Opinion: Laguna’s biggest financial challenge

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By John Thomas

Considering the Strategic Planning the city is currently doing, the question arises: Is this the year that Laguna Beach confronts and addresses its biggest financial challenge?

A large share of the taxes that residents pay are not used to pay for services or capital improvements that directly benefit residents but are diverted to cover the substantial costs the city incurs due to the high number of visitors to Laguna. 

A 2017 report showed that, at that time, revenue the city received that was attributable to tourists was $23 million less than the added costs the city incurred due to those visitors.

Since then, the city budget and visitors have grown, so the shortage is likely much greater today.

City leaders and staff have acknowledged this problem, and despite some early efforts, there has been little progress made by residents and visitors in reducing this large subsidy.

Now is the time to act. The City Council could put a measure on the November 2024 ballot to narrow the gap between revenue and visitor costs. The number of ambitious and costly items currently under discussion by the City Council makes it even more important to reduce the visitor subsidy. The aggregate cost of some of these items could exceed hundreds of millions of dollars. Without correcting the drain on city revenue due to visitor costs, it will be financially challenging for the city to proceed with even the most important projects.

Three of the best possibilities for generating meaningful amounts of revenue for the city are:

  1. An adjustment in the business license fee structure that increases city revenue from the most tourist-focused businesses.
  2. Revising the current hotel tax to be on par with one-third of Orange County hotels.
  3. Expanding pay parking for nonresidents to areas within walking distance of the beaches while allowing residents to continue to park for free in residential neighborhoods.

Alternatives would be to either raise taxes on residents, lower the level of city services provided by the city government or borrow a lot of money.

The solution with the biggest potential revenue impact could be a revised business license fee focused on tourist-focused businesses. Though only a small percentage of visitors stay in Laguna hotels and pay hotel tax, approximately 70% of visitors to Laguna spend on food and beverages in town. This means that Laguna’s tourist-focused restaurants are a key point of contact with visitors, and these businesses are an opportunity to create a collection mechanism for visitor revenue to cover visitor costs. These bars and restaurants could be the stars in this effort, Laguna’s toll booth. A business license fee based on 1% of the gross revenue of these restaurants could currently generate over $4 million per year for the city government, and a very high proportion of this revenue would come from the visitors patronizing these restaurants. With time, a visitor-targeted business license fee could slowly increase from one percent to a maximum of 5% over five years and could eventually cover perhaps 60% of the current imbalance.

The revised fees could be designed to have little or no change for primarily resident-serving businesses. And fees for smaller businesses could be much lower than for the larger tourist-focused businesses. As is, our business license fees are among the lowest in California, so there is substantial room to adjust this fee without being out of line.

A second way to generate revenue from visitors is to expand pay parking for nonresidents to areas throughout the city within walking distance of the beaches while allowing residents to continue to park for free in residential neighborhoods.

The third way could be to update Laguna’s current 12% hotel tax to match the third of the hotel rooms in Orange County that charge 15%. As a top Orange County visitor destination, it seems only fair that Laguna’s total hotel tax should align with other top Orange County tourist destinations.

Combining the redesigned business license fee with an increased hotel tax and expanded paid parking areas could, in time, cover more than 75% of the overall shortage, thereby reducing the subsidy of residents to visitors, leaving more city revenue available to serve residents, and freeing up funds for the many projects on the city council priority list.

This is an election year. Now is the time for the City Council to act to close this huge financial gap and reduce the subsidy of visitors by residents. A solution will likely require a ballot measure. And a plan and ballot measure will take time to develop. Now is the time to get started, and the City Council needs to take action to do that.

John is a long-time Laguna Beach resident, business owner, former chair of the Laguna Beach Audit Review & Measure LL Oversight Committee, board member of the South Laguna Civic Association, and member of the South Laguna Water/Sewer Advisory Committee.

(The following is an abbreviated version of an email sent to City Council that provides a longer, more detailed explanation of ways the city can reduce the residents’ subsidy of the cost of visitors. The full version is available on the city website under the public comments section of the agenda for the 2024 Annual Planning Workshop, which is also attached at the end of the agenda. – Editor’s note)

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13 COMMENTS

  1. There are so many things wrong with this logic it’s hard to know where to begin. It seems every year Mr. Thomas returns with an assault on local business owners and a demonization of visitors. His latest gambit suggests taxing restaurants up to 5% of their gross earnings. Say what?! Does Mr. Thomas have any clue how difficult it is to run a restaurant these days, and why we already see so many closures? Margins are minuscule, costs have ballooned, staffing is a nightmare, and weekdays in the offseason we are a ghost town. 5% is an easy profit killer and invitation for restaurants to leave town, or never come here to begin with.

    He further suggests burdening hotels with additional guest taxes above our already onerous 12%, to a whopping 15%. These overnight visitors contribute a huge revenue bonus already. As Assistant City Manager Gavin Curran told me two years ago, “The City expects to receive approximately $13.6 million in TOT revenue this year, FY 2021-22. About $4 million is allocated toward the City’s Capital Improvements Program, $7.4 million toward government services (police, fire, marine safety, public works, etc.) in the General Fund, and $2.2 million toward Measure LL related programs (programs that enhance City services). All the TOT revenue is spent on City services (local services), benefiting both residents and visitors to the community.”

    Talk about repelling visitors with endless taxation, which includes his final suggestions to further increase day parking costs. Has he noticed how expensive it already is to park downtown amidst the steady recent increases? And may I remind him of how much revenue is already being generated, (again via Curran): “The Parking Fund Proposed Budget includes a revenue forecast of $8.1 million that will pay for $3 million in parking enforcement, parking operations, and maintenance; and $1.1 million for the Neighborhood & Environmental Protection Plan. The proposed Parking Fund budget also includes transfers of $2 million to the Transit Fund; a transfer of $300,000 to the Vehicle Replacement Fund for the future replacement of transit vehicles; and a transfer of $525,000 to the General Fund.”

    “In addition, the Parking Fund includes requests for capital improvement projects that included $200,000 for the Citywide Parking Lot Rehabilitation, $300,000 for the replacement of parking pay stations at Heisler Park (Phase 1 of the program), $100,000 for the Citywide Parking Master Plan, and programming $1 million for future parking facilities that is expected to accumulate to $10.9 million over the next ten years.”

    John, everything is fine. This assertion that visitors and tourist-facing businesses don’t pay their fair share is simply untrue. Our 2023/24 budget is $137.2 million, with expenses of $136.3 million., That’s a surplus of nearly $1 million. We still have a 20% reserve in our General Fund, and a 10% reserve in our Disaster Relief Fund. Property tax revenues are projected to increase 3% (thanks to our scorching property values), sales tax by 2%, and TOT bed tax by 4%, increasing the General Fund by 5%. Perhaps the state should look to us for fiscal guidance.

    Please stop making it harder for those of us trying to make a living here. Not all of us can afford living here without an income. And we make life better for all you retirees with expanded products and services. Why don’t you put your energy into the real problem of our town’s swelling popularity – a plan to reduce traffic with 21st century transportation solutions. Thank you.

  2. Once again, John Thomas provides sound suggestions to help reduce the visitor subsidy that tax-paying residents have been providing visitors. The imbalance is unsustainable when we have so many pressing needs and wants; furthermore its inherently unfair to force residents to forego facilities and services they should be getting, in order to subsidize the oversized city staffing needed 24/7/365 to provide safety & services to visitors.

    Complainers like Mr. Fried are simply worried that forcing tourist focused businesses (like his) that rely primarily on day-tripper visitors, to collect additional monies in the form of taxes to help cover those visitors burdens, will make his business less profitable. Guess what? If your business can’t sustain higher taxes/fees then your business model is wrong. You can’t expect indirect tax-payers subsidies in order to make your business model work.

    Its time for council to move forward with enacting fixes, many in line with Mr. Thomas’ suggestions, in order to ensure that visitors pay their fair share and that resident tax-payers are getting the services and facilities they rightly deserve through their tax payments.

  3. I mean, really? “What Costs” do tourists create? More lifeguards? Maybe right? If they weren’t here paying taxes his taxes would go up right?

  4. This is just another way of trying to reduce visitors, which will have the reverse effect of lowering visitor subsidies and costing residents to be taxed more.

    Mr Morris, “day trippers” are a minuscule percentage of my business. In fact, I get more locals than daytrippers. So how exactly do you and your team of regulators deem which businesses are tourist facing and should be taxed, versus which are resident serving?

  5. Sam – that’s the problem. They come but they don’t spend. Day trippers come with coolers and at most buy an ice cream for the kids on the way out. In South Laguna they don’t pay for parking ever since there are no meters. Day trippers in town park in neighborhoods. What do they cost residents? Yes, more in lifeguards but also police, water, sewage, toilet paper (ok it’s small but it’s still something), cleaning crews, electricity. I know there’s others I’m forgetting. In New Jersey people going to the shore have to pay to get onto the beach as well as for parking. It’s to cover all those costs. Here we foot the bill for them. I get that they have a right to go to the beach but why is it fair for residents to pay for them to be here?

  6. SAM – If you’re really interested in understanding the huge subsidies resident tax-payers (primarily those paying property taxes) are forced to provide to the tourism industry, check out the authoritative study: “Balancing the Costs and Revenues from Visitors to Laguna Beach” by John Thomas with Dennis Aigner, Prof James Danziger and Roger McErlane, July 6, 2017. This study estimated that the subsidy was at $20million in 2017 and will increase with the increases in tourist numbers. To quote from the study:
    “Adding 6.3mill visitors annually virtually doubles the population of the City on an average day. Hosting millions of visitors requires extra police, extra paramedics, and extra lifeguards. In addition to the obvious demands on services, the visitors impact the size of the entire city government…”
    When one considers the cost of a single sworn officer on the police force (approx $250k/annually, fully loaded), and the fact that the size of Laguna’s police force is about 3x’s that of a similar sized city that doesn’t host hoards of tourists, its easy to see how tax-payers have to subsidize the tourism industry. As a result, tax-payers forego amenities and services we rightly should get…and urgent infrastructure needs (such as our decrepit sewer system) await special bond-funding to be met; in the meantime everyone’s sewer rates are increasing 6% annually while the City regularly spills into the ocean. Make no mistake, public funds are increasingly being used to subsidize tourism, effectively putting public money in the private hands of those businesses and landlords that cater to tourists. {in fairness, tourists who visit our hotels typically cover the costs the public incurs to host them, but unfortunately, hotel-stayers represent only 5% of visitors}

  7. John. Thank you for bringing attention to this glaring and growing issue. It’s not uncommon to hear folks complain about the lack of availability and quality of city services. Visitors in SL get away with ignoring parking signs, beach use/dog rules, trash and noise. No one around to enforce them either and most calls go to voicemails. We have become a “fill out a form” city.

    The real question is: Are there any resident-centric, fiscally responsible City Council members who will take up the challenge you state: “Now is the time to act. The City Council could put a measure on the November 2024 ballot to narrow the gap between revenue and visitor costs.”

    Let’s see if any elected’s step up. Thanks.

  8. You guys are so funny. That study by anti-tourist partisans was never peer reviewed or vetted with anything like objectivity. They cherry-picked their stats, starting with the thoroughly debunked 6.3 million annual tourist numbers. The research criteria was wafer thin and designed with one objective in mind – to justify the tourist bureau that funded it with inflated visited numbers. Does anyone really believe that we have an average of nearly 23,000 people a day (As Michael says) who spend significant time that would use up city resources? Get real.

    All they want to do is further burden the “have nots” by repelling them with excess costs to come here. Which of course would have the opposite effect of reducing our tourist subsidy.

    See, every time this group attempts to hijack control of our perfectly functioning government, it costs taxpayers money. Their Measure Q attempt to hijack the approval process for commercial spaces fell flat on its face, costing the City untold dollars to put it on the ballot yet defend against it. A giant distraction.

    The hijacking of our library under the false pretense that it was going to be converted into a parking garage got us stuck with a 25 year lease with the County to effectively run it into the ground. While we could have taken control and rebuilt a 1st class modern library in partnership with private donations, the way Newport did it. Costing us millions in opportunity costs.

    Then it was the harassment of our highly functioning City Manager that forced her to resign because “life’s too short.” (Just check the city website for a striking list of accomplishments she achieved last year.) Which to date has cost us millions in settlements and searching for her replacement.

    What we receive now from visitors is a huge gift to Laguna, a huge windfall via the TOT bed tax, parking revenue, and sales taxes. They also support a large percentage of residents who work here. And that’s why the town is fiscally sound, and runs a surplus while providing wonderful services.

    Stop with the poverty consciousness and be thankful for the over abundance of riches we receive through a functioning city that receives massive tourist subsidies. And let people be.

    If you would just stop meddling we’d have millions of dollars more to offset any so-called tourist subsidies.

    It’s the Dunning-Kruger effect.

  9. Fried tries repeatedly to cheer-lead for tax-payers’ continued subsidy of his and others’ tourist-dependent businesses by trashing the studies done to try to quantify the numbers and over-state the “contribution” visitors make to the City’s finances. He does so without concrete evidence, just his typical, uninformed hand-waving and unsubstantiated claims. The 6.3million annual tourist arrivals estimate was arrived-at under a “Visit Laguna Beach” contract to Destination Analysis, a firm that uses sound statistical sampling techniques to come up with numbers that are indeed difficult to capture. They do similar work for other cities around the country and evidently are providing valuable and defend-able estimates otherwise they wouldn’t be getting hired. I’ve reviewed their sampling techniques and have spoken with their lead investigator to satisfy myself that their approach is sound (and I taught undergraduate level statistics whilst in grad school).

    Fried also attempts to trash the brain-trust of authors of the aforementioned 2017 study (“Balancing the Costs and Revenues from Visitors to Laguna Beach” by John Thomas with Dennis Aigner, Prof James Danziger and Roger McErlane, July 6, 2017) because the findings put the gravy-train that his struggling business depends on, at risk. Just because Billy doesn’t like the findings, he attempts to dismiss the report out of hand (a typical tactic by those with zero factual counter arguments). He tries to defend: “our perfectly functioning government” as another way to discredit those of us who are forced to feed his private gravy-train and therefore try to fix it to tilt more in favor of those of us who provide its primary funding. Yes, Measure Q (which I championed) failed but for a number of reasons. But at its core was the widely held belief that the City Council majority and City bureaucracy was biased in favor of unsound growth and unsustainable desire for “vibrancy” and balance needed to be encoded in law (more than a third (4,300+) of LB voters agreed there was a need for such encoded constraints).

    As for his endless touting of the financial benefits brought to us by tourists, he knows he’s being dishonest when sales tax revenues are around $5mill/yr, TOT around $15mill and parking attributable to visitors at about $5millyr (total approx $25mill/yr) is dwarfed by the extra costs of government services that LB must provide 24/7/365 in order to keep those visitors safe, the city clean and everything functioning at an acceptable level. It is extraordinarily expensive to provide the additional services needed to support visitors…Laguna’s public safety expenses alone are over 350% higher than the average spend of similar-sized non-tourist-destination cities. Revenues attributable to visitors simply doesn’t cover the enormous additional fixed costs LB must pay. That also doesn’t take into consideration the infrastructure costs that ever increasing tourist numbers will eventually impose on local tax-payers (e.g. 1 or more parking structures that pro-vibrancy council members keep trying to hoodwink tax-payers into agreeing to build). Local tax-payers pick up the excess costs and instead of those dollars going towards resident-serving infrastructure improvements and enhanced services, they go for a over-sized workforce needed to support visitors (of course, as I always state in fairness, overnight visitors do cover the costs they impose on the City thru the TOT, its just that they comprise only 5% of tourist arrivals).

    This “columnist” should be read with caution since he’s got such a giant vested interest in keeping the tax-payer subsidies to the tourism industry going. Its tiresome to have to keep highlighting his distortions, diversions, half-truths etc, but its in the interest of local tax-payers that we keep shining a light on Mr. Fried’s writings.

  10. Michael, did you just try and whitewash Measure Q’s thorough drubbing by saying that “belief that the City Council majority and City bureaucracy was biased in favor of unsound growth” was “widely held?” Even someone unschooled in statistics knows that one third of the voters does not constitute “widely held,” but rather an “astonishing minority.” Yes, you were the champion of one of the most failed measures in recent voting history.

    It is indeed tiresome to address your feeble attempts to freeze our town in time when the real majority of residents want things like pedestrian promenades, cultural centers, a multi-modal transportation system, modern libraries, arts and entertainment, and more amenities to enrich our lives. You don’t have to participate. But you won’t stand in our way.

  11. Billy: I’m far more concerned about your constant distortions and half-truths about the costs & effects of over-tourism on our town and the costs to all tax-payers. That’s the primary focus of my rebuttals; that, and to point out that you have a vested financial interest in misrepresenting the truth about the costs of tourism to all Lagunan tax-payers. The rest is simply context. Fine, if you consider “widely held” an “astonishing minority”; so be it. Your highlighting of that issue to the exclusion of the main focus of my rebuttal above shows that you again try to slither away from the main topic at hand. Your dishonesty and constant drum beat of distortions to help your struggling day-tripper-dependent business is my primary focus.

  12. Well said Mike. I wouldn’t expect anything but obfuscation. If the business owners paid for the cost of tourism I would pay more attention to their missives. But they apparently are so afraid that if we dumb cash cows will realize that we contribute what is now well over $25,000,000 to annually subsidize the tourists while at the same time lowering our quality of life and getting no benefit we might vote for council members that give our inputs equal weight as the business and building owner cabal and they may have to pull their own weight. But instead they basically are always saying “look at the shiny coin”. The distraction seems to be working. And Billy Fried is one of the best at the shiny coin game.

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