Councilwoman Mickie Winkler's e-mail on recovering Menlo Park sales tax revenues Menlo Park, posted by Richard Hine, managing editor of The Almanac, on Oct 24, 2006 at 11:13 am Richard Hine is a member (registered user) of Almanac Online
Below is Councilwoman Mickie Winkler’s Oct. 23 e-mail to Menlo Park residents on recovering Menlo Park revenues. (Note: Mickie Winkler is a candidate for one of three seats on the City Council in the Nov. 7 election.)
The question of how to grow our sales-tax revenues has become one of the main themes of the current Menlo-Park city council race. Campaigning is an opportunity to educate an interested public. Candidates have a duty to know at least basic financial facts, and so as not to confuse our citizens.
History: During the high-tech boom, companies like Sun Microsystems experienced soaring sales and as a result Menlo Park reaped millions in extra sales-tax revenues, peaking at $12 million in 2000.When the bubble burst, sales dropped and along with them sales-tax revenues. To make matters worse, Sun consolidated their billion-dollar sales operations to more business friendly Santa Clara, taking millions of sales tax dollars with them for good. By the end of 2002, when Lee and I were elected, sales taxes revenues had already fallen nearly 50% to about $6 million.
The question for Menlo Park is what, if anything, can be done to get back that $6 million in lost revenues?
Can we recover lost sales-tax revenues from Santa Cruz Ave, as some have suggested? While we like the idea of more vibrancy downtown, and are delighted with the new construction we have attracted, the city keeps only one cent on every retail dollar, so it would take a retail district bigger than Stanford Park Mall to generate $6 million.
Can we recover lost sales-tax revenues by propping up the failing car dealerships on El Camino Real, as some have suggested? At the peak of the free-spending high-tech bubble, our car dealerships brought in a total of $1.4 million, so we would need four times that number of car dealerships in order to generate $6 million.
Would service businesses or “green energy” start-ups be part of the answer as suggested by some? Unfortunately, in California service businesses -- even as big as Google -- do not pay sales taxes and start-ups rarely generate sufficient product revenues to be major sales tax producers.
So what is our strategy to get back lost revenues?
1. Hotels pay a Transient Occupancy Tax of 10% to the city. Thus a single new hotel like the Rosewood Hotel already under construction at Sand Hill and 280 will generate up to $1.9M/year -- more revenues than all of the car dealerships combined. There is a second hotel before the planning staff at Marsh road and 101 and an expansion of the Stanford Park Hotel has just been announced.
2. Recognizing that the small auto lots on El Camino will never be viable again, we have been working with GM to create a regional auto-mall near the Dumbarton Bridge. Even with GMs proposed tax sharing arrangement on a quarter of the site, the first phase of the auto-mall would generate ¾ million per year – a figure that could easily grow to $3 million per year when the site is fully leased to other dealers.
3. With the understanding that the majority of Menlo Park’s sales-tax revenues are generated east of 101 from business selling to other businesses (e.g. computers, office products, etc.) we have been working to change the business unfriendly practices that drove Sun to Santa Clara. Since coming into office we have grown annual business-to-business sales-tax revenues by 22% to $2.5 million.
The fruits of all these efforts, and several other major efforts under way, will take several more years to be fully realized, and we must all understand and commit to the realities of creating a long-term, sustainable economic base.
Posted by New Voter, a resident of the Menlo Park: Sharon Heights neighborhood, on Oct 24, 2006 at 1:15 pm
Boy, this presents a very different picture. I had thought the main loss in sales tax revenue was from the failing auto dealerships, or decline in retail businesses. I understand the council has been working on streamlining the processes that businesses use to get regulatory approvals. Can you tell me what's happening, and what effect this is having on helping sales-tax generating businesses east of Bayshore?
Posted by Econ PhD, a resident of the Menlo Park: Central Menlo Park neighborhood, on Oct 24, 2006 at 5:12 pm
Perhaps Mickie should get her numbers straight. According to the city's own figures, right there on the city website, the sales tax revenue for the year ending 6/30/02 -- 6 months before she took office -- was around $9 million. It has fallen steadily, year by year, since then, so it's now around $6 million. Meanwhile, sales taxes have been increasing across the state.
Fortunately, I think most people in Menlo Park are too smart to be taken in by phony data. Just one look at the vacant buildings in our east of 101 office park and the empty lots on El Camino will illustrate how much business development has occurred between 2002 and 2006.
Posted by Finance Wonk, a resident of the Menlo Park: The Willows neighborhood, on Oct 24, 2006 at 6:03 pm
First, lets get the facts straight.
Winkler writes: "By the end of 2002, when Lee and I were elected, sales taxes revenues had already fallen nearly 50% to about $6 million."
That's not quite rightl. Now, here's the real data. Sources and links are provided below:
2002 8,648,641 <-- Winkler elected Nov 2002 (Winkler email claims sales tax at $6.0M here)
2004 6,048,940 <-- Sales tax bottoms out at 1995 levels
2005 6,057,460 <-- Sales tax stays flat
2006 6,100,000 <-- Estimate in budget
These data are taken from Consolidate Annual Financial Reports (CAFR's) that appear on the City's web site at the links listed below. I happen to have historical copies all the way back to 1993 which do not appear on the web site.
Posted by FACT CHECK, a resident of the Menlo Park: Downtown neighborhood, on Oct 25, 2006 at 12:36 am
Finance Wonk - you may have missed the cover of the financial statement that says "For the Fiscal Year Ending June 30, 2002." Ms Duboc and Ms. Winkler's first coucil meeting was December 17, 2002. According to the city sales tax records, sales taxes for the CALENDER year ending 12/31/02 were $6,126,046. Almost exactly the number you show for 2006.
Posted by Common Sense, a resident of the Menlo Park: Central Menlo Park neighborhood, on Oct 25, 2006 at 2:28 am
I'm not an Econ PhD or a Finance Wonk, but I did witness the high tech boom and bust story. The spike in Finance Wonk's 2001 data is a reflection of the boom and decline is a reflection of the bust. Today's NASDAQ close is still less than half of the peak 2000 level. To suggest that any city council should be expected to grow retail sales by 100% in a normal economy is absurd when our GDP is growing at less than 3% per year. Especially when it takes years to get any major new development projects approved in Menlo park.
Posted by FinanceWonk, a resident of the Menlo Park: The Willows neighborhood, on Oct 25, 2006 at 7:28 am
FIDDLED WHILE ROME BURNED: Duboc, Winkler, and Jellins fiddled while Menlo Park sales tax base burned, and their policies failed to reverse it.
SALES TAX RATES ARE FLAT AND HAVE NOT RECOVERED: When sales revenues bottomed at pre-boom (1995) levels they remained flat despite 1.) Duboc & Winkler's "streamlining" policies and 2.) a state and national recovery. California state sales taxes have surpassed pre-boom levels, but local sales tax revenues are stuck below pre-boom levels.
WINKLER MIS-DIAGNOSED THE PROBLEM: Winkler's simplistic analysis is that sales have waxed and waned with the boom and bust, that Menlo Park is (still after four years of her policies) "unfriendly", and her only policy, "streamlining", a euphemism for zoning liberlizations, will fix it.
ITS HIGH RENTS STUPID: Retailers and sales tax producers are being driven out by high rents both downtown (car dealers) and in the east (light manufacturers.) Menlo Park office rents are and have been the highest in San Mateo County for a long time, and Menlo Park commercial property has fetched the highest prices ever on the West Coast. High rents and high land prices contradict Mickie's claim that there is no economic demand for businesses to locate in Menlo Park. If we are so unfriendly, why are we getting such high rents and property prices.
CASE STUDY: THE PARK THEATER. The owner terminated the lease on his tenant in the expectation of gaining future higher rents from office price. The tenant was willing to pay, and could afford only a slight rent increase. Forced vacancy had nothing to do with "unfriendliness."
HIGH RENT PAYERS PRODUCE LITTLE SALES TAX: RESULT: LOSS OF SALES TAX PRODUCERS: Sales tax revenues are down despite the recovery because there are fewer sales tax producers than there were before the boom. A sales tax producer exodus has occurred because businesses that do not generate sales tax are replacing those that do. Office conversions in the east and downtown, and now condo conversions on El Camino are replacing retailers and other sales tax producers with tenants (professional services) who can afford the rents but pay no sales taxes.
"STREAMLINING (ZONING LIBERALIZATION) MAKES IT WORSE: Property owners want to maximize their rents and property value, not sales tax for the city. Winkler and Duboc's zoning liberalizations make spec development easier, and therefore encourage property owners and developers to convert properties to non sales tax producing uses. The most prominent example is auto dealers, being replaced by offices and condos. Out went the car dealers, in came the condos. There is a net loss in sales tax, because Duboc and Winkler don't understand that commercial parcels that produce sales tax need to be preserved, and they need to add sales tax producers, and "the market" won't do that on its own.
THE PROBLEM WAS FORESEEN IN 1999: This was already known in 1999 by the city council who, then, were taking some actions to preserve sales tax producing zones. Those actions were abandoned in 2002 when Duboc and Winkler took office.
Posted by Econ PhD, a resident of the Menlo Park: Central Menlo Park neighborhood, on Oct 25, 2006 at 7:37 am
Thanks for the links, FW.
Common Sense no one, except for a deluded writer here or there, expects to grow the sales tax by 100% to get back to 2001 levels. Any sensible person recognizes that 2001 was an anomaly. But Menlo Park taxes should be growing along with sales taxes across the state.
Mickie et al can obfuscate and manipulate as much as they like, but after four years the direction of their efforts is clear: city finances continue to head downward.
Posted by FinanceWonk, a resident of the Menlo Park: The Willows neighborhood, on Oct 25, 2006 at 8:35 am
Yeah. The real issue is not, as others point out, that sales tax revenue waxed and waned with boom/bust, but stayed flat, and, stayed flat a *pre-boom* levels (1995.)
Remember, both State and National economic indices are fully recoverd and are now surpassing boom peaks. Indices like State sales tax revenues, DOW, S&P, Federal tax revenues etc are surpassing boom peaks.
I'm concerned that this issue is not getting the real attention it deserves, and, unfortunately, in an election environment, leaders will defend, defend, defend, rather than admit.
Posted by FACT CHECK, a resident of the Menlo Park: Downtown neighborhood, on Oct 25, 2006 at 12:42 pm
At least we are all now agreed, that the ad STILL being distributed by Robinson, Cline, and Bressler entitled "Menlo Park Needs New Management" is factually incorrect in its openning paragraph which states that during the Duboc and Winkler term "sales tax dropped by 50%." This is after Robinson himself admitted that it was incorrect and promised it would be corrected.
Posted by ConcernedTaxpayer, a member of the Hillview Middle School community, on Oct 25, 2006 at 3:13 pm
I have seen literature that does not have the "sales tax dropped by 50%" so I don't know what you're talking about.
So we should be happy that the sales tax drop was only 30%? That's the real number. The problem isn't the literature; it's the lack of results. And there is no written economic or business development plan after four years. The citizen Budget Advisory Committee was blown off when they volunteered to help tackle this.
Posted by SSoffer, a resident of the Menlo Park: Linfield Oaks neighborhood, on Oct 25, 2006 at 4:29 pm
I. Regarding Sales Tax:
Not quite correct. Here's the data from the City's Annual Financial Reports for 2002 and 2005. The 'secured' tax revenue is from property tax, which naturally increases as houses sell and are re-assessed. This is what's currently keeping Menlo Park afloat.
True that the sales tax revenue had begun to decline before Mickie, Lee and Nick took office, but not 6,000,000 as claimed. And it continued to decline. What is notable is that today we are back where we were approximately 10 years ago -- when presumably the city was able to balance its budget.
II. Regarding Menlo Park as 'Business Unfriendly'.
Whether city policy has anything to do with this notion or not depends on whose business you're referring to. The real issue for businesses that choose to locate in Menlo Park is rent. Dave Johnson is aware of this, and it's been discussed at the Downtown Business Roundtable with Mickie present.
Menlo Park has high, if not highest, office rents. I cite the 1st Quarter 2006 reports from CBRE Menlo Park and Palo Alto rent survey data.
Menlo Park Palo Alto
Total Vacancy: 23.3% 8.8%
Avg Lease Rate: $3.57 sq/ft $3.29 sq/ft
Palo Alto is cheaper than Menlo Park; Palo Alto has less vacancy.
Mickie’s view is anecdotal. But here's an anecdote from the LA Times March 9, 2003 in an article titled Valley of the Stunned Raccoons.
"”I can't stand it," cries a lawyer in San Francisco at the mere mention of "the Peninsula," as people in the Bay Area call the valley to the south. "The tech bubble nearly caused the disintegration of our law firm. We had to relocate out of Menlo Park when our lease came up for renewal because E-Trade offered the landlord three times what we were paying. We'd been in that office, never missing a payment, for 14 years, and the landlord met with us for five minutes and then said, 'I don't know why I'm even talking to you.'"
Posted by Roxie Rorapaugh, a resident of the Menlo Park: University Heights neighborhood, on Oct 25, 2006 at 5:42 pm
Finance Wonk's numbers are correct.
SSoffer, you made a mistake by quoting numbers from the unaudited statistical sections of CAFR2005 and CAFR2002. This can be really confusing when checking numbers, and it is an easy mistake to make because the unaudited statistical sections usually interesting summary reports, but these unaudited reports are just informational and often have mistakes. The numbers Finance Wonk listed are the actual numbers from the audited financial reports and are correct.
Fact Check, I don't think the city records for sales taxes for the CALENDER year ending 12/31/02 is the best number to use, because tax reporting is a yearly process and it is hard to get exact numbers until the year has closed and the books are audited. So I would suggest using the audited numbers, even though they do apply to the fiscal years instead of calendar years. So before Mickie Winkler was elected, from July 1 2001 to June 30 2002, sales tax revenues were $8,648,641. The next year, Jul 1 2002 to Jun 20, 2003, after MW had been in office for over 6 months, the sales tax revenues were $ 6,857,224. After that they have hovered around the $6,050,000 mark as Finance Wonk shows.
After looking at these reports for a while I truly understand why good CPA's are paid well. Don't know what Finance Wonk does for a living , but I believe his numbers are correct here.
Posted by FACT CHECKER, a resident of the Menlo Park: Central Menlo Park neighborhood, on Oct 25, 2006 at 8:26 pm
Sales taxes are collected by the state, which provides preliminary and then later final audited numbers to the city on a quarterly basis. The difference between $9M and $6M for 2002 is not an accounting issue, it is the difference of 6 months in timeframe. Revenues were falling rapidly throughout 2001 and 2002 so shifting your time by 6 months makes a big difference.
The second important point is that the $6M drop had very little to do with either car dealerships or retail sales. It had to do with a huge drop in business-to-business sales east of 101.
Again, all of this happenned before Ms Winkler and Ms Duboc were elected.
It is true that total sales tax revenues have remained flat since Ms Winkler and Ms Duboc have been in office. Underlying that trend is a steady recovery in business-to-business sales tax revenues, offset by a continued decline in automotive sales revenues.
Posted by FinanceWonk, a resident of the Menlo Park: The Willows neighborhood, on Oct 26, 2006 at 5:49 pm
The point is moot to the fact that the revenues dropped and stayed low, and did not recover with State and Federal recoveries, and that Mickie and Lee fundamentally misdiagnosed the problem.
The four-quarter run rate didn’t fully decelerate to $6M until June ‘04.
The city does get and produce quarterly sales reports, but, to my knowledge, never aggregated by Calendar Year. I never saw "audited" state sales reports. The quarterly sales tax data was always quite dirty, but useful nonetheless.
I agree that the huge drop was B2B rather than retail. (I completely disagree that it had anything to do with Sun’s relocation. That is a red herring.) The loss of retail from auto's didn't help. Anderson alone was producing nearly $1M.
This article from the San Jose Business journal in 1999[Web Link], shows that prior council members were concerned about the sales tax exodus in 1999 even as sales tax coffers were skyrocketing, and had not reached the peak.
Here's the money quote [pararaph 6]:
"City Council members also are concerned about ... the loss of sales tax from companies such as light industrial businesses that are being replaced by professional services companies that don't pay sales taxes."
Here's another Money quote about what the Biz journal said:
Menlo Park's effort to tackle problems deserves attention
Silicon Valley/San Jose Business Journal - October 1, 1999
"Concerned about traffic congestion, an imbalance between jobs and housing, and the loss of sales tax from companies such as light industrial businesses that are being replaced by professional companies that don't pay sales taxes … the City Council are considering a moratorium of up to two years on new development in two areas of the city..."
It was well known by 1999 that office conversions were crowding sales tax producers out of M-2. That was the problem that began early in the 90’s and persisted throughout the decade. During the boom the “office conversion fire” swept through M-2.
Morotoriums were only considered as temporary measures, and were rejected, but one part of the solution was obvious. Close the loophole in M-2 that allowed office conversions to sweep out sales tax producers, but Mickie Winkler and Lee Duboc opposed that.
Here's the article on closing the M-2 loophole, "Why changes are needed in the M-2 zone"[Web Link]
Here's the money quotes:
"Menlo Park might soon update its zoning rules, eliminating a loophole that allows oversized, high-density offices to crowd-out light industrial uses and warehouses in the eastern half of the city. City Planners call the commercial area east of Highway 101 the "M-2" district.
The phenomena of high-rent offices crowding out beneficial lower-rent uses in M-2 is similar to events downtown where the Park Theater and Menlo Hardware are being crowded-out by rent pressure from offices along El Camino.
For M-2, the primary goal of Menlo Park's general plan is to expand diverse light industrial uses that increase sales tax without generating much traffic or adding new pressure to build housing. In M-2, high-density offices are already crowding-out Menlo's existing sales tax producers and may permanently eliminate any chance for new ones to return.
Compared to the average high-density office, the average light industrial use generates significantly more sales tax. High-density offices generally don't generate sales tax. Both uses generate equivalent property tax, but since Proposition 13, commercial property tax no longer contributes much to the city's revenue."
The reason why sales tax revenues haven't returned is because the number of sales tax producers has dwindled, the exodus is permanent. So even if the surviving sales tax producers experience an upturn, there are far fewer survivors.
Mickey never understood the problem or the policy issues.
Mickie’s zoning liberalizations, euphemistically called “streamlining, just made the problem worse. They throw gasoline on the fire by making spec development easier, thereby encouraging office, and now condo conversions in parcels formerly occupied by sales tax producers.
It would be really ironic, if Mickie, under pseudonym, or a Mickie supporter was now trying to take credit for policies and diagnoses that Mickie disagreed with and opposed vehemently.