Rancho Palos Verdes City Council
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TO:

TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL

FROM: DENNIS McLEAN, DIRECTOR OF FINANCE AND INFORMATION TECHNOLOGY

DATE: MAY 10, 2003

SUBJECT: 2003 FIVE-YEAR FINANCIAL MODEL

Staff Coordinators: Kathryn Downs, Accounting Manager

Gary Gyves, Senior Administrative Analyst

BACKGROUND AND DISCUSSION:

Overview

The 2003 Five-Year Financial Model (the "2003 Model") is a financial schedule prepared by the Finance Department under the supervision of the City Manager. City Council Policy No. 18 requires preparation of the Model. The 2003 Model includes all funds of the City and its component units (Redevelopment Agency and Improvement Authority).

Utility Users Tax

Section 3.30.180 of the Municipal Code requires the City Manager to submit an analysis of revenues derived from the City’s Utility Users Tax ("UUT") in connection with the preparation of the City’s annual budget. The 2003 Model includes the projection of UUT revenue, as well as all other revenues and expenditures for the City and its agencies.

The UUT rate has always been 3% since its inception during FY 1993-1994. The City Council may vote to decrease or eliminate the UUT rate at any time. In the event the rate is decreased, the City Council may elect to increase the rate at a later date, but not to exceed 3%. As a result of the 1996 municipal election, the UUT rate may only be increased in excess of 3% with the majority vote of the people.

Possible Loss of Vehicle License Fee (VLF) Revenue – A Contingency Plan

Staff expects that Vehicle License Fee ("VLF") revenue will reach $2.4 Million during FY2002-2003, nearly nineteen (19%) percent of total General fund revenue. Approximately $1.6 Million of the VLF revenue is currently back-filled by the State. The Governor’s recent budget proposal excludes the payment of VLF back-fill to counties and cities beginning with FY 2003-2004. Therefore, no VLF back-fill revenue is included in the 2003 Model.

Short-Term Budget Contingency Plan

At the February 18, 2003 meeting of the City Council, the City Manager presented a Short-Term Budget Contingency Plan to the City Council. At the conclusion of its discussion, the City Council adopted the following recommendations presented by the City Manager:

 

  1. Reduce the FY 2002-2003 City Budget as follows:
    1. Public Safety – Emergency Preparedness. Reduce Professional Services account by $55,600 to $26,900.
    2. Capital Outlay - Reduce the Traffic Signal program budget appropriation from $108,000 to $0.
  2. Defer action on the establishment of a Cable TV studio until the next fiscal year (savings of approximately $150,000).
  3. Defer action on awarding the FY 2002-2003 Residential Overlay project until the next fiscal year (savings of approximately $623,000).
  4. Defer action on awarding the FY 2002-2003 Slurry Seal project until the next fiscal year (savings of approximately $500,000).
  5. Identify unspent funds budgeted for the PVIC soil remediation project and return them to the General Fund.
  6. Identify unspent RDA funds budgeted for projects in the Portuguese Bend landslide and return them to the General Fund.
  7. Request the Los Angeles County Sheriff to propose a contingency public safety services contract for FY 2003-2004 and FY 2004-2005 reflecting a 12% decrease over the approved public safety services contract for FY 2002-2003.
  8. Direct the Finance Advisory Committee to present their financing alternatives report outlining strategies for funding storm drain and sewer rehabilitation projects.
  9. Appoint a City Council ad hoc budget committee to work with the City Manager on developing the FY 2003-2004 and 2004-2005 budget proposals.

During the meeting, the City Council decided that the following projects, included in the FY 2002-2003 budget, as well as the Short-Term Contingency Plan described in the proceeding paragraph, will not be expended:

  1. $55,600 of Professional Services included in the FY 2002-2003 General fund budget to support the Emergency Preparedness Task Force;
  2. $108,000 that was included in the FY 2002-2003 General fund budget for an unspecified traffic signal;
  3. $623,000 that was included in the FY 2002-2003 CIP fund budget for a residential overlay project; and
  4. $500,000 that was included in the FY 2002-2003 General fund budget for a residential slurry seal project.

The elimination and/or reduction of the projects described in the proceeding paragraph will save $1,286,600 of General fund reserves. The savings are included in the 2003 Model.

Other FY 2002-2003 Budget Adjustments

Subsequent to adopting the above recommendation, the following budget action was taken by the City Council:

  • The City Council approved a budget resolution on March 4, 2003 for $10,000 of General fund monies to begin the Education Access Channel program during FY 2002-2003. The budget resolution also included an appropriation of $25,000 from the Building Replacement fund for restoring the cable studio located at Upper Point Vicente Park, adjacent to City Hall. The working draft of the FY 2003-2004 budget will include $10,000 to operate the Education Access Channel program.
  • On March 18, 2003, the City Council approved a $491,067 appropriation increase for additional costs incurred for the San Ramon storm drain project within the Capital Improvement Projects fund. The increase will require a proportionate transfer from the General fund reserves.

Format of the 2003 Model

The 2003 Model includes the presentation of actual FY 2001-2002 revenue, expenditures and ending fund balances for all funds. The City’s independent auditors expressed an unqualified (clean) opinion regarding the fair presentation of the FY 2001-2002 financial statements as a result of their audit. The 2003 Model includes projections of revenues, expenditures and ending fund balances for FY 2002-2003. The working draft of the proposed budget for FY 2003-2004 and FY 2004-2005 is the basis for the first and second years of the 2003 Model.

The 2003 Model includes the segregation of funds as follows:

  • General fund – The General fund balance represents the City’s unrestricted reserve monies. These monies may be used for any City expenditure, including general operations of the City.
  • Funds restricted by action of the City Council – The fund balances of these funds represent monies restricted by City Council action for a particular purpose. The funds were formed with transfers from the General fund. These monies may be returned to the General fund or used for other purposes (e.g. infrastructure projects) upon the action of the City Council.
  • Funds restricted by law or external agencies – The fund balances of these funds represent monies restricted by law or external agencies, such as the Federal Government, State of California, or Los Angeles County. These monies can only be used for the purpose outlined by the restricting agency in accordance with the terms and conditions set by legislation and voter ballot measures.

Although Exhibit A provides a meaningful "Summary", the 2003 Model includes several schedules organized as follows:

Exhibit A Summary – 2003 Five-Year Financial Model (One Page Summary)

Exhibit B 2003 Five-Year Financial Model By Fund

Exhibit C CIP Plan Project Expenditures

Exhibit D Summary Of Fund Transfers

At the request of the FAC, the 2003 Model includes a Summary of Transfers between funds for fiscal years 2003-2004 through 2007-2008.

Complete List of 2003 Model Assumptions

General Assumptions

  1. Revenue and expenditure estimates presented for FY 2003-2004 and 2004-2005 ARE based upon the working draft of the budget.
  2. Most expenditures have been increased annually using a factor of 3.26% beginning in FY 2005-2006 and continuing through FY 2007-2008. A 3% factor was used during the preparation of the 2002 Model, as well as the preparation of Models prior to 2002. Staff believes the 3.26% factor will provide a more accurate estimate of expenditures in the final three years of the Model.
  3. Most revenues have been increased annually based upon a general increase of 2%. Certain revenue categories (e.g. projected changes in permit activity and retail sales) have been increased based upon staff’s discussions with other agencies, reports provided by other agencies or staff’s own expectations. The factors (% rate of change) are presented on Page 1 of the 2003 Model using an alphabetical index (a through l) and are referenced throughout the 2003 Model.

    4. Assumptions Specific to the Funds and Program Revenue and Expenditures Included In The 2003 Model

  4. It is assumed that the City's share of property tax will remain constant at 6.2% of the one-percent rate assessed by the County. Property tax revenues have been increased at the rate of 5% in FY 2003-2004, 3% in FY 2004-2005 and 2% annually each year thereafter. The 2002 model assumed annual property tax increases of about 4%.
  5. The 2003 Model assumes the continuation of the 3.0% utility user tax through FY 2007-2008. It is impossible to accurately project future UUT revenue through FY 2007-2008. Based upon recent discussions with utility providers, no increases have been estimated for the remaining years of the 2003 Model. The estimated annual rate of increase included in the 2002 Model was 1%.

    6. Based upon our discussions with Southern California Edison, California Water and California Gas Company, the expected reduction of electrical rates (and related UUT revenue) should be offset by expected increases expected by California Water and California Gas.

  6. Staff has estimated that golf tax revenue derived by Ocean Trails will be about $165,000 during FY 2002-2003. Due to anticipated completion of landslide repairs, Staff has assumed that it will increase at a rate of 6% for FY2003-2004 and 2% annually thereafter.
  7. No expenditures have been included in the 2003 Model for major park facility and open space improvements. The residential overlay and slurry program has been included in FY2003-2004 only, and at a reduced rate (approximately half of the work recommended by the Pavement Management Program). The arterial roadway projects included in the CIP fund of the 2003 Model are financed with a combination of Proposition C (transit) fund monies and other highway grant monies.
  8. Public works staff presented a revised spending plan for the use of state legislated grants, Quimby fund reserves and EET fund reserves to the City Council on March 4, 2003. The 2003 Model includes the use of these funds in accordance with the spending plan.
  9. $1 Million is budgeted in FY 2003-2004 for the City’s participation towards the proposed purchase of about 722 acres of coastal hillside along Palos Verdes Drive South (PVDS) in cooperation with the Palos Verdes Peninsula Land Conservancy (PVPLC). The PVPLC has committed to raising about $6 Million. The City and the PVPLC are striving to raise the remainder of the funds from state and federal grants totaling approximately $23 Million. Based on a staff report prepared by the Public Works Department, dated March 4, 2003, the $1 Million budgeted by the City will be funded in the amounts of $538,878, $332,500 and $128,622 from Proposition 12, Proposition 40 and Measure A funds, respectively.
  10. No tax revenue (e.g. transient occupancy tax, sales tax) from the operation of the proposed Long Point Resort project has been included in the 2003 Model.
  11. During preparation of the 2002 Model, estimated interest income for all funds was based on a 5% investment interest rate. Currently, the LAIF investment interest rate hovers around 2%. In the preparation of the 2003 Model, staff has used an investment interest rate of 2% for FY 2003-2004, increasing to 2.25% during FY 2004-2005 and 2.5% for the last three years of the 2003 Model.
  12. A Quimby fund developer fee of $460,000 for the Point View residential project has been included in FY 2005-2006 of the 2003 Model. The parks and trails amenities included in the Conditions of Approval of the Long Point Resort project satisfy any and all of its Quimby requirements. Due to the uncertainty of completion of the development project, as well as its timing, no expenditures have been included in the 2003 Model utilizing this revenue source.
  13. Environmental Excise Tax revenue of approximately $1.4 Million has been included in the 2003 Model, include Crestridge Villas ($257,200), one-hundred new miscellaneous dwelling units over five years ($256,000), Point View residential units ($238,080), Ocean Trails residential units ($189,440), Long Point Resort project ($350,000), Ocean Front residential units ($76,800), and a 13-lot subdivision ($33,280). Due to the uncertainty of completion of development projects, as well their timing, no expenditures have been included in the 2003 Model utilizing this revenue source.
  14. The working draft of the FY 2004-2005 budget includes the receipt an Affordable Housing In-Lieu fee attributable to the proposed Long Point Resort project of about $931,000. Due to the uncertainty of completion of development projects, as well their timing, no expenditures have been included in the 2003 Model utilizing this potential revenue source from the proposed Long Point resort project. Because the decision whether or not to accept Affordable Housing In-Lieu fees vs. requiring affordable housing to be provided is decided for each respective project, no other In-Lieu fees have been included in the 2003 Model related to other proposed projects (e.g. the Point View residential project).
  15. Except for the Altamira Canyon Storm Drain project that is eligible for Community Development Block Grant (CDBG) funds, no expenditures for storm drain or sewer projects have been included in the 2003 Model. General fund reserves are not sufficient to perform storm drain and sewer improvement projects. No dedicated revenue source currently exists to provide monies to perform storm drain and sewer infrastructure improvements, as well as any long-term debt that could be used to finance such improvements. The FY 2002-2003 budget includes appropriations for the preparation of an update of the citywide storm drain plan, as well as the preparation of an Engineer’s rate structure analysis report.

    16. The actual cost to implement the NPDES program is not definitely known at this time. In the event the cost of NPDES regulations becomes excessive, the City could elect to offset all, or a portion, of the costs of NPDES with the establishment of user fees.

  16. The Director of Public Works presented an overview regarding the Tarapaca Landslide to the City Council on April 15, 2003. The staff report described the following: "GeoSyntec Consultants, Inc. recently completed its investigation and concluded that a landslide exists along the eastern side of the San Ramon canyon just east of the PVDE switchbacks. The landslide, named the Tarapaca Landslide, is an active landslide that borders the eastern edge of the larger and inactive South Shores Landslide. The Tarapaca Landslide is presently sliding westerly into the San Ramon canyon, partially blocking stream flow, and contributing sediment for transport to downstream areas of the canyon."

    17. The staff report included a recommendation to install a storm drain for erosion control with an estimated cost of $1.2 Million. The staff report clearly states that no funding sources have been identified for this project. The landslide is principally within the City; however, a portion of the landslide lies within the City of Los Angeles. The potential sharing of the liability and cost for the project between the City, Los Angeles County and the City of Los Angeles is not known at this time. Because the amount of shared liability is not known at this time, as well as the lack of a funding source, nothing has been included in the draft of the budget for FY 2003-2004 or the 2003 Model at this time.

  17. The 2003 Model includes Altamira Canyon Storm Drain project expenditures in excess of $900,000 in FY 2003-2004. As this project is eligible for Community Development Block Grant (CDBG) funding, the project expenditures are reflected in the CDBG fund.
  18. The 2003 Model does not include a provision for projects currently under consideration by the Open Space, Planning and Parks and Recreation Task Force, including:
    1. Additional athletic fields;
    2. A permanent home for the Peninsula Seniors;
    3. Improvement to Upper Pointe Vicente Park (surrounding City Hall);
    4. An Equestrian park facility; and
    5. Improvements to the City Hall facility.
  19. The 2003 Model includes a transfer of $100,000 from the General fund to the Building Replacement fund for fiscal years 2005-2006 through 2007-2008.
  20. The City’s Natural Community Conservation Plan includes a City funding commitment for habitat restoration and reserve maintenance and monitoring. An annual Habitat Restoration fund expenditure of $100,000 has been included in all five years of the 2003 Model, as well as the working draft of the budget. The Habitat Restoration fund expenditures are partially funded with an annual General fund operating transfer in the amount of $76,752.
  21. The working draft of the FY 2003-2004 budget includes a non-recurring transfer of $75,000 and $175,000 from the Portuguese Bend fund of the Improvement Authority and RDA to the General fund, respectively. The fund balance reserves of the Portuguese Bend fund of both the Improvement Authority and RDA have exceeded a necessary level to pay for normal operations, therefore, the non-recurring transfer is appropriate.
  22. It is anticipated that expenditures for legal fees may reach $1,000,000 during FY 2002-2003. If this occurs, it will be an increase of approximately $200,000 over the previous year. The cost of legal services in prior years was approximately $500,000 annually. The significant expenditure increase is a result of ongoing litigation (i.e. Abrams antenna and the Echevarrieta view ordinance lawsuits). The working draft of the FY 2003-2004 budget includes a provision for $700,000 for legal fees, based upon the expectation of reduced litigation.
  23. The City Council recently began the process of updating the City’s General Plan and other related master plan documents of the City. An estimate of $200,000 has been included in FY 2002-2003 budget to pay for the cost of updating these master plans. Because the work of the General Plan Update Steering Committee will continue into FY 2003-2004, the $200,000 budget appropriation for consulting services is expected be carried over to FY 2003-2004.
  24. The working draft of the FY 2003-2004 budget for the Street Maintenance fund includes about $800,000 of State apportioned Highway Users tax revenue, an operating transfer of $370,000 from the 1972 Act fund, an operating transfer of $273,000 from the General fund, an operating transfer of $109,000 from the Proposition C fund, an operating transfer of $47,000 from the Waste Reduction fund, $20,000 for miscellaneous revenues and $20,000 for sidewalk repair fee revenue, totaling about $1.64 Million. Street maintenance program expenditures are expected to be about $1.61 million.
  25. Staff has included an assumption that approximately $1 million will be spent from the Affordable Housing Set-Aside fund and an additional $1 Million form the RDA Low and Moderate Income Housing fund during FY 2005-2006 for an affordable housing project. The project may include use of the Crestridge property purchased with RDA Housing Set-Aside funds in FY 1999-2000.
  26. Staff estimates the Proposition A fund will build a reserve of about $500,000 by the end of FY 2004-2005. A proposed sale of Proposition A funds in the amount of $550,000 has been included in FY 2005-2006 in the 2003 Model. Based on the 1999 sale of Proposition A funds to the City of Torrance, staff has estimated the sale will be exchanged for approximately $385,000 of unreserved and undesignated General fund monies.
  27. The City Council recently approved the preparation of a Cost Based Fee Study. Although staff expects that some fees will be increased as a result of the Study, a reasonable estimate is not known at this time. Therefore, the possible impacts of increases to cost based fees have not been included in the 2003 Model.
  28. All RDA – Abalone Cove projects, including the installation of the sewer system, are completed. Accordingly, no additional project expenditures are included in the 2003 Model.
  29. The 2003 Model indicates that the fund balance of the Improvement Authority’s Abalone Cove fund will steadily decrease over the five years of the Model. This decrease is due to a commitment to fund a portion of the Abalone Cove Landslide Abatement District (ACLAD) in the amount of $54,000 annually. Interest income on the non-expendable $1,000,000 portion of the fund balance is not sufficient to pay for the estimated annual expenditures including the ACLAD contribution.
  30. The working draft of the budget for FY 2003-2004 and FY 2004-2005 assumes that the renovation of PVIC will be completed during FY 2003-2004. The budget for FY 2003-2004 is based upon operations of PVIC for one-half year.
  31. The City has been experiencing an over-funded position in its CALpers retirement account during the last couple of years. As of a result of the excess funded status, no employer retirement contributions have been required. The working draft of the FY 2003-2004 and FY 2004-2005 budget includes an increase of the employer portion of the CALpers retirement contribution rate of 2.5% and 8% respectively. The estimated fiscal impact is expected to be about $64,000 and $221,000 respectively, when compared with no employer contributions being required the last couple of years. The increase of the employer contribution is a result of unfavorable investment earnings experienced in the retirement portfolio managed by CALpers. Finance staff expresses caution that the contribution rate for FY 2004-2005 may be increased upon completion of the 2002 actuarial report expected to be issued during the Summer 2003.

It should be noted that future economic activity, legislation and policy decisions, as well as any other unforeseen circumstances could affect the City's revenue stream and expenditures during any of the years presented in the 2003 Model.

 

RECOMMENDATION

Based upon the assumptions described above, the projected ending fund balances of the General fund would decline by approximately $1.5 Million over the five years of the 2003 Model. Additionally, the proposed construction activities of the CIP fund and the costs of the Street Maintenance fund will require annual transfers from the General funds totaling about $4.1 Million over the five year period included in the 2003 Model. It’s important to note that nothing is included in the 2003 Model for residential street overlay projects, storm drain improvements and sewer system improvements using General fund resources.

The FAC reviewed the 2003 Model during two meetings and offer the following:

  • Based upon the findings of the 2003 Model, it appears the City will need to increase its revenue and other cash inflow sources in the future to: (1) adequately maintain the City’s infrastructure (Note: sewer and citywide storm drain infrastructure costs are not included in the 2003 Model); (2) improve park facilities; (3) provide funding for park and open space improvements for the benefit of residents; and (4) enable payment of any scheduled long-term debt to finance such improvements.
  • The FY 2003-2004 state budget process must be monitored closely. It may be prudent to further revise the working draft of the FY 2003-2004 budget as a result of the budget adopted by the state (e.g. continued payment of the VLF back-fill, further shifts of property tax revenue allocated to the City).

Respectfully submitted,

Dennis McLean

Director of Finance and Information Technology

Reviewed,

Les Evans

City Manager

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