October 10, 2024 - Update on the California Department of Tax and Fee Administration (CDTFA) Audit and SettlementCITY COUNCIL INFORMATIONAL MEMORANDUM
Date: October 10, 2024
To: Cupertino City Council
From: Pamela Wu, City Manager
Re: Update on the California Department of Tax and Fee Administration (CDTFA) Audit
and Settlement
Purpose:
The City recently resolved the dispute with CDTFA regarding the distribution of disputed
sales and use tax revenues. This informational memorandum aims to provide a
background on the sales and use tax redistribution and the resulting impacts, City Council
actions, the City’s efforts to adapt to financial challenges, and the next steps. Details
regarding CDTFA administrative proceedings are confidential and are not discussed in
this memorandum.
Background:
In December 2021, the City received a notice from CDTFA informing the City of an audit
of one of its taxpayers. In October 2023, CDTFA notified the City of a proposed
reallocation of sales and use tax revenues previously allocated to Cupertino. The proposed
allocation sought to require repayment of significant sales and use tax revenues
previously disbursed to the City and would have an ongoing impact on the allocation of
sales and use tax revenues in the future. CDTFA’s determination was subject to review
through a confidential administrative process, as discussed below.
Council Action
In response to the review of sales and use tax distributions to the City, the City Council
preemptively reduced the City’s annual budget by $17.9 million for FY 2023-24 and
further by $8.7 million in FY 2024-25 through service level reductions focused on
operations and maintenance infrastructure, fiscal accountability, and community
benefits. The City Council also set aside a sales tax repayment reserve that is presently
estimated at $74.5 million as of June 30, 2024. These actions and adjustments have resulted
in the City adopting a balanced budget in June.
Budget Balancing Strategies
Several strategies were implemented to help balance the budget in FY 2023-24 and FY
2024-25, which are shown by fiscal year below.
FY 2023-24:
Vacant Position Reductions
Summary of Reductions
Expense Category Reduction Service Impact
Contract Services $2,700,000 Reduce expert technical training; less outside technical support,
and reduced LaserFiche document scanning. Reduced
maintenance of equipment. Reduced citywide trainings, reduced
executive recruitments and reduced consultant costs. Reduced
expansion of current or new offerings for contracted programs,
camps, and classes. Reduction of free events offered and removed
budget to cover fees for festivals. Termination of on-call contracts
and negotiation of new contracts will reduce service level and
response time.
Materials $1,800,000 This reduction is primarily related to savings in supplies, meeting
expenses, and conference, travel and food and drink for city
council meetings. Reduced applications utilized by staff, residents,
and customers. Commissioners and part time staff limited to E-
mail; Prolonged tech refresh cycles and significant reduction in
replacement parts and supplies. Drone program and training
reduced, and eliminate Wi-Fi in parks. Reduced Employee events
and small tool and equipment.
Staffing $6,200,000 Elinimation of 14 vacant full time positions and reduced PT Staff
budgets to minimum levels necessary to operate currently open
Recreational facilities and ongoing programs.
Special Projects $1,400,000 Delayed or deferred sidewalk repairs and pavement maintenance.
Transfers Out $5,800,000 Reduce General Fund subsidies for other funds
TOTAL $ 17,900,000
In addition to these reductions in FY 2023-24, Council authorized the use of $6 million in
one-time unassigned fund balance and utilizing the City's Section 115 Trusts to fund
pension and OPEB (Other Post-Employment Benefits) costs.
FY 2024-25:
Vacant Position Reductions
Service Level Reductions
Continuing City Operations
Despite fiscal challenges, the City has shown remarkable resilience and adaptability. Since
receiving the state audit notification, the City has provided important services to residents
while balancing its budget through mitigation measures taken by the Council as
mentioned above. The City also adopted innovative approaches such as strategic
partnerships, sponsorships, and exploring more efficient service delivery methods. This
has led to the City maintaining critical operations and serving our residents without
significant disruption. It is important to highlight the role of our community and partners
in these efforts to navigate the financial shortfall and, at the same time, identify long-term
opportunities for growth and sustainability.
CDTFA Appeal and Settlement
In November 2023, , the City filed an administrative appeal of CDTFA’s proposed
reallocation. As part of the appeals process, the City entered into settlement negotiations
with CDTFA.
On October 2, 2024, the City and CDTFA finalized a settlement agreement resolving the
dispute regarding the proposed reallocation of sales and use tax. While the terms of the
settlement agreement are confidential, the agreement will have a significant net positive
fiscal impact on the City. Specifically, the repayment reserve that was set aside will now
be available for other uses. Staff will seek Council direction on the use of those funds.
Note, however, that certain future sales and use tax revenues will remain unavailable to
the City. Beginning in 2025, the City will no longer receive the sales tax distributions that
CDTFA determined should be reallocated to other jurisdictions, resulting in an estimated
ongoing structural deficit estimated in FY 2028-29 of $0.3 million and increasing to $7
million annually beginning in FY 2033-34. The growth in the structural deficit is driven by
increased funds for capital projects and the sunset of the Utility Users Tax in FY 2030-
2031. Thus, it is best to view the settlement agreement as providing a one-time event that
does not address the City’s ongoing structural deficit, even though it provides significant
short-term financial relief. The City will need to identify other revenue sources or
expenditure reductions to balance its budget over the long term.
Next Steps
In addition to the information being provided in this memorandum, staff will bring back
a plan for the strategic use of one-time repayment dollars as part of the First Quarter
Financial Report in November for Council consideration and further direction.
Sustainability Impact
No sustainability impact.
Fiscal Impact
No fiscal impact.
_____________________________________
Prepared by: Tina Kapoor, Interim Assistant City Manager
Reviewed by: Chris Jensen, City Attorney
Approved by: Pamela Wu, City Manager