Author: Cupertino Facts

As Cupertino continues to face a budget deficit and cut services, a growing number of residents are questioning why approximately $48M in city funds are being held in an account that earns zero interest.

Councilmember Kitty Moore flagged the account to staff, who confirmed that it does not earn any interest. Cupertino uses its Wells Fargo checking account to handle day-to-day transactions. The account is regularly referenced in Treasurer’s Reports, with a stated balance $49M as of December 31, 2023. A recent Public Records Request shows all of the latest transactions in this account, with a slightly different balance of $48.4M as of December 31, 2023. 

Checking accounts serve as an important source of liquidity for cities to fund regular operations. However, residents are now questioning whether it is appropriate to hold such a large amount in zero-interest checking. Assuming there is $48M in cash, if the city leaves $3M in the account for liquidity purposes, it could be earning up to $2.25M per year simply by moving the remaining $45M into a CD or Money Market bearing 5% interest. 

Considering Cupertino’s proposed drastic measures to close the budget gap, the millions in lost interest income are meaningful. For example, the City recently explored tax increases to generate $1M-$5M per year, raising fees on residents, and reducing costs by requiring residents to maintain sidewalks and street trees.

Residents are always welcome to express their opinion by emailing:

City Manager: [email protected]
City Council: [email protected] 

The January 17, 2024 City Council meeting to discuss potential budget cuts (“Service-Level Reductions (SLRs)”) revealed a bloated budget, long-standing accounting errors, and further confirmed out-of-control spending. There were no significant staffing reductions or cutbacks for City employees.

A Closer Look at Service Level Reductions

Remarkably, over $2.2M of the proposed Service Level Reductions were actually just accounting adjustments. For example, Councilmember Kitty Moore expressed concern over calling a $160,000 reduction in extra library hours a “service level reduction”. The City has not had to pay for extra Library hours for years, as the costs are funded by the County. Other changes to the Sheriff’s Office, Public Works, and  City Attorney budget were also accounting adjustments to “align the budget with the actual hours provided.” These changes are now being presented to the community as “Potential Service Level Reductions,” when there are actually no associated service level reductions.

Council did advise on a few service reductions that may impact residents: Sidewalk and tree maintenance may now be the responsibility of the property owner. Community events, such as concerts, movies, and festivals, will also have reduced funding (most notably, the elimination of July 4th fireworks in 2024). And the Cupertino Scene will now be mailed quarterly instead of monthly.

While Cupertino attempts to cut costs, its proposed changes to employee headcount remain insubstantial. The latest budget report states that the city plans to eliminate only “3-4 vacant positions annually” over the next decade, “until the City reaches a staffing level of 180 positions, which is consistent with the levels in FY 2015-16”. The January 17th proposed service level reductions included elimination of an undisclosed number of part-time roles, for an undisclosed amount of savings. As of September 2023, the city had 195 full-time equivalent employees. Most notably, in the past five years, the budgeted headcount for Administration and Administrative Services ballooned from 30 to 40 employees.¹ Meanwhile, as the City struggles with its finances, its finance head was paid nearly $300K in 2022.²

Questionable Budget Reduction Target

Currently, Cupertino has a $10M financial deficit. During the January 17th City Council Meeting, Councilmember Moore questioned why staff was attempting to make $15M in expenditure reductions or revenue generation efforts. Moore noted that the $15M financial deficit was anchored to a 2033 forecast, 10 years in the future, while for the next 4 years, the deficit was only anticipated to hover around $10M.

A Need for Greater Fiscal Accountability

Once again, City Council met behind closed doors on January 29, 2024 to discuss its appeal to the California Department of Tax and Fee Administration (CDTFA). As previously reported, the CDTFA has questioned whether Apple should direct all California online sales tax revenues to Cupertino. This lucrative arrangement accounts for about 63% of Cupertino’s sales tax revenue. The potential loss of this revenue, and repayment dating back to mid-2021, has shined a spotlight on Cupertino’s budgeting practices.

Meanwhile, last November, Staff acknowledged that it had stockpiled over $80M in unassigned funds. Currently, the unassigned fund balance sits at $47M, with an additional $56M set aside as a sales tax repayment reserve for Apple. Cupertino also has $149M sitting in an investment account with Chandler Asset Management.⁴ This begs the question of whether raising taxes, eliminating community services, or partnering with developers to turn City-owned land into housing, such as the Sports Center, is the appropriate course of action.

Particularly when it comes to evaluating the use of public funds, the role of our publicly-elected representatives is to make decisions based upon what is good for the community. Meanwhile, the current majority of Councilmembers Wei, Fruen, and Mohan have actively discouraged other Councilmembers, such as Moore, who spends her time on the dais pushing for transparency and accuracy regarding Cupertino’s true financial situation, and highlighting accounting errors.

Now, as Council considers tax increases and elimination of resident services, it is imperative that it makes decisions with a long-term community benefit, rather than simply rubber-stamping staff recommendations. And without true fiscal accountability, it is unclear whether residents will support a sales tax hike that is expected to be on November’s election ballot.

References

1 – Staffing Report. City of Cupertino’s Financial Reporting Platform. (n.d.). https://cupertino.opengov.com/transparency/#/33189/accountType=fteCount&embed=n&breakdown=28459e6a-563e-4695-97d4-8a0d97d881e1&currentYearAmount=cumulative&currentYearPeriod=years&graph=bar&legendSort=desc&proration=true&saved_view=103397&selection=3B47265EDAEBBD4AA92D700FE18A69B7&projections=null&projectionType=null&highlighting=null&highlightingVariance=null&year=2024&selectedDataSetInddex=null&fiscal_start=earliest&fiscal_end=latest. Accessed January 29, 2024.

2 – Salary information for Kristina Alfaro. Transparent California. (n.d.). https://transparentcalifornia.com/salaries/2022/cupertino/kristina-alfaro/. Accessed January 29, 2024.

3. Staffing Report. City of Cupertino. (19 December 2023). https://cupertino.legistar.com/LegislationDetail.aspx?ID=6475868&GUID=B089ABAD-726F-44B5-9596-A946A765AA0B&Options=&Search=. Accessed January 29, 2024.

4. FY 2023-24 Adopted Budget. City of Cupertino. (6 June 2023). https://apps.cupertino.org/pdf/FY_2023-24_Adopted_Budget.pdf. Accessed January 29, 2024.

On December 5, 2023, City Council voted to explore raising Cupertino sales taxes by 0.25% (to a total of 9.375%). The decision follows staff recommendations, and would poll the business community to understand whether they would be willing to vote for a 0.25% tax hike on the November 2024 ballot.

Background

Presently, Cupertino receives approximately $0.65 for every $100 of products purchased from Apple online in California. However, the State recently decided to rescind Apple’s practice of directing online sales tax revenue to Cupertino. 

The City has contemplated the loss of its lucrative Apple deal since at least 2006. The annual budget cautioned:

‘Our largest sales tax producer, Apple computer, comprises 26% and given the volatility of the high tech industry, this fact alone has put this revenue source in an “at risk” situation. To add to this concern, the State is continuing its efforts to change the way Internet sales are reported and, if they are successful, will dramatically affect the amount of sales tax revenue currently received from Apple.’

When online sales surged during the height of COVID-19, so did Cupertino’s net sales tax income, which peaked at $42.6M in fiscal year 2020/21. The average sales tax income was $23.3M in the fiscal years 2015/16 through 2018/19. If the State nullifies Apple’s agreement with the City, sales tax income is estimated to plunge from $11.4M to $9M in 2023. While the City appeals this decision, it is finally preparing for the worst-case scenario. 

Muddy Messaging

In May 2023, the City anticipated a $31M or 73% decline in sales-tax revenue. Recently, the budget gap was reduced to a more realistic $15M. However, with the exception of some smaller cuts, such as cancelling 4^th of July fireworks next year, the City has not significantly curbed spending since receiving its first warning letter from the California Department of Tax and Fee Administration (CDTFA) in December 2021. To the contrary, the current annual budget has increased to $113M, from an actual spending of $89M in 2018/19. 

Accordingly, subsequent budgets listed various “budget-balancing” strategies, among them, taxes on sales (Transaction and Use Tax), hotel stays (Transient Occupancy Tax), parcels, and businesses (Business Operations Tax).

City Staff Pushes for Sales Tax Increase

At the December 5, City Council Study Session, staff asked Council to provide “direction to staff regarding exploring the feasibility of one or more potential revenue tax measures – Transaction and Use Tax, Transient Occupancy Tax, Parcel Tax, and/or Business Operations Tax-through opinion research for the November 2024 election.” City Staff and Urban Futures Inc (UFI) presented these four options, but the Transaction and Use Tax was the pre-determined winner: as of October 2023, the City had already entered into a $170K contract with TeamCivX for sales tax revenue measure polling and consulting services.

The following list describes the new tax proposals and compares them with information from the 2020/21 Budget.

1. Transaction and Use Tax (TUT): A new 0.25% Transaction and Use Tax would increase the Cupertino sales tax rate from 9.125% to 9.375%, meaning that a purchase of $100 in taxable goods would cost $0.25 more. This tax is estimated to raise $5.4M, a significant increase from the 2020/21 Budget estimate of $3M to $4M. This tax would be levied on taxable purchases made in and/or delivered to Cupertino and would not be shared with County tax pools. Only three of Santa Clara County’s fifteen cities have a tax rate this high, Campbell, Milpitas, and San Jose. Some Bay Area cities have higher rates.
2. Hotel Tax: The City’s Transient Occupancy Tax (TOT) of 12%, imposed on Hotel stays and Airbnbs, could be increased to 15% (for an estimated $1.875M in revenue). A hotel representative balked at the proposal, leaving Council Members mystified as to why neither the Chamber of Commerce nor Cupertino hotels had been consulted. The 2020/21 Budget did not consider a tax this high and estimated that an increase from 12% to 14% would raise an additional $1.7M.
3. Parcel Tax: A parcel tax would add $250 to each parcel in the City, regardless of whether it is a small single-family home or an immense industrial complex. A flat tax was considered more straight forward than the more equitable graduated rates of $27 to $613. The graduated rates seem to have been selected so that the amount of money raised for the City would be about the same, $3.7M.
4. Business Operations Tax: A revised Business License Tax would raise $4.3M, less than half of the $10M estimate in the 2020/21 Budget. No details were provided on how the tax would be calculated. The staff report confirmed that Cupertino has a “notably low business license tax rate compared to neighboring cities on a per capita basis” and warned that a tax-increase could deter existing and future businesses.

Next Steps

In January and February, the City will poll the business community for its opinions on a higher sales tax. Outside of the limited poll, it is unclear what communications the public will receive around a potential sales tax ballot measure. A majority vote on the November 2024 ballot would be needed to enact a new 0.25% sales tax. 

City staff will also discuss budget cuts. Just after the December council meeting, City Staff contracted with Voler Strategic Advisors (VSA) for $42K to “Develop a media strategy on key issues such as the budget or major developments.” As such, the public can potentially expect to receive professional messaging around the budget cuts.