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TO: HONORABLE MAYOR AND COUNCILMEMBERS
FROM: CITY MANAGER
DATE: FEBRUARY 4, 2003
SUBJECT: SHORT TERM BUDGET CONTINGENCY PLAN
b. Capital Outlay - Reduce the Traffic Signal account by $108,000 to $0.
City Staff has undertaken a review of the City’s current budget document in light of the Governor’s January 10, 2003 announcement that he would ask the Legislature to take Vehicle License Fee revenues from local government (cities and counties) in order to help the State deal with a $34 billion deficit. If the Governor is successful in getting his budget approved, Rancho Palos Verdes will lose about $670,000 in revenues over the final five months of this fiscal year and $1.6 million in the fiscal year beginning on July 1, 2003.
As an initial reaction to the Governor’s proposed budget, on January 15, 2003 City Departments were directed by the City Manager to delay work on any programs/projects that appear in the approved budget, but have not yet been implemented. The programs affected include the annual residential pavement slurry seal and overlay project, the sewer cleaning and filming project, consulting services for emergency preparedness and general plan update, additional traffic signals and the cable television studio proposal (funding for this new program has not yet actually been appropriated by the Council). The total value of these programs/projects is about $1.5 million.
Although $1.5 million is far more than a potential $670,000 loss of revenues over the next five months it was staff’s intention to leave as many options open as possible. The State has a poor record for meeting the July 1st budget deadline and in view of the current situation; there may not be a State budget until October or November. Without a budget, the State will likely cut off disbursements to local government. Therefore, the short-term contingency plan for City operations actually assumes a year of indecision on the part of the State.
The long-term impacts of a loss of $1.6 million annually will be addressed in the budget process for our two-year budget for Fiscal Years 2003-04 and 2004-05. It is unlikely that a loss of 12% of the City’s general fund revenues will leave any program unaffected including the City contract with the Sheriff for public safety services.
Quotation From the CAFR (Dennis McLean)
"Though the General Fund reserves of the City increased moderately during the fiscal year ended June 30, 2002, it is important to continue to measure the City’s financial strength over time, not just on the basis of the most recent three or four years experience. The budget adopted by the City Council for the fiscal year ending June 30, 2003 presents the expectation of a decrease of General Fund reserves. The economic downturn and management’s concern about the possible decrease of state shared revenues will require continued conservative fiscal policies." (Page v of the Letter of Transmittal)
Following up on our Finance Director’s advice, staff has attempted to present a concise review of the ten-year financial history of the City in the following pages. The ten-year review generally reflects a period of increasing revenues and prosperity for both private enterprise and government. However, economic trends are cyclical and planning for a down cycle, while not popular, is an obligation of responsible government.
City revenues from all sources have risen from approximately $9.7 million in fiscal year 1992 to over $17.4 million in fiscal year 2002. This 79% increase in annual total revenues over the ten-year period represents an average annual increase of about 6%.
In order to make annual comparisons as accurate as possible, the revenue figures used for the purposes of this report do not reflect extraordinary one-time revenues including:
Approximately 62% of the City’s General Fund Revenues come from three sources: property tax (27%), vehicle license fees (19%) and utility users tax (16%). Other significant sources of City General Fund Revenues include sales tax (8%), franchise taxes (9%) and licenses and permits (8%). Since the approval of Proposition 13 by the voters in 1976, the distribution of property taxes has been controlled by the State. Vehicle License Fees, the revenues from which are Constitutionally guaranteed to local governments, are set by the State. Local government has little control over revenues to fund local services such as police protection and maintenance of infrastructure.
Some sources of revenue that the City has come to depend on over the past few years include use of money, revenues from other agencies and other revenues. Use of money is the interest we earn on our investment. With recent interest rates at, or near, an all time low, this source of income has been drastically reduced. Revenues from other agencies and other revenues include roadway improvement grants from federal and state sources, public safety grants and CDBG funds. These funding categories will very likely decrease over the next few years as grant funds become scarce.
The City also receives funds that are restricted for use on streets. These revenues include gasoline taxes, Proposition A funds (for transit purposes), Proposition C (for use on arterial streets) and 1972 Act Funds. When the voters passed Proposition 218 in 1998, limitations on these assessment district funds were enacted that substantially reduced the revenues to local government. Prior to 1998, Rancho Palos Verdes funded park maintenance activities with 1972 Act Funds. Now the funds can only be utilized for traffic signal maintenance and landscaping maintenance in the public rights of way.
Looking back over the past ten years, the fiscal year ending on June 30, 2002 is the only period for which Total Revenues did not exceed the previous year’s revenues. The 2002 fiscal year also marks the only period in the past ten years that total expenditures exceeded total revenues. Note that expenditures for capital improvement projects, rather than baseline operating costs, were the reason total expenditures exceeded total revenues. We did not include the large amounts for purchase of open space property, PVIC grant funds or the sale of Proposition A funds in the annual revenue figures reflected in the chart below.
Operating Costs, which are defined here as all expenditures other than capital outlay, have risen $4.1 million in ten years; from $8.2 million in fiscal year 1992 to $12.3 million in fiscal year 2002. This 50% increase represents an average annual increase in operating expenses of over 4%. As we did with the revenue figures, we did not include the large amounts for purchase of open space property, PVIC grant funds or the sale of Proposition A funds in the analysis.
The net difference between Total Revenues and Operating Expenses over the ten-year period is nearly $20 million. The majority of these funds were transferred to the City’s Capital Improvement Fund or the RDA and have been expended primarily on pavement overlay projects, drainage improvement projects and redevelopment agency loans. Some of these funds have also been set aside in the Building Replacement Fund.
Expenditures on Major Programs
Reviewing the past ten years of expenditures on the City’s major programs, Public Safety stands out as a bargain. Over the period where the overall cost of doing business increased by 50%, the cost of public safety services increased by only about 34%.
The Recreation and Park program has actually decreased by one-third since 1992 due to severe program cuts and lay-offs during the last financial crisis in the early 1990s.
The Public Works programs have increased in cost by slightly more than 42%, or less than the overall increased cost of running the City. The higher increase in expenditures between 1994 and 1998 reflect costs of engineering for an aggressive capital improvement program, focused on pavement management, that was actually implemented in 1997.
The Capital Improvement program has seen significant growth since the early 1990s. The development of a pavement management plan and a concentration on improving the City’s residential streets has accounted for about $10 million of a total expenditure of $26 million in capital expenditures over the past ten years.
The cost of the Planning, Building and Code Enforcement programs have almost doubled over the past ten years primarily due to the cost of the View Restoration/Preservation program that became active in 1998-99 and the NCCP work that began in 1996. The Equestrian Committee was also created since 1996.
The program that has seen the most growth over the past ten years (other than capital improvements) is General Government. The total cost of this program has risen by over 120%, or $1.6 million, in the past ten years. Increased costs of insurance, the recent costs of litigation and providing support to a very active Finance Advisory Committee as well as the addition of an Information Technology program are the primary reasons for the sharp increase.
Over the remainder of the fiscal year, Staff believes savings in our approved budget must be identified to offset any sudden VLF loss. In addition to the recommended budget cuts or program delays, there are two other programs that we considered for delay or deletion. The first was the professional services budget of $200,000 to support the General Plan Update Task Force. Staff felt that since the Task Force has begun its’ work, it would be counterproductive to delete these funds. The budget also includes $350,000 for an "evaluation" of our sewer system. Although this is a new program and might be considered as very vulnerable to cutting, the Public Works Department feels that the City needs to know what condition it’s sewers are in and proposes to retain this "one-time" cleaning and inspection in the budget.
The FY2002-2003 estimated general fund revenues in excess of adopted expenditures are only $827. Therefore, any appropriations for new or expanded programs approved by the City Council have been drawn from the General Fund Reserve. The current estimated General Fund Reserve available has been revised based on the actual audited General Fund Reserve of June 30, 2002.
The calculation puts the current estimated General Fund Reserve at $6,255,840 or $196,030 below the "Policy Reserve Level."