Item 40 - Refinancing City’s Pension Obligations with California Public Employees Retirement System

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44 4826-7904-2280v7/200434-0005 Certain Risks Associated with Sales Tax and Other Local Tax Revenues For the past several Fiscal Years, sales tax revenues, including the Bradley-Burns allocation and the Measure X district add-on, have been the largest source of General Fund revenues to the City. Measure X, a 1- 1/2 cent sales tax measure that was adopted in 2018 and expires in 2039, is expected to contribute a significant amount of revenue available for General Fund obligations of the City in the future. See the caption “CITY FINANCIAL INFORMATION—Sales Taxes.” Sales and use tax revenues are based upon the gross receipts of retail sales of tangible goods and products by retailers with taxable transactions in the City, which could be impacted by a variety of factors. For example, during an economic recession, the gross receipts of retailers often decline, and such a decline would cause the sales tax revenues received by the City to decline. An economic recession would also be expected to affect hotel occupancy within the City, and consequently, the amount of hotel visitor’s taxes the City will receive. See the caption “THE CITY—COVID-19 Outbreak,” “CITY FINANCIAL INFORMATION—Sales Taxes” and “CITY FINANCIAL INFORMATION—Other Taxes.” Also, many categories of transactions are exempt from the Statewide sales tax, and additional categories could be exempted in the future. Currently, most sales of food products for human consumption, except for liquor and restaurant meals, are exempt from the Statewide sales tax. The rate of sales and use tax levied on taxable transactions in the City or the fee charged by the State Board of Equalization for administering the City’s sales tax could also be changed. In addition, changes or amendments by voter initiative could have an adverse effect on sales tax revenues received by the City. See the caption “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS.” Assessed Value of Taxable Property Property taxes are the second largest source of the City’s General Fund revenues. Natural and economic forces can affect the assessed value of taxable property within the City. The City is located in a seismically active region, and damage from an earthquake in or near the area could cause extensive damage to taxable property. Other natural or manmade disasters, such as flood, fire, wildfire, ongoing drought, toxic dumping, erosion or acts of terrorism, could cause a reduction in the assessed value of taxable property within the City. See the captions “—Natural Disasters” and “—Hazardous Substances.” In addition, economic and market forces, such as a downturn in the regional economy, could affect assessed values, particularly as these forces might reverberate in the residential housing and commercial property markets as has been experienced in the past. Also, the total assessed value can be reduced through the reclassification of taxable property to a class exempt from taxation, whether by ownership or use (such as exemptions for property owned by State and local agencies and property used for qualified educational, hospital, charitable or religious purposes). Reductions in the market values of taxable property may cause property owners to appeal assessed values and may also be associated with an increase in delinquency rates for property taxes. Section 2(b) of Article XIIIA of the State Constitution and Section 51 of the State Revenue and Taxation Code, which were adopted pursuant to Proposition 8, which was adopted in 1978, require the County assessor to annually enroll either a property’s adjusted base year value (the “Proposition 13 Value”) or its current market value, whichever is less. When the current market value replaces the higher Proposition 13 Value on the assessor’s roll, such lower value is referred to as the “Proposition 8 Value.” Although the annual increase for a Proposition 13 Value is limited to no more than 2%, the same restriction does not apply to a Proposition 8 Value. The Proposition 8 Value of a property is reviewed annually as of January 1; the current market value must be enrolled as long as the Proposition 8 Value falls below the Proposition 13 Value. Thus, any subsequent increase or decrease in market value is enrolled regardless of any percentage increase or decrease. Only when a current Proposition 8 Value exceeds the Proposition 13 Value