These arguments often became heated and belligerent and although the Ordinance and the VR Compliance department were both new it seemed as though some people were determined to have VRs banned even though no one on social media knew how effective the new system was nor what the likely effect of a ban would be. So I thought I’d ask some of the people involved in the new system: Boris Stark one of the officers of the City’s new Vacation Rental Compliance department, and Geoffrey Kiehl, the City’s Director of Finance.
According to Boris Stark, the purpose of the new VR Compliance Department is to:
“…enforce the ordinance, enforce the municipal code and educate the community, making sure the community is educated, on an ongoing basis.”
He believes that the whole community should be informed of the provisions of the new ordinance governing VRs, “so that the residents know what is a violation” as well as how to take action if they believe the ordinance is violated. What is new is that tougher regulations have been introduced, and the City is serious about enforcing them. That wasn’t the case in the past, and according to Finance Director Kiehl the problems with the old system were obvious.
Kiehl joined the City of Palm Springs as Director of Finance nine years ago, which means he started right when the Great Recession was beginning. Back then Vacation Rentals generated only $1.7m of Transient Occupancy Tax, no fees were charged for VRs, and the City had only one staff member handling everything related to VRs. Enforcement of the old VR ordinance was handled by the Police Department, even though many, including the Chief of Police, felt that that was a poor use of their officers’ time, especially as the PSPD was understaffed. As Kiehl noted:
“When I first came here, I could say there was no vacation rental anything. We had one clerk from finance who managed, dealing with the TOT, hotline calls and stuff like that and there was great dissatisfaction with the lack of enforcement… the police chief was arguing it's kind of overkill having police officers respond to the stuff. So that's where we got into considering trying to get more Code enforcement kind of people involved on the response.”
Today the picture has changed. In 2017 Vacation Rentals are bringing in $7.7m in Transient Occupancy Tax and close to $1.9m in permit fees. Those fees more than cover the cost of the new department, of which Boris Stark is one of nine full-time officers. According to Kiehl:
“(The City) created the two vacation rental officials and then they created a building official position to do inspections and then they added code enforcement positions and then they added administrative clerical positions so all together I believe it's nine F T Es that were created out of thin air. There was only half a clerk allocated in my department previously and so this entire function, other than the TOT portion of it, the collecting of the money, is the only thing remaining in my department. The rest of it got shipped to this brand new department. They're not fully ramped up yet, they're still getting there so they're not spending nine hundred dollars per vacation rental yet, but that is what is being collected right now, or actually it is a little bit more because we are providing I think it was a five percent increase, so I think is nine forty five.”
I asked Stark (who I interviewed in June of this year) to give me a sense of the timeline in the establishment of the new department:
“The program is in its infancy but we are already seeing changes. Even though the ordinance came into effect less than ninety days ago, the Department was established with the first two hires towards the end of December 2016/beginning of January 2017, we are already taking enforcement measures and seeing some results in the infancy of the program. Between January and today we have hired three code compliance officers who are out in the community six or seven days a week. They’ve been doing training for the last two weeks. They have a lot of experience in code compliance and enforcement and then we have two additional accounting clerks and we have one additional person, so we have so far eight people, plus one more who will either be a building inspector or a compliance officer, we are evaluating that now.”
I asked him what impact the new department had had on the Police.
“Both Suzanne and I felt from the beginning that it was really important to us that the police were here to deal with larger scale community issues like crime, and DUIs and we felt we owed them to free them up as much and as quickly as we could, so with the new compliance officers we have significantly dropped the police on-call hours to respond to vacation rentals and we have rearranged the schedule where some of the time in the late shift has security covering the lower demand for calls coming in.”
In July the City’s records showed that police exposure to Vacation Rental complaints filed through the Vacation Rental Hotline had been reduced from 75 hours (December 2016) to 14.5 hours (July 2017) on a weekly basis.
Beyond their impact on the Police department, the new VRC Department was laying the ground-work for their new compliance officers and engaging in their educational role. According to Stark:
“The fact that the compliance officers only started recently doesn’t mean that the people who have been in our department since January haven’t been taking an active role in trying to investigate, taking a look at who repeat offenders are. There are things that we are continually taking up on the next level of compliance, whether that’s taking them to the courts and things of that sort. So there’s been a general effort in compliance and finding people who are not good operators and saying “Hey, you have to comply; this is what you have to do” and more than anything when people are put on notice they tend to pay attention a lot closer than they used to, so we are seeing a higher response from people wanting to be good operators coming in, meeting them and them asking “What do I need to do to be a good operator” and most operators want to be a good neighbor. At the same time there are operators out there that really do not understand the severity of their guests’ impact on the neighborhood.”
According to Stark the new department is having an effect on “bad-operators”:
“We are catching more bad operators each week with our code compliance officer efforts. In addition, we are getting some great leads from the neighbors on unregistered VRs through the Hotline. Some bad operators become good operators within a short time because they do not want to have their Certificate suspended for 2 years. It is a shifting landscape month to month.”
That then led me to wonder how the department will know whether it’s being successful. I supposed that if the new department had an impact, the volume of legitimate complaints would diminish. (There are illegitimate complaints, and have been since the Hotline was set up, but now the new Ordinance has penalties for such abuses of the system]. According to Stark:
“If you look at the volume of vacation rentals we have versus the how many nuisances we get it’s a really interesting statistic. We’re monitoring our success with some key indicators:
- Volume of Vacation Rental Hotline calls.
- Type of a nuisance reported.
- Outcome of the call.
- Number of citations issued as a result of the Call into the Hotline, and
- Number of calls made in a period of time on one property.”
According to Stark, the biggest challenge he faces is having the time to prove the effectiveness of the system he’s operating.
“The ordinance has not yet been in effect for ninety days. It’s in its infancy and we are seeing some change out there within compliance so I think the biggest challenge is it’s really hard to ask people for just a little more time to be able to see the full effects of this ordinance. In my opinion, it is a very well drafted ordinance that targets people who are bad operators. Those are the people that create nuisances to the owners and it’s a great framework we have been given to work with, we just need a little more time to show the results. So I think that’s the greatest challenge: time.
We’re going into uncharted territory. There is no city in the U.S. that has such an ordinance in place. So there is not a parallel example of a similar situation happening in other municipalities. So, ultimately, our goal is to as quickly as possible crack down on bad operators and to educate people as quickly as we can. … We have some really great staff that are dedicated; Suzanne and I we dedicate ourselves to solving this issue and we are going to work as hard as we can to get bad operators out of business, to get people educated and to understand what it means to have a vacation rental permit in this city.”
How then does the new system work?
In order to operate in Palm Springs all short-term rentals must have a permit issued by the City and the permit number must be displayed in any online advertising. Failing to display that number is itself an infraction. Each permit also places a limit on the number of people who can be present in a property and the number of cars allowed.
When a guest arrives at the property, the owner must have the requirements of the ordinance on display and the owner or their agent must have the guest sign an acknowledgement that they understand them.
If then a complaint is received, compliance officers go to the address at which the claimed infraction is occurring, and, if they find there to be a violation of the ordinance, they issue a citation on the spot. This is not discretionary; all observed violations receive a citation. At that point, the police might be involved but according to Stark that generally isn’t the case:
“One of the things I really like about this ordinance is that it gives us options. For instance if an officer goes to a property and they attempt to contact the guest and they didn’t want to comply with the requirements, didn’t want to accept the citation, there’s several things we can do; we can call the police, and they can come over and assist us in bringing the guest into compliance. That’s one option. A second option is that we can contact the contact person, a property manager or other local person, and they have to be able to respond within thirty minutes to help us with the guest to get them to comply with what we are asking them for. So, we have those two options. We really try not to dispatch the police unless we have to but if the situation does come up, we will call for their assistance. We have the right under the municipal code to request an eviction and we will exercise that right when needed, (but), most people comply with our requests and are very nice. They understand that they have broken the rules and some don’t but most people are very understanding and very apologetic after we make contact and issue a citation.”
If when the compliance officers get to a property, no violation is observed, the officers still issue a “Courtesy Warning”, meaning they tell whoever is at the property that a complaint had been received.
If a property-owner receives three citations in a rolling twelve-month period, their permit is revoked for two years. From that point, the matter is handled by the City Attorney’s office. Stark described it as:
“Once a suspension is issued the City Attorney is involved, and that's because we then enter another realm where my experience and my job can no longer help guide these people to compliance. So that's when the City Attorney and their office get involved.”
The property owner can appeal the permit suspension to the City of Palm Springs Appeals Board, (as described in section 2.5 of the Municipal Code), but at that stage the City’s Attorney is involved and he has been taking an aggressive stance against violators of the new ordinance since the new system started. Even by June of this year, the permits of a number of VR operators had been revoked and their appeals had failed.
Whether or not the suspension comes into effect immediately is a matter of discretion by both the Compliance Department and the City Attorney. For instance, a property owner may want to implement improvements that will bring them into compliance with the ordinance, and the City can allow them to continue operating until their appeal against the permit suspension is heard, or alternatively the City can insist that the owner ceases operating immediately until the appeal.
If a property owner simply ignores the suspension and they continue to advertise on say AirBnB, or VRBO the VR Compliance department will be aware of these people as they monitor advertised properties and can have the City Attorney’s office take further action against them.
That said, although this enforcement system is far stricter and more water-tight than before it has some weaknesses. For instance, it relies on a complainant accurately identifying the location of a nuisance, which can be difficult when, say, someone is playing loud music late at night that can be heard by multiple neighbors. In such cases, the system depends on how quickly the VR Compliance officers respond, and how hard they try to locate the offenders if the nuisance is detectable when they get there. This can be further hampered if a complainant is unwilling to give their name and location. But it seemed to me that the department is determined to deal with complaints quickly, and as these new compliance officers are focused on one task, their response times are not going to be affected by calls for them to deal with other more serious issues, as happened when the police were responsible for enforcement.
If this VR Compliance department is a failure, or even if it’s not, and the short-term rental of homes in Palm Springs are banned, what will happen? Some people believe that all the visitors who book Vacation rentals will still come to Palm Springs, they’ll just stay in hotels instead. Others argue that they’ll simply stop coming. Finance Director Kiehl says it’s likely to be something in between:
“I think there's truth to both of those parts. I don't have a good answer for you there and what really would happen if (VRs) just went away overnight, would the hotel and motel sector just be able to absorb it? I think more likely the answer is somewhere in the middle. They'd absorb the people that would still want to come to Palm Springs and they can absorb that. Other people say: “If I'm going to stay in Palm Springs and there’s not a vacation rental home then I don't want to go because that's a different experience than I was expecting.””
But even if the majority stop coming to Palm Springs, surely, that wouldn’t make much difference to the City’s finances, and it could save $1.9m by closing the VR Compliance department because it wouldn’t be needed any more? According to Kiehl, not so fast:
“Do you really believe that all of those people who are currently renting and generating that $7.7m (in Transient Occupancy tax), if you banned it, does that mean it stops? In the cities that have banned it, has it really stopped, or has it just gone off the grid? Has it gone underground? So then, how passionate are you about stepping up your efforts, on an enforcement side, to really ferret out the people that, now that you've shut down all the vacation rental agencies, and all the people who are legally permitted and cooperating with the city rules and then there’ll be a bunch of people who’ll say well right, now I can charge a lot more now it's illegal, basically on the black market. There's going to be Vacation Rental people no matter what.”
Although nearby Indian Wells has banned short-term rentals, according to Kiehl, Palm Springs is “a very different animal”. It’s far easier for Indian Wells to police a ban for its 3,000 residents because they almost all live in HOA-controlled gated communities. As Kiehl noted:
“When you're not looking at a bunch of gated communities it is harder to really put the clamp on”
So, according to the Director of Finance, if a ban is introduced, enforcement would still be needed, otherwise there will be an underground market in short-term renting. So little to none of the $1.9m expense might be saved.
What of the impact on TOT revenues? Surely, tax revenues from VRs aren’t important for the City? Not so, says Kiehl, who told me that the City’s budgeted General Fund, which pays for day-to-day operations, is $100m, and that the City has $20m saved in reserve. That can be compared with the City of Rancho Mirage, which has a reserve fund of over $200m.
So, what happens if short-term renting is banned? Well, first of all, the City loses all of its permit fee income of $1.9m as no one will be applying for permits for something no longer allowed, yet the City must still maintain a compliance department to ensure that the ban is enforced. In addition, some or all of the current Transient Occupancy Tax of $7.7m will be lost. According to Kiehl, if that worst-case scenario was to happen, and no other action was taken, Palm Springs’ reserve fund will be eradicated in less than three years as a result of a ban:
“Keep all the compliance but you lose the seven point seven. That wipes out your reserves in three years or less right I mean that is your worst case scenario right there. It's not a realistic scenario to me but I mean that is the scenario… we'd have to make adjustments elsewhere… So if the citizens were to choose that option then what they have also to choose is find seven point… six point something million dollars… worth of savings a year and that's not insignificant.”
Losing $6 or $7 million dollars on a General Fund budget of $100 million does seem to be “not insignificant”, but it’s made even more significant by the impact of the Great Recession on the State of California’s pension scheme (CalPERS). According to Kiehl:
“Some years back where Cal PERS lost 40% of their portfolio in one year. We've been suffering from that ever since and the returns in recent years haven't been at the level that the Cal PERS actuaries had anticipated based upon the twenty year average of 7.5%. So, we’re lowering the estimate of what we will be earning. Over a period of six years our pension costs are going to double from $13m a year to $26m a year and it works out to about $6.5m a year, and that means we have to cut costs or increase revenues in some combination on an average of $6.5m a year for those six years to get back to even on where the CalPERS costs are going just six years from now.”
Thus, even without a ban on short-term rentals, in the Summer of 2017 the City was facing cuts (like scrapping The Buzz) and looking for ways to increase revenues, not reduce them. Hence, the recent ballot measure to increase sales taxes by 0.5%, which was approved by voters in November and is expected to bring in an extra $6.7m per year. That makes Palm Springs the city with the highest sales tax in the county at 9.25%.
That then puts the potential financial impact of a ban on VRs into context. If an increase in costs of $6.7 due to CalPERS leads to either major cuts in services or a sales tax increase of 0.5% then, if a VR ban costs the City around $6m to 7m it will be faced with the same choice: cut services or raise revenues through the equivalent of a further 0.5% sale tax. Scrapping The Buzz, which costs the City $1m per year in Measure J Funds, could help, but there’d still be a shortfall of over $5m per year, i.e. unless that money was found somewhere, the reserve fund of $20m would dry up in four years instead of three, and having gone through the baptism of fire that the Great Recession was for a Director of Finance of a City heavily dependent on tourism, that’s a prospect that Director Kiehl is keenly aware of.
“If you look at the Great Recession the property tax decline actually happened first, and then the tourism stuff. Property taxes used to be our number one revenue source when I came here in 2008 and number two was T.O.T, hotel tax, and number three was sales tax and we took the plunge in property taxes, saw the signs of the weakening in tourism and that's when we started scaling back and sure enough about a year later is when the TOT and sales tax, which tend to ride in tandem, started to decline also.”
Kiehl, watches the tourism industry like a hawk and receives regular reports from hotel managers not just of TOT takings, which are retrospective, but of hotel bookings, which give him an earlier indication of demand and enable him to forecast TOT receipts. Although when asked he agrees that the Great Recession is over, he thinks another minor recession could be on the way:
“There is so much concern at the national and world level that I think that the strength of Tourism is at risk.”
His focus he told me is on tourism rather than property prices:
“I’m focused more on tourism: people being afraid to fly and actually we benefited from some of that because of the drive market; instead of flying elsewhere, or driving to Mexico - fear of traveling to Mexico helped us - they still wanted to go somewhere. Instead of going South they went East and the whole thing with flying just being more expensive and traveling and companies cutting back on travel and conferences hurt us in one aspect and yet gave us an opportunity to pick up some more of the drive market.”
Kiehl it seemed to me was well-informed about the prospects facing the City, and was actively monitoring them. His focus on tourism reinforced my own belief that that is the main driver of the city's economy and certainly of the income of the City, and my impression was that he is a truly prudent City officer, which I guess is not a bad quality in a Director of Finance. In his opinion a ban on Vacation Rentals could effectively reverse the effects of the sales tax increase voters supported in November and if not offset with increased revenues, will again face the City with cutting services, in part because, unlike its more modern sister cities down the valley, it has a relatively small reserve and a far higher annual expenditure.
In the meantime, Boris Stark and his team, supported by the City’s new Attorney, are working hard to make sure that the new ordinance governing Vacation Rentals is working. His main challenge, he says, is time: time to show that the new system is working and I am hoping that he and they will be given that before anyone decides whether Vacation Rentals should be banned in a city whose number one industry is tourism.
This article has been a long time coming. It started in the Summer when I asked to interview Boris Stark one of the officers of the City’s new Vacation Rental Compliance department, after which I interviewed the City’s Director of Finance, Geoffrey Kiehl. Both were extremely kind and generous with their time and I want to thank them both, and the City Manager, David Ready, for their willingness to answer my questions.