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Local Government Revenue

Systems: Understanding How

Municipal Government is Funded

Dr. Peter Pirnejad,, Executive Director, Davenport Institute

Matt Bronson, City Manager, Grover Beach

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Road Map

Introduction
Local Government Revenue Sources
Ebb and Flow of Government Funding
Q & A

Break

Funding Options
The Allocation of Funds
Q & A

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Arlington's FY 2022 Budget Explained with Lego Bricks

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Poll

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Introduction

Funding Local Government

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Local Government Revenue Sources

From providing police and fire protection to maintaining sewage systems and building parks—everything local governments do must be funded

Increased public expectations and growing infrastructure needs have made it difficult for many cities to fund services

Taxes are an essential revenue source, but there are others Property tax limitations and uses have led to the “fiscalization of land use”

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Local Municipal Services

Police

Fire

Road Repair

Water and Sewer

Parks and Rec

Planning & Development

Library

Admin Services

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More Than Just Numbers

Revenues and expenditures = sources and uses for a budget

Budgets are more than numbers as they tell story of linking priorities to resources

Today’s session will explain how local government is funded and what funding is used for

Broader policy discussion on service need and merits outside session scope

Councils set expectations and approve budgets

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Local Government Revenue Sources

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Property Taxes

Key source of funding for local governments that exists in several forms

Annual tax on assessed property value, Real estate

transfer tax, Rental income tax, Land value tax

Four types of property subject to taxes

Land, Land improvements, Personal property,

Intangible property

Revenue generated from property taxes varies significantly across California and the nation
One of the largest revenue sources in most local governments yet most funding goes to schools

Source: San Luis Obispo County

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Property Taxes Over Time

Decline in property tax revenue following the passage of Proposition 13 in 1978
In response, the State Legislature passed the Community Facilities District Act in 1982
As a result, localities could create special “Mello-Roos” districts and impose a parcel tax that is not based on property value
This method has been one tool to offset lost revenue and/or produce new revenue

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Sales Taxes

Another important revenue source for local governments which also varies across the state
The state sales tax rate is 7.25% though cities and counties can increase it within their jurisdiction

Total sales tax rates in cities range from 7.25% to 11.25%
Legislation needed to go above 9.25%

Sales tax applies to many consumer goods and services, while others are exempt

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Other Taxes and Fees

Hotel Taxes
Cannabis Taxes
Franchise Fees
Service Charges
Property Use Fees
Permits and Licenses
Other Fees and Fines

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Intergovernmental Transfers

Some revenue for municipalities that comes from the state and federal government

Community Development Block Grants
Housing Programs
Gas Tax

Declining amount over time until CARES Act and ARPA funds during COVID pandemic
Funding uncertainty given federal government reductions

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Ebb and Flow in Local Government Funding

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Ebb and Flow in Local Government Funding

While property tax, charges/ fees, sales tax, and transfers are the primary revenue sources of government funding, the revenue composition fluctuates over time but remains fairly stable
Prop 13 initially significantly reduced property tax revenue for local government but has been [partially] offset by other revenue and by rising property values
Federal funding has recently increased with support/relief related to the pandemic, but had been declining
Unfunded mandates from State (e.g. organic food waste)

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Source: https://lao.ca.gov/LAOEconTax/article/Detail/712

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Questions?

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10 Minute Break!

Stretch & Hydrate

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Funding Options

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Exploring Funding Options

Taxes, charges, fees, and transfers serve as reliable revenue sources for local governments
However, additional funding is often needed in response to various situations:

Decreasing revenue
Disasters/unforeseen events
New projects and initiatives

Legislative changes
Rising costs

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Funding Options

Special taxing districts
Bond measures
Grants

State, federal, other

Federal payments

CARES Act
ARPA funding
CDBG/HUD programs

Legislative changes
Rising costs

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Taxes (Revenue Measures)

General tax is any tax levied to fund general government purposes and which goes into the local government entity's general fund. General taxes imposed by local governments must be approved by voters and, moreover, they must be put before voters during regularly scheduled general elections. General taxes require approval from a simple majority of voters—50 percent + one vote.

Special tax is any tax levied for a specific purpose. Special taxes imposed by local governments require a two-thirds (66.67 percent) supermajority vote at the ballot box for approval.

Source: https://ballotpedia.org/Laws_governing_local_ballot_measures_in_California#General_and_special_taxes

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Types of Taxes

Taxes that appear before voters include:

Parcel taxes: a type of property tax based on units of property rather than assessed value
Sales taxes: a percentage of the sale of goods and services
Business taxes: a percentage of profits, a business license fee, a levy based on the size of a commercial or retail facility, or any other tax levied on businesses
Transient Occupancy Tax (TOT): a percentage of hotel, motel, and other short-term lodging charges
Utility taxes: a fee imposed on water, electric, sewer, or other public utilities
Vehicle registration fees: a fee imposed on vehicle registration that surpasses the cost of processing and administering the registration

Source:https://ballotpedia.org/Laws_governing_local_ballot_measures_in_California#General_and_special_taxes

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Municipal Bonds

A bond is a loan. There are many types of municipal bonds, but they have only one purpose – to borrow money. It involves a promise to pay money, with interest, on a specified date.

General Obligation Bonds

State general obligation bonds enjoy the “full faith and credit” of California. “Full faith and credit” expresses the commitment of the issuer to repay the bonds from all legally available funds. GO bonds issued by local governments, such as schools, are often only payable from the local issuer’s property taxes.

Revenue Bonds

To repay investors, revenue bonds rely on monies derived from the sale of commodities (such as water) or from the use of facilities (such as airports).

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Exploring Funding Options

Source: Institute for Local Government: https://www.ca-ilg.org/sites/main/files/file-attachments/basics_of_municipal_revenue_2016.pdf

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Ballot Measure Results

CaliforniaCityFinance.com

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Local Government Fund Types

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Poll

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Local Government Fund Types

Enterprise Funds

Self-supporting funds with revenue required to be used for specific uses
Examples: Water, wastewater, parking

Capital Project Funds

Dedicated for funding capital projects
Examples: Streets, utilities, parks, public Facilities

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Local Government Fund Types

Special Revenue Funds

Funds accounting for dedicated revenues often from grants
Examples: Housing, Community Development, Environmental Programs

Internal Service Funds

Funds for services that support other services or organizational needs

Examples: Information Technology, Equipment Replacement, General Liability Insurance

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General Fund

Primary fund for most governmental services
Funded by general tax revenues like property and sales tax
Significant percentage of most city budgets particularly for public safety functions
Examples:

Police
Fire
Parks and Recreation
Administration (City Mgr, HR, Finance)
Economic Development
Streets and Park Maintenance

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City of Palo Alto General Fund Budget Example

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City of Palo Alto All Funds Budgets

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Budget Example

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Questions?

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Thank You!

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