CITY OF RANCHO PALOS VERDES
SPECIAL MEETING OF THE FINANCE ADVISORY COMMITTEE
AUGUST 15, 2001
2.Approval of Agenda.
3.Approval of Minutes for the meeting of June 27, 2001. (Butler)
4.Additional Information Requested June 27, 2001 - Proposed Long Point Resort Project. (McLean)
5.Status report of economic trends that may have an impact on the City (if any). (McLean)
DRAFT OF M I N U T E S
RANCHO PALOS VERDES FINANCE ADVISORY COMMITTEE
June 27, 2001
The meeting was called to order at 7:02 P.M. by Chair Butler at the City Hall Community Room, 30940 Hawthorne Boulevard, for the purpose of conducting the business pursuant to the Agenda delivered by mail to the Members. Present: Butler, Clark, Smith, Van Wagner, Wallace and Wolowicz. Absent: Au.
Roll call was answered as follows:
PRESENT:Butler, Au, Smith, Van Wagner, Wallace, and Wolowicz
Also present were Finance Director Dennis McLean, Accounting Consultant Kathryn Downs, Destination Development Corporation representatives Robert Lowe and Mike Mohler and Minute Taker Teresa Takaoka.
APPROVAL OF AGENDA:
Chair Butler moved to approve the agenda, seconded by Commissioner Wallace. Motion carried.
MINUTES OF THE MEETING OF JUNE 13, 2001:
Director McLean requested a correction on page 3 for a resident's first name as Dena rather than Dean. Member Wolowicz added that he would like the word proliferally replaced with broadly in his public comments, as well as inclusion of his complaint to the developers regarding the lengthy delay in getting the necessary reports.
RESCHEDULING OF JULY 11, 2001 MEETING:
Chair Butler moved to cancel the next regularly scheduled July 11, 2001 meeting due to the fact that the information requested of HVSI will not be available until on or about July 25, 2001. He directed staff to notify members, electronically, of the next regular or specially scheduled meeting date. Van Wagner seconded the motion. Motion carried.
PRESENTATION OF DEVELOPER'S BACKGROUND AND CAPABILITY - PROPOSED LONG POINT RESORT PROJECT:
Robert J. Lowe, Senior Vice President of Lowe Enterprises, made a presentation introducing his company's background and capability. Mr. Lowe then answered questions from the committee members. Chair Butler stated that based on Mr. Loweís presentation, satisfactory background information had been presented.
Methodology Employed by Hospitality Valuation Services International (HVSI) Ė Proposed Long Point Resort Project:
Director McLean then presented his staff report, which included the methodology used by HVSI to prepare their report, HVSI's background capability and independence while performing their assignment (especially the fact that 75% of their scope of work is for the lenders, not the resort operators). Director McLean also mentioned that Suzanne Mellen, the HVSI representative, is a member of MAI (member of the Appraisal Institute) and CRE (Counselor of Real Estate), and as such must adhere to Standards of Professional Practice and a Code of Ethics when performing consulting assignments. Mr. McLean then answered questions from members. Chair Butler motioned to accept the report. Member Wolowicz seconded the motion. Motion carried.
Requested Information for the Finance Advisory Committee - Proposed Long Point Resort Project:
Director McLean presented his staff report with findings and recommendations of the original six questions posed to HVSI regarding the Proposed Long Point Resort Project. FAC members directed Mr. McLean to request additional information as follows:
2001 Five Year Financial Model:
Chair Butler motioned to approve the 2001 Five Year Financial Model as presented, member Wolowicz seconded the motion. Motion carried.
Status Report of Economic Trends that may have an Impact on the City
Director McLean commented on the status of the FY 01-02 State Budget and concerns about the possible reduction of Vehicle License Fees in the future. He also stated that the Army Corps of Engineers has agreed to conduct the clean-up of Pt Vicente Interpretive Center.
Public Comments regarding the Agenda Item:
Vic Quirarte, 29369 Quailwood, commented on the financial data available and the HVSI report.
Joseph Picarelli, 30311 Via Borica, expressed concern over liability of errant golf balls near churches and questioned the feasibility study.
Rowland Driskell, 30 Via Capri, expressed his desire to save the Cityís parkland and questioned whether there is a demand for a 9-hole golf course.
Stasys Petravicius, 15 Seacove Drive, commented on the Ocean Trails Chapter 11 bankruptcy.
George Gleghorn, 28850 Crestridge Road, donated his time to Tom Redfield.
Tom Redfield, 31273 Ganado Drive, encouraged the FAC to take the necessary time needed to make a decision.
Dena Friedson, 1737 Via Boronada, expressed concern that if the resort were to fail, new owners would replace it with a low cost hotel. She also questioned the deed restrictions of city parkland.
Frank Bescoby, 19 Surrey Lane, commented that he believes it would be detrimental to lose the use of public land.
Bob Fisher, 30545 Rhone Road, expressed his concern over including the City land.
Mike Mohler, 11777 San Vicente Blvd., Suite 900, Los Angeles, stated that a golf feasibility study was provided to the City in July 2000. He also encouraged FAC members to review portions of the planning commission meeting tapes.
There were no general public comments. All public comments had been incorporated into individual agenda items.
The meeting was adjourned at 9:32 P.M.
Agenda Item 4
TO:HONORABLE CHAIR AND MEMBERS OF THE FINANCE ADVISORY COMMITTEE
FROM:DENNIS McLEAN, FINANCE DIRECTOR
DATE:AUGUST 15, 2001
SUBJECT:ADDITIONAL INFORMATION REQUESTED JUNE 27, 2001 PROPOSED LONG POINT RESORT PROJECT
BACKGROUND AND DISCUSSION:
Events Leading to HVSI Supplemental Report Ė Additional Information Ė Requested June 27, 2001 (report dated July 30, 2001)
Destination Resorts (hereafter referred to as the "Developer") has provided financial reports which state that the City would receive approximately $4.7 Million of tax and fee revenue annually, in the event the Long Point Resort Project (hereafter referred to as the "Resort Project") is built and operated. If so, the tax and fee revenue would be deposited into the Cityís General fund, therefore, available to fund normal operations of the City. For the sake of comparison, the total General fund revenue during FY 01-02 is anticipated to reach $12.7 Million. Therefore, the additional annual tax and fee revenue would increase General fund revenue by nearly forty (40%) percent.
During the month of August 2000, the City Council requested the FAC to review the financial reports to determine:
During the September 12th meeting of the Finance Advisory Committee (hereafter referred to as the "FAC"), the Developer asserted that a 9-hole regulation-length golf course was an essential amenity for the Resort Project to be financially feasible. Afterwards, Robert Wetmore of Keyser Marston, the Cityís Financial Consultants assisting staff during its processing of the Developers application, recommended retaining Hospitality Valuation Services International (hereafter referred to as "HVSI"). The primary purpose for the limited review conducted by HVSI was to consider the following:
During its January 16th meeting, the City Council directed the Developer to conduct an analysis to determine the financial impact resulting from the elimination of Resort Villas, and/or Casitas and/or other facilities from the Resort Project. The City Council also directed Finance Staff to instruct HVSI to review the Developerís financial analysis as a part of its assignment.
HVSI performed their assignment and presented their report, dated June 8, 2001, during the June 13th meeting of the FAC. During its discussion regarding the HVSI report, the members of the FAC directed Finance Staff, HVSI and Keyser Marston, to research the answers to several questions and obtain certain additional information.
Staff presented the answers to the FACís questions and provided some of the additional information during the June 27th FAC meeting. At the request of Finance Staff, HVSI also prepared a Methodology Letter, dated June 21. 2001, describing its credentials, experience, the scope of inquiries made during its visit to the offices of the Developer and the methodology it used during its limited study. During its discussion, the members of the FAC directed Finance Staff, HVSI and the Developer to research the answers to several additional questions and obtain additional information. HVSI has made the additional inquiries and reviewed additional information as requested by the FAC on June 27th. HVSIís findings are included in the "Supplemental Report Ė Additional Information - Requested June 27, 2001" that is attached to this staff report.
The Amount Of Money Included In The Developerís Financial Projections For Concession Payments To The City For Use Of Upper Point Vicente Park Land For Golf
During the June 27th FAC meeting, the members of the FAC directed Finance Staff to request either a range or an estimate of the concession amount the Developer has included in its pro formas. If a concession agreement is entered into between the Developer and the City, it will follow the approval of the Resort Project applications by the City Council as well as their approval of the use of a portion of Upper Point Vicente Park. The City Councilís approval would be followed by negotiations led by the City Manager, with the assistance of the City Attorney and the Cityís consultants. The final concession agreement would require the approval of the City Council.
Though the negotiated concession compensation may be different than the amount the Developer has included in their own financial projections, the Developer recently agreed to disclose the basis for the amount of concession compensation included in their financial proformas as follows:
A Long Point Resort concession agreement is contemplated to have two compensation features:
Estimated Value of capital Improvements:
The Developer proposes to construct public improvements on the City property (generally throughout the Upper Point Vicente Park land), including the following:
The Developer has reported that the value of these proposed improvements is estimated between $1.8-2.0 Million.
Stream of Cash Payments:
The Developerís financial projections included a cash payment would be based upon the present value of a stream of payments over thirty (30) years, using a 7% interest rate. The present value computation would be based upon the Developerís own estimate of the value of the Upper Point Vicente Park land. The Developer used a $38,000 per acre valuation for the 37.1 acres it proposes to use for a 9-hole golf course. Based upon these assumptions, the annual cash payment would be approximately $112,000 annually.
Finance Staff has verified the accuracy of the Developerís present value computation resulting in the amount of $112,000 annually. Finance Staff hereby asserts that the presentation of the above concession information is not an endorsement of it. Except for the verification of the computation, Finance Staff has performed no further inquiries about the concession information.
Both Finance Staff and the Developer agree the presentation of this information in this Staff Report does not constitute the beginning of the negotiation of the concession amount. The presentation is included for the sole purpose of answering the question raised by the FAC regarding the concession amount included in the Developerís financial projections. Finance Staff discourages any negotiation of the concession amount as a part of the FACís review of the Resort Project. It is Finance Staffís understanding that this is the direction established by the City Council as well.
Recent Supreme Court Decision - Howard Jarvis Taxpayers Association v. City of La Habra (2001) 25 Cal. 4th 809
As you may already know, the California Supreme Court recently ruled that a taxpayer is afforded a new three-year period during which the taxpayer may challenge the validity of the tax for not having been submitted to the voters pursuant to Proposition 62. This is a complete reversal of the decisions of the three appellate courts that previously ruled regarding this matter.
It also means that no window period tax is afforded protection by an applicable statute of limitations. Its validity always may be challenged so long as the tax is being collected. This applies to the golf tax and the transient occupancy tax rate increase that Rancho Palos Verdes adopted during the window period.
As a result of the California Supreme Court decision, unless the ten (10%) percent TOT tax rate is affirmed by the voters of the City, it could be argued that the Cityís TOT rate is enforceable at a rate of only six (6%) percent. It could be argued that the Cityís ten (10%) percent golf tax is unenforceable as well.
The potential current impact to the City is immaterial, because the City currently receives only about $3,000 of TOT annually. The City is on the verge of beginning to collect golf tax from Ocean Trails. Regardless, Ocean Trails has provided the City a guarantee of the golf tax in accordance with its Development Agreement with the City.
As you will recall, the Developer has estimated that the Cityís annual TOT would exceed $3.9 Million in the event the Proposed Resort is built and operated, based upon a 10% TOT rate. Additionally, the Developer has estimated that the Cityís annual golf tax would exceed $200,000 in the event the Proposed Resort is built and operated. Therefore, the potential loss of TOT and golf tax revenue would be a minimum of $1,760,000 annually. The potential annual loss of tax revenue is calculated as follows: $3.9 Million of TOT, based upon a 10% TOT rate, less $2.34 Million TOT, based upon 6%, plus $200,000 of golf tax revenue.
The City Council agendized this matter for discussion at its August 7th meeting. In light of the fact that the staff report for the August 15th meeting of the FAC will be released to FAC members and the public before the City Council meeting, Finance Staff has attached a copy of the City Council staff report to this report.
Based upon a recent discussion with the Director of Planning, Building Safety and Code Enforcement, it appears as though the Planning Commission will make its recommendation to the City Council at its September 18th meeting. Finance Staff seeks direction from the members of the FAC, including the following:
As described above, a Special Meeting of the FAC has been scheduled for Wednesday, August 22nd. Finance Staff seeks direction whether the members of the FAC would like to conduct the meeting.
If the FAC elects to consider the framework of a recommendation to the City Council, Finance Staff offers the following questions to consider:
Report Ė Additional Information Ė Requested June 27, 2001
Discuss whether to place either the golf tax or the increase of the transient occupancy tax on the November 6, 2001 ballot and take whatever actions the Council deems to be appropriate.
As a result of a very recent decision by the California Supreme Court, the Cityís golf tax and the 1991 increase of the transient occupancy tax ("TOT") from 6% to 10% are vulnerable to a legal challenge. On July 18, 2001, the Supreme Court denied a request to reconsider its decision, which now is final. Accordingly, last week, I advised the City Council about this issue in a confidential memorandum. The Mayor and other Councilmembers made individual requests to Mr. Evans to place these items on the August 7th agenda so that the City Council could discuss the issue at a duly noticed City Council meeting and determine how to proceed in light of this recent change in the law. Because Mr. Stern is on vacation, he requested that this staff report document that he was one of the Councilmembers who had requested that this matter be placed on the agenda for Council discussion and that the public be made aware of this issue as soon as possible.
To insulate the golf tax and the increased amount of the TOT, both ordinances eventually should be placed on an upcoming ballot for approval by a majority of the voters. The immediate issue is whether either or both taxes should be placed on the ballot for the November 6, 2001 election, or whether this action should be deferred to another general municipal election.
It is important to note for purposes of this discussion that even without voter approval, the current risk to the Cityís general fund is minimal. This is so with respect to the golf tax because the only entity that currently is obligated to pay the golf tax to the City, Ocean Trails, is obligated to do so by its development agreement with the City. That agreement specifically recognized the potential invalidity of the golf tax but nonetheless obligates the developer to pay the tax to the City. The agreement was entered into in 1997 and is effective for ten years. Therefore, there is no immediate need to address this issue with respect to the golf tax.
Mr. Evans has stated that a reduction of the amount of the TOT that is collected by the City to the amount that originally was established will not have a significant impact on the Cityís revenues. The TOT originally was approved by the City Council in 1973 at a rate of 6%. In 1991, the City Council increased the rate to 10%. It is the 4% increase that currently is at risk. Last year that percentage yielded approximately $3,200 to the Cityís general fund.
Based on these facts, the Council could determine to place one or both of these taxes on the upcoming November ballot. On the other hand, the Council could decide not to place them on the ballot for this election. If the first option is chosen, four affirmative votes by Councilmembers are required by Proposition 62 and Proposition 218, and that action would have to be taken at the August 7, 2001 City Council meeting so that the appropriate documents can be transmitted timely to the County Clerkís office.
A decision to defer placing these taxes on the ballot for this election would not preclude the City Council from making a subsequent decision to place either or both taxes on a ballot for another general City election. It also would not preclude the City from entering into a development agreement, similar to the Ocean Trails agreement, with any other project that is expected to generate significant revenues from either or both taxes so that payment of the taxes to the City would be required, despite the recent change in the law.
In 1986, the voters of the State of California enacted Proposition 62, which required that any new general tax and any increase to an existing general tax is submitted to the voters for approval before it could become effective. Based upon long-standing case law, many public attorneys and officials, including this office, believed that Proposition 62 was not constitutional. California courts had long held that income-producing measures at the local level are not subject to referendum under the California Constitution, and Proposition 62 appeared to require a form of referendum on a locally adopted tax. The belief that Proposition 62 was unconstitutional was fortified in 1991, when the Court of Appeal issued its decision in City of Woodlake v. Logan, 230 Cal. App. 3d 1058 squarely holding that Proposition 62 was unconstitutional. The California Supreme Court denied a petition for review filed in the Woodlake case, thereby implicitly approving the decision.
In accordance with the above-referenced legal authorities, many cities, counties and other public entities in California enacted or raised general taxes without submitting such proposals to a vote pursuant to Proposition 62. Rancho Palos Verdes was one of these cities. In 1991, the City Council increased the Cityís transient occupancy tax from 6% to 10%, and in 1993, the City Council adopted the golf tax and the utility users tax.
However, in September of 1995, the California Supreme Court issued its opinion in Santa Clara County Local Transportation Authority v. Guardino, (1995) 11 Cal. 4th 220. In that case, the Supreme Court declared Proposition 62 to be constitutional, placing in question the validity of the tax ordinances enacted by many cities between the time Proposition 62 became effective and the date of the Guardino decision, a period of approximately nine years (hereinafter referred to as "window period taxes").
The Guardino decision left open many questions concerning the validity of window period taxes. One of those questions was the protection afforded by the statute of limitations. Another question was whether the courts would apply the Guardino decision retroactively to invalidate taxes enacted or increased during the window period. Guardino did not directly address this question, as the tax invalidated in that case had never been collected.
Over two years after the Guardino decision, the first appellate court addressed the issue of whether the statute of limitations protected taxes that were adopted during the window period. That case was McBrearty v. City of Brawley, (1997) 59 Cal.App. 4th 1441. There, the appellate court applied a three-year statute of limitations to window period taxes not submitted to a vote pursuant to Proposition 62. However, that court stated that the statute of limitations began to run upon the filing of the Guardino decision in September 1995, rather than at the time the tax was enacted. Under the holding in that case, any window period tax that was not challenged before September of 1998 was safe from later challenge and could continue to be collected.
The La Habra Decision
At the time that the appellate court issued its McBrearty opinion, the City of La Habra was embroiled in a separate case raising the same issue regarding the statute of limitations. Although the trial court in the La Habra case agreed with the court of appeal in McBrearty, the court of appeal in the La Habra case did not. The Court of Appeal in the La Habra case held that the three-year statute of limitations began to run when the tax ordinance was enacted. This was a more favorable result for local governments because any tax ordinance that was more than three years old was safe from challenge under the La Habra rule. An identical conclusion was reached in Griffith v. County of Santa Cruz, an unreported appellate decision filed on June 15, 2000.
Unfortunately, the California Supreme Court decided to review the La Habra decision and still has pending before it the Griffith v. County of Santa Cruz decision. In the La Habra case, the Supreme Court again reversed the appellate court and issued an opinion that was modified and finalized on July 18th. (Howard Jarvis Taxpayers Assn. v. City of La Habra (2001) 25 Cal.4th 809). In its La Habra opinion, the Supreme Court held that each time a taxpayer pays a tax, that taxpayer is afforded a new three-year period during which the taxpayer may challenge the validity of the tax for not having been submitted to the voters pursuant to Proposition 62. This, of course, is a complete reversal of the decisions of the three appellate courts discussed above. It also means that no window period tax is afforded protection by an applicable statute of limitations. Its validity always may be challenged so long as the tax is being collected. This applies to the golf tax and the transient occupancy tax increase that Rancho Palos Verdes adopted during the window period. Thus, the limitations protection, which we believed would be available based on the appellate court decisions in McBrearty and La Habra, has been eliminated.
Implications of the La Habra Decision
It is clear that if either the Cityís golf tax or the increase of the transient occupancy tax is challenged, our ability to protect their validity has been severely eroded by the Supreme Courtís La Habra decision. However, there is one argument left available to the City if it wishes to defend these taxes.
Some local government attorneys have made the argument that Proposition 218, the 1996 initiative that imposed further limitations on the ability of local governments to impose taxes, fees and assessments, implicitly superseded Proposition 62ís applicability to window period taxes. This argument is based on the language of Proposition 218, which provides that all taxes enacted subsequent to January 1, 1995, must be submitted to a vote of the electorate. Thus, these attorneys argue that this language implicitly "grandfathers" those taxes adopted after Proposition 62, but before January 1, 1995. The trial court in the Griffith case accepted this argument, although the court of appeal declined to address it because the Court of Appeal decided the case on other grounds. As mentioned above, the Griffith case remains pending before the California Supreme Court.
We believe that it is unlikely that the Supreme Court would accept the argument that Proposition 218 implicitly "grandfathers" window period taxes adopted before January 1, 1995, because it seems clear that the intent of the authors of Proposition 218 was to limit local government authority to impose taxes. Furthermore, the California Supreme Courtís opinion in the La Habra case appears unsympathetic to the plight of local governments that adopted taxes in reliance on the court of appealís decisions invalidating Proposition 62.
We believe that the La Habra decision leaves the City with the following four basic options regarding the TOT (All but the second option also apply to the golf tax.):
1. Continue to collect the transient occupancy tax at the current rate of 10% and defend the validity of both the increase of the TOT and the validity of the golf tax in reliance on the Proposition 218 argument discussed above without ever placing either tax on a ballot for approval by the voters.
Because we are not optimistic that the Supreme Court will render a favorable decision on this issue in the Griffith case, we do not believe that this will be a viable defense if either tax ever were challenged. Accordingly, this option is not recommended as the long-term solution to this issue. However, it should be noted that the Ocean Trails development agreement is effective for almost seven more years, and the owner of the golf course parcels is obligated to pay the golf tax to the City during the remainder of the life of the development agreement. Thus, addressing the issue of the validity of the golf tax will not become critical until that time, unless another golf course is constructed within the City that is not subject to a development agreement that requires the payment of the golf tax.
2. Cease collecting the TOT at the rate of 10% and resume collecting the tax at the rate of 6% until such time as the voters approve an increase in the amount of the TOT.
This would bring the City into compliance with Proposition 62 with respect to the TOT and is recommended until such time that the voters approve an increase of the TOT above 6%. (Again, since Ocean Trails is obligated to pay the golf tax to the City pursuant to the development agreement, is not recommended that the City refrain from collecting the golf tax from Ocean Trails.)
3. Place ratification of either, or both. the increase of the TOT and the golf tax on the November, 2001 election ballot.
Neither Proposition 62 nor Proposition 218 prohibits an increase of the transient occupancy tax or the imposition of the golf tax; they merely require that the taxes be submitted to the electorate for a vote. Thus, the City could place an increase of the TOT and approval of the golf tax on the November, 2001 ballot, provided that four Members of the City Council vote to do so.
If the City Council wishes to place the tax on the November ballot, the City Council must adopt a resolution calling that election no later than August 10th. Furthermore, Proposition 218 provides that a tax increase may only be submitted to the voters at a regularly scheduled election for City Council members, unless an "emergency" is declared by a unanimous vote of the City Council. "Emergency" is not defined by Proposition 218.
Thus, unless the City Council unanimously declares an emergency, the tax increase must be placed on the November, 2001 ballot, or the City Council will not have another opportunity to submit the matter to the voters until November, 2003. Councilmember Stern requested that the staff report reflect that he favored placing both taxes on the ballot at the November 6, 2001 election.
If the City Council chooses to place this matter on the November ballot, the Council still should provide direction to staff about whether to continue to collect the tax in reliance on the Proposition 218 "grandfathering" argument between now and the election or to refrain from collecting the increased amount of the TOT that was approved in 1991, as recommended by staff.
Also, the Council could choose to place an increase of the amount of the TOT on the ballot that differs from the 4% increase that was approved by the City Council in 1991. In that regard, the Mayor requested that staff conduct a survey to ascertain the amounts of transient occupancy taxes that other cities have imposed. The results of that survey are attached to this staff report.
4. Place neither tax on the November 6, 2001 ballot, and wait to place them on a ballot at another election. If this alternative is chosen, the Council is not limited or precluded from determining in the future whether to place either or both of the taxes on a ballot at any other election that coincides with election of seats on the Rancho Palos Verdes City Council (unless, as discussed above, the Council unanimously determines that an emergency exists so that another election date could be used).
This alternative also would not preclude the City from entering into a development agreement with any forthcoming project, such as the Long Point Development, that would require payment of either or both of the taxes regardless of approval of the taxes by the voters.
The financial impacts of placing either or both of these measures on the ballot for the upcoming election is negligible, because Proposition 62 and Proposition 218 require that election to be held at the same time as the regular municipal election for seats on the Rancho Palos Verdes City Council, unless an emergency is declared. The City Attorney is required by law to prepare a title and summary and impartial analysis for any measure that is placed on a ballot for approval by the voters, so there will be some cost to the City for the preparation of those documents.