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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
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:
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.
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:
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.
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.
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.
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.
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.
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.
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:
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:
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:
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.
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:
The 2004 Model includes the segregation of funds as follows:
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
Assumptions Specific to the Funds and Program Revenues and Expenditures Included In The 2004 Model
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.
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.
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.
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.
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.
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:
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.
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.
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.
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.
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.
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).
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
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.
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.
Director of Finance and Information Technology