CC 2020-04-14_11a Revenue Impacts due to CoronavirusMEMORANDUM
TO: CITY COUNCIL
FROM: MICHAEL STEVENS, ADMINISTRATIVE SERVICES DIRECTOR
SUBJECT: CONSIDERATION OF REVENUE IMPACTS DUE TO CORONAVIRUS
(COVID-19)
DATE: APRIL 14, 2020
SUMMARY OF ACTION:
Review and discuss estimated fiscal impacts as a result of reduced revenue associated
with the Coronavirus (COVID-19) pandemic.
IMPACT ON FINANCIAL AND PERSONNEL RESOURCES:
There is no direct fiscal impact other than the staff time to prepare the update; however,
based on the forecast, significant fiscal impacts are projected for the remainder of the
fiscal year.
RECOMMENDATION:
It is recommended the City Council receive, discuss, and file the update.
BACKGROUND:
On March 24, 2020, the City Council adopted a Resolution ratifying the existence of a
local emergency in response to the Coronavirus Pandemic. In an effort to slow the spread
of the disease, the Centers for Disease Control and Prevention, the California Department
of Health, and County of San Luis Obispo have issued shelter at home directives to
enforce physical distancing, prohibited group events, and taken other precautions to
protect health and prevent transmission of this highly communicable virus. As a result of
the public health emergency and shelter at home directives, many City residents and local
businesses will experience income loss, ultimately impacting the City’s ability to generate
revenue.
The City’s Administrative Services Department is in the process of developing a one-year
budget for Fiscal Year 2020-21; however, given the recent circumstances and the need
to focus on financial impacts of Coronavirus in the current fiscal year, efforts have been
diverted briefly from the annual budget process and focused on a high level revenue
forecast, taking into consideration the impact of the various orders and actions needed to
slow the spread of the Coronavirus and the impact this will have on current City revenue
estimates within the current fiscal year.
Item 11.a. - Page 1
CITY COUNCIL
DISCUSSION AND CONSIDERATION OF REVENUE IMPACTS DUE TO
CORONAVIRUS (COVID-19)
APRIL 14, 2020
PAGE 2
ANALYSIS OF ISSUES:
The City’s three largest General Fund revenue sources are property tax, sales tax and
transient occupancy tax (TOT). These three sources comprise roughly 65% of the City’s
General Fund revenues. Service fee revenue including recreation, planning, and building
plan checks also contribute to the City’s General Fund revenue, but to a lesser degree.
The health measures put in place to ensure public safety and limit the spread of the virus
have already had a significant and immediate impact on City revenues including sales
tax, TOT, recreation services and could potentially impact property taxes, if these
measures inadvertently result in widespread foreclosures and small business closures.
The following discussion will address each of these important revenue sources and
attempt to quantify the impact of the Coronavirus on each revenue sources.
Transient Occupancy Tax (TOT) – Shortfall of ($300K)
Tourism plays an important role in the financial vitality of the City. Lodging establishments
in the City provide not only a place for visitors to stay while in the City, but also generate
additional income in the form of TOT revenue. Transient Occupancy Tax makes up
roughly 6% of the City’s revenues. Prior to the Coronavirus, TOT revenues on an annual
basis were running 11% over the prior year’s actuals. However, as a result of health
measures to ensure public safety and limit the spread of Coronavirus, lodging occupancy
has significantly been reduced and TOT revenue is expected to decline by 19% compared
to the prior year. Transient Occupancy Tax is also expected to decline 36%, or $300K,
versus the current budget, with just under three months remaining in the fiscal year.
Transient Occupancy Tax revenue is seasonal with the majority of revenue collected in
the months from June through September.
Lodging occupancy rates started to decline in mid-March and are expected to remain
lower for the remaining months in this fiscal year. Our current forecast assumes a 50%
reduction in TOT revenue for the month of March and is based on March actuals from the
prior year. For the remaining months of April through June, we forecasted a more
aggressive reduction in TOT revenues of 80%, based on the final quarter of the prior year.
These TOT revenue projections are preliminary and may change depending on when
shelter at home directives begin to be lifted and subsequent tourism rebounds.
Sales Tax – Shortfall of ($550K)
Sales tax collections are the second largest revenue source for the City and accounts for
$4.1 million dollars of General Fund revenue. Sales tax revenue is approximately 22% of
total City revenue. Currently, sales tax revenues are forecasted to be 13% lower
compared to the current budget, or a shortfall of $550K in the current year. As is the case
with TOT revenue, a portion of sales tax revenue is directly impacted by tourism and the
sales tax dollars generated from visitors’ purchases at local restaurants and stores. In
addition, local businesses are scrambling to stay solvent in the face of closures,
quarantines, and physical distancing rules which have impacted their overall sales.
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CITY COUNCIL
DISCUSSION AND CONSIDERATION OF REVENUE IMPACTS DUE TO
CORONAVIRUS (COVID-19)
APRIL 14, 2020
PAGE 3
As a note, the forecast does not reflect the impact of the Governor’s announcement on
April 2nd that the State is considering allowing small businesses (less than $5 million in
taxable annual sales) to defer payment of sales and use taxes of up to $50,000 for 12
months. We will be continuing to track this proposal and its impact in the coming weeks
when more details from the State are provided.
Our sales tax forecast is based on the City’s top 13 business and their generation of sales
tax. These 13 local businesses combine to make up 49.5% of all sales tax revenue. The
remaining 50.5% is attributed to a number of smaller businesses that collectively make
up the remaining sales tax balance. The table below is a listing of sales tax generated by
business, prior to the Coronavirus, and reflects the most recent sales tax data available
to us.
In mid-March, directives limiting residents’ movement and closing of nonessential
businesses had a significant impact on sales tax revenues. Certain businesses were
deemed essential and remained open for business; however, most with physical
distancing limitations. Businesses deemed essential included grocery, hardware, gas
stations, discount, and big-box stores. For forecasting purposes, many of these essential
businesses were not impacted to the extent that other local businesses have been.
Walmart, at the top of the list, and grocery and hardware stores were included in this
category and sales tax was forecasted to remain stable. Other businesses also
determined to be essential, like food establishments, are currently restricted by physical
distancing guidelines and are not open for dining but rather only takeout. For forecasting
purposes, these businesses were assumed to generate 50% of normal sales tax revenue.
Similarly, sales tax collected by fuel and service stations also considered essential are
impacted by both a decrease in the demand for fuel, due to stay at home orders, coupled
with an increase in supply from Russia and OPEC, further decreasing the price of fuel
% of total
Cumulative
%Impact
Sales Tax
Discount
Wal Mart 14.03% 14.03% 100% 14.03%
Mullahey Ford 8.07% 22.10% 0% 0.00%
AG Chevrolet 4.30% 26.40% 0% 0.00%
Marshalls 3.48% 29.88% 0% 0.00%
Kath GO 3.25% 33.13% 50% 1.63%
Burke & Pace Lumber 3.05% 36.18% 100% 3.05%
Arco 2.88% 39.06% 50% 1.44%
Chevron 2.68% 41.74% 50% 1.34%
Ace Hardware 2.19% 43.93% 100% 2.19%
Smart & Final 1.70% 45.63% 100% 1.70%
Mobil 1.68% 47.31% 50% 0.84%
In n Out 1.67% 48.98% 50% 0.84%
AG Valero 1.51% 50.49% 50% 0.76%
Remaining sales tax 49.51% 49.51% 50% 24.76%
52.56% Discounted sales tax collections based on impact
of COVID‐19 on local businesses
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CITY COUNCIL
DISCUSSION AND CONSIDERATION OF REVENUE IMPACTS DUE TO
CORONAVIRUS (COVID-19)
APRIL 14, 2020
PAGE 4
and the associated sales tax. Both food service and fuel related businesses, as shown
in the table, are forecasted at a discounted sales tax rate of 50% over the final quarter of
this fiscal year. Lastly, the second and third ranked sales tax contributors on the list (12%)
are the two local car dealerships, both of which we took the conservative approach and
assumed that vehicle sales would be significantly reduced during the final quarter.
The year-end forecast of sales tax is calculated by taking an average of monthly sales
tax and multiplying this by the discounted rate of 53% for the remaining three months of
the fiscal year. When combined with actuals through March, you get a total sales tax
estimate of $3.6 million. The shortfall of $550K in sales tax revenue represents the
difference between the FY 2019-20 budgeted amount and this new forecasted amount.
Unfortunately, we don’t have current sales tax receipt data by business for the month of
March. However, when more current sales tax information is available we will update our
assumptions and revise our forecast accordingly.
Property Tax – Shortfall of ($200K)
Property tax is the single largest revenue source at $7 million, or 38% of revenue. The
impacts of Coronavirus on property taxes are unknown at this time. Property tax revenues
could be impacted in the long term by extensive home foreclosures and business
closures.
The forecasted property tax shortfall of $200K, while not a result of the Coronavirus per
se, is due to the difference between our original budget, which included a property tax
growth rate of 6% for the year and now our revised forecast of growth at 3%. Our current
estimate for the year was based on discussions and information provided by the County
Auditor’s office.
Recreation Fees – Shortfall of ($183K)
Lastly, recreation fees will be significantly impacted in the months of April through June
as staff and City residents adhere to the sheltering at home directives. Many recreation
programs like Children in Motion and special interest classes are temporarily closed, as
are sports leagues. Recreation fees were trending favorable prior to the Coronavirus, but
taking a conservative approach we did not assume any additional recreation revenue for
the months from April through June.
Salary Savings – Savings of $415K
While most of the discussion has focused thus far on the revenue impacts of Coronavirus,
a full forecast including expenditures was developed. Salary and benefit costs make up
approximately 55% of budgeted expenditures. We are forecasting $415K in salary
savings by year’s end. This salary savings will play an important part in offsetting revenue
shortfalls.
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CITY COUNCIL
DISCUSSION AND CONSIDERATION OF REVENUE IMPACTS DUE TO
CORONAVIRUS (COVID-19)
APRIL 14, 2020
PAGE 5
Summary
The table below summarizes the discussion above and the impacts of the Coronavirus
on revenue estimates. The Department will be working on developing a list of strategies
to address the forecasted shortfall and will be looking to discuss those strategies at an
upcoming City Council meeting.
ALTERNATIVES:
1. Receive and file the update; or
2. Direct staff to provide more specific information at a later date.
ADVANTAGES:
Receiving this report will facilitate discussions regarding the City’s current revenue
projections in response to the impacts brought on by the Coronavirus. Communication to
the community, City Council, and staff regarding these impacts is transparent and
contributes to the organizational values of the City.
DISADVANTAGES:
There are no disadvantages.
ENVIRONMENTAL REVIEW:
No environmental review is required for this item.
PUBLIC NOTIFICATION AND COMMENTS:
The Agenda was posted at City Hall and on the City’s website in accordance with
Government Code Section 54954.2.
General Fund Revenue Estimates Affected by COVID‐19
Estimated As of 3/2020
(In thousands)
Year to Date
03/31/20
Budgeted
FY 2019‐20
Forecasted
FY 2019‐20
Variance
Fav/(unfav)
REVENUES:
Taxes
Sales Tax 2,437 4,143 3,595 (548)
Transient Occupancy Tax 724 1,142 839 (303)
Property Tax 4,545 7,071 6,872 (199)
Service Fees
Recreation Fees 612 795 612 (183)
Other Revenue 3,610 5,688 5,743 55
Total Estimated Affected Revenues 11,928 18,839 17,661 (1,178)
EXPENSE:
Salary & Benefits 7,534 11,297 10,882 415
Forecasted Shortfall (763)
CURRENT YEAR
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