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On Manhattan Government 1-9-2020

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City can beat county to sales tax increase

by Mark Burton  

As of the fiscal year ending on June 30, 2018, Manhattan Beach’s net pension liabilities were over $74 million.  Yes, that means we are underfunded or, in plain English, in debt in the amount of $74 million. As noted in the City’s most recent Comprehensive Annual Financial Audit Report, “managing the growing net pension liabilities and meeting retirement obligations remain some of the City’s biggest challenges.”

Over the next five years, pension rates will rise significantly, pursuant to the Pension Reform Act of 2013.  In FY 20/21, CalPERS will be dropping their discount rate to 7 percent, resulting in an increase to local pension costs. Finally, if CalPERS doesn’t meet its projected 7 percent return, Manhattan Beach has to make up the difference. Just think of CalPERS as a loan shark, where you can only fall further in debt.   

Here’s what this triple whammy means in dollars: In FY 17/18, Manhattan Beach’s annual contribution to CalPERS for its pensions was $6.65 million. In the next five years, our annual contribution is projected to be, at a minimum, $12.5 million.  That’s double in five years. And, it very well could be closer to $15 million.  

So, what’s the answer to the City’s ever-rising pension rates and costs, and the subsequent ballooning unfunded pension liabilities?

For many cities in California, the only answer is developing more “revenue streams”.  Yes, in plain English that means more taxes or fees.  

In our City’s Financial Master Plan, a sales tax increase, increasing the transient occupancy tax (hotel tax), implementing a utility user tax and increasing storm water fees were all discussed. An increase in the transient occupancy tax was approved in our last City election.   

Under state law, cities can impose sales taxes. But, those taxes, along with state, county and other local sales taxes cannot exceed 10.25 percent.  With the current sales tax rate at 9.5 percent in Manhattan Beach, either the City or the County could raise the sales tax as much as an additional .75 percent.  That projects to millions of dollars of additional revenue. The question becomes who will raise the sales tax first? Will it be the County or the City? Remember, once the cap of 10.25 percent is reached, there can be no increases in sales tax.     

Quite simply, if we don’t keep the sales tax increase local, the county is going to come in and take it. 

Already in the County, 37 cities have implemented a sales tax increase, ranging from .5 percent to 1 percent. And, 52 cities in California have done so. Recently, our neighboring city of Redondo Beach discussed putting a sales tax increase on the ballot for this March, but decided not to.  

It may be prudent for our City Council to explore a sales tax increase, sooner rather than later. There is time to have such an increase placed on the November ballot. Given the 10.25 percent cap on sales tax and the possibility of the County raising the sales tax in the future, an exploration is certainly warranted.

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