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:
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:
- Reduce the FY 2002-2003 City Budget as follows:
- Public Safety – Emergency Preparedness. Reduce Professional Services
account by $55,600 to $26,900.
- Capital Outlay - Reduce the Traffic Signal program budget appropriation
from $108,000 to $0.
- Defer action on the establishment of a Cable TV studio until the next
fiscal year (savings of approximately $150,000).
- Defer action on awarding the FY 2002-2003 Residential Overlay project
until the next fiscal year (savings of approximately $623,000).
- Defer action on awarding the FY 2002-2003 Slurry Seal project until the
next fiscal year (savings of approximately $500,000).
- Identify unspent funds budgeted for the PVIC soil remediation project
and return them to the General Fund.
- Identify unspent RDA funds budgeted for projects in the Portuguese Bend
landslide and return them to the General Fund.
- 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.
- Direct the Finance Advisory Committee to present their financing alternatives
report outlining strategies for funding storm drain and sewer rehabilitation
- 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:
- $55,600 of Professional Services included in the FY 2002-2003 General fund
budget to support the Emergency Preparedness Task Force;
- $108,000 that was included in the FY 2002-2003 General fund budget for an
unspecified traffic signal;
- $623,000 that was included in the FY 2002-2003 CIP fund budget for a residential
overlay project; and
- $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
- 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
- Revenue and expenditure estimates presented for FY 2003-2004 and 2004-2005
ARE based upon the working draft of the budget.
- 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.
- 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
Assumptions Specific to the Funds and Program Revenue and Expenditures Included
In The 2003 Model
- 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%.
- 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%.
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.
- 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.
- 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
- 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.
- $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.
- 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.
- 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.
- 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.
- 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.
- 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
- 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
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.
- 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."
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.
- 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.
- The 2003 Model does not include a provision for projects currently under
consideration by the Open Space, Planning and Parks and Recreation Task Force,
- Additional athletic fields;
- A permanent home for the Peninsula Seniors;
- Improvement to Upper Pointe Vicente Park (surrounding City Hall);
- An Equestrian park facility; and
- Improvements to the City Hall facility.
- 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.
- 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.
- 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.
- 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
- 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.
- 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.
- 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.
- 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.
- 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
- 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.
- 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
- 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.
- 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.
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
Director of Finance and Information Technology
W:\5 Year Model\2003 Financial Model\20030326_2003 Financial Model.doc