Category: City Finances

After discovering over $100,000 in funds designated for affordable housing instead went to pay off a YIMBY lawsuit, San José Spotlight reports that Cupertino is “scrambling fix what city officials are calling an ‘accounting error.’” As the City continues to struggle with its budget deficit and residents endure budget cuts, the latest error drew more questions about its fiscal management.

YIMBY Law, one of the two litigants in the lawsuit questioned Cupertino’s motives in its misallocation of funds. “They’re saying it’s an error, so I think we have to pretend that we believe that,” stated YIMBY Law’s Sonja Trauss. “There’s another reality where it wasn’t an error at all and Cupertino looks even worse.”¹

Resident Discovers Alleged Error
The issue first came to light at the February 21 City Council meeting, when resident Rhoda Fry spotted errors in the Accounts Payable Report which had been approved by three levels of City staff. Fry said, “developers are paying these mitigation fees in good faith that these will go toward below market rate housing, not to pay for frivolous lawsuits.” It was thanks to Councilmember Kitty Moore that Fry found the error; in 2021 Moore requested that the specific paying fund be listed in the Accounts Payable Report.²

Councilmember Liang Chao pulled the Accounts Payable item from the Consent Calendar. City Attorney Jensen tried to shut down discussion by claiming that it was an administrative issue while City Manager Wu added that it was a waste of time to discuss it. Their comments angered residents who hadn’t originally intended to speak on this item, resident Lisa Warren chided “you should be very happy you have people that care.”

Although City staff admitted that affordable-housing money was misallocated, Councilmember Hung Wei persisted in assuming that the City has “checks and balances in place.” Councilmember Kitty Moore requested that any adjustments to the BMR Fund make their way into the City’s annual Development Mitigation Fee Report under State Law AB 1600.

More Concerns about the Affordable Housing Fund
Since the article was published, other questionable withdrawals from the fund have been discovered such as subscriptions to the San Jose Mercury News, memberships to organizations, airfare, and hotel stays. Furthermore, the use of the fund has been surprisingly inefficient. Nearly half of the fund’s 2023 expenses of $769K went to pay for “Staff and Administration.”

The San Jose Spotlight Article closed with a quote from Councilmember Moore, who previously served on the City’s Audit Committee, “We are the stewards of the city’s public funds and must demonstrate we are prudent, responsible and accountable.”

Sources

1 – Freimarck, A. (2024, March 29). Cupertino spent affordable housing funds on lawsuit. San José Spotlight. https://sanjosespotlight.com/cupertino-spent-affordable-housing-funds-on-lawsuit/ 

2 – Cupertino Development Fee Impact Reports: https://www.cupertino.org/our-city/departments/finance/budget-reports

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.

On October 17th, 2023, a heavily-debated topic was presented at the Cupertino City Council meeting: whether or not the City should tear down and rebuild its City Hall. In order to fund the construction of a new City Hall, Council considered building high-density housing on City-owned properties, such as the current City Hall, Community Hall, and Sports Center.

Video Recap of City Hall Meeting

Background

Cupertino’s City Hall, which contains the Emergency Operations Center, does not meet current seismic safety standards. Over the last decade, several City Councils have floated solutions, ranging from new buildings with many amenities ($100 Million +) to a retrofit of existing buildings ($27 million). A recent audit of the tax deal between Apple and the City might result in a $56M+ loss to the City. However, rather than working to resolve this impending loss of tens of millions of dollars per year, the current Council majority is instead opting to spend more money on a brand-new City Hall. The solution could include selling public land to private entities and/or engaging in public-private enterprises. 

A Change in City Hall Direction

In 2022, the prior council, including current Council Members Kitty Moore and Liang Chao, voted to pursue the lower-cost renovation of City Hall. On February 21st, 2023, the current City Council led by Mayor Hung Wei directed city staff to stop working on plans to seismically retrofit the City Hall, and  instead investigate a plan for a new and larger City Hall. Currently, City Hall is an office for about 130 employees, many of whom often work from home.

Questionable Funding for New City Hall

The City hired a consultant, Cumming Management Group, with a master agreement of up to $170,000 for real estate research. The initial 83-page study, which cost our City $76K, explains that these partnerships can involve selling or long-term leasing of City-owned land. It recommends building housing at sites that it considers to be “underutilized,” such as the Sports Center. However, the study revealed that it would be difficult for these partnerships to provide enough funding for a new City Hall, even with high-density housing.

During the October 17th meeting, Assistant City Manager Matt Morley presented the findings of the report. Morley noted that because Cupertino is in a 10-year deficit, it does not have the cash flow to issue debt to fund a new City Hall. Raising taxes would also not be ideal, since taxes typically fund operational expenses. The only funding method staff could recommend was a public-private partnership, though profitability is unlikely. It is questionable whether profit-seeking development interests will assume the work of City Hall on behalf of the public.

Councilmember Chao questioned the density of housing required to make the project profitable. Chao stated that Stevens Creek currently has 35 units per acre, but by her calculations, a project would need 60 units per acre (or 10 stories) to be profitable. Morley demurred, saying he did not want to get into this further. 

Councilmember Moore questioned the public-private partnership option, given doubtful profitability. “Why would we go to this endeavor if it doesn’t pencil out?” Moore asked. Moore stated that she worked on the City Hall subcommittee, and  a seismic-only retrofit could cost as little as $ 7.4 million; other options had different price tags.

The need for a new City Hall is further questioned given that the City’s population is projected to decline over the next five years.

Protest from Cupertino Community

Many residents and non-resident supporters attending the October 17th Council meeting were driven by their concern that the Cupertino Sports Center might be eliminated to fund City Hall.  Forty speakers put in speaker cards and several more raised their hands on Zoom, but they did not all have the opportunity to speak. Speakers reminded the Council how important the Sports Center was to creating a sense of community, as well as to their health. 

Resident Patrick Kwok stated the city spent millions of dollars making the center ADA compliant. Kwok added that projects like the retrofit, or the new City Hall complex should be put on the ballot, like the library, so the public can decide how taxpayer dollars would be spent. City councils have the authority to place land use decisions, such as whether to build a new City Hall or renovate an existing City Hall, on the ballot for Cupertino voters to decide.

Another resident wrote the Council, stating “Our City Hall should continue to be part of our Civic Center complex with our Community Hall and Library. Housing in Cupertino should continue to be provided by the private sector with supportive policies from our City Council and City staff.”

Possible Project Ties to Vallco

Mayor Wei shut down Oral Communications on Item #7, the City Hall study, before all speakers spoke. She stated that it was necessary to bring the item back to the council for a vote. Wei put forward a motion to “pursue conceptual development of a new City Hall and/or renovation” along with specific interest in partnering with Sand Hill Properties (the owner of Vallco). 

At Councilmember Moore’s objection to the ethics of naming individual developers in a motion, Sand Hill was removed. To note, Sand Hill recently defaulted on a 100,000 square-foot office building in Mountain View. 

By a 3-2 vote, the revised motion passed. Chao and Moore cast the dissenting votes.

Additional Resources:

To view the Council Meeting, the presentation and written comments go to:

https://cupertino.legistar.com/DepartmentDetail.aspx?ID=22534&GUID=759DE527-B7CF-4B4C-88AB-B83875AB732D&Mode=MainBody

The City of Cupertino’s website provides a summary and a number of documents. To note the comprehensive study to renovate the City Hall is presently missing: https://www.cupertino.org/our-city/departments/public-works/capital-improvement-program-projects/city-hall-projectPart of the City Hall renovation plan can be found in Councilmember Kitty Moore’s public comment from the 10/17/23 meeting, starting on page 121:

https://cupertino.legistar.com/View.ashx?M=E2&ID=1053225&GUID=32C570ED-67B8-43BB-8BE8-7F0A82467799

Cupertino financial woes got a reality check when last-ditch efforts at the governor’s office failed to save its lucrative tax revenue sharing agreement with Apple. On October 17, 2023, staff proposed to set aside a $56.5M sales tax reserve, further worsening Cupertino’s impending budget deficit.

Background

Since 1998, Apple has assigned Cupertino as its point-of-sale location for all online purchases of its products in California. According to Bloomberg Tax, the appropriate point-of-sale location for internet sales is determined by where an item is “picked, packed, and shipped.” Because Cupertino is not a distribution center for Apple products, the California Department of Tax and Fee Administration (CDTFA) warned the City in December 2021 that its sales tax revenues might have been improperly allocated.

Like all public money, Cupertino’s tax dollars are subject to redistribution. While the State of California has been questioning tax sharing agreements that divert money from other municipalities, there are also arguments for keeping these agreements. Tax revenue sharing agreements, such as the one Apple argued was essential to its survival during a lean period in the 1990s, are enacted to help struggling businesses thrive and benefit the greater economy. Apple has received over $107.7 million of California’s sales tax revenue since its revenue sharing agreement with Cupertino was first enacted in 1998.

Over the years, Cupertino has become increasingly dependent on Apple for its sales tax revenue, which City staff expects to drop from $42.1M to $9.4M (the $42.1M likely includes Apple’s portion per the agreement). Additionally, Apple-owned properties also account for about a quarter of the City’s real estate tax revenue.

Budget Deficit Worsens

Although copious information is available through Bloomberg Tax, the current Council majority (which took office December 2022) only recently began discussing the fiscal crisis that it was repeatedly warned about by the prior Council. The City’s response to the CDTFA’s threat to terminate the Apple agreement and to repay the taxes dating back to April 2021 has been sluggish.

On October 17, 2023, staff proposed to reserve $56.5M to repay the taxes. Then, on October 25, City Council met in closed-session to discuss litigation against the CDTFA. City Council is expected to reveal the outcome of that meeting at the next City Council meeting on November 7. Meanwhile, the debt will grow as Cupertino continues to receive disputed funds from the state. Accounts payable data indicates that the City ceased reimbursing Apple its share in January 2023.

Moving forward, City spending has continued unabated. The budget allows for an 11% increase in employee headcount since 2019 (203 to 225), while Cupertino’s population has declined 8%. Cupertino is already in debt from the construction of the Library and the Community Hall, pegged at $2.7M annually until 2030. Given the impending structural deficit, the City is unable to able to issue more municipal bonds because it does not have a reliable revenue stream to repay them.

At a time when Cupertino needs it most, the current Council majority canceled the Economic Development Committee at the beginning of this year. Meanwhile, Mayor Wei has not asked for budget cuts, instead advocating for a new City Hall that the City can’t afford.

References

• Mahoney, Laura. “Cupertino Reserving $56.5 Million to Repay Tax From Apple Sales.” Bloomberg Tax, https://news.bloombergtax.com/daily-tax-report-state/cupertino-reserving-56-5-million-to-repay-tax-from-apple-sales. Accessed 10/25/23.
• Staffing Report. City of Cupertino, https://cupertino.opengov.com/transparency/#/33189/accountType=fteCount&embed=n&breakdown=28459e6a-563e-4695-97d4-8a0d97d881e1&currentYearAmount=cumulative&currentYearPeriod=years&graph=line&legendSort=desc&proration=true&saved_view=103397&selection=3B47265EDAEBBD4AA92D700FE18A69B7&projections=null&projectionType=null&highlighting=null&highlightingVariance=null&year=2023&selectedDataSetIndex=null&fiscal_start=earliest&fiscal_end=latest. Accessed 10/25/23.
• Mahoney, Laura. “California Cities Agree to Rein in Apple-Like Tax Windfalls.” Bloomberg Tax, https://news.bloombergtax.com/daily-tax-report/california-cities-agree-to-limit-tax-sharing-deals-with-retailers. Accessed 10/25/23.
• “Cupertino, California Population 2023.” World Population Review, https://worldpopulationreview.com/us-cities/cupertino-ca-population. Accessed 10/25/23.

The City of Cupertino forecasts a $23.9M deficit from 2023-24. While Mayor Wei, Councilmember Fruen and Vice Mayor Mohan are fixated on persecuting elected officials they disagree with, our serious budgetary issues have gone unattended, which will result in cutbacks to services and personnel in all areas of the City. Here’s how the City plans to address the deficit, and how it will impact residents:

Source: FY 2023-24 Proposed Budget

While Cupertino will cut some expenses like capital outlays and several vacant positions, a significant part of its plan relies on deficit spending. The $6M “Use of Fund Balance” means Cupertino will need to draw from our General Fund, which is our historic savings, to fund operations.

Source: FY 2023-24 Proposed Budget

In fact, per the chart above, the City plans to deplete the General Fund over the next decade, draining it from its current level, $104M, to just $37M by 2033. It is unclear what the plan is to fully reverse this trajectory of diminishing reserves.

Cupertino’s largest expense category is employee compensation and benefits ($35M, or 41% of forecasted budget). During the May 17th meeting, Council Member Liang Chao questioned eliminating only 14 vacant positions, when there are 43 in total. She also suggested returning to 2015 staffing levels (169 staff vs 225 currently).

Here’s how budget cuts will impact residents so far:

• Decreased pavement quality
• Decreased maintenance of parks and trees
• Decreased janitorial cleaning of City facilities
• Reduced funding for community events (Fourth of July, Tree Lighting, etc)
• Closure of teen center
• Elimination of the Bobateeno event for teens ($10,000 savings)
• Fewer parks with Wi-Fi
• Law enforcement will not be impacted. Learn more in the city’s proposed budget plan.