The attached ordinance would repeal and replace the per square foot and per multi-family unit Business License Surcharge (“new surcharges”) currently scheduled to go into effect on 1/1/2019 with a combination of utility tax increase on City-owned utilities and expansion of the per FTE Business License Surcharge. Specifically, this ordinance will:

• Phase in an elimination of the four hundred (400) employee cap on the number of employees subject to the FTE business license surcharge (VMC 5.04.095);
• Narrow current exemption of all not-for-profit companies to only those that currently have the Internal Revenue Service status of 501 (c)(3) and have fewer than 20 employees while preserving the exemption for nonprofit businesses that operate exclusively as a place of worship (5.04.020 and 5.04.075)
• Repeal provisions related to indoor space license fee surcharge on retail, commercial, industrial space and residential units, effective January 1, 2019. (VMC 5.04.096)
• Increase the gross receipts tax on water, sewer, storm/surface water and solid waste by 2.2% effective January 1, 2019, and by another 1.8% effective January 1, 2020 (VMC 5.92.010, 5.93.010, and 5.94.030)
• Increase water, sewer, surface water, and solid waste rates to reflect the new utility tax rates, effective January 1, 2019, and January 1, 2020 (VMC 14.04.210, 14.04.230, 14.09.060, 6.12.208, 6.12.209, 6.12.210, 6.12.211 and 6.12.212).

These changes were contemplated as part of the adoption of Ordinances M-4192 and M-4193.

In February 2017 the City Council adopted a revenue and staffing package (herein referred to as “resourcing package”) to support an increase in sworn and civilian positions that would close identified gaps in key service areas of the Vancouver Police Department (VPD). The resourcing package is intended to add 42 sworn and 19 civilian positions to VPD between 2016 and 2020.

The package was designed to be implemented over a 5-year period, with staffing increases generally matched with a concurrently phased in set of revenues. The package was adopted based Community Resource Team recommendations, which were developed through a broad-based, inclusive community engagement effort over the preceding 10 months.

This revenue package adopted by City Council included a $20 increase in the existing per FTE business license surcharge (to a total of $90 per FTE per year), a 3.4% increase to the utility tax rate on City-owned utilities (sewer, water, drainage, garbage) and a new indoor space business license fee surcharge for retail, commercial and industrial businesses and a per-unit surcharge for leased multi-family residential units. The new business license surcharges were approved to become effective on 1/1/2019, while other funding components of the package have already been implemented. Of the total combined resources dedicated to police, the new business license surcharges (per square foot and per multi-family unit) represent $6.1 million in annual revenue. This dollar amount included the costs for the City to administer the new tax, which was estimated to be approximately $0.25 million annually; the net revenue dedicated to police would have been approximately $5.8 million.

The Council action to adopt a multi-year funding package for police included legislative intent to consider alternative funding sources to the new surcharges in the context of a larger, more comprehensive plan for sustainable, stable and streamlined resourcing for all City services.

As a result, the City initiated an extensive community engagement effort in the spring of 2017 referred to as Vancouver Strong. Central to the Vancouver Strong engagement efforts is the Executive Sponsors Council (ESC), a nine-member advisory group composed of leaders from business, not-for-profit, diverse and volunteer communities. Since May 2017 the ESC has been engaged in developing a recommended comprehensive, long-term, streamlined funding solution to close identified gaps in core City services and to more fully implement the City’s strategic plan. The first actionable component of their work is the replacement revenue source for the business license surcharge portion of the original police funding package.

On June 18, 2018, the ESC presented at a Council workshop their recommendation for replacement revenue to fund police. The ESC recommendation includes replacing the per square foot and per multi-family unit surcharge with a combination of increased utility tax on water, sewer, drainage and solid waste and an expansion of the per FTE business license surcharge to cover the not-for-profit businesses as well as eliminating the 400 FTE cap per business. Their recommendation included a recognition that Council may wish to consider phasing in implementation of the replacement revenue, as well as take into account the unique considerations of including nonprofits as subject to the FTE surcharge.

While eliminating the 400 FTE cap per business ultimately applies to a relatively small number of all businesses in Vancouver, in some instances the difference between the current cap and actual FTEs subject to the fee is substantial. By providing for a two-year phase out of the cap, the City provides a longer transition period and multiple fiscal periods for effected businesses to plan for and accommodate the change.

At the workshop, Council expressed an interest in additional engagement with the nonprofit sector to gather feedback on the recommendation to include them as subject to the surcharge. Through an online survey of almost 200 nonprofits, staff gathered feedback on the nonprofit component. This feedback is summarized in the attached memorandum dated August 21, 2018. A more detailed review of response themes is included in the attached memorandum.

In addition to the outreach to non-profits, staff conducted a finer grained analysis of the composition of the nonprofit sector in the City. Based on data from the Washington State Department of Labor, a sensitivity analysis examined the forecasted revenue to be derived from the nonprofit component at the 4 FTEs and above threshold, as well as at 10 and 20 FTEs and above levels. This analysis showed that at different thresholds, the following total number of nonprofits would be subject to the FTE surcharge with their associated projected revenue generation:

Nonprofit FTE                Number of nonprofit businesses                Total revenue derived 

   threshold                               subject to surcharge                          from nonprofit sector

4 or fewer                                                122                                                    $900,000

10 or fewer                                               38                                                     $700,000

20 or fewer                                               27                                                     $650,000

Based upon the relative amount of revenue generated at each threshold, there is an opportunity to adopt a BLS surcharge applicable to nonprofit businesses with 20 or more FTEs, minimizing the impact on the smaller nonprofit sector while capturing a significant majority of the revenue contemplated by including the non-profit sector as a whole.

Based upon the above and attached, the draft ordinance presented to City Council would phase in the expanded applicability of the per employee surcharge as well as establish a threshold of applicability to nonprofits at 20 or more employees.

The proposed ordinance also includes a phasing proposal, with the cap of FTEs per business being increased from 400 to 799 per company in year 2019 and removing the cap in 2020. The City would utilize a combination of its undesignated General Fund in 2019 and savings from VPD vacancies to offset the lost revenue in 2019. The utility tax increase on water, sewer, drainage and solid waste is consistent with the Vancouver Strong recommendation to Council, increasing 2.2% in 2019 and an additional 1.8% in 2020.

In addition to the changes above, the 2017 Washington State Legislature passed a law requiring cities with business licenses to administer their business license program through the state’s Business Licensing System by 2022 or File Local by 2020 and to adopt the model ordinance by October 17, 2018. The model ordinance includes a mandatory definition of “engaging in business” and a minimum threshold exception to establish when out-of-town or transient businesses are required to be licensed. The City is already administering its business license program through File Local and has current provisions compliant for the most part with the model ordinance. The model ordinance has recommended including a $2,000 threshold level, or higher, per year for out-of-city businesses. The city’s current limit is $12,000 per year. The proposed ordinance brings the City in compliance with the model ordinance, but does not recommend changing income thresholds.

The proposed changes to funding of the increase in police services would replace the cumbersome and complex to administer BLS per square foot and per multi-family unit with a combination of revenues that are significantly easier to administer for both the City and payers. In addition, the expansion of the base that pays the surcharge adds equity and resilience to this particular revenue stream.