City of St.

Louis
Comprehensive Revenue Study

Project Review
The PFM Group
January 25, 2010

Randall Bauer
Project Manager
bauerr@pfm.com
Table of Contents

Page
I. Background & Methodology 3

II. Benchmarking & Best Practices 8

III. Summary of Findings 13

IV. Policy Options 16

V. Next Steps 24

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I. Background & Methodology

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Background & Methodology

 In 2006, PFM completed a staffing study for the City with recommendations to improve
operations and generate cost savings
o Funded by the Regional Business Council
o As with this study, supported by Mayor Slay with primary City contact being Ron
Smith, Executive Director of Operations

 The City implemented many PFM recommendations, including creating a Vacant Position
Review Committee

 At that time, PFM began discussing a revenue study with the Mayor’s office

 Comprehensive Revenue Study was commissioned with funding provided by the Missouri
Council for a Better Economy in March 2009

 Study substantially completed by August 2009

 Primary goal is to better inform the City and its stakeholders of opportunities to improve
the sustainability and economic competitiveness of the City’s revenue structure

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Background & Methodology

Project Approach
 Conducted in-depth interviews with leaders in City government, stakeholder
groups, and other subject matter experts
 Completed extensive benchmarking and best practices research
o Identified nine comparable cities for benchmarking on a broad range of
financial, economic, and demographic information and analyzed
variations in tax structure, tax burden, and possible impacts on the
economy and development
o Reviewed best practices research, surveys, and reports on economic
development incentives, financial policies, fees and non-tax revenue,
tax collection, and revenue reporting and disclosure
 Identified and applied key revenue principles to the City’s revenue
structure
 Analyzed a variety of revenue alternatives for City leadership and
stakeholders to consider

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Background & Methodology

City Strengths
 Its financial management has been cited by municipal rating agencies as a
positive influence on the City’s credit rating
 Investments in its urban core have revitalized areas formerly in decline and
stabilized its population
 An important regional center with a diverse economy and tax base
 A strong nonprofit and public sector base - home to the Eighth District Federal
Reserve Bank, nationally prominent hospitals and higher education institutions

City Challenges
 Over the last 35 years, St. Louis has experienced a long-term decline in its
proportion of personal income and metropolitan area jobs
 Structurally balanced budget has been difficult to accomplish, exacerbated by
‘the Great Recession’ of 2008-09

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Background & Methodology

Revenue and Expenditure Trends

 Since FY2006, General Fund revenues have grown at a 1.7% average annual rate
 In the coming years, escalating health insurance and pension costs are projected to contribute to a
substantial structural budget gap
 As of July 2009, PFM estimated the City would face a $31.4 million structural budget gap in
FY2011. Absent corrective action, this gap would widen to a projected total of $215.7 million over
the FY2011-FY2015 period

0
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2011 2012 2013 2014 2015

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II. Benchmarking and Best Practices

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Benchmarking and Best Practices

 St. Louis has four revenue sources (earnings, franchise, sales, and property
taxes) that each provide over 10% of General Fund revenues, more than any
of the comparable cities
 A tax burden analysis ranked the city burden in St. Louis to be above the
average of the comparable cities
 A comparison of St. Louis regional business taxes found them to be higher
due mainly to the presence of the earnings and payroll expense taxes
 The City is heavily reliant on income-based sources of revenue. Earnings and
payroll taxes combine for nearly 40% of the City’s revenue – second highest
among the comparable cities
 St. Louis has the lowest percentage of General Fund revenue generated
by property taxes – generally considered local governments’ primary and
most reliable revenue source

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Benchmarking and Best Practices

Select City/County Tax Rates

Residential Sales and
Property Residential Sales and
Assessed Use Tax
Tax Equalized Income tax Use Tax
Value (Total
(m illage) (m illage) (Local Option)
Percent Burden)
St. Louis 13.23 19% 2.51 1.00% 3.35% 8.24%
Kansas City 20.11 19% 3.82 1.00% 3.50% 7.73%
St. Charles 10.86 19% 2.06 -- 3.18% 7.40%
Baltimore 22.68 100% 22.68 3.05% -- 6.00%
Knoxville 55.00 25% 13.75 -- 2.25% 9.25%
Louisville 4.93 100% 4.93 2.20% -- 6.00%
Minneapolis 11.95 100% 11.95 -- 0.90% 7.40%
Norfolk 11.10 100% 11.10 -- 1.00% 5.00%
Omaha 6.78 97% 6.58 -- 1.50% 7.00%
Pittsburgh 15.49 100% 15.49 1.00% 1.00% 7.00%

 St. Louis’ property tax millage rate is high in comparison to the comparable
cities, however, Missouri’s low percentage of taxable assessed value means
that the City’s equalized property tax rate is the second lowest
 The City’s earnings tax rate is in line with other jurisdictions

 The local and total sales tax rate is above average

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Benchmarking and Best Practices
Best Practices
 The following have been cited as useful strategies for a City seeking to improve its local
economy and revenue structure:
o Develop a Strategic Plan that objectively assesses the impact of local taxes and fees on
the economy
o Avoid Tax Favors that significantly interfere with the market
o Diversify the Tax Base through the use of several broad-based tax sources
o Increase Use of Service Charges
o Limit Nuisance Taxes
o Promote Revenue Self Sufficiency

City Strengths
 St. Louis relies on a diverse mix of revenue sources to provide the resources to fund
current operations and services.
 The City has a well diversified economy, with five primary sectors (education and health
services, professional and business services, trade, transportation and utilities, leisure
and hospitality, and manufacturing) each making up at least 10% of the City’s output

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Benchmarking and Best Practices

City Challenges
 The City’s revenue structure has not provided sustainable revenue growth over time. General
Fund revenues have grown at an average annual rate of 1.5% over the last ten years
 Hancock Amendment restrictions somewhat limit City revenue options
 The City is highly dependent on the earnings tax
o 31% of the City’s General Fund revenues are generated by the earnings tax. Other
cities rely more heavily on the historically more stable property tax
o The structure is out of balance when examining the relationship between the earnings
tax and property taxes
 Best practices suggest the ratio of earnings to property taxes should be in the range
of 1.5 to 1 or less
 In St. Louis, the ratio of earnings tax to property tax is 2.7 to 1 – nearly twice the
preferred balance

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III. Summary of Findings

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Summary of Findings

 St. Louis has a relatively broad tax base, but depends heavily on the earnings tax
 The City’s current tax structure has likely had an impact on economic decisions and job locations.
 The current revenue base will likely not be sustainable given normal expenditure pressures and increases due to rising costs
 In order to modernize its current revenue structure, the City will need to re-balance its tax mix in order to capitalize on some of its
recent successes
 The following details options for structural changes to the City’s current revenue structure aimed at providing the City with
alternatives to address the shortcomings of the City’s current revenue structure including:
o Erosion of the City sales tax base
o Over-reliance on the earnings tax
o Under-utilization of charges for services and other non-tax revenues that can further diversify the City’s revenue mix
o Certain aspects of tax incentive and development policy

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Summary of Findings
Scorecard of City Revenue Structure
Tenet Characteristics
In the short term, does the City’s revenue
stream generate enough resources to fund
Adequacy services currently demanded by citizens?
Over the long term, is the municipality’s
revenue stream able to support projected
Sustainability
expenditure needs?
Does the revenue structure provide fair
treatment of similarly situated individuals
Horizontal
and/or business taxpayers who benefit from
Equity
public services?
Does the revenue structure provide fair
distribution of the tax burden across
Vertical Equity individuals or businesses at differing income
levels that benefit from public services?
Does the current tax policy distort the
Neutrality market or heavily influence economic
decisions?
Is a high concentration of tax revenue
Economic subject to volatility from economic
Sensitivity conditions?
St. Louis Analysis
While revenue growth during positive economic times was
sufficient to fulfill at least St. Louis’ basic service demands,
there is insufficient growth to self-correct for the City’s
underlying, structural budget gap absent other
changes.
St. Louis’ current revenue base and growth rates will
likely not be sustainable given normal expenditure
pressures, nor increases due to fast rising costs, such as
pension benefits.
St. Louis has a balance between earnings, sales,
utility, property, and other taxes, which spreads the tax
burden across businesses, residents, non-residents who
work in St. Louis, and visitors, all of whom benefit and
consume public services.
It is not clear that the City’s tax structure provides
vertical equity. Revenue structures that are less
regressive usually use a progressive income tax to offset
the regressive features of the property and sales tax; but
St. Louis’ earnings tax is a flat tax.
There is evidence that the City’s basic tax structure has
had an impact on economic decisions and job
relocations, due to the earnings tax.
St. Louis has a relatively broad tax base, but it does
depend on heavily on the earnings tax and to a lesser
15to
extent the sales tax, which are economically sensitive
some degree.
IV. Policy Options

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Tax Policy
1. Sales Tax
o Expand City Sales Tax to Cover Select Services: Expansion of sales tax to services Revenue Estimate: $5 million annually
o Reduce the Number of Sales Tax Exempted Goods: Remove local sales tax exemptions Revenue Estimate: $2 million annually
2. Property Taxes
o Real Estate Transfer Tax: Impose a 1% City tax on the transfer of real property Revenue Estimate: $7 million annually
o Pursue the Imposition of a 911 Surcharge on Wireless Communications: Lobby the state to allow counties to enact a wireless
communications surcharge for 911 operations Revenue Estimate: $2 million annually
o Raise the Property Tax Millage Rate: Increase the millage rate to the just below Hancock cap level over a two year period.
Revenue Estimate: $8 million over two years
3. ‘Sin’ Taxes
o Impose a Junk Food Tax: Revenue Estimate: $26 million annually
o Impose an Alcoholic Beverage Tax: Revenue Estimate: $3.6 million annually
o Impose a Plastic Bag Tax: Revenue Estimate: $2 million initially declining to $0.4 million
o Extend Cigarette Occupational License to Retail Sales: Revenue Estimate: $2.6 million

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Tax Policy
4. Adjustments/Increases to Existing City Revenue Streams
o Adjustments to the Restaurant Gross Receipts Tax: Increase current 1.5% City restaurant tax to 2.5% and/or extend the tax to take-out
establishments Revenue Estimate: $4-$10 million annually

o Increase Use of Service Charges: Adjust fees to more accurately reflect cost of service and raise City automobile license that has not been raised
in over 20 years Revenue Estimate: $5 million annually
4. Realign Tax Policy to Foster Improved Economic Growth
o Shift to a Land Value or Split-Rate Property Tax System:

 Adopt a land value or split rate property tax system that taxes land at a greater rate than improvements. Revenue Estimate: $20 million
annually

o Begin a Program of Incremental Reductions to the Earnings Tax

 Adoption of a package of revenue enhancements by the City could reduce its reliance on the earnings tax creating a more attractive economic
environment

 Academic studies and experience of the City of Philadelphia indicate reductions to income taxes may result in increased in economic activity to
partially offset the loss of income tax revenues

 Reduce the tax incrementally over a multi-year period

Revenue Reduction: $36 million (one 0.25% reduction)

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Other Non Tax Revenues
PILOT Agreements

 Tax exempt organizations currently own 22% of the City’s total assessed property and receive City services
with less contributions to the cost of these services

 Negotiation of voluntary payment agreements with institutions can recover lost revenue. Comparable
examples include Pittsburgh, Boston, Madison, and others

 PILOT agreements with non-profit entities in the City of St Louis, after creation of a city-wide program,
could raise as much as $5 million in new annual revenue

Market Based Revenue Opportunities (MBROs)

 MBROs are agreements between cities and private firms for that provide payments for corporate marketing
using City property and assets. These can include advertising, exclusivity arrangements, rental
agreements, and sponsorships
 The City should procure a qualified vendor to assess the City’s revenue potential to benefit from specific
MBRO strategies
 A comprehensive and effectively administered MBRO program in St. Louis could generate revenue as
much as $5 million annually

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Fees, Fines, and User Charges
Issues
 Fee, fine, and user charge revenue accounted for under 12% of General Fund revenue in FY2008; many user
charges have not been reassessed in over a decade
 There are services the City provides at no cost. Nationally, charges for services have been the fastest growing
part of cities’ revenue portfolios
 An in-depth analysis of less than 20 out of over 700 fees showed the City could charge an additional $4 million if it
increased fees to fully cover costs
Recommendations
1. Develop and implement a user fee policy that sets cost recovery goals so fees are reviewed regularly to
more accurately reflect the cost of service
2. Examine options to update or modernize IT systems related to user fees
3. Consider generating additional revenue from new user based charges.
4. Partner with other Missouri municipalities to lobby the state legislature to raise fees that are set by state
statute, provide localities with a local option, or index fees to inflation to more accurately cover the cost of
service

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Tax Collection
 The study focuses on improvements within the City’s current tax collection structure not on consolidation of revenue collection agencies
 In general, authority for tax collection in St. Louis is highly decentralized. Primary revenue collection responsibilities rest with the Comptroller, Collector of
Revenue, and the License Collector, with other departments playing significant collection roles
Recommendations
1. Expand online payment options
2. Create single site City Payment Centers
3. Create a centralized IT platform
4. Implement new citywide programs for collection past due receivables & taxes
5. Develop standard city policies on accounts receivable and revenue collection
6. Regularly perform performance evaluations in tax collecting agencies
7. Pursue opportunities for cooperation with other governments on tax collection
Revenue Potential

 Implementation of at least one recommendation would yield an additional $0.3 million annually. Adoption of all options could yield up to $10 million annually

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Tax Incentives

 Recently the City has experienced successes in the redevelopment of many

formerly vacant properties into profitable developments, particularly downtown
and in adjacent areas
 St. Louis has utilized TIF for residential projects, often involving rehabilitation
of older structures into lofts and condominiums with ground level retail
 Tax abatements have been applied throughout the City on a widespread basis
in broad redevelopment areas. Tax abatements tend to be approved more
quickly than TIFs and are typically subject to less scrutiny and review
o In 2007, 15.7% of the City’s assessed property value was subject to
some sort of real estate tax abatement
 St. Louis has, at times, pledged General Fund revenue for TIF projects. This
is generally not the norm for the benchmark cities -- or most cities across the
country. Numerous studies of TIF best practices have recommended that
cities avoid General Fund subsidization of TIF projects

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Tax Incentives
Select Recommendations
1. Enhance TIF project reporting and evaluation
o Regularly and actively evaluate initial tax revenue estimates against actual collections
o Require regular reporting of job creation, wage, and employment data
1. Expand the Cost Benefit Analysis process for TIFs and larger scale tax abatements
o Require independently or City-performed cost benefit analyses
o Include indirect and intangible costs and benefits in the calculation to gauge the full revenue impact
to the City from each development
1. Impose controls on the percentage of assessed property value subject to TIF or tax
abatement
2. Consider new methods to recoup City TIF costs
o Consider more extensive use of special tax districts, equity stakes and profit-sharing agreements
as ways to maximize returns of City investment in TIF projects
o Adopt a policy prohibiting General Fund support of TIF projects
1. Align the maximum tax abatement period with project benefits
2. Restrict tax abatement eligibility to blighted areas only

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V. Next Steps

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Next Steps

 The study has been provided to the City, and they are
considering the recommendations as part of the upcoming “At minimum, cities
FY2011 budget process will be working
through the
 The coming budget promises to be difficult due to the
catastrophic drops
continuing declines in local government revenues. in revenue for the
However, difficult fiscal realities can provide an opportunity next 18 months to
to rethink the way government services are funded and two years”
delivered
- Mark Munro,
 The City could elect to maintain its current revenue Brookings Institution,
quoted in the Wall
structure, which would almost certainly lead to consistently Street Journal
painful budget options. Alternatively, the City may consider (December 30, 2009)
approaches that could lead to a more sustainable revenue
structure

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