Marin grand jury calls on Novato to raise sales tax to slash deficit

A new Marin County Civil Grand Jury report is calling on the city of Novato to begin efforts to raise its sales tax rate to address what it describes as the city’s “chronic” financial issues.

The report was released as the Novato City Council prepares to adopt its 2023-2024 budget this month with a projected $1.4 million deficit. This is the fourth year in a row that the city adopted a budget with a projected shortfall.

While the grand jury acknowledges the coronavirus pandemic exacerbated the city’s financial struggles in recent years, it stated other factors, including missing financial audits, poor records management, lack of adequate revenue sources and other factors have contributed to Novato’s current budgetary woes.

“There have been lapses in the city’s financial management to the detriment of Novato and its residents,” the June 8 report states. “While Novato’s City Council has known for more than a decade about its financial challenges and looming deficits, they have not taken sufficient measures to resolve them.”

The grand jury is recommending the city make several changes to begin balancing its finances in order to avoid service cuts and to improve city services.

The most notable is a recommendation to raise the city’s quarter-percent sales tax back to a half-percent tax in 2024. The city previously had a half-percent sales tax approved by voters under Measure F in 2010. The tax had a five-year sunset, with the city opting to place a quarter-cent sales tax proposal on the ballot instead in 2015 under the voter-approved Measure C. The tax does not have a sunset date.

Sales tax revenue is one of the largest sources of revenue for the city, making up a third, or nearly $16 million, of its projected annual general fund revenue for the upcoming 2023-2024 fiscal year.

City Manager Adam McGill said this week that the structural budget deficits are expected to continue each year unless the city is able to find new revenue sources. He said there is no more room to cut unless the city wants to reduce services at a time when demand for them is at its highest in the aftermath of the pandemic.

“You’re not going to solve this by cutting paper clips and paper,” he said. “We have the lowest number of staff that we’ve had in 17 years.”

This year, city financial staff have warned the city faces a fiscal cliff unless it can find new revenue. The city plans to cover the projected $1.4 million using its emergency reserve funds, but staff said this is not sustainable and places the city at risk in the event of a disaster or downturn in the economy.

The city has considered and adopted some new sources of revenue, including the voter-approved increase to the city’s hotel use tax in 2020 and sales or leasing of city properties. The grand jury stated these measures are inefficient to address the city’s structural deficit. The City Council opted not to pursue a sales tax increase in 2022 based on polling.

McGill said raising the sales tax appears to be the only remaining option to raise revenue.

“We just simply have no choice. There really are no other sources of revenue out there,” McGill said. “I think it’s likely the council will seriously consider making a run for it in the November 2024 election regardless of the polling.”

Property tax revenue accounts for another third of the city’s general fund revenue, but is outside of the city’s control to raise, the grand jury report states. The city had reduced its distribution rate to 7% in the 1970s as the city was growing, which was locked in place when California voters approved Proposition 13 in 1978. McGill noted Novato’s rate is the same as the College of Marin’s rate and half of what the Novato Fire District receives.

“This is one of the city’s most severe impediments to its financial stability,” the grand jury report states. “Novato’s share of the basic property tax is the lowest of any major municipality in Marin.”

In addition to the sales tax, the grand jury also recommends the city create a financial plan to improve its financial condition; create a new independent internal auditor position to ensure timely audits; create a new records management system by mid-2025; create an inventory of city owned properties and draft recommendations for potential uses or sales by May 2024; and create a plan to address financial issues at the city-owned Marin Valley Mobile Country Club.

The city is considering creating an updated fiscal sustainability plan, proposed by Councilman Tim O’Connor in March. O’Connor, who served as a member of the city’s citizens finance advisory committee and is finance director for the University of California Berkeley’s chancellor’s office, lauded the grand jury report for identifying the challenges Novato faces.

“We need both a short-term strategy to adequately fund the city, and a long-term strategy to handle many of the structural issues that have been ignored for too long,” O’Connor wrote in an emailed statement. “… The plan outlines steps we must take to put the city on a stronger path, including what we can do to generate additional revenue by maximizing our current assets, particularly city-owned properties, and making our city more business-friendly.”

The City Council is required to respond to the grand jury within 90 days of the report.

The report can be found at marincounty.org/depts/gj/reports-and-responses.