It comes as little surprise to the informed observer that Davis’ sales tax per capita is much smaller than that of other comparable communities. Of that sales tax, a large percentage is generated by auto sales – a fact that is deeply ironic, given Davis’ sustainable claims on the environment.
We will have some numbers to illustrate just how bad off we are here later this week, but in the meantime, I want to discuss some implications of this.
While the short-term budget picture has improved, indeed the city right now has about $8.6 million in one-time funds that it is going to put toward paying down some of the city’s liabilities. But, as anyone who has read these pages knows, the city faces ongoing challenges to fund infrastructure maintenance and repair across a range of areas.
The recent news on CalPERS suggests that there will be additional adjustments to profit projections that are likely to add additional millions in costs for pensions.
The city is currently projecting about a 2.6 percent annual revenue growth from this year until 2022 when the sales tax increase is set to expire. Allowing the sales tax increase to expire would reduce the annual revenue base by $5.6 million in 2022-23. This would push the city back into the red by 2022-23.
Those numbers do not allow for the city to add revenue in order to deal with hundreds of millions in deferred maintenance for roads, greenbelts, parks, city buildings, and other infrastructure.
The ongoing question is how to pay for those and other community needs. Right now the city has done well to find about $4 million in general fund money for roads. Most analysts believe that the city needs about twice that annually. There was a time when it appeared that the state might fund at least some of that – but a bipartisan roads package fell through last fall.
The city at this point has not put a revenue measure on the ballot for November. Back in February, there was significant discussion on the type and amount of tax we needed. However, disagreement on the type of tax, the target of that tax, and the amount, convinced the council to push off that discussion for probably two more years.
The council seemed to have little appetite for putting a tax measure up this fall that would compete with the school’s $620 a year parcel tax. Moreover, the Finance and Budget Commission had asked council to forestall any parcel or other tax increases until they could fully analyze the need and cost.
There has been a discussion that ultimately, between the schools and the city, the need for a parcel tax could reach as high as $3000 per year. That would allow the city to collect its $30 million while ratcheting up the school’s take to fund the programs it needs.
Clearly, that number is a non-starter for all but the most wealthy residents. But that’s the point actually.
The question is where does the city get the money it needs to provide at least current levels of service, while funding its pension and OPEB (Other Post-Employment Benefits) liabilities to retired city employees and funding infrastructure projects?
One area where the city thinks it can expand its revenue is in the hotel industry. Already, voters approved a modest increase in the Transient Occupancy Tax (TOT), but that figures to have only a modest impact of perhaps $300,000. That’s nothing to sneeze at but not a game changer.
However, there is a belief that the Embassy Suites Hotel Conference Center could generate $500,000 if the city ever settles the lawsuit. Moreover, the city may look at a second hotel that could also generate additional revenue.
As the Vanguard reported earlier this year and other reports seemed to confirm, there are some questions as to how many rooms the current system can accommodate, and also the belief on the part of some that there is leakage to other cities.
Nevertheless, this is not going to fix our revenue problem, but it may help it at the margins.
When the discussion of innovation centers came up a few years ago, one of the abiding beliefs was that Davis needed to diversify its economy. Its sales tax base is too reliant on auto sales, and that may be a diminishing return market at some point.
Moreover, there is an belief that the community will not support a huge expansion of peripheral retail. There has been general support for the notion of protecting the downtown. Target was the one big box that Davis appears to have considered adding.
Without an expansion of retail, that leaves the innovation park proposals, with the idea that adding commercial space at Nishi and in one or two spots on the periphery might add up to $10 million annually to the revenue.
Others have suggested that we are under-utilizing the downtown and that densification of the downtown could generate additional revenue.
What is clear right now is that Davis is well below average for sales tax revenue. Bringing Davis up to closer to what some other cities bring in per capita will greatly close the gap. That appears to be something that the community can accomplish without throwing down strip malls on ag land.
But, as the city seeks to embark on a General Plan update, part of the vision should be economic and commercial development – where is the city going to get additional sales tax revenue from, how are they going to do it, and what is the city going to look like as a result?
All of that needs to flow from an accurate and honest assessment of our needs and how we can better utilize our strengths.
—David M. Greenwald reporting
As the Vanguard reported earlier this year and other reports seemed to confirm, there are some questions as to how many rooms the current system can accommodate, and also the belief on the part of some that there is leakage to other cities.
There will always be some leakage to Sacramento. But the leakage is significant now, because of the inadequacy of the supply of reasonable quality of the rooms. The Hyatt on campus has done extremely well because of the quality of the asset. If we were to add two or three new hotels with reasonably good locations, the leakage would decrease dramatically. Hopefully, the city council does not get mired down in trying to reduce competition for the existing hotel owners.
Moreover, there is an belief that the community will not support a huge expansion of peripheral retail. There has been general support for the notion of protecting the downtown.
It’s interesting to consider whether or not Davis has succeeded in protecting its downtown. The Davis downtown is transitioning to an entertainment district – driven by high real estate rents and demand for restaurants and entertainment. It seems likely that some service providers will remain along with a few boutique type retailers. Shopping for our day to day needs clothes, school supplies, hardware etc will continue to move to what has become our periphery – Woodland, West Sac and Dixon and of course, the internet.
True.
COSTCO, Home Depot and Frys are the three legs of my retail shopping. None in Davis.
Agree quielo.
Last week I sent my office manager to buy a bunch of organic chicken breasts for a our company BBQ. She when to all the stores in Davis and could only buy eight (that was all we had in town apparently). She drive to Costco on my suggestion and there were many dozens of organic chicken breasts.
Davis is a low-shopping-service city. But the old folks seem to like it that way.
Yes, and you can add Walmart, Best Buy, and Lowes to that list.
Costco, Home Depot and Walmart for my family. For groceries we do our big shop locally at Safeway or SaveMart.
For us it’s more of a price savings quest. I’ll shop locally at Nugget and Ace but only for a few needed items as their prices are so much higher.
Lowes is one I should probably go to more however when I go to COSTCO HD is around the corner and I have little reason to go to West Sac. No Walmart for me. BTW much as I like the farmer’s market in Davis the one on Sunday morning in Sac is where I do my real shopping.
David Smith said . . . “Shopping for our day to day needs clothes, school supplies, hardware etc will continue to move to what has become our periphery – Woodland, West Sac and Dixon and of course, the internet.”
My personal opinion is that Woodland, West Sac and Dixon are becoming, and will continue to become, a diminishing factor in the retail purchases of Davis residents. The real elephant in the room is the Internet, where currently the local portion of Sales Tax is not collected and forwarded to either Yolo County or the City of Davis on (almost) all transactions.
One of the highest priorities for our City Council and City Manager should be to be doing everything they can to work with the State Board of Equalization to ensure that Internet retailers collect and forward on to the State of California (for further distribution to the local jurisdictions) the full amount of sales tax due based on the delivery location of the retail purchase. If that is accomplished, the sales tax leakage will be significantly reduced, and the City’s Revenues from sales taxes will address their debilitating and continuing decline.
Matt, I totally agree with you. Amazon recently rolled out Prime Now and Prime Fresh, allowing you to do even grocery shopping from online. As technology continues to develop, this is a trend that is not likely to stop or reverse. Focusing on the tax issue is the right move in my opinion.
Why is the sales tax revenue so low? Because shopping in brick-and-mortar Davis is a scavenger hunt. The situation will only get worse as the effects of the Brinley property sale play out.
I see the Brinley sale as a huge opportunity to reshape the downtown, with more retail and entertainment options and the expansion of residential above.
Mark – I don’t see this happening. The rents are going up and retailers are leaving. There might be more pizza-restaurants and bars. Maybe some more office space.
The problem with the high real estate costs due to the lack of inventory is that rents don’t allow business to pencil out given the increasing customer demographic of students and older core area residence that tend to clutch their dollars.
Yes there is an opportunity to reshape the downtown, but more entertainment and less retail.
Related to this Brinley sale, the new landlords just hit the existing tenants with a huge CAM bill… basically making them pay for common area improvements that will be needed to attract replacement tenants that would justify the higher rent costs.
The Davis downtown is in trouble.
In the short-term, you are probably right. In the long-term, most of those buildings should be redeveloped and expanded upwards, which is something the new owners have experience doing. Like I said, this is an opportunity to create something better, but I have no doubt that our community’s ‘no on everything’ mindset will come to the fore and we will waste time and money arguing about protecting the ‘historic’ structures instead.
Mark, the problem that Davis faces is that the demographic cohort of Davis that is responsible for the lion’s share of retail purchases (I do not include purchases of groceries and consumables as retail purchases), the 25-54 year olds who head working families, is declining precipitously in Davis. Consumers who are 55 and over are looking to shed “things” rather than acquire them. Consumers who are 25 and younger seek out discount stores for their clothing purchases and/or purchase their clothes and other items on the Internet. Bottom-line the demand base for boutique retail purchases in Davis is shrinking, and that is not going to calculate well inthe supply/demand models of any of the national/regional retailers who might consider Davis. The results of their modeling will more than likely say “Pick another location!”
You are conflating issues, Matt. Redeveloping the Brinley parcels to multi-story mixed use (high-density residential over commercial) provides an opportunity to improve the downtown commercial environment while also creating core area living space. The demographic shift that we have experienced does not change the value of redeveloping the downtown parcels, but the redevelopment may help reverse the demographic shift by allowing some to sell their larger homes (opening the space to young families) and move downtown. It won’t be enough by itself, but it could be one of many ‘small steps.’
Mark, I don’t disagree with that redevelopment strategy at all. Residential over commercial for those properties makes a huge amount of sense. I support it wholeheartedly.
With that said, I fully expect the first floor commercial in the redeveloped buildings will be selling services, not retail goods.
“There has been a discussion that ultimately, between the schools and the city, the need for a parcel tax could reach as high as $3000 per year.”
We either need to decrease the cost of operating the City or start paying what we are spending in full now. Delaying this is only going to make things harder in the future. For years Chicago overspent on city services and their school system and didn’t have enough revenue to pay for it. They are now increasing their property taxes 10%+ per year to try and stay out of bankruptcy court. They also have a credit rating one level above junk so borrowing for projects is extremely expensive.
The transient occupancy tax is easy money for the City so we should be working to capture as much as possible. The Hyatt on campus has done quite well both because of its location and its quality, but we do not receive any TOT from that facility because it is on the University’s property. We need more quality hotels in Davis and should not be waiting for the Embassy Suites to break ground before moving forward. There are at least two quality projects in the planning process, and both should be approved quickly.
Downtown is no longer a major retail center, so we need to rethink the zoning restrictions we put in place around town for the purpose of protecting downtown retail. If we want to increase the diversity and quantity of sales tax revenues, we need to allow for more retail opportunities in our neighborhood centers and on the periphery.
The City should not be in the business of protecting existing businesses and property owners from competition, whether we are talking about hotels or retail.
FWIW, my mother-in-law stayed there once and won’t go back because she found the accommodations sterile and cheesy.
Sterile, perhaps a bit, but cheesy? All of the appointments I saw were pretty high-end. The designers also took accessibility into account, something one doesn’t find in the city of Davis, so much. The staff and service are 5 star.
What the City of Davis lacks is robust business to business sales tax revenue, which comes from manufacturing and selling to other businesses. This doesn’t create traffic, except for workers arriving and leaving work, that retail has and creates higher paying jobs for the community. Retail jobs tend to be low paid, so depending on retail sales tax only is not good for the community. The community turns into a bedroom community for other cities with higher paying manufacturing, research, government and other higher paying jobs. The University provides jobs with higher wages, but hides the poor fiscal health of the City due to a lack of large manufacturing or research businesses that would generate not only decent jobs, but sales tax revenue. Expanding housing is the only way to counter that – keeping people who work at the University in town and spending their wages here and paying City and School taxes here, rather than taking their wages to neighboring communities. However, rising housing prices and limited housing inventory will drive people away. We will all have to pay ever increasing property and school taxes to make up for this lack of revenue.
This is exactly what we were looking to expand with the proposals for economic development. Increasing business to business sales tax, and also increased property taxes for unsecured property (manufacturing equipment). A large manufacturing facility, such as Mori Saki or Schilling Robotics, likely pay as much or more in property taxes on their manufacturing and business equipment, as they do on the value of their land and buildings.
Yes, that’s why MRIC if properly built out and assessed would have likely generated $10 million plus in revenue.
And Mace 391… $100 million plus in dollars to the city.
Don, please don’t take the bait.
Yeah – that’s worked “real well” so far. Maybe if the city just keeps expanding its housing supply, that will “solve” the city’s financial challenges.
Never mind that housing is a money-loser for cities, over the long term. (The very reason that the city faces financial challenges.) By all means, when you’re in a hole – keep digging!
Why do (some) development-types keep trying to “sneak” this false statement into the discussion? Maybe if it’s repeated often enough, some will believe it?
Why do anti-development-types keep trying to “sneak” this false statement into the discussion? Maybe if it’s repeated often enough, some will believe it?
As has been repeated many times, and Ron conveniently ignores, there is nothing inherent in residential developments that make them ‘money-losers’ for cities. Failing to control the rate of growth of the city’s costs is what creates the money-losing situation, whether we are talking about revenue increases through development or tax increases. When the rate of cost growth exceeds the rate of revenue growth, cities lose money. In the case of Davis, the primary cause of cost inflation for City services is the rate of growth of total compensation for city employees.
That’s b.s., and I strongly suspect that you know this.
However, you correctly point out that there are two factors: 1) revenue (taxes), and 2) cost (city services).
Proposition 13 limits revenue. However, there is no method to permanently control costs.
The result is that housing is consistently a money loser (not just in Davis).
Before Matt chimes in again, I realize that he believes that he has some ideas to address this problem. However, since it’s a problem throughout California, I believe that it will be difficult to “solve”. (Even if costs are better-controlled, housing is not going to be a “money-maker”.)
In the meantime, it seems that you and others will advocate that we “keep digging” further into a hole.
Sure there is, it is called being fiscally responsible. Just because many cities in California (not just Davis) have agreed to provide public employees with grossly unsustainable compensation benefits does not mean that there is a requirement to continue doing so. Acting like we cannot do anything about cost increases is what is total B.S., Ron. All you are doing with your repeated false statement is providing justification for the City Council to continue failing in their fiduciary responsibility. Stop supporting failure and start working to solve the problems.
Ron, I don’t have time to respond in detail right now, but your statement above is wrong, dead wrong. There is absolutely no reason why “there is no method to permanently control costs.”
I will respond in detail later today.
And, all that you (and some others are doing) is attempting to spread the outright lie that additional housing will “solve” the city’s financial challenges. (Yeah, it doesn’t work with 67,000 residents. Maybe it will work with 80,000, 90,000, 100,000 . . .)
I find it particularly disappointing that given your stated interest regarding the financial status of the city, you continue to spread this lie.
And Matt – I see that you can’t resist sharing your ideas. Perhaps you do have some ideas to control costs. But, it’s important to clarify the difference between controlling costs, vs. actually claiming that additional housing will be a financial “savior” for Davis (as some continue to claim, despite evidence to the contrary).
This and the fact that residential development is generally a net positive revenue maker for a city for the first decade or more, but then moved to negative territory as the property tax revenue as a percentage of market value of the property declines from a slowing in home ownership turn-over… while the city labor costs continue to escalate at many times the rate of inflation.
Davis could in fact continue to build more housing developments at a pace that we benefit from net positive revenue even while failing to do much to control city labor costs.
Additional revenue has to found somewhere – build new housing to even temporarily increase revenue, increase taxes for the existing property owners, increase cost for city services, or attract manufacturing that will increase sales tax revenue beyond the cost of infrastructure. Can you suggest others?
Or we can reduce expenses – reduce city services, fire people, close little used streets and abandon them, close pools and parks, etc.
Ron – Please show where I, or anyone else for that matter, has claimed here that building more housing will ‘solve’ all of the City’s financial challenges. The only person who I recall ever making such a claim is you, when you were falsely attributing the statement to others.
Building more housing will directly address the City’s housing shortage. If we control the rate of cost inflation for City services, building more housing will not worsen the City’s fiscal crisis, and may be part of a long-term fiscal solution. The ‘lie’ that you choose to repeat, is that housing is always a net negative for cities. It is not, but failure to control costs is.
We can convert all city employee defined benefit pensions to defined contribution plans. And we should do this soon as CalPers is going to keep under-performing their returns estimates and coming to the cities to contribute more.
frankly, what you describe here is called a pyramid scheme. You always need more new investors in ever increasing quantities to cover the cost of the old, then one day you can’t find enough new investors and the whole thing collapses. Not a great way to plan for the future of a city.