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News

State Lands Comm'n Staff Warns Long Beach Proposed Oil Tax Increase May Violate Tidelands Trust, Possibly Trigger Challenge Extending to Sums LB Now Collecting; Council Will Consider Tweak At July 29 Special Council Meeting

Measure will be General Fund ("blank check") with non-binding statement of current intent to spend it for equity issues (but won't legally bind future Councils)



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(July 29, 2020, 4:35 a.m.) -- The California State Lands Commission's Chief Counsel informed the City of Long Beach n writing three weeks ago, and SLC staff reiterated in two teleconfernces thereafter, that City Hall's proposed oil barrel production tax -- coming to the second of three Council votes on July 29 for placement on the November 3 ballot -- may violate the City's Tidelands Trust agreement with the state of California.

The agency's lawyer said it could trigger litigation, not just over the now proposed measure but also possibly challenging LB's current oil production tax. [LB City Hall has been collecting an oil production tax for police and fire purposes, voter enacted Measure H, since 2007.]

State Lands Commission Chief Counsel's July 7 letter is included as Attachment F to the city staff agendizing memo for the July 29 agenda item. .

Also attached as Attachment F is a memo from LB's Dir. of Energy Resources noting it held two follow-up conferences with SLC (July 13 and July 22). It indicates SLC staff (the agency that oversees uses of state lands; its governing board consists of the Lt. Governor, State Controller and Governor's Director of Finance) says the agency seeks additional time to analyze the barrel tax proposal and consult with the California Attorney General's Office. It also indicated SLC staff voiced concerns about the legality of the entire oil barrel tax in relation to the State's share, not just the currently proposed increase.

Meanwhile, the City Council faces a drop-dead deadline of August 4 to put a finalized resolution proposing the oil production tax increase on the Nov, 3 ballot. .

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At the July 29 meeting, City staff now proposes a change in its originally proposed measure.

In order to minimize the concerns expressed, one course of action is to set a total Barrel Tax rate that is competitive in the market. A Barrel Tax increase of 12 to 15 cents per barrel can be competitive with the market, depending on what indices other cities use. A 12 to 15 cent increase would place the total Long Beach tax in line with recent Signal Hill oil Barrel Tax rates, so that Long Beach would not stand out in terms of tax rate. Also, by using the more stable consumer price index (CPI) the tax will be relatively consistent. Some of the rates are periodically index adjusted. Signal Hill is one of the cities along with Long Beach that makes periodic adjustments and Signal Hills rates are shown for several different time periods as they vary significantly over time.

It is recommended that the attached proposed ballot measure be approved for placement on the ballot, increasing the current general Barrel Tax by 15 cents, from 15 cents per barrel to 30 cents per barrel, with annual adjustments according to CPI on June 1. When combined with the special purpose tax the total tax would increase from 48 cents to 63 cents per barrel. A 15 cent tax increase would generate an estimated $1.6 million in the first year. The new tax would take effect on January 1, 2021, or the earliest first of the month thereafter as permitted by law. Further, the new 15 cent oil Barrel Tax will be suspended in any month if realized oil prices are at or below $20 per barrel.

"When combined with the special purpose tax the total tax would increase from 48 cents to 63 cents per barrel. A 15 cent tax increase would generate an estimated $1.6 million in the first year. The new tax would take effect on January 1, 2021, or the earliest first of the month thereafter as permitted by law. Further, the new 15 cent oil Barrel Tax will be suspended in any month if realized oil prices are at or below $20 per barrel."

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The proposed oil tax increase and its potential to trigger a larger challenge by the state

As early as July 7 -- the same date the Council voted 9-0 to direct city staff to pursue the the General Fund ("blank check") oil barrel production tax increase -- State Lands Commission raised issues over the action. In a letter date July 7 -- which Councilman Richardson and city staff didn't publicly disclose at the July 7 Council meeting (beyond saying there'd been SLC/City discussions), Chief Counsel Seth Blackmon said SLC first learned of the proposal on July 3 (when it appeared on the Council's scheduled July 7 agenda). The SLC letter notes that city staff and Councilman Rex Richardson (agenda proponent and chair of the Council's State Legislation Committee) discussed the proposal on the afternoon of July 7. SLC counsel Blackmon's letter stated:

...While Commission staff understands the City's rationale for the proposed tax, staff is concerned that the proposed tax increase may improperly affect the City's fiduciary responsibilities as trustee for the State, as well as its contractual obligations as the unit operator for the Long Beach Unit and West Wilmington. More specifically, staff is concerned that the tax may already have resulted in an inappropriate redirection of State funds, that any increase in the existing tax may exacerbate the injury, and the increase may not be in the best interests of the State...

...Commission legal staff needs the opportunity to analyze the proposal, in full, and consult with the California Attorney General's Office before a ballot measure is considered for the November 2020 ballot.

Commission staff thanks City Council Member Richardson and City Staff for taking time on the afternoon of July 7, 2020 to discuss the proposed ballot measure. Commission staff appreciates the long-standing collaborative relationship with City staff and the work that the City does as trustee and unit operator. Commission staff looks forward to working with the City on the issues presented therein.

The State Lands Commission letter is Attachment F to city staff's July 29 Council meeting agendizing memo

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City staff's July 29 agendizing memo describes the current posture as follows

[City staff July 29 agendizing memo] Staff...met with the State Lands Commission (SLC). In setting a proposed general Barrel Tax increase, staff was cautioned by initial conversations with the SLC. The SLC reiterated their concerns that a tax increase is inconsistent with the City's responsibilities as a trustee based on a potential claim that it diverts money from the State's trust and inconsistent with the City's responsibilities as an operator, if the Barrel Tax places a burden on the existing operations and drives down production.

...In order to minimize the concerns expressed, one course of action is to set a total Barrel Tax rate that is competitive in the market. A Barrel Tax increase of 12 to 15 cents per barrel can be competitive with the market, depending on what indices other cities use. A 12 to 15 cent increase would place the total Long Beach tax in line with recent Signal Hill oil Barrel Tax rates, so that Long Beach would not stand out in terms of tax rate. Also, by using the more stable consumer price index (CPI) the tax will be relatively consistent. Some of the rates are periodically index adjusted. Signal Hill is one of the cities along with Long Beach that makes periodic adjustments and Signal Hills rates are shown for several different time periods as they vary significantly over time.

...In order to minimize the concerns expressed, one course of action is to set a total Barrel Tax rate that is competitive in the market. A Barrel Tax increase of 12 to 15 cents per barrel can be competitive with the market, depending on what indices other cities use. A 12 to 15 cent increase would place the total Long Beach tax in line with recent Signal Hill oil Barrel Tax rates, so that Long Beach would not stand out in terms of tax rate. Also, by using the more stable consumer price index (CPI) the tax will be relatively consistent

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Councilman Richardson has repeatedly sought to describe the General Fund ("blank check") measure as an upward adjustment of LB's current tax (Measure H) to address chronic issues including the effects of pollution, health impacts on SW and NW LN. However those spending promises aren't legally guaranteed. As a General Fund ("blank check" revenue (like the Measure A sales tax increase), the Council plans to include a non-binding resolution reciting its present intent to use the revenue for equity and pollution related purposes. It doesn't legally bind future Councils to do so; citing those purposes would make it a "special tax{ requiring 2/3 voter approval.)

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The item was added to the July 7 agenda by Mayor Robert Garcia, joined by Councilmembers Richardson, Zendejas, Pearce and Austin. The tax increase, which wouldn't be paid directly by most LB taxpayers unless they own an oil well, would provide City Hall with a revenue infusion for Mayor/Council desired spending items.

The agendizers framed their proposal in terms of addressing global warming emissions and the shortage of open space in low income areas near freeways and industrial facilities. They didn't focus on budget issues (stemming form Council spending exceeding revenue) previously acknowledged by city management for FY21 and beyond prior to COVID-19.

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At the July 7 Council meeting, no Councilmembers suggested using new revenue for police (which was legally guaranteed by the 2007 Measure H tax (a special tax approved by over 2/3 of Long Beach voters;).

The agendizers likewise didn't mention two now-pending legal challenges: LB's Reform Coalition to City Hall's March 2020 Measure A sales tax extension and the March 2018 Measure M utility revenue transfer (ruled unconstitutional, City Hall appeal pending.)

According to the City Clerk, the cost estimate for a one issue ballot measure is $1.1 million.

LB's Reform Coalition is currently suing the LA County Registrar/County Clerk to enable an affordable recount of a 16-vote passage margin claimed by LA County for the March 2020 City Hall-sought extension of the 2016 "temporary" Measure A (General Fund) sales tax increase.

In a separate action by LB taxpayers Diana Lejins and Angela Kimball, a Superior Court has ruled uncostitutional City Hall's June 2018 Measure M utility revenue transfer. (City Hall is appealing the ruling.) Measure M included a mechanism enabling LB's Mayor-chosen Water Commission to transfer a percentage of LB Water Dept. revenue to City Hall for General Fund spending and raise rates on LB Water Dept. users to backfill the transferred amount. (LB's Water Commission recently approved such an action for FY 21.)


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