REQUEST FOR CITY COUNCIL ACTION
SUBMITTED TO: Honorable Mayor and City Council Members
SUBMITTED BY: Eric G. Parra, Interim City Manager
VIA: Travis K. Hopkins, Assistant City Manager
PREPARED BY: Jane Chung, Assistant to the City Manager
Subject:
title
Receive and file response to August 6, 2024, Council Member Item: Taxpayer Transparency - Evaluation of City Tax-Sharing
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Statement of Issue:
At the August 6, 2024, Council Meeting, Council Member McKeon directed the City Manager and Finance Director to report back to Council with a written report and oral presentation on questions regarding the City Tax-Sharing.
Financial Impact:
No funds are required.
Recommended Action:
recommendation
Receive and file response to August 6, 2024, Councilmember Item: Taxpayer Transparency - Evaluation of City Tax-Sharing
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Alternative Action(s):
Do not approve the recommended action and direct staff accordingly
Analysis:
At the August 6, 2024, Council Meeting, Council Member McKeon directed the City Manager and Finance Director to report back to Council with a written report and oral presentation with the answer to the following questions:
1. What tax-sharing or incentives were provided to Amazon for locating its warehouse in north Huntington Beach. Additionally, how much is/was the "sharing" or City tax/revenues foregone by the City (i.e., the difference between what the City would have received in the aggregate over the years at the regular rate of tax, minus what the City actually has received in the aggregate over the years at a discounted rate of tax) as a result of these incentives.
The City did not provide any concession or incentive to any Amazon business. However, the City may provide economic incentives in the form of sales-tax sharing agreements, through negotiated contracts, to incentivize a business to locate or remain in the City and encourage the sale of goods within City boundaries.
State law (AB 562) defines an “Economic Development Subsidy” as an expenditure of public funds or loss of public revenue of $100,000 or more for economic development purposes. As of January 1, 2014, before approving an economic development subsidy, a local agency must prepare a written report that includes:
• Name and address of beneficiary
• Start and end date, schedule of subsidy
• Description of subsidy, including total estimated expenditure of public funds or lost public revenue
• Statement of the public purposes for the subsidy
• Projected tax revenue to the local agency as a result of subsidy
• Estimated number of jobs created by subsidy, broken down by full-time, part-time and temporary
The procedure to adopt an economic development subsidy includes the following steps:
• Noticed public hearing to consider the report
• Report made available to the public and on website for entire term
• Within 5 years of granting subsidy, local agency must:
o Prepare new report that includes the info contained in original report, plus:
§ Net tax revenue accruing as a result of subsidy
§ Net number of jobs created (full-time, part-time and temporary)
• Hold a noticed public hearing on the updated report
• For subsidies with a term of 10+ years, local agency must prepare an updated report and hold a noticed public hearing at subsidy term end
According to Revenue and Taxation Code Section 7056, sales tax data must remain confidential. Therefore, the information provided here is based on publicly accessible data from the City’s Annual Comprehensive Financial Reports. Since 2018, the City has provided approximately $5.9 million under four sales tax sharing agreements, and an additional $300,000 to $400,000 annually through a Memorandum of Understanding with the Auto Association. Two of the four sales tax sharing agreements are listed below, the other two are listed under Question 3. Combined sales tax to the City over the years through the sales tax sharing agreements is estimated to be over $30 million. The City’s current economic development subsidy reports are available on the City’s website https://www.huntingtonbeachca.gov/departments/community_development/economic_development/sales_tax_sharing.php.
A. Pinnacle
Founded in 1995, Pinnacle Petroleum, Inc. (Pinnacle) is a national provider of competitively priced energy products and services. Pinnacle was approached by other cities to relocate their operation and sales tax payments to their city, however Pinnacle decided to stay in Huntington Beach in large part due to the City entering into a Sales Tax Sharing Agreement in 2014. While terms have changed over the years, the current agreement provides a rebate of 65% of the sales tax revenues generated by Pinnacle in any given fiscal year. The City was also able to retain between 19 and 22 full-time and part-time jobs. The agreement was extended in 2024 and runs through 2029 with one remaining five-year option (2034).
B. Applied Computer Solutions (ACS)
The City entered into an agreement with Applied Computer Solutions (ACS) in 2000 to keep them in Huntington Beach, as they were considering moving to another city to find a site that could accommodate their continuing growth at a lower cost. ACS was consistently a top 25 sales tax producer. The agreement was later amended in 2010 to allow ACS to receive a 25% rebate of the sales tax increment it generates over a base of $200,000, and 35% over $600,000 annually. This agreement expired in 2020.
2. What was the total amount of foregone rent revenue as a result of the City Council’s March 31, 2020, action implementing rent abatement for tenants at various City-owned facilities related to COVID relief. How much did the "sharing" or "discount" or "write-off" of rents that were contemplated by leases between lessees and the City (i.e., the difference between what the City would have received in the aggregate over the years at the regular rent rates specified in the original leases, minus what the City actually has received in rents, if anything, during the rent abatement period) equate to.
a. List the Businesses/Lessees who were subject to the COVID rent abatement program.
b. List the time period of when COVID rent abatement was in effect for each of those Businesses/Lessees.
c. List the amount of rent each Business/Lessee did not pay during that rent abatement period.
d. Identify when the rent abatement period ended.
On March 31, 2020, the City Council approved COVID rent abatement to concessionaire tenants of various City-owned facilities, effective from the date of the issuance of the State of California’s Proclamation of State of Emergency (March 4, 2020) until the Proclamation was lifted. On July 6, 2020, the City Council approved to end COVID rent abatement for certain tenants at City-owned facilities, effective August 1, 2020, and authorized the City Manager to reinstate if necessary.
Some concessionaire tenants were required to pay partial rent payments beginning on May 1, 2021, in one of three ways:
1. For tenants with leases containing percentage sales rent, minimum base rent continued to be temporarily waived.
2. For tenants with leases containing only monthly rent, 50% of monthly rent was required to be paid.
3. For tenants occupying City facilities that remained closed, rent abatement was continued until the facilities were fully reopened to the public.
The table below lists the businesses/lessees that were approved to receive COVID rent abatement, the time period, and the amount of base rent abated. Percentage rent abated has not been included in the table since those projections are based off gross revenues received.
|
Business |
Rent Abatement Amount |
Start Date |
End Date |
|
Ruby's Diner (RAV) |
$175,751.52 |
April 2020 |
July 2021 |
|
Let's Go Fishing |
$13,300.00 |
March 2020 |
April 2021 |
|
Surf City Store |
$12,464.00 |
March 2020 |
March 2021 |
|
Kite Connection |
$13,442.50 |
March 2020 |
April 2021 |
|
Duke's |
$503,495.00 |
March 2020 |
April 2021 |
|
HB Visitor's Kiosk |
$3,777.06 |
March 2020 |
July 2021 |
|
Zacks Pier Plaza |
$0.00 |
- |
- |
|
Dwight's Beach Concession |
$11,846.40 |
March 2020 |
April 2021 |
|
Jack's Beach Concession |
$11,846.40 |
March 2020 |
April 2021 |
|
Kokomo's Surfside Grill |
$13,414.28 |
March 2020 |
April 2021 |
|
Hilton Beach Cabana |
$0.00 |
- |
- |
|
Hyatt Beach Concession |
$17,850.00 |
March 2020 |
July 2021 |
|
Zack's Too |
$12,927.64 |
March 2020 |
April 2021 |
|
National Link |
$3,825.00 |
March 2020 |
July 2021 |
|
Fare Share Enterprises |
$0.00 |
- |
- |
|
HB Emp. Credit Union |
$46,529.00 |
March 2020 |
July 2021 |
|
Huntington Harbour Yacht Club |
$47,538.64 |
March 2020 |
July 2021 |
|
Primo Nosh |
$1,275.00 |
March 2020 |
July 2021 |
|
Braver Players |
$0.00 |
- |
- |
|
California Genealogical Society |
$11,900.00 |
March 2020 |
March 2023* |
|
One Fine Blend |
$12,750.00 |
March 2020 |
July 2021 |
|
Kathy May's Restaurant |
$26,250.00 |
March 2020 |
April 2021 |
|
Disc Sports Management |
$14,000.00 |
March 2020 |
April 2021 |
|
Park Bench Café |
$12,500.00 |
March 2020 |
December 2020 |
|
HCP Equestrian Center |
$0.00 |
- |
- |
|
Primo Nosh |
$21,768.16 |
March 2020 |
July 2021 |
|
Denny's |
$954.06 |
June 2020 |
July 2020 |
|
Huntington Shorecliffs |
$12,000.00 |
April 2020 |
July 2021 |
|
Surf City Nissan |
$0.00 |
- |
- |
|
Monroe Pacific Nursery |
$40,457.48 |
March 2020 |
July 2021 |
|
Meadowlark GC |
$753,338.00 |
March 2020 |
July 2021 |
|
Visit HB - Surf Museum |
$8,721.00 |
March 2020 |
July 2021 |
|
Oak View Rec Center |
$1.00 |
March 2020 |
March 2020 |
|
Vans Skate Park |
$0.00 |
- |
- |
|
Total |
$1,803,922.14 |
*Rent abatement continued until the group was able to return to the library.
During the pandemic, hotels were given the option to hold their TOT/TBID receipts for the months of March 2020 to August 2020. They were given the option to repay the funds in full by January 29, 2021, or in six equal payments due by June 30, 2021. All applicable hotels met the requirement of repaying the funds within the agreed timeframe.
3. What tax-sharing or incentives have taken place due to the agreement(s) with the Car Dealerships for locating/improving car dealerships in Huntington Beach. Additionally, how much is the "sharing" or City tax/revenues foregone by the City (i.e., the difference between what the City would have received in the aggregate over the years at the regular rate of tax, minus what the City actually has received in the aggregate over the years at a discounted rate of tax) since the inception of the subject Agreement(s).
According to Revenue and Taxation Code Section 7056, sales tax data must remain confidential. Therefore, the information provided here is based on publicly accessible data from the City’s Annual Comprehensive Financial Reports.
A. Surf City Auto Group II, Inc.
In 2017, the City entered into a Sales Tax Sharing Agreement with Surf City Auto Group II, Inc. to help defray the cost for development and opening of a stand-alone Jeep dealership at 16701 Beach Boulevard. The economic development subsidy is equal to fifty percent (50%) of the sales tax revenue received by the City from Surf City Auto in excess of $1,681,797 (base amount) for the first year, increasing by 1% each subsequent year. Surf City Auto has hired 25 full-time workers since completing the stand-alone Jeep dealership and approximately 75 workers were hired during construction. The property value has also increased due to site improvements. The agreement terminates in 2037.
B. McKenna Motors Huntington Beach, Inc.
To encourage the creation of a new Subaru dealership within Huntington Beach, the City entered into an agreement in 2016 to provide a subsidy equal to forty-five percent (45%) of the sales tax revenue received by the City for McKenna’s Volkswagen (VW) and Subaru dealerships in excess of $150,800 (base amount) for each year of the term. Benefit to the City is through additional sales and property tax received. The subsidy enabled McKenna Motors to expand the operations of both the VW and Subaru dealerships by constructing a new showroom, retail store, and maintenance facility to meet Subaru’s dealership image and space guidelines. Subaru has hired a total of 37 full-time employees, and they had approximately 300 workers onsite during construction. The property value has also increased due to site improvements. The agreement terminates in 2032.
Auto Incentive Beach Parking Pass
In 2022, the City and the Huntington Beach Auto Dealers Association renewed its agreement for five years to provide car purchasers and lessees with a free annual beach parking pass with the goal of encouraging car purchases and leases in the City, and having visitors support downtown businesses. The City provides financial assistance in the form of parking vouchers to auto dealers within the Association to incentivize sales tax revenue. The City collects between $8 and $9 million in sales tax annually from car dealerships. In FY 23/24, the City provided 1,977 vouchers which equates to approximately $385,515.
4. How much property tax per year will the City forego through the Breakwater and Elan property purchases. Further, how much foregone property tax will be owed to Local Government and Education Agencies, i.e. the County of Orange, Coast Community College District, Municipal Water District of Orange County etc., upon conveyance of the properties.
In 2021, the City entered into Public Benefit Agreements for the acquisition and conversion of the Breakwater and Elan properties for the Middle-Income Housing Program (Resolution No. 2021-43 and 2021-44). The initial sales price for Breakwater was $185,000,000 and for Elan was $136,000,000.
The City of Huntington Beach will forgo approximately $22,168,676 in property tax revenue over a 35-year period due to the tax-exempt status of the Breakwater and Elan properties under the Middle-Income Housing Program. This total includes both the City's share of property taxes ($20,926,549) and the Huntington Beach Employee Retirement levy ($2,242,127). On average, this amounts to about $633,391 per year. This estimate takes into account a 2% annual increase in property tax revenue that the City would have otherwise received.
The Surplus Conveyance Proceeds clause in the Public Benefit Agreements for the Breakwater and Elan projects outlines how remaining funds, after bond redemption and other expenses, will be distributed to various local government and education agencies. Importantly, these payments are only triggered "upon a conveyance of the properties." This means that if the City does not sell or transfer the properties, it would not be required to make these payments to the other agencies.
If a conveyance occurs, the anticipated foregone property tax over the 35-year period for each entity would be as follows:
• City of Huntington Beach: $20,926,549 (12.08%)
• Huntington Beach Employee Retirement: $2,242,127 (1.29%)
• County of Orange: $128,548,813 (74.21%)
• Orange County Sanitation District: $9,016,679 (5.21%)
• Coast Community College District: $4,754,806 (2.74%)
• Huntington Beach City School District: $3,663,640 (2.11%)
• Huntington Beach Union High School: $3,514,168 (2.03%)
• Municipal Water District of Orange County (1): $526,451 (0.30%)
• Orange County Vector Control District: $26,884 (0.02%)
• Municipal Water District of Orange County (2): $3,291 (0.00%)
The total anticipated foregone property tax across all these entities is approximately $173,223,408 over 35 years. By the end of the 35-year period, the properties are expected to have a combined value of approximately $595.6 million, assuming an annual appreciation rate of 1.8%. The values are estimated as follows:
• Breakwater: $345,417,199
• Elan: $250,194,074
At year 35, assuming the City decides to sell the properties and after the bonds are fully paid off and all obligations to local government and education agencies are met, the City of Huntington Beach is anticipated to receive approximately $445,556,542. This amount includes the City’s share of the property tax payment and the Huntington Beach Employee Retirement share.
5. Any other example of cost sharing, tax sharing, or other type of financial concession to a private entity in the last five years.
A. Nonexclusive agreements
a. Waive field use for Youth Sports organizations in exchange for facility maintenance (e.g. Little League, AYSO). - license agreement
b. Waive rent for non-profit organizations in exchange for facility maintenance and services to the community (e.g. Boys & Girls Club, Waymakers, Catalyst Family, Inc.)
B. Memorandums of Understanding (MOUs)
a. Waive rental fees for non-profit organizations in exchange for use of meeting space at libraries (e.g. Veterans Resources Center, Sister City Association of Huntington Beach, Robert Mayer Leadership Academy, HB Reads).
b. Waive rental fees for non-profit organizations in exchange for use of meeting space at the Senior Center for lectures, routine wellness checks, and financial support of facilities, programs, and services (e.g. Huntington Beach Council on Aging, Orange County Memorial Care, Hoag).
C. City Sponsored or Co-Sponsored Events
a. Per Resolutions 2014-15 and 2014-16, the City can waive charges for City sponsored or co-sponsored events, such as the Kiwanis Club for the Annual Easter Hunt and Family Fun Day, Huntington Beach Concert Band, Huntington Beach Historical Society.
D. Specific Events
a. Waive specific event fees based on Council Action, such as VISSLA International Surfing Association (ISA) World Junior Surfing Championship and Airshow
b. VISSLA International Surfing Association (ISA) World Junior Surfing Championship
i. On July 2, 2018, the City Council approved an in-kind donation of $10,000 to cover permit and parking fees.
ii. On October 7, 2019, the City Council approved to waive Specific Event fees in the amount of $10,000.
c. Airshow
i. On September 16, 2019, the City Council approved to waive a Specific Event Permit for the 2019 Great Pacific Airshow, which included a fee waiver of $11,250, parking offset revenues of up to $100,000 contingent on actual parking revenues, and utilization aspects of the City’s in-kind contributions via its waste franchise agreements (estimated at up to $10,000).
Environmental Status:
This action is not subject to the California Environmental Quality Act (CEQA) pursuant to Sections 15060(c)(2) (the activity will not result in a direct or reasonably foreseeable indirect physical change in the environment) and 15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA Guidelines, California Code of Regulations, Title 14, Chapter 3, because it has no potential for resulting in physical change to the environment, directly or indirectly.
Strategic Plan Goal:
Non Applicable - Administrative Item
For details, visit www.huntingtonbeachca.gov/strategicplan.
Attachment(s):
1. City Council Presentation