Weekly Report – September 6, 2016

Delta Airlines

The L.A. City Council recently unanimously approved Delta’s lease and license agreement to enable the airline’s relocation to Terminals 2 and 3 at LAX, completing another vital step toward a $1.9 billion plan to upgrade and connect the complex. By relocating from Terminals 5 and 6 to the complex at Terminals 2 and 3, the future project will enable Delta to build a premier space for its LAX operations alongside its airline partners, dramatically improving the passenger experience, by making it quicker and more convenient for people to check-in and transfer flights. It will also provide a secure connector to the north side of the Tom Bradley International Terminal. The lease agreement and relocation will expand Delta’s gates at LAX in tandem with the airline’s growth there. Since 2009, Delta has more than doubled its number of seats and grown from 70 daily departures to more than 175. Los Angeles World Airports’ Board of Airport Commissioners approved the plan last month. An environmental impact review process will follow.

Upcoming Ballot Initiatives 

Please find below an overview of measures that the City of L.A., County of L.A. and the State of California are presenting to the voters to help generate revenues from taxpayers to pay for significant initiatives impacting the community.

City of Los Angeles

Proposition H (Bond Measure for Homelessness): Presently, an additional 10,000 units of Permanent Supportive Housing are needed in order to house all of the City’s chronically homeless residents, including women and children, veterans, seniors, foster youth and the disabled. L.A.’s political leaders developed a $1.8-billion plan for addressing the City’s homelessness crisis and they would like voters to approve a $1.2-billion property tax increase* to pay for it. If passed, proceeds are required to go toward the development of “bricks and mortar” facilities. Initially, the measure would have required the City to own the land where the bond-funded affordable housing is built, forcing City officials to prepare for the possibility of acquiring hundreds of parcels, from nuisance motels to underused parking lots, throughout the next decade. They would then rent them for $1 a year to groups that develop permanent supportive housing – subsidized apartments that offer substance-abuse counseling, mental health services or other on-site resources. Now, after a recent decision by the City Bond counsel, City leaders will be permitted to use the bond proceeds to provide direct loans and grants to developers of homeless housing. It is projected that the City will be able to finance 8,000-10,000 units, depending on the leveraging sources available. A 2/3 vote is needed to pass the measure.

Revenue Method: The bond measure would raise property taxes** by varying amounts throughout the next 30 years. Taxes will steadily grow over a decade, then taper off year by year. So in 2027, when the city’s borrowing reaches its peak, the measure is projected to add $17.54 in taxes to every $100,000 of assessed value. The average yearly increase would be $44.31 per year for a home assessed at $327,900, currently the median in L.A. for property owner. Overall the total cost of the Bond is projected at $2B. These general obligation bonds will be sold once a year, based on selected projects that are ready to break ground, in the public market through a competitive sales method. The sale will go to the lowest bidder and bond proceeds will go into a special fund, not into the City’s General Fund to pay a portion of the construction costs for each unit. The City provides the proceeds of the bond to local developers through a competitive process to construct and operate these facilities. All housing units financed will remain affordable for 55 years and for every $1 of City investment, the City leverages about $3 from private, state, and federal sources.

Concerns: The measure calls for a citizen committee to watch over the project, appointed by the Mayor and the City Council. To ensure the committee’s independence it is paramount that the appointees have the right level of expertise and do not  have any conflict of interest issues. Secondly, the County of L.A., which is the top provider of services and programs for the homeless, and the City, need a sustainable long-term strategy that best leverages this initiative in order to provide the necessary ongoing funding required to pay for the high demand for mental health services, substance abuse treatment, counseling and rent subsidies, among other things. The County’s funding discussions have stalled in the last couple of months and they continue to discuss an array of proposals for generating the necessary revenue – $450 million a year – for services for the homeless. The County continues to analyze the following revenue streams: (1) a half-percent tax on personal income exceeding $1 million a year (2) redirecting Measure B revenue (3) imposing a parcel tax (4) a marijuana tax or (5) a half-cent sales tax.

As to the City plan, Critics content that the City should respond to the homelessness crisis with a rapid rehousing effort. It should create its own rent-voucher program to augment the tapped-out federal Section 8 program, and it could quickly convert existing structures such as motels, run-down apartments and even commercial buildings to homeless housing. These efforts could be paid for without recourse to a bond and a property tax increase. The city’s special tax counsel estimates L.A.s revenue will increase by almost $600 million over the next four years. If only a portion of those increases were earmarked for housing the homeless, existing buildings could be converted, rent vouchers could be supplemented and no new taxes would be necessary.   

*The L.A. City Council did discuss a Parcel tax, an assessment based on the characteristics of the parcel, instead of property taxes, which are based on the value of the property, but the Parcel tax had fewer restrictions on where the money goes, making it a harder sell to voters.

**Though state law limits the City’s independent ability to raise revenues, the City has created multiple revenue streams, that impact residents and businesses alike, that have continued to grow over time. The top five (2015-2016 Budget): (1) Property tax – $1.79B (2) Department Licenses, Permits, Fees and Fines – $923M (3) Utility Users’ Tax – $634M (4) Business Tax – $502M (4) Power Revenue Transfer – $291M (5) Documentary Transfer Tax – $202M. Additionally, many commercial and industrial property owners in L.A. have taken civic betterment into their own hands, banding together into business improvement districts and taxing themselves to provide services beyond what the City government offers. There are now 42 such districts across the City, all voted into existence locally and then approved by the L.A. City Council. Venice has the most recent proposal for a BID and its first year budget plan is to spend $1.8 million, the majority of it to go to homeless outreach and social service referrals.

County of Los Angeles

Measure M (Transportation): In November, L.A. County voters will be asked to approve a sales tax increase to fund​ ​a major expansion of the region’s transit network. The measure proposes a new ½ cent sales tax starting in 2017 that would increase to a 1 cent sales tax in 2039 when the existing ½ cent Measure R sales tax expires.. A 2/3 vote is needed (current polling is in the low 70s). Passage would generate at least $860 million per year to support Metro’s ~$120 billion plan to fix the county’s rail network through the San Fernando Valley, the San Gabriel Valley and the Sepulveda Pass. The so-called L.A. County Traffic Improvement Plan would also fully or partially fund 10 new highway projects, including an extension of State Route 71 and a new carpool-lane interchange between the 405 and 110 freeways. The big ticket item is a $17 billion 405 Freeway tunnel. These projects would put $79.3 billion back into the economy, create an estimated 465,000 jobs and bring in $9.5 billion in tax revenue for the city, state and federal government. The measure would be the third tax that funds Metro without an expiration date.

Revenue Method: The measure would impose a half-cent sales tax increase from 9.5 percent to 10 percent to generate at least $860 million per year to support Metro’s ~$120 billion plan.

Concerns: CA already has the highest state sales tax rate in the country, which is currently 6.25 percent, but its also includes a mandatory local rate of 1.25 percent that increases the total state sales and use tax base to 7.5 percent. It also allows local governments to collect a local option sales tax of up to 3.5 percent. Depending on local municipalities, the total tax rate can be as high at 10.0 percent. The County of L.A.’s rate is currently 9.5 percent.

Building on the Success of Measure R (2008): Three new projects, the Expo Line to Santa Monica, the Gold Line to Azusa and the Orange Line busway to Chatsworth have been built and are now carrying tens of thousands of passengers each day. Three more – the Crenshaw Line to LAX, the downtown regional connector and the Purple Line extension to the Westside – are under construction. Additionally, the return of the Rams to the L.A. Memorial Coliseum has caused a surge in ridership on the Metro Expo Line train, which now extends from downtown L.A. to downtown Santa Monica. On a typical Saturday, ridership averages roughly 34,000 passengers, but during the two preseason games at least 10,000 more riders used the service. Metrolink is expected to add more trains to accommodate passengers when the regular season kicks off Sept. 18.

Measure (TBD) Parks: L.A. County Supervisors will place a measure on the November 2017 Ballot asking voters to approve a one-and-a-half cent per square-foot parcel tax that would raise about $94.5 million annually. This initiative was developed because a large majority of L.A. County residents do not live within walking distance of a park and the parks that currently exist are in need of serious renovation. A recent assessment found that infrastructure in more than three-quarters of County parks is in fair or poor condition. The highest priority areas identified were South L.A, the San Fernando communities of Sun Valley and Van Nuys, North Long Beach and the San Gabriel Valley communities of South El Monte and Baldwin Hills. To create more park space, and to restore existing parks, the County will need to invest up to $21.5 billion. The voter-approved tax funding park projects expired last year, and funds from another tax – passed in 1996 – will dry up in 2019. Recent polling numbers presented to the supervisors show that 69 percent of L.A. residents would likely support the measure, with that number growing to 75 percent after respondents were given more information about the tax. Two-thirds of voters must approve the measure for it to pass.

Revenue Method: A 1.5 cent-per-square-foot parcel tax on built-out property is the proposed funding mechanism. It would generate about $94.5 million a year and translates to $22.50 a year for a 1,500 square-foot home or commercial building. The proposed measure’s spending plan devotes 15 percent of the revenue generated to increase park space and improve existing recreational facilities in the County’s highest need communities. Allocating a minimum of 15 percent to the most park deficient communities will yield significant health and safety benefits to citizens throughout the county.

Concerns: The imposition of additional taxes, fees, etc. continues to increase in the region, impacting the economy and jobs growth.

Measure CC (L.A. Community College District Affordable Education/Job Training/Classroom Safety Measure): The L.A. Community College District serves more than 225,000 students at its nine colleges and provides them with a quality education leading to the completion of an Associate of Arts or Associate of Science degree, transfer to four-year institutions, successful completion of workforce development programs designed to meet local, regional and statewide needs, and opportunities for lifelong learning and civic engagement. The Board of Trustees of the District has determined that certain educational facilities at each of the District’s nine colleges (L.A. City College, East Los Angeles College, L.A. Harbor College, L.A. Mission College, Pierce College, L.A. Southwest College, L.A. Trade-Technical College, L.A. Valley College and West L.A. College, collectively, the “Colleges”) need to be constructed, renovated, acquired and equipped to enable the District to maintain the Colleges as valuable community resources that provide an affordable education to local students and veterans who desire to learn job skills and transfer to four-year universities. To fund the repair of L.A.’s nine local community colleges and to help prepare students/veterans for jobs/university transfer by upgrading vocational/career education for veterans, firefighters, paramedics, nurses/police, removing lead paint/asbestos, upgrading campus safety/security systems, technology, handicapped accessibility/earthquake safety, repairing deteriorating gas, water/sewer lines, acquiring, constructing, repairing facilities, sites/equipment, the L.A. Community College District are looking to the voters to approve the issuance of $3.3B in bonds. The LACCD last passed facilities bonds in 2001, 2004, and 2008.

Revenue Method: On November 7, 2000, the voters of CA approved the Smaller Classes, Safer Schools and Financial Accountability Act (“Proposition 39”) which reduced the voter threshold for ad valorem tax levies used to pay for debt service or bonded indebtedness to 55 percent of the votes cast on a community college district general obligation bond. In April 2001, the LACCD became the first community college district in CA to pass a property tax financed bond (Proposition A) under the  requirements of the Proposition 39, Smaller Classes, Safer Schools and Financial Accountability Act, of the State of California. Passed by voters at a value of $1.245 billion, the District’s Proposition A Bond Construction Program was one of the largest community college bonds ever passed in CA. The bond measure was designed to implement a capital improvement program for each of the nine colleges within the District. Measure CC is estimated to cost L.A. County’s taxpayers  $15.00 per $100,000 assessed valuation. The legal limit from Proposition 39 is $25.00 per $100,000 AV.

Concerns: The imposition of additional taxes, fees, etc. continues to increase in the region, impacting the economy and jobs growth.

State of California

California Proposition 55 (“The California Children’s Education and Health Care Protection Act of 2016”): This measure would extend Proposition 30 (55 percent of voters approved it) for an additional 12 years in order to fund education and healthcare. Proposition 30 imposed personal income tax increases on incomes over $250,000. About 89 percent would go toward K-12 schools and 11 percent to state community colleges. Proposition 30 also had a sales tax component that this initiative would not extend. The original plan was to have the income tax increased phased out starting in 2018 and the sales tax increase was set to expire at the end of 2016. Proposition 30 has raised about $6 billion per year since it was approved in 2012.

Revenue Method: By extending by twelve years the temporary personal income tax increases enacted in 2012 on earnings over $250,000 (for single filers; over $500,000 for joint filers; over $340,000 for heads of household), additional revenues will be allocated to K-12 schools, California Community Colleges, and, in certain years, healthcare. According to Legislative Analyst, this 12 year extension of the ‘temporary” income surcharges will increase state revenues by $4 billion to $9 billion a year from 2019 through 2030, depending on the economy and, importantly, the stock market.  This year’s budget assumed $7 billion from these income tax surcharges.

Concerns: The imposition of additional taxes, fees, etc. continues to increase in the region, impacting the economy and jobs growth.

California Proposition 51 (The California Public School Facility Bonds Initiative): A coalition of labor and business groups are pushing a measure, that if passed, would have the state issue $9 billion in bonds to fund improvement and construction of school facilities for K-12 schools ($3 billion for the construction of new school facilities; $500 million for providing school facilities for charter schools; $3 billion for the modernization of school facilities) and community colleges ($500 million for providing facilities for career technical education programs; and

$2 billion for acquiring, constructing, renovating, and equipping community college facilities.) Since 1914, 42 education-related bond measures have appeared on the ballot in CA, and all of them were legislatively-referred. In 2014, legislators tried to place a legislatively-referred bond act that called for $9 billion for school maintenance and construction on the ballot. The legislation passed the California State Assembly, but Governor Brown opposed it before it could pass the California State Senate, and so it did not qualify for the 2014 ballot. The California Public School Facility Bond Initiative will be the first education-related bond measure to appear on the ballot since 2006, and it is the first ever education-related bond measure that was citizen initiated. Governor Brown has not expressed any support for this measure, due to the cost impact it would have on the state’s budget.

Revenue Method: Authorizes $9 billion in general obligation bonds for new construction and modernization of K-12 public school facilities; charter schools and vocational education facilities; and California Community Colleges facilities. Fiscal Impact: State costs of about $17.6 billion to pay off both the principal ($9 billion) and interest ($8.6 billion) on the bonds. Payments of about $500 million per year for 35 years.

Concerns: The imposition of additional taxes, fees, etc. continues to increase in the region, impacting the economy and jobs growth.

Other revenue enhancement measures being discussed at the State Level

Sales taxes: State Senator Bob Hertzberg (D-Van Nuys) is pushing to extend the sales tax to include services. This change would generate “roughly $10 billion in its first year and increasing amounts thereafter.”  According to a chart prepared by the California Board of Equalization, the State has identified 15 industries and 487,000 firms that have the potential to generate $111 billion in sales tax revenue.  This includes lawyers, accountants, and other value added service providers.

“Split Roll”: According to a report by State Controller Betty Yee and her Council of Economic Advisors on Tax Reform, another revenue enhancement is the “split roll” where commercial and industrial properties would be assessed at their fair market value.  At a 1 percent property tax rate, annual “revenue gains would likely surpass $5 billion and may add up to more than $10.2 billion.”  However, the split roll will require the approval of the voters since it involves amending Proposition 13, the third rail of California politics.

Gas tax: The democratic majority in the State Legislature continues to advocate for an increase the CA’s gas tax, which is already the highest in the nation when you factor in the impact of the “cap & trade” fees.  This proposed increase is estimated to be in the range of $2 billion to $4 billion a year.  This money would help fund efforts of the California Department of Transportation to repair the State’s highways, roads, bridges, and other related infrastructure.