REPORT TO COUNCIL
SUBJECT
Title
Action on Request for Letter of Support for AB 398: COVID-19 Local Government and School Recovery and Relief Act [Council Pillar: Enhance Community Engagement and Transparency]
Report
BACKGROUND
As a result of the necessary shelter-in-place measures that the State of California, Santa Clara County and City of Santa Clara have undertaken to mitigate the spread of COVID-19, the City has and will continue to experience an extreme loss of revenue from hotel taxes, sales taxes, property taxes, charges for City services, and the temporary closing of Levi’s Stadium and Santa Clara Convention Center. Additionally, the City has expanded our Silicon Valley Power’s rate assistance program to include residents who are financially impacted by COVID-19, and launched a Small Business Assistance Grant Program, a supplemental food program for our vulnerable and low-income residents, and, most recently, an Emergency Rental Assistance Program for low-income households, to assist our community during the pandemic. As a result of the loss of revenue and our various COVID-19 community programs, the City anticipates a shortfall of $10 million for this fiscal year, and an additional $22.7 million for FY 2020/21 based on current projections that economic activity will return to a reduced level as the State and County’s shelter-in-place orders are eased.
These projected budget shortfalls are not unique to Santa Clara. According to a factsheet provided by the Office of Assembly Member Kansen Chu:
In May of 2020, over 4 million people had filed for unemployment over the course of seven weeks. COVID-19 and the resulting stay at home orders have led us into what is being called the COVID-19 recession. As Californians are struggling, the recession is reducing revenues available to government to provide the services people need. According to analysis by the League of California Cities, California cities are projecting a nearly $7 billion general revenue shortfall over the next two fiscal years. If the stay-at-home order keeps extending, this shortfall will grow by billions. About 90 percent of cities projected that these shortfalls will impact core city services including, police, fire department, transportation and schools, according to the League of California Cities. California is facing a $54.3 million deficit due to COVID-19, which is the state’s worst budget gap since the Great Recession.
Legislation has been introduced at both the federal and state levels of government that aim to provide economic relief to local jurisdictions. The City has submitted letters of support for such legislation including the HEROES Act and a Phase 4 Stimulus Package and requested distribution and a greater allocation of CARES Act Corona Relief funding to local jurisdictions from the State and Santa Clara County. Copies of those letters can be found in the 2020 Q1 Legislative Update agenda report (RTC #20-612) that is being presented to City Council at tonight’s July 13, 2020 Council meeting. The letters were signed and submitted in compliance with the City’s Legislative Advocacy Position (LAP) Policy (Attachment 1) and the 2020 COVID-19 Legislation LAP (Attachment 2) that was adopted by City Council on April 7, 2020.
The LAP Policy establishes clear guidelines for advancing City goals and positions through legislative review and advocacy at the regional, state, and federal levels of government. The LAP Policy requires that the City Council adopt LAPs annually to provide such guidance, and additionally allows for action on a bill that meets one or more of the following guiding legislative principles:
• Support the League of California Cities and National League of Cities positions on priority bills that benefit Santa Clara.
• Protect local revenue sources and prevent unfunded mandates.
• Protect and/or increase funding for specific programs and services.
• Protect and/or increase local government discretion.
• Advance approved policies such as the City’s Statement of Values, the General Plan, or the Climate Action Plan.
The COVID-19 Legislation LAP outlines the City’s support for continued efforts to stop the spread of COVID-19, provide direct relief funding to local jurisdictions, especially small and medium-sized cities, and the temporary suspension of certain time-specific statutory requirements.
The City has received a request from the Office of Assembly Member Kansen Chu to support AB 398: COVID-19 Local Government and School Recovery and Relief Act (AB 398), which will be considered by the State Senate after they return from recess on July 13, 2020. The AB 398 Fact Sheet prepared by the Office of Assembly Member Kansen Chu provides more information about the bill (Attachment 3).
DISCUSSION
AB 398 aims to provide financial relief to counties, cities and schools in the wake of the COVID-19 pandemic. To raise revenue, this bill will impose a $275 per employee tax on large businesses in California from 2021 through 2026. The bill defines a large business as “a for-profit, private entity, including, but not limited to, a limited liability company, corporation, or limited liability partnership, that has more than 500 employees that perform any part of their duties within the state.” If passed, the California Department of Tax and Fee Administration will be responsible for administering and depositing the tax revenues into the COVID-19 Local Government and School Recovery and Relief Act Fund, and funds will be distributed by the Controller to counties, cities and schools based on the proportion of employees of large businesses in the area. The bill allows the Controller to use up to five percent (5%) of the moneys deposited in the fund to cover its costs to administer the program.
Each county would receive a proportion of the funding based on the total number of employees counted that perform their duties in the County. From there, twenty percent (20%) of funding would go to the County, thirty percent (30%) would go to cities (based on the number of employees counted that perform work in that city), and fifty percent (50%) would be distributed to school districts within the County.
While AB 398 aligns with the City’s COVID-19 Legislation LAP in that it will provide direct relief funding to local jurisdictions, the City of Santa Clara is also home to many businesses that will be impacted by the employee tax if AB 398 passes. Based on the City’s current business license records, there are forty-three (43) for-profit, private entities that self-reported employing more than 500 employees in Santa Clara at the time of filing their business licenses (Attachment 4). Together, the 43 businesses reported 99,195 employees working in Santa Clara. The City’s business license only requires businesses to report the number of people engaged in the conduct of business at the Santa Clara location which they file a business license for. There are likely many other businesses located in Santa Clara that employ more than 500 employees throughout the state, and therefore will be impacted by AB 398, whose information was not captured by the City’s business license.
Based on the tax allocation language outlined in AB 398, a large business with 501 employees performing duties within the state would pay $137,775 annually in taxes. The company reporting the most employees working in Santa Clara (39,651 employees at the time of filing their business license) would pay $10,904,025 annually in taxes. However, because the tax allocation will be disbursed between the County, City, and school districts within the County as described above, Santa Clara will only receive a portion of the funding based on the employees that are physically located within the City.
The COVID-19 Pandemic has financially impacted individuals, government entities, and businesses in all sectors so there may be unintended implications with imposing an additional tax on large businesses as proposed by AB 398. It is also important to note that this bill has not been heard in an Assembly Committee yet and may be subject to further changes.
The Office of Assembly Member Kansen Chu has requested that the City of Santa Clara send a letter in support of this legislation. Given its complexity and combined favorable impact to Santa Clara revenues and unfavorable impact to Santa Clara businesses, staff felt that legislation of this magnitude required Council discussion. A draft letter of support for AB 398 has been included with this report for the City Council’s consideration (Attachment 5). However, the Council would still need to agree with the merits of the legislation to authorize that the letter be finalized.
ENVIRONMENTAL REVIEW
The action being considered does not constitute a “project” within the meaning of the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines section 15378(b)(5) in that it is a governmental organizational or administrative activity that will not result in direct or indirect changes in the environment.
FISCAL IMPACT
Based on the current criteria outlined in AB 398 and the number of employees that Santa Clara businesses with more than 500 employees self-reported at the time of filing their City business licenses (99,195), the imposed tax would generate an estimated $7,774,408 for the City of Santa Clara. This amount does not include taxes for the unknown number of employees in Santa Clara working for large businesses that have more than 500 employees within the state but whose information was not included in the business license report due to self-reporting less than 501 employees working in Santa Clara nor does it account for discrepancies associated with recent layoffs or other factors that may fluctuate the number of employees working in Santa Clara that large businesses in Santa Clara self-reported in their business licenses.
COORDINATION
This report has been coordinated with the City Attorney’s Office and Finance Department.
PUBLIC CONTACT
Public contact was made by posting the Council agenda on the City’s official-notice bulletin board outside City Hall Council Chambers. A complete agenda packet is available on the City’s website and in the City Clerk’s Office at least 72 hours prior to a Regular Meeting and 24 hours prior to a Special Meeting. A hard copy of any agenda report may be requested by contacting the City Clerk’s Office at (408) 615-2220, email clerk@santaclaraca.gov <mailto:clerk@santaclaraca.gov>.
ALTERNATIVES
1. Authorize Mayor Gillmor to sign and submit the letter of support for AB 398 on behalf of the City Council;
2. Do not authorize Mayor Gillmor to sign and submit the letter of support for AB 398 on behalf of the City Council; or
3. Take no action on the AB 398 support letter.
RECOMMENDATION
Recommendation
Staff has no recommendation on this item.
Staff
Reviewed by: Nadine Nader, Assistant City Manager
Approved by: Deanna J. Santana, City Manager
ATTACHMENTS
1. Legislative Advocacy Position Policy
2. COVID-19 Legislation Legislative Advocacy Position
3. AB 398 Fact Sheet
4. List of Santa Clara Businesses with 500+ Employees
5. Draft Letter of Support for AB 398