Budget: Sonoma Finishes Year With Surplus, But Business Owners Face a Different Economic Climate

City staff presented an optimistic portrait of Sonoma's financial future Wednesday, reporting that the city ends the fiscal year with an over $84,000 surplus and roughly $4 million in reserves, a ready message after a tumultuous year.

But the , which was championed by Mayor Laurie Gallian to investigate new revenue sources for the city, may be necessary; the city faces an uncertain financial future – where additional revenue may be needed – largely due to statewide changes to redevelopment agencies, which usher in about $10 million annually to Sonoma’s downtown project area.

In June, the state legislature and Gov. Jerry Brown dissolved redevelopment agencies, unless cities pay a fee – dubbed ‘ransom’ – to the state.

Sonoma agreed to , which, , will cost the city a one-time payment of $1.5 million and $400,000 annually – all of which must be factored into the new city budget.

Even more complicated: Brown’s legislation is facing legal challenges, adding uncertainty to the revenue until a decision is reached.

At least the city is ending the year ahead. Earlier this year, from reserves to balance the 2010-2011 budget. (The money was repaid before the end of the year, staff said.) City spending was also under estimates, running .3 percent, or $33,786, lower than expected.

City funds have been largely unaffected by the Great Recession; the top three revenue sources remained relatively steady in recent years:

• Property Tax (24 percent of the General Fund): The mortgage crisis hasn’t affected Sonoma’s property values – which rose between 2004 and 2008, before leveling off at just over $2.5 million per year.

• Sales Tax (19 percent): The City charges an 8 percent sales tax, which is less than many County districts: Rohnert Park and Cotati charge 8.5 percent, while Sebastopol charges 8.25 percent.

• Transit Occupancy Tax (21 percent): The city recoups a 10 percent Transit Occupancy Tax (or TOT) from each hotel room sale. Carol Giovanatto, assistant city manager, called the tax “the lifeblood of [Sonoma’s] economy.  The tax rose with new buildings in projects after 2003, but bottomed out after 2010 at just under $2.5 million.

Though the city’s TOT share has stayed relatively steady, the prominent financial troubles of several area hotels – namely, the Fairmont Sonoma Mission Inn, which was put up for sale last month – worry hoteliers, who say they’ve been forced to cut room rates drastically, earning the same gross with more guests, to keep up sales.

In July, a group of local hoteliers petitioned the council to create a ‘Tourism Improvement District,’ by raising the TOT rate by 2 percent and using the additional funds, about $440,000.  They were denied.

And the hoteliers, who attended the meeting en masse, are still worried about their industry's financial future.

“We have a serious problem, with 36 percent of our rooms underused,” said Norman Krug, who operates the .

At 10 percent, Sonoma has the lowest TOT rate in Sonoma County – Napa County averages 14 percent – and is the only city, other than Healdsburg – not to have a Tourism Improvement District.

“We’re grossly being outspent by Napa,” said Dan Parks, owner of the .  

City staff question the efficiency of the Tourism Improvement District model, arguing that the increase in business is untested, and the additional marketing budget would have to bring in over $4 million in additional sales for the City to regain the $440,000.

“We don’t know if they’re reaping benefits by advertising,” said City Manager Linda Kelly.

But industry workers see a direct and significant correlation between marketing dollars and room sales. Bill Blum the longtime general manager at Macarthur Place, said the hotel saw a big spike in RevPar – an industry calculation, which combines room price with occupancy rate – after partnering with the for a marketing push in 2004.

“The one thing I know for sure is that a healthy tourism industry in Sonoma means a healthy city…more jobs, more sales tax, more occupancy tax, healthy businesses and fewer empty storefronts,” said Blum.

Despite Sonoma’s steady and long-unchanged rates, officials were hesitant to increase taxes except for a specific ‘quality of life project’ – .  

“I’m unconvinced that it’s foretold that we have to raise any revenue,” said Mayor Pro Tem Joanne Sanders. “We’ve just been told we have a budget surplus, and I’d like to see how the economy improves.”

But Sonoma Mayor Laurie Gallian disagreed – arguing that such financial fore planning is crucial for municipalities in fiscally uncertain times.

 “Sonoma deserves to have a quality of life that people are paying to be here to have,” said Gallian. “One of the things that predicates [this]…is how fiscally alert we are to the changing seasons of economic downturns.”