TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL

FROM: DENNIS McLEAN, DIRECTOR OF FINANCE AND INFORMATION TECHNOLOGY

DATE: SEPTEMBER 7, 2004

SUBJECT: 2004 FIVE-YEAR FINANCIAL MODEL – REVISION 1

Staff Coordinator: Kathryn Downs, Accounting Manager

Gary Gyves, Senior Administrative Analyst

RECOMMENDATION:

1. Receive and file the 2004 Five-Year Financial Model - Revision 1 (the "2004 Model"); and
2. Adopt Resolution No. 2004- , amending Resolution 2004-45, approving the City’s budget for FY04-05, to increase General fund revenues in the amount of $1,539,157 for Property Tax In-Lieu of VLF; and
3. Adopt Resolution No. 2004- , amending Resolution 2004-45, approving the City’s budget for FY04-05, to decrease General fund revenues in the amount of $165,000 for Golf tax revenue.

EXECUTIVE SUMMARY:

Purpose Of Staff’s Revision Of The 2004 Model

At a City Council Budget Workshop on April 14, 2003, the City Council directed staff to prepare a "baseline operating budget" with the assumption that the City would not receive Vehicle License Fee ("VLF") backfill revenue of about $1.6 million during FY03-04. The expected loss of VLF backfill in FY 03-04 required drastic cuts in the City’s expenditure budget. VLF revenue for FY03-04 and FY04-05 remained in question until the recent adoption of the State budget for FY04-05. The caution proved justifiable because the City lost about $1 million of VLF backfill during FY03-04.

The adopted FY 03-04 City "baseline budget" included reductions and cuts of the annual residential overlay and slurry seal program, as well as proposed sewer, storm drain and other capital projects totaling about $1.2 million. The adopted FY03-04 budget also included the elimination of the annual $100,000 contribution to the Building Replacement fund and minor reductions in other programs, including travel for conferences and grants to civic, cultural and social organizations.

The attached 2004 Five Year Financial Model - Revision 1 has been completed to include revenues restored by the adopted FY 04-05 State Budget; to show the effect of restoring some of the programs eliminated in the City FY 03-04 Budget and to make other minor adjustments of revenues and expenditures not known at the time the original 2004 model was prepared.

The revised 2004 Model:

1. Includes approximately $1.5 million annually of Property Tax In-Lieu of Vehicle License Fee (VLF) revenue over the five years of the 2004 Model, which is a result of the State’s FY04-05 Adopted Budget. A FY04-05 budget adjustment accompanies this staff report for this increase of General fund revenue.
2. Includes Capital Improvement Project expenditures associated with the restoration of the City‘s residential pavement management program. The City’s engineering consultants recently updated the City’s pavement management program, which is currently under review by Staff.
3. Includes a reduction of FY04-05 Golf tax revenue of $165,000 in FY04-05 due to the temporary closure of Ocean Trails. A FY04-05 budget adjustment accompanies this staff report for this decrease of General fund revenue.
4. Includes resumption of the annual transfer of $100,000 from the General fund to the Building Replacement fund in FY05-06 through FY08-09.
5. Does not include the proposed budget adjustment in the amount of $250,000 for additional litigation costs expected during FY04-05, presented separately in a staff report by the City Manager, dated September 7, 2004.
6. Does not include the receipt of the FY02-03 VLF Backfill Gap loan to the State. The VLF Backfill Gap loan is scheduled to be repaid to the City in FY06-07 and is estimated to be $726,000. The State Legislative Analyst’s Office has estimated that the State Budget shortfall may exceed $10 billion over the next two years. Therefore, due to uncertainty of its timely collection, Staff has not included the Backfill Gap Loan repayment in the 2004 Model.
7. Does not include revenues from the proposed Long Point Resort project.

Purpose of Table 1 – Fiscal Impact of Significant Proposed Program Expenditures and Capital Projects

In addition to the attached revision of the 2004 Model, Staff has prepared the following Table 1 – "Fiscal Impact of Significant Proposed Program Expenditures and Capital Projects for review and consideration by the City Council." The purpose of Table 1 is to provide an analysis of the potential fiscal impact on Estimated General Fund Reserves over five years that would result from adoption of several programs and capital improvement projects under consideration by Staff, the City’s commissions and committees and the City Council.

The Proposed Recurring Program Expenditures presented in Table 1 include cost estimates for the proposed Team RPV and NCCP programs. Because funding sources are not currently available to finance Infrastructure needs, no Infrastructure cost estimates have been included under the Proposed Infrastructure Expenditures section of Table 1. The City’s Infrastructure Financing Team, including Staff and the City’s consultants expect to present a financing plan to the City Council and the Finance Advisory Committee (the "FAC") at a joint meeting in late 2004.

The first row of Table 1 is titled "A - Ending Estimated General Fund Reserves". The fiscal impact of revisions 1) though 4) described in the previous section (e.g. inclusion of Property Taxes In Lieu of VLF and the residential pavement management program) have been included. The row titled "B - Cumulative Total Proposed Program and Infrastructure Expenditures Through FY 08-09" presents the cumulative estimated costs of the Proposed Recurring Programs over five years. The row titled "C - Ending Estimated General Fund Reserves Including Cumulative Proposed Expenditures" presents the fiscal impact on Estimated Ending General Fund Reserves in the event the Proposed Recurring Programs are adopted.

Fiscal Impact of Significant Proposed Program Expenditures and Capital Projects
	ESTIMATED FY 04-05	MODEL FY 05-06	MODEL FY 06-07	MODEL FY 07-08	MODEL FY 08-09
A - Ending Estimated General Fund Reserves (per 2004 Five-Year Model - Revision 1, see Exhibit A)	11,014,420	11,978,399	10,887,772	11,353,746	10,502,240
Proposed Recurring Program Expenditures:
Team RPV (beginning October 2004)	299,186	398,915	563,232	580,805	598,926
NCCP Open Space Preserve (Additional Costs) (1)	56,645	61,532	66,572	71,769	77,128
Proposed budget adjustment for additional litigation costs	250,000	0	0	0	0
Proposed Infrastructure Expenditures:
Storm Drain Reconstruction	Unknown	Unknown	Unknown	Unknown	Unknown
Storm Drain Lining	Funded (2)	Unknown	Unknown	Unknown	Unknown
Sewer Reconstruction	Unknown	Unknown	Unknown	Unknown	Unknown
Park & Recreation Facilities	Unknown	Unknown	Unknown	Unknown	Unknown
Total Annual Proposed Program and Infrastructure Expenditures	605,831	460,447	629,804	652,574	676,054
B - Cumulative Total Proposed Program and Infrastructure Expenditures Through FY 08-09	605,831	1,066,278	1,696,082	2,348,656	3,024,711
C - Ending Estimated General Fund Reserves Including Cumulative Proposed Expenditures (A - B)	10,408,589	10,912,121	9,191,689	9,005,090	7,477,530
(1) Includes costs associated with ACLAD and Klondike Assessments.
(2) The FY04-05 budget includes $500,000 to begin a storm drain lining program.

Based upon information presented in Table 1 above, the adoption of both the proposed Team RPV and NCCP programs would cause a decrease of Ending Estimated General Fund Reserves by an additional $3 million by the end of FY08-09 (see C in Table 1). If the proposed Team RPV and NCCP programs were not adopted, Ending Estimated General Fund Reserves would decrease by approximately $500,000 by the end of FY08-09 (see A in Table 1).

BACKGROUND AND DISCUSSION:

Overview

The 2004 Model is a financial schedule prepared by the Finance and Information Technology Department under the supervision of the City Manager. City Council Policy No. 18 requires preparation of the Model. The 2004 Model includes all funds of the City and its component units (Redevelopment Agency and Improvement Authority). The requirements of Municipal Code Section 3.30.180 were met when the City Council received and filed the 2004 Model at the April 20, 2004 City Council meeting.

The City’s Five-Year Financial Model is updated annually at the time of budget preparation. However, on occasion, the City’s Five-Year Model is updated during the fiscal year when "significant changes" could impact the City’s financial position.

Fiscal Impact of FY04-05 Adopted State Budget and Potential Impact of Proposition 1A

The Governor signed the FY04-05 State Budget on July 31, 2004. The FY04-05 State Budget includes components of a "local government agreement" framed by representatives from local government and the California League of Cities and the Governor. Local governments agreed to help finance the State’s deficit by agreeing to reductions in State shared revenues in exchange for constitutional protection of local government revenues. The protection of local government revenues (property tax, sales tax & VLF) is in the form of a constitutional amendment (Proposition 1A) that will appear on the November 2, 2004 general election ballot. The major components of the local government agreement and its impact on the City are listed below.

• Local Government State Shared Revenue Contribution:

The State’s FY04-05 Budget includes a $1.3 billion contribution of State shared revenues from cities, counties, special districts and redevelopment agencies in both FY04-05 and FY05-06. The City will lose approximately $348,000 in General fund property tax and as much as $60,000 in redevelopment agency property tax increment in both FY04-05 and FY05-06, for a total estimated loss to the City of as much as $816,000 over the two-year period.

• Property Tax In-Lieu of Vehicle License Fees:

Prior to 1999, State residents paid a Vehicle License Fee ("VLF") of 2% of the market value of their respective vehicles to the Department of Motor Vehicles. This VLF funding is passed through to cities and counties throughout California. The State legislature reduced the VLF tax rate from 2% to 0.65% over a period of three years ending in 2001. The same legislation also guaranteed cities and counties that the State would "backfill" or pay the difference between the two rates.

The property tax in-lieu of VLF component of the State’s FY04-05 Budget eliminates the backfill portion of the VLF payment and replaces it dollar for dollar with property tax taken from the Educational Revenue Augmentation Fund (ERAF). At this time, the City does not expect to realize any loss of revenues from the property tax in-lieu of VLF component of the State’s Budget. The property tax in-lieu of VLF is permanent and took effect on July 1, 2004. Property tax in-lieu of VLF increases each year with each jurisdiction’s change in their gross assessed value of taxable property.

• Repayment of FY02-03 VLF Backfill Gap

On June 19, 2003, due to the State budget crisis, the VLF tax rate was restored to the pre-1999 rate of 2%. Due to the VLF tax rate increase, the need for the State to backfill local governments was eliminated. On November 17, 2003, the new Governor issued an executive order lowering the rate back down to 0.65% and reinstating the backfill to local governments. However, during the time it took the DMV to initiate the increase (approximately three months), the State did not make VLF backfill payments to local governments. The State Legislature has characterized the amount of VLF backfill revenues it failed to pay to cities and counties during this three-month period as a loan.

The State Controller’s Office has estimated the City’s VLF Backfill Gap loan to be about $726,000. In accordance with the State’s FY04-05 Budget, the Backfill Gap Loan is scheduled to be repaid during FY06-07. The State Legislative Analyst’s Office has estimated that the State Budget shortfall may exceed $10 billion over the next two years. Therefore, due to uncertainty of its timely collection, Staff has not included the Backfill Gap Loan repayment in the 2004 Model.

• Propositions 57 and Associated "Triple Flip":

Proposition 57, the one time Economic Recovery Bond of $15 billion, was approved by voters on March 2, 2004. The $15 billion will be used to finance the State’s accumulated General fund deficit carried over from FY02-03, FY03-04 and possibly a portion of the expected FY04-05 deficit.

The "Triple Flip", used to secure the $15 billion bond issue, redirects 0.25% of the sales and use tax going to cities and counties throughout the State. The State will then replace the lost revenues on a dollar-for-dollar basis with property tax taken from the ERAF. At this time, the City does not expect to realize any loss of revenues from the Triple Flip. The Triple Flip took effect on July 1, 2004. The Triple Flip will be discontinued when the Economic Recovery Bonds are retired. The property tax in-lieu of sales tax increases each year in relation to the sales and use tax each jurisdiction would otherwise have received.

• Constitutional amendment (Proposition 1A) Elements:

As stated above, local governments agreed to help finance the State’s deficit by agreeing to reductions in State shared revenues in exchange for constitutional protection of local government revenues. However, it should be noted that the items discussed above have been adopted in the State’s FY04-05 Budget and are not dependent on the outcome of Proposition 1A.

Property Tax:

Proposition 1A would prevent the Legislature from reducing the combined property tax shares of cities, special districts, and the county, except to borrow the funds on a temporary basis to address a "severe State fiscal hardship". However, if Proposition 1A passes, the State will retain the authority to transfer property taxes among cities, counties, and special districts with a 2/3 vote of the Legislature. Under current law, the State can make this type of transfer with a majority vote of the Legislature. Additional restrictions related to the State borrowing local government property tax would include:

• The FY03-04 VLF Backfill GAP Loan must be repaid before any additional borrowing could occur;
• The loan could only occur twice within a 10 year period;
• The loan must be repaid with interest within 3 years, and prior loans must be repaid before borrowing could occur a second time within 10 years;
• The amount of the loan is limited to no more than 8% of the total amount of property tax allocated to cities, counties, and special districts in the previous fiscal year; and
• The loan could only occur with a 2/3 vote of the Legislature.

Sales Tax:

Proposition 1A would prevent the State from taking, borrowing or shifting sales and use taxes from local governments. Regarding the Proposition 57 bonds, Proposition 1A would also prevent the State from:

• Extending the period during which the one-quarter cent sales tax is suspended;

• Failing to pay the property tax in-lieu of sales tax during the period of suspension; and
• Failing to restore the full sales tax rate when the Proposition 57 bonds are repaid.

Vehicle License Fees:

Proposition 1A would constitutionally guarantee VLF revenue to cities and counties at the rate of 0.65% of the value of a vehicle. This is a significant change for cities and counties, because currently the constitution does not guarantee VLF revenues to cities and counties at any specific rate.

If the Legislature lowers the VLF rate below 0.65%, Proposition 1A requires the Legislature to enact a law that provides for an allocation to cities and counties equal to the difference between the revenues received from the 0.65% rate and the lower rate.

Fiscal Impact of FY04-05 Adopted State Budget on City General Fund Revenues

At the time the City’s FY04-05 Budget was adopted, it was unclear if the City would receive VLF Backfill revenues. Therefore, VLF revenues were conservatively estimated to include only the "non backfill" portion, or, as stated above, at the State’s 0.65% rate.

Although the City will not receive VLF Backfill from the State, the State’s FY04-05 Budget includes a Property Tax In-Lieu of VLF Backfill component. The State’s FY04-05 Budget eliminates the backfill portion of the VLF payment and replaces it dollar for dollar with Property Tax In-Lieu of VLF that will be taken from ERAF funds. Table 2 below details the increase in General fund monies the City will receive based on the State’s FY04-05 Adopted Budget. Staff has included a budget adjustment in the amount of $1,539,157 for this unanticipated revenue source with this staff report.

Description Of Significant Proposed Program And Infrastructure Expenditures

The following projects are currently being considered by the City Council:

Traffic Enforcement and Maintenance (TEAM) RPV:

The concept of TEAM RPV was first introduced at a joint City Council/Traffic Committee meeting on March 30, 2004. One of the goals of TEAM RPV is to reduce citywide speeding by increasing traffic enforcement. The TEAM RPV proposal includes adding deputies and patrol vehicles to the City to enforce posted speed limits and other traffic laws. The estimated cost of TEAM RPV was provided by the Los Angeles County Sheriff’s Department (Sheriff) and is detailed in Table 1 above.

Potential Funding for TEAM RPV from Proposed Sales Tax Increase:

Los Angeles County Supervisors, based on a recommendation from Sheriff Lee Baca, voted to place a countywide half-cent sales tax increase on the November 2, 2004 general election ballot. The proposed half-cent sales tax increase would strengthen public safety efforts throughout Los Angeles County by providing a stable funding source for local law enforcement.

The proposed sales tax increase would generate approximately $500 million annually, and would be dedicated to law enforcement throughout Los Angeles County. After allocations to the Sheriff for providing countywide duties required by law, these funds would be distributed (each receiving one-third) to the LAPD, cities that do not contract with the Sheriff, and cities that do contract with the Sheriff. Based on estimates provided by the Sheriff, the City could receive up to $2.3 million annually.

However, per the ballot proposal, the City would not be able to use these additional funds to pay for "current service levels" provided by the Sheriff. The current service level is defined in the FY02-03 contract between the City and the Sheriff. The additional funds could only be used to pay for additional deputies and new programs. Therefore, if the ballot measure passes, the City could use these monies to fund the proposed TEAM RPV program. The estimated annual expenditures for the proposed Team RPV are included in Table 1 in the Executive Summary section of this staff report.

NCCP and Open Space Preserve Maintenance:

The Director Of Planning, Building, and Code Enforcement wrote a staff report to the City Council titled "The City’s Natural Communities Conservation Planning (NCCP) Subarea Plan", dated August 31, 2004. The staff report includes the following recommendation:

1. Adopt Resolution No. 2004-__, thereby certifying the Final Environmental Impact Report (EIR) for the Rancho Palos Verdes NCCP Subarea Plan (ZON 2004-00460);
2. Approve the NCCP Subarea Plan, which includes the following related actions:
1. Determine whether to include any portion of Grandview Park in the Reserve; and
2. Approve the refined Reserve boundary line for Upper Pt. Vicente Park.
3. Conceptually approve the Draft NCCP Implementing Agreement, which includes the Draft sub-agreement between the City and the Palos Verdes Peninsula Land Conservancy (PVPLC) for management of the proposed NCCP habitat Reserve.

Finance and information Technology Staff wrote a separate staff report to the City Council, titled "Proposed Natural Communities Conservation Plan And Proposed Purchase Of Open Space – Fiscal Impact", dated August 31, 2004. The staff report included the presentation of Costs Expended To Date, Sources for Financing Proposed Purchase, a Schedule of Estimated Annual Expenditures Over Estimated Revenues and a Summary Of Long-Term Potential Savings of Federal and State Habitat Costs for the proposed NCCP and open space purchase. The estimated annual expenditures for the proposed NCCP are included in Table 1 in the Executive Summary section of this staff report. As described in Assumption 8 later in this staff report, $1 Million has been included in the City’s budget for the proposed purchase of about 700 acres of coastal hillside along Palos Verdes Drive South ("PVDS") in cooperation with the PVPLC. 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.

During it’s meeting on August 31, 2004, the City Council approved Staff’s recommendation described previously above. The inclusion of estimated additional cost of the proposed NCCP and open space Reserve in Table 1 serves to advise the City Council of the project’s fiscal impact.

Residential Pavement Management Program:

The Public Works Department is working with the City’s consultant (Harris & Associates) to finalize the update to the Citywide Pavement Management Program, and expects to present the final report to City Council later this year. The update to the Citywide Pavement Management Program will include a current inventory of all public roadways, the current pavement condition for all public roadways and a cost analysis for future pavement maintenance. The Public Works Department has received preliminary estimates of pavement management costs. The 2004 Model includes expenditures for overlay projects in FY05-06 through FY08-09, as recommended by the Pavement Management Program.

The residential street overlay program is primarily funded with General fund monies. Expenditures for this program were included in the original FY03-04 Budget at a reduced rate (less than half of the annual work recommended by the Pavement Management Program). The Adopted FY04-05 budget includes a one-time transfer of $1.1 million from the General fund to the Capital Improvement Projects fund for residential street overlay projects.

Storm Drain Renewal:

The Public Works Department presented the results of the storm drain master plan update at the June 15, 2004 City Council Meeting. The storm drain master plan update identified 58 storm drain renewal projects with a total cost of $24.8 million.

On April 6, 2004 the City Council awarded a contract to Harris & Associates to prepare a preliminary methodology and rate analysis for the possible formation of a storm drain user fee. Harris & Associates will review the storm drain master plan update to establish the estimated range of potential storm drain user fees. The Infrastructure Financing Team expects to present a proposal for the financing of storm drains to the City Council near the end of 2004. The 2004 Model does not include expenditures for storm drain renewal projects identified in the storm drain master plan update because the timing and funding of these projects is currently unknown.

Storm Drain Lining:

The storm drain master plan update also identified a need for storm drain lining at a cost of $ 4.5 million, or 18% of total storm drain needs. Storm drain lining extends the life of a storm drain and postpones the need for reconstruction. The City’s FY04-05 Budget includes an appropriation of $500,000 to begin a storm drain lining program. However, no funding beyond FY04-05 has been identified or included in the 2004 Model. The Infrastructure Financing Team expects to include annual storm drain lining projects in the proposal for the financing of storm drains.

Sewer Reconstruction:

The Public Works Department is working with the City’s consultant (Dudek & Associates) to finalize the citywide master plan of sewers. Public Works staff anticipates presenting the citywide master plan of sewers to the City Council in October of 2004. The Infrastructure Financing Team expects to include a proposal for the financing of sewer replacement and maintenance, if necessary, to the City Council near the end of 2004. The 2004 Model does not include expenditures for sewer reconstruction because preliminary cost estimates are not known at this time.

Format of the 2004 Model

The 2004 Model includes the presentation of:

• Actual FY02-03 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 FY02-03 financial statements as a result of their audit.
• Estimated FY03-04 revenue, expenditures and ending fund balances for all funds.
• The Adopted FY04-05 Budget, which is the basis for the first year of the 2004 Model.

The 2004 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.

The 2004 Model includes several schedules organized as follows:

Exhibit A Summary – 2004 Five-Year Financial Model (One Page Summary)

Exhibit B 2004 Five-Year Financial Model By Fund

Exhibit C CIP Plan Project Expenditures

Exhibit D Summary Of Fund Transfers

Complete List of 2004 Model Assumptions

General Assumptions

1. The Adopted FY04-05 Budget is the basis for the first year of the 2004 Model.
2. Most expenditures have been increased annually using a factor of 3.12% beginning in FY05-06 and continuing through FY08-09.
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 2004 Model using an alphabetical index (a through l) and are referenced throughout the 2004 Model.

Assumptions Specific to the Funds and Program Revenues and Expenditures Included In The 2004 Model

4. Excluding the property tax in-lieu of VLF and Sales Tax components of the FY04-05 State Budget discussed above, It is assumed that the City's share of property tax will remain constant at approximately 6.35% of the one-percent rate assessed by the County.

The City’s actual increase in Property tax revenues from FY00-01 through FY02-03 has averaged slightly over 6.5%. However, considering the cyclical nature and recent signs of a slowing real estate market, staff has conservatively increased Property tax revenues at the rate of 2% in FY05-06 through FY08-09.

5. The 2004 Model assumes the continuation of the 3.0% utility user tax through FY08-09. Based on previous conversations with telephone company representatives and recent newspaper articles, staff is concerned that UUT derived from telephone usage may decrease in the future due to the movement toward cellular phones resulting in an overall reduction of phone costs to consumers and therefore, utility users tax revenue to the City. However, staff believes that increases associated with other utilities, such as cable television, gas and electric, will likely offset losses from the decrease in telephone usage. Therefore, no increases or decreases have been estimated for the remaining years of the 2004 Model.
6. Ocean Trails will be closed to all golfers from August 19, 2004 to January 15, 2005. Based on the conservative methodology used in the preparation of the 2004 Model, staff has assumed that Ocean Trails will be closed for the remainder of the fiscal year and reopen with the full use of all eighteen holes for FY05-06. Therefore, only actual receipts for July of 2004 ($12,240) are shown in the 2004 Model for FY04-05. Golf Tax collected by the City is a percentage of golf operations revenue. Staff has conservatively estimated Golf Tax revenue by increasing estimated FY03-04 Golf Tax revenues at a rate of 2% annually in FY05-06 through FY08-09. Staff expects to present a budget adjustment to the City Council at the September 7, 2004 meeting for $166,260.
7. The residential street overlay program is primarily funded with General fund monies. Expenditures for this program were included in the original FY03-04 Budget at a reduced rate (less than half of the annual work recommended by the Pavement Management Program). As described previously, the Adopted FY04-05 budget includes a one-time transfer of $1.1 million from the General fund to the Capital Improvement Projects fund for residential street overlay projects.

The 2004 Model includes expenditures for overlay projects in FY05-06 through FY08-09, as recommended by the Pavement Management Program. The arterial roadway projects included in the CIP fund of the 2004 Model are financed with a combination of Proposition C (transit) fund monies and Federal highway grant monies.

8. $1 Million has been included in the City’s budget for the proposed purchase of about 700 acres of coastal hillside along Palos Verdes Drive South ("PVDS") in cooperation with the PVPLC. In the event the purchase is completed, the open space land would be transferred to the Reserve established by the NCCP Subarea Plan. The City would own the land and the PVPLC would hold the conservation easements and have the responsibility for managing the Reserve. The PVPLC has committed to raising about $6 Million towards the purchase. The City and the PVPLC are striving to raise the remainder of the funds from State and Federal grants totaling approximately $20 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.

The proposed NCCP and open space purchase includes a funding commitment for maintenance of the Reserve by the PVPLC. An annual Habitat Restoration fund expenditure of $100,000 has been included in all five years of the 2004 Model. The Habitat Restoration fund expenditures are partially funded with an annual General fund operating transfer in the amount of $76,752 for FY04-05 through FY07-08 and $94,860 in FY08-09. See the sub-section titled NCCP and Open Space Preserve Maintenance under the "Proposed Significant Increases of Program Expenditures and Capital Projects for Consideration by the City Council" section of this report for additional information about the proposed NCCP and open space purchase.

9. The City Council approved the Proposed Long Point Resort Project on August 28, 2002. The Coastal Commission approved the Proposed Long Point Resort Project in the fall of 2003. Due to the uncertainty of project completion, as well as its timing, no revenues (e.g. transient occupancy tax, sales tax, developer fees, etc.) or expenditures have been included in the 2004 Model.

The Long Point Resort Hotel developer is seeking to amend the project’s conditions of approval. The developer seeks to amend the project conditions to allow 50 hotel rooms and the bungalows to be sold to private individuals or entities with restrictions that regulate the use and duration of stay and to establish a 1% Property Transfer Fee with proceeds of the fee to go to a non-profit corporation. The proposed changes would reduce the project’s generation of estimated Transient Occupancy Tax, while increasing the project’s generation of estimated Property Transfer Fees. The developer has calculated revenue increases to the City from the proposed changes totaling $278,766 in Operating Year 4 (the first year the Developer’s projections assume stabilized occupancy rates). The City Council approved the amendments to the conditions of approval at the August 17, 2004 City Council meeting. The California Coastal Commission must also review and approve the proposed revisions.

10. 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, a Quimby fund developer fee for the Point View residential project has not been included in the 2004 Model.

EET revenue of approximately $812,000 has been included in the 2004 Model, including Crestridge Villas ($257,200), one-hundred new miscellaneous dwelling units over five years ($256,000), Ocean Trails residential units ($189,440), Ocean Front residential units ($76,800), and a 13-lot subdivision ($33,280). EET revenue may only be used for improving or purchasing City owned facilities. Due to the uncertainty of any development project, as well as its timing, no expenditures have been included in the 2004 Model utilizing this revenue source.

Due to the uncertainty surrounding the Point View residential and Long Point Resort projects, no EET revenue for those projects has been included in the 2004 Model.

11. In 1997, the City Council approved the establishment of an in-lieu affordable housing fee pursuant to the City’s General Plan and Development Code. The fee is charged to developers of large commercial and residential projects, in-lieu of the developer constructing on-site affordable housing units, as required by State Law. 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 In-Lieu fees have been included in the 2004 Model.
12. Currently, the LAIF investment interest rate hovers around 1.5%. The Adopted FY04-05 Budget includes an assumption that the LAIF interest earnings rate will be 2.25%. In the preparation of the 2004 Model, staff has used an investment interest rate of 2.25% for FY05-06, increasing it by 0.25% for each fiscal year thereafter. If investment interest rates do not significantly increase, Staff will likely present a budget adjustment to the City Council for a decrease in interest income.
13. An amount of $75,000 has been included in FY04-05 through FY08-09 for Miscellaneous Drainage. The intended use of this miscellaneous allocation is to provide for small emergency repairs. No expenditures for storm drain renewal projects have been included in the 2004 Model. General fund reserves are not sufficient to perform storm drain renewal projects. No dedicated revenue source currently exists to provide monies to perform storm drain infrastructure renewal, as well as any long-term debt that could be used to finance such improvements. Please see the section titled "Proposed Significant Increases of Program Expenditures and Capital Projects for Consideration by the City Council" and Table 2 above for more details on storm drains.

As noted above, the Public Works Department presented the results of the storm drain master plan update at the June 15, 2004 City Council Meeting. The storm drain master plan update identified 58 storm drain construction projects with a total cost of $24.8 million and assigned each storm drain construction project the following priorities:

Priority One

Projects were assigned a Priority One if it was determined that failure of the storm drain to convey the 50 year storm would result in flooding of private property. Most priority one projects have experienced flooding in the past. The total cost of Priority One projects is estimated at $6.9 million.

Priority Two

Projects were assigned Priority Two if it was determined that failure of the storm drain to convey the 50 year storm would result in significant street flooding or bluff or canyon erosion that over time could threaten structures. Some priority two projects have experienced flooding in the past. The total cost of Priority Two projects is estimated at $11.2 million.

Priority Three

Projects were assigned a Priority Three if it was determined that failure of the storm drain to convey the 50 year storm would result in inconsequential street flooding which would not, even over time, threaten structures. The total cost of Priority Three projects is estimated at $6.7 million.

The actual cost to implement the National Pollutant Discharge Elimination System (NPDES) program, a program administered by the Regional Water Quality Control Board to control storm-water and urban runoff from municipalities, is not definitely known at this time. In the event the cost of NPDES compliance becomes excessive, the City could elect to offset all, or a portion, of these costs with the establishment of user fees.

14. The City Council, at its June 15, 2004 meeting, approved the plans and specifications for the construction of an elevator at City Hall. The total amount authorized by the City Council for the elevator, including the 10% contingency factor, is $564,500. The elevator will be built with CDBG funds. No General fund monies will be used to construct the elevator. CDBG fund expenditures are completely reimbursed with CDBG grant monies; therefore, the CDBG fund balance is always projected to be zero, regardless of the level of expenditure activity within the fund. The City Hall elevator in expected to be completed in early 2005.
15. 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 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 currently being discussed by all parties. However, the City of Los Angeles has budgeted approximately $1 million for the project that has been estimated to reach at least $2.5 million. It is unknown if Los Angeles County is willing to provide funding for the project. Because the amount of shared liability for the City is not known at this time, as well as the lack of a funding source and competing storm drain projects, nothing has been included in the 2004 Model at this time.

16. No expenditures have been included in the 2004 Model for major park facilities or open space improvements. Additionally, the 2004 Model does not include a provision for projects being considered by the Open Space, Planning and Parks and Recreation Task Force ("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.
17. The 2004 Model includes the resumption of the transfer of $100,000 from the General fund to the Building Replacement fund for FY05-06 through FY08-09.
18. The Adopted FY04-05 budget for the Street Maintenance fund includes about $800,000 of State apportioned Highway Users tax revenue, an operating transfer of $285,000 from the 1972 Act fund, an operating transfer of $100,000 from the General fund, an operating transfer of $312,000 from the Proposition C fund, an operating transfer of $48,000 from the Waste Reduction fund, $20,000 for miscellaneous revenues and $20,000 for sidewalk repair fee revenue, totaling approximately $1.59 Million. Street maintenance program expenditures are expected to be approximately $1.6 Million.
19. In the August 12, 2004 Friday Report to City Council, Planning Staff reported that the RDA Housing Set-Aside fund balance is expected to reach $1 Million in December 2004. One year after reaching the $1 Million cash balance, State law requires the RDA to either transfer excess funds over $1 Million to the County or initiate a program to expend the excess funds.

In March 2000, the RDA Housing Set-Aside fund purchased the Crestridge property for $702,392 with the intention to construct affordable housing on the site. State law requires the RDA to either initiate a project on the property by March 2005, or formally extend the development of a project to March 2010. If a formal extension is adopted, physical development of the project must begin by March 2010.

Staff expects that the City’s Affordable Housing In-Lieu fund will also contribute to an affordable housing project. Therefore, Staff has included an assumption that approximately $1 Million from the City’s Affordable Housing In-Lieu fund and $1 Million from the RDA Housing Set-Aside fund will be spent during FY05-06 for an affordable housing project. Planning Staff expects to place the issue on the October 19, 2004 City Council meeting agenda.

20. Proposition A funds are provided by the half-cent sales tax distributed to cities on a per capita basis. These funds are restricted and may only be used for transit services. Currently, the City uses Proposition A funds for the City’s contribution to Peninsula area transit systems (Palos Verdes Peninsula Transit Authority and Municipal Area Express). Staff estimates the Proposition A fund will build a reserve of about $613,000 by the end of FY04-05. A proposed sale of Proposition A funds in the amount of $550,000 has been included in FY05-06 in the 2004 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. If a city has no qualifying projects to utilize restricted Proposition A monies, they may be sold to another local agency in exchange for unrestricted General fund monies.
21. Staff anticipates that the Cost-Based Fee Study will be completed in late 2004. Although staff expects fee revenue increases will be realized in FY04-05 as a result of the Fee 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 2004 Model.
22. All RDA – Abalone Cove projects, including the installation of the sewer system, are completed and the fund balance has been depleted. Accordingly, no additional project expenditures are included in the 2004 Model.
23. The 2004 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.
24. The PVIC Expansion Project is a 7,474 square foot single story addition to the existing PVIC building. Miscellaneous remodeling will occur in the existing building for the incorporation of interpretive exhibits. As detailed in the July 6, 2004 staff report to the City Council from the Public Works Department, MTM Construction, Inc. was the low bidder at a cost of just under $5.1 million for the PVIC expansion project. The 2004 Model assumes that renovation of PVIC will be completed during FY04-05.

The PVIC renovation project will be funded with County Measure A grant monies ($2,874,785), EET monies ($579,212), Quimby monies ($492,511), Proposition C monies ($350,000), Roadway Beautification monies ($347,228), un-obligated CIP fund balance ($298,488), General fund monies ($56,500), Waste Reduction monies ($50,000) and a portion of the City’s Proposition 40 grant ($27,291).

25. The City’s Adopted FY04-05 Budget includes an employer contribution for the CalPERS retirement system of 8%. The estimated fiscal impact is expected to be about $164,000, when compared with the FY03-04 contribution. The increase of the employer contribution is a result of unfavorable investment earnings experienced in the retirement portfolio managed by CalPERS.

Based on the June 30, 2002 actuarial valuation of the City’s pension plan dated September 26, 2003, the City’s employer contribution rate is estimated to be 8.54% and 9.9% for FY04-05 and FY05-06, respectively. As mentioned above, the Proposed FY04-05 Budget uses a contribution rate of 8%. The 2004 Model increases this cost at 3.12% for the remaining years of the model. Therefore, staff believes the 2004 Model accurately projects the costs associated with the contribution rates detailed in the actuarial valuation

26. During FY03-04, General fund legal expenditures of $1,044,007 exceeded the original adopted budget by $344,007. Due to continued litigation, Staff anticipates that FY04-05 legal expenditures will again exceed the original adopted budget of $700,000. Staff expects to present a budget adjustment for legal expenditures to the City Council as early as September 7, 2004 for approximately $250,000. Staff has included $250,000 in Table 2 of this report. No additional legal expenditures have been included in FY04-05 column of the 2004 model.

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 2004 Model.

SUMMARY:

Based upon information presented in Table 1 above, the adoption of both the proposed Team RPV and NCCP programs would cause a decrease of Ending Estimated General Fund Reserves by an additional $3 million by the end of FY08-09 (see C in Table 1). If the proposed Team RPV and NCCP programs are not adopted, Ending Estimated General Fund Reserves would decrease by approximately $500,000 by the end of FY08-09 (see A in Table 1).

Recommendation of the Finance Advisory Committee:

Based upon the FAC’s review of the original 2004 Model presented in March 2004, the FAC recommended the following to the City Council on April 20, 2004:

Based upon the findings of the 2004 Model, it appears the City will need to develop a dedicated revenue source in the future to: (1) Implement a plan for infrastructure renewal and maintenance (Note: the cost of sewer and citywide storm drain renewal and maintenance are not included in the 2004 Model); (2) improve park and open space facilities; and (3) enable payment of any scheduled long-term debt to finance such infrastructure renewal and maintenance.

The FAC reviewed the 2004 Model (Revision 1) on August 25, 2004. It offered several suggestions regarding presentation (rather than financial content) that have been incorporated into this staff report. Additionally, the FAC re-affirmed its recommendation included above during its meeting on August 25, 2004.

Respectfully submitted,

Dennis McLean

Director of Finance and Information Technology

Reviewed,

Les Evans

City Manager