $.00800 per $100
of assessed valuation ($.0010 higher than the tax rate in FY2006/07). This will yield
approximately $1,973,346 in FY2007/08. This will result in a homeowner with a $500,000
assessed valuation (e.g., a property assessed at $500,000) paying an additional five dollars
($5.00) per year. Any increase in the portion of pension costs paid by the tax rate, frees
other revenues, which can be used for infrastructure, reduction of unfunded liabilities and
enhanced services.
Calculation of Possible Tax Rates
The City may levy any tax rate between zero and the maximum allowable tax rate. To
compute the maximum allowable tax rate, the pre-1978 retirement costs are divided by the
City's total secured assessed valuation. For FY2007/08, the City's secured assessed
valuation (not including Redevelopment Agency incremental assessed valuation) is
estimated at $24,666,820,582. This represents an increase of approximately
$1,583,514,778, or 6.86% percent over the prior years city-wide secured assessed valuation.
This estimate is made using County of Orange Assessor's local assessment roll value data
and represents the percent change over the 2006/07 roll year. Unsecured valuation is levied
at the prior year secured rate so it is not used in determining the current year tax rate. On
June 18, 2007, the City Council approved a prepayment of retirement costs resulting in
savings to the City and taxpayer. Since the City can recover only actual costs of the
-2- 7/23/2007 9:38 AM
REQUEST FOR CITY COUNCIL ACTION
MEETING DATE: 08/06/2007 DEPARTMENT ID NUMBER: FN 07-007
retirement program, only the discounted amounts can be recovered and thus were used in
the following calculations.
The table below summarizes the calculation of the maximum amount of estimated
FY2007/08 safety retirement costs that could be recoverable through a property tax levy:
Total
Full Amount of Estimated Employer Costs—Safety Employees $9,046,176
Discounted Amount from CalPERS Prepayment $8,714,779
Savings $331,397
Less Amount Related to 3%at 50 (Discounted Safety Costs x 16.28%) $1,418,491
Safety Retirement Costs Recoverable Through Property Tax $7,296,288
The amount of safety retirement costs related to the post-1978 benefits was computed as
follows:
Employer Safety Estimated Employer
Retirement Rate Safety Retirement
FY 2007/2008 Ratio of Costs Costs FY 2007/2008
Retirement Percentage Attributable to Pre-1978
Benefits 23.6610% 83.72% $7,296,288
Retirement Percentage Attributable to Post-1978
Benefits 4.6000% 16.28% $1,418,491
Total Safety Employer Rate 2007/2008 28.2610% 100.00% $8,714,779
Below is a table summarizing the results of levying the maximum allowable rate, the prior
year tax rate (FY2006/07), and a staff recommended rate for FY2007/08:
Maximum Allowable Prior Year Staff
Rate (FY2006/07)Rate Recommendation
Total Pre-1978 Retirement Costs Recoverable $7,296,288 $7,296,288 $7,296,288
through Property Tax Levy
Amount of Pre-1978 Costs to be Recovered $7,296,288 $1,726,677 $1,973,346
Total City-wide Secured Assessed Valuation $24,666,820,582 $24,666,820,582 $24,666,820,582
Tax Rate(per$100 of assessed valuation) $0.02958 $0.00700 $0.0080
Estimated Cost for Parcel with Assessed Valuation $147.90 $35.00 $40.00
of$500,000
The maximum allowable rate is the lesser of the above calculation ($0.02958 per $100 of
assessed valuation) and the amount allowed under Revenue and Taxation Code 96.31(a) (4)
($.04930 per $100 of assessed valuation for Huntington Beach).
-3- 7/23/2007 9:38 AM
REQUEST FOR CITY COUNCIL ACTION
MEETING DATE: 08/06/2007 DEPARTMENT ID NUMBER: FN 07-007
Because of the County's timeline for approving the tax rate and the City's budget cycle, the
rate must be set before the City Council takes action on its annual budget adoption. While
the tax rate may be increased above the recommended level, it is suggested that the lower
rate be adopted and that staff work with the City's financial consultant in reviewing the rate
during the preparation of the long-term financial plan to determine the need for future rate
adjustments. The recommended action preserves the City's future option of adjusting the
rate without creating an increased burden upon residents this year and allows the city's
financial plan to be studied over the next year. This will give City Council adequate time to
consider its options and impacts prior to the adoption of the FY2008/09 budget.
Strategic Plan Goal:
Financial
Environmental Status:
Not applicable
Attachment(s):
City Clerk's
Page Number No. Description
1. Resolution Number 2007-49 , "A Resolution of the City Council
of the City of Huntington Beach Levying a Retirement Property Tax for
Fiscal Year 200712008 to pay for Pre-9978 Employee Retirement
Benefits" of $.00800 per $100 of assessed valuation to pay for pre-
1978 employee retirement benefits.
-4- 7/23/2007 9:38 AM
ATTACHMENT # 1
RESOLUTION NO. 2007-49
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF HUNTINGTON BEACH
LEVYING A RETIREMENT PROPERTY TAX FOR FISCAL YEAR 2007/2008 TO PAY
FOR PRE-1978 EMPLOYEE RETIREMENT BENEFITS
WHEREAS, since 1948, the City has provided for employee pensions through a contract
with the California Public Employees Retirement System (CAPERS). Pursuant to the 1966 and
1978 Charter, the voters of the City authorized the City Council to pay for the cost of employee
pensions through a separate retirement property tax. Section 607(b)(2) of the 1978 Charter
provides that the City may impose a retirement tax "sufficient to meet all obligations of the City
for the retirement system in which the City participates"; and
Proposition 13 was added to the California Constitution in 1978. It limits the local
property tax to 1% of assessed value, except that the City may levy an override tax in excess of
1%to pay "any indebtedness approved by the voters prior to July 1, 1978"; and
In the case entitled Carman v. Alvord, 31 Cal. 3d 318 (1982), the California Supreme
Court determined that under Proposition 13, an override property tax in excess of 1% of assessed
value may be levied to pay for employee pension benefits the voters approved prior to 1978.
Consequently, after Proposition 13, the City Council continued to levy an override tax to pay for
employee pensions. Since 1983-84, Revenue and Taxation Code Section 96.31(a)(4) has limited
the City to levying a maximum override tax of$0.04930 per$100 of assessed value to pay for its
retirement system; and
In 2001, Proposition 13, as applied to the City Charter, was interpreted in Howard Jarvis
Taxpayers Association, et al., v. County of Orange, and City of Huntington Beach as Real Party
in Interest, Orange County Superior Court Case No. 81-87-80. The Court held that the override
tax may only be levied to pay for retirement benefits the City contracted for before July 1, 1978,
and may not encompass the benefits the City added after the passage of Proposition 13. This
interpretation was upheld in Howard Jarvis Taxpayers Assn v. County of Orange (2003) 110
Cal.AppAth 1375, 2 Cal.Rptr.3d 514.Court of Appeal Case No. G029292; and
Prior to July 1, 1978, the City entered into collective bargaining agreements with
employee associations representing its safety employees providing that, effective July 1, 1978,
they would be entitled to a CaIPERS retirement benefit known as "2% @ 50." Subsequently, on
June 30, 1999, pursuant to collective bargaining agreements the City had entered into with its
safety employees, the City provided its safety employees with the CalPERS retirement benefit
known as 3% @ 50. Consequently, it is necessary to allocate the employer contribution to
CalPERS for safety retirement between 2% @ 50 and 3% @ 50, because only the employer
contribution for 2%@ 50 may be paid through the override property tax; and
The City has received a report from John Bartel of Bartel Associates, a professional
actuary experienced in pension calculations, entitled, "City of Huntington Beach CalPERS
Actuarial Issues—Cost of 3%@ 50," dated August 10, 2004. The Report identified the additional
cost of 3% @ 50 as what CalPERS refers to as the "normal cost" of the benefit, which
represents the present value of future benefits employees earned during the current year. Under
07-1176/12468 1
Resolution No. 2007-49
this approach, the incremental cost of 3% @ 50 is 4.6% of safety payroll, and the remainder of
the employer contribution represents the cost of 2%@ 50; and
In April 2004, Assemblyman Harman formally asked the Attorney General regarding the
correct method of allocating the employer contribution to CaiPERS between its pre-1978 and
post-1978 components. In his February 7, 2005, Opinion (Opinion No. 04-413) the Attorney
General opined that "any reasonable accounting method may be used for purposes of
determining which costs are not subject to the 1% property tax limitation of the Constitution";
and
The City Council has determined that the allocation approach presented in the Bartel
Report is a reasonable accounting method for determining which costs are not subject to the 1%
property tax limitation of the Constitution; and
In 2003/2004, Ca1PERS required the City to contribute 9% of safety employee payroll as
the City's employer's contribution. In order to set the tax override, the City subtracted the 4.6%
normal cost of 3% @ 50 from the 9% to set the override tax at the equivalent of 4.4% of safety
employee payroll. The cost to the City of 4.4% of safety employee payroll for 2003/2004 was
$1,279,113, and consequently, the City set the override tax for 2003/2004 at $0.00696 per $100
of assessed value, which amount was designed to yield $1,279,000; and
For 2007/2008, Ca1PERS is requiring the City to contribute 28.2610% of safety employee
payroll as the City's employer's contribution. In order to set the tax override, the City may
subtract the 4.6% normal cost of 3% @ 50 from the 28.2610% to set the override tax at the
equivalent of 23.6610% of safety employee payroll. The cost to the City of 23.6610% of safety
employee payroll for 2007/2008 will be $ 7,296,288, and consequently, the City may set the
override tax for 2007/2008 at $0.02958 per $100 of assessed value; and
Notwithstanding this authority, the City Council chooses to set the override tax rate for
2007/2008 at $0.00800 per $100 of assessed value, which will yield approximately$1,973,346 in
revenue. This amounts to an override tax of approximately $8.00 per $100,000 of assessed
value.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Huntington
Beach that a retirement property tax levy of Zero and 0.00800/100`h Dollars ($0.00800) per $100
of assessed value shall be levied for employee retirement costs for Fiscal Year 2007/08;
BE IT FURTHER RESOLVED that the remainder of the Zero and 0.02958/100th Dollars
($0.02958) per $100 of assessed value levy authorized under Revenue & Taxation Code Section
963 I(a)(4) is suspended for Fiscal Year 2007/2008;
BE IT FURTHER RESOLVED that the City Council declares that although it is
suspending a portion of the retirement property tax for Fiscal Year 2007/2008, it retains the
authority to levy the tax in future years up to the rate of$0.0493 per $100 of assessed value.
07-1 176/12468 2
Resolution No. 2007-49
PASSED AND ADOPTED by the City Council of the City of Huntington Beach at a
regular meeting thereof held on the 6th day of August , 2007.
ayor
REVVIEWED AND APPROVED: APPROVED AS TO FORM:
f � 1
Z �a
ity Ad inistrator r ty Attorne mV -a3-o7
iNITI AND APPROVE JD:
Finance Director
07-1176/12468 3
Res. No. 2007-49
STATE OF CALIFORNIA
COUNTY OF ORANGE ) ss:
CITY OF HUNTINGTON BEACH )
I, JOAN L. FLYNN the duly elected, qualified City Clerk of the City of
Huntington Beach, and ex-officio Clerk of the City Council of said City, do hereby
certify that the whole number of members of the City Council of the City of
Huntington Beach is seven; that the foregoing resolution was passed and adopted
by the affirmative vote of at least a majority of all the members of said City Council
at a regular meeting thereof held on the 6th day of August, 2007 by the following
vote:
AYES: Bohr, Coerper, Green, Hardy
NOES: Carchio, Cook, Hansen
ABSENT: None
ABSTAIN: None
Citjklerk and ex-officio 61erk of the
City Council of the City of
Huntington Beach, California