The Infrastructure Financing Team (the "Team"), which includes Staff, makes the following recommendation to the City Council and the Finance Advisory Committee:

1. Receive and file this Staff Report, including the Preliminary Financial Model for the Water Quality And Flood Protection Program and the pro-forma calculation of the pro-forma user fee rate, both to be used solely for discussion and not to be considered "final" costs and the proposed user fee;
2. Authorize Staff to continue to develop a Water Quality And Flood Protection Program, including the development of a user fee system and the preparation for a mail ballot measure that would be conducted during Summer 2005 in accordance with Proposition 218 requirements;
3. Subject to approval of the proposed Water Quality And Flood Protection Program and user fee by property owners, approve the concept of an initial, one-time transfer of $2 million of General Fund Reserves to a new Water Quality And Flood Protection Program enterprise fund in early FY05-06;
4. Proceed with the Community Education and Outreach Strategy regarding the proposed Water Quality And Flood Protection Program to be designed by Moore Iacofano Goltsman, Inc. ("MIG"), the City’s Public Information Consultant;
5. Authorize an additional budget appropriation during FY04-05 of $200,000 for services to be provided by MIG, Fieldman, Rolapp & Associates and Harris & Associates, as well as postage, printing and other costs, in order to continue the development of the Water Quality And Flood Protection Program and the process to establish a user fee; and
6. Defer consideration of establishing a sewer user fee and utilize General Fund Reserves, augmented by County Sewer District funds and services, to complete the cleaning and video inspection of the City’s entire sewer system, as well as any sewer line segment repairs deemed essential over the next five years.

The Team, which is made up of City staff and the consultants that were authorized by the City Council, has been meeting regularly to discuss the elements of an infrastructure-financing plan.

Following the direction of the City Council, the Team has developed a Preliminary Financial Model for the Water Quality And Flood Protection Program. The Preliminary Financial Model should not be considered the "final" plan for financing the Water Quality And Flood Protection Program. The Preliminary Financial Model was developed to serve as a financial tool to spread the project costs, as well as the recurring annual costs over the initial 20 years of the proposed Water Quality And Flood Protection Program. Based upon the smoothing of the annual costs of the proposed Water Quality And Flood Protection Program, the Preliminary Financial Model calculates the "pro-forma" user fee rate (defined in the subsequent section of this Report). The pro-forma user fee rate serves as a benchmark for discussion and should not be considered as the "final" user fee rate.

The Team considered several alternatives (described later in the Staff Report) during the preparation of the Preliminary Financial Model and the related pro-forma user fee rate. The facts and assumptions that will be used in the preparation of the "final" Financial Model and the "final" calculation of user fee rate will be based upon further engineering, financial and risk analysis, as well as the results of the survey currently being conducted by MIG. The Team decided it was prudent to prepare the Preliminary Financial Model and the related pro-forma user fee rate based upon a near "maximum cost" scenario to avoid cost surprises for both the City Council and the property owners, if and when, a final analysis is prepared.

The following overview explains the assumptions used in the preparation of the Preliminary Financial Model and the related pro-forma user fee rate, as well as several factors that may be considered during the preparation of the final Financial Model and the final user fee rate:

1. A user fee rate system was prepared in accordance with the Preliminary Rate Analysis developed by Harris & Associates, based upon parcel size, impervious cover on the property (such as buildings and concrete) and parcel use (i.e. residential and commercial using the County Hydrology Manual). Harris & Associates would review the impervious factors of large commercial parcels, government-owned parcels and update the County parcel database prior to finalizing the Rate Analysis for presentation to the City Council at a rate hearing.
2. The Preliminary Financial Model includes all 56 renewal-projects identified in the Storm Drain Master Plan update with a total cost of $25 million scheduled over the initial 20 years of the proposed Water Quality And Flood Protection Program. As described in the Staff Report to the City Council, dated June 15, 2004, each renewal project was assigned a priority category.

"Not all the projects are of equal importance. Each project was reviewed and a priority was been assigned using the following criteria:

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.

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.

Project 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."

Although the City’s Water Quality And Flood Protection consultant, AKM, recommended that all 56 reconstruction projects be completed, the Team may elect to defer the Priority Three projects indefinitely, possibly spreading the remaining 38 projects over 30 years, rather than 20 years. The Team would consider risk, financial resources and engineering considerations while finalizing the Financial Model.

1. The Preliminary Financial Model includes a provision for Water Quality And Flood Protection facility lining projects over 19 years with a total cost of $4.6 million. The Team may elect to increase or decrease the provision for storm drain lining or decrease or increase scheduled storm drain renewal projects, prior to finalizing the Financial Model.
2. The Preliminary Financial Model includes a provision for the installation of approximately 600 catch basin filtration devices over 5 years with a cost of $82,524 each year to reduce pollutants and assist in compliance with National Pollutant Discharge Elimination System (NPDES) and Clean Water requirements.

1. Subject to approval of the proposed user fee by property owners, The Team has included a one-time transfer of $2 million of General Fund Reserves to a new Water Quality And Flood Protection Program enterprise fund in early FY05-06. The proposed transfer would fund the first project (Sunnyside Ridge) before user fees are collected in FY06-07. The transfer would also contribute to the cost of Priority One projects in the early years of the Water Quality And Flood Protection Program. In fact, a portion of the proposed transfer of $2 million will reduce the user fee for each property owner by an average of approximately $6 per year.
2. The Preliminary Financial Model was prepared using both Pay-As-You-Go and Debt-Financing scenarios. Using the Pay-As-You-Go scenario, the annual user fee pays for the entire annual cost of the Water Quality And Flood Protection Program, including reconstruction projects, installation of catch basin filtration devices, maintenance, and administrative costs. The Debt-Financing scenario is based upon the assumption that bond debt would be issued every three to six years to provide financing for reconstruction projects.
3. The Storm Drain Master Plan would be updated at least every five years leading to a revision of the Financial Model based upon the identification of new Water Quality And Flood Protection Program projects.
4. The user fee rate would be reviewed and set annually at a noticed Public Hearing of the City Council after review of an Annual Fee Report outlining the estimated annual costs of the program.
5. User fees would be billed using the County property tax rolls beginning with FY06-07, collected and deposited into a dedicated Water Quality And Flood Protection Program enterprise fund to enable program accountability and separation from all other financial activities of the City.

The Sewer Master Plan identified few deficiencies and noted that the overall condition of the sewer system is fair. Unlike the Storm Drain Master Plan, the Sewer Master Plan includes an extrapolated estimate of $2.1 million for line segment replacement based upon a sample of only 6% of the system. As the sewer system does not appear to be in need of immediate large-scale reconstruction, the Team concluded that further investigation of the entire sewer system at a cost of $1.1 million is necessary to determine the full extent of required line segment replacement. In addition, Staff is currently pursuing the County’s willingness to perform additional cleaning and ability to complete line segment replacement projects within an acceptable period of time. The extent of the County’s responsibility and ability to satisfy sewer system needs has not been finalized at this time. The additional information obtained from further cleaning and CCTV inspection will enable the City to fully identify sewer system needs to the County.

The Team concluded that the City could pay for the entire cost of cleaning and inspection of the sewer system over the next five years as a "worst case scenario", if necessary. Staff believes that General Fund Reserves are sufficient to pay for the total cost of about $3.2 million, if necessary. The need for a sewer user fee could be revisited at a later date, perhaps at the end of the five-year period depending on the results of the inspection program and determination of the County’s ability to satisfy sewer system needs.

Based upon the Pavement Management Program report, dated June 1, 2004, prepared by Harris & Associates, Staff included the estimated costs of arterial and residential streets and roadways over the five years ending FY08-09 in the 2004 Five-Year Financial Model – Revision One. Fieldman & Rolapp & Associates reviewed the Pavement Management Program report, as well as Staff’s inclusion in the 2004 Five-Year Financial Model – Revision One, dated September 7, 2004. Based upon its review, Fieldman, Rolapp & Associates, and other members of the Team determined that General Fund revenue resources are sufficient to finance the estimated costs of arterial and residential streets and roadways through FY08-09.

On January 10, 2004, the City Council established the following goals for calendar years 2004 and 2005 regarding infrastructure renewal and maintenance during a Tactical Planning Workshop conducted between the City Council and Staff:

1. By March 31, 2004, the Public Works Director will complete an update of the Storm Drain Master Plan.
2. By July 31, 2004, the Public Works Director will complete the initial phase of the Sewer Investigative Program.
3. By September 30, 2004, the Team will present a tax/fee/assessment/bond/loan proposal for the financing of street/storm drain/sewer maintenance to the City Council and the Finance Advisory Committee at a public workshop.
4. The City Council directed staff to proceed with selection of a public information consultant as soon as possible to advise the Team and the City Council regarding the development and implementation of an educational program, citizen surveys and other community outreach programs, the design of ballot initiatives, assessment districts or other funding mechanisms, as deemed necessary.

By July 1, 2005 the Council will approve the final infrastructure renewal plan and, if required, a ballot initiative will be prepared for the November 2005 general election. During its discussion at the Tactical Planning Workshop, the Council informed Staff that storm-drain and sewer financing should be based upon a sustainable long-term program for renewal and maintenance of storm drain and sewer assets.

The Finance Advisory Committee (the "FAC"), under the leadership of its then Chair, Council member Stefan Wolowicz, conducted meetings with Staff, the Deputy City Attorney and Joan Cox of Harris & Associates over the previous 1½ year prior to the issuance of its report titled "Financing Alternatives", dated March 4, 2003 (see Attachment A). During the course of the FAC’s review of this subject, current Chair, Becky Clark and Vice Chair, Gina McLeod, acted in the capacity of a Financing Alternatives sub-committee of the FAC and met frequently with staff and the Deputy City Attorney.

The Financing Staff Report, dated March 4, 2003, included the following findings:

Staff and the FAC believe that the City must immediately implement a long-term plan to replace existing and build additional storm drain infrastructure. After reviewing several alternatives, staff and the FAC believe establishing a user fee is the most practical "revenue" alternative to provide monies to pay for storm drain infrastructure improvements. The proposed user fee should be based upon a sound estimate of the long-range cost of storm drain improvements and maintenance, as well as the use of LT debt to spread the payment over twenty (20) years.

In the event other significant revenue sources are developed in the future (e.g. tax revenue generated by the proposed Long Point Resort Project), user fees could be reduced proportionately if fiscally prudent.

During its consideration of infrastructure financing matters that led to its Recommendation on March 4, 2003, Staff and the FAC considered and dismissed the following financing alternatives for storm drain financing:

The City could place a voter initiative on a future ballot to consider the levy of a General Obligation Bond Override (property) tax. The property tax would be added to the property tax rolls, based upon the assessed property value, of all homeowners and commercial property owners. The parcel tax would raise sufficient revenue to enable payment of voter approved long-term debt to finance infrastructure improvements. The cost of maintenance could not be paid for from the proceeds of the General Obligation Bond Override (property) tax. Therefore, Staff and the Committee determined that it was not a prudent infrastructure financing alternative.

In 1993, the City imposed a three (3%) percent Utility Users Tax ("UUT") on the consumers of natural gas, water, electricity and telephone services. The tax currently provides approximately $1.8 Million of General fund revenues annually.

Several factors to consider include:

1. UUT revenue is dependent upon the revenue streams of utility companies (e.g. if electrical rates decline, so will UUT revenue to the City);
2. UUT revenues cannot be pledged as dedicated collateral for repayment of long-term debt; and
3. Approval of an increase of the UUT rate would require a majority vote of the electorate of the City.

Because the City’s utility users tax cannot be pledged as dedicated collateral for repayment of long-term debt for storm drain financing, Staff and the Committee determined that it was not a prudent infrastructure-financing alternative.

Prior to the presentation of the Financing Alternatives staff report, dated March 4, 2003, Staff, the Financing Alternatives sub-committee of the FAC and the deputy City Attorney prepared a Financing Alternatives Matrix. Staff has made several minor revisions to the Financing Alternatives Matrix (see Attachment B) accompanying this Staff report. The Matrix provides an overview of the factors that were considered leading to the recommendation to establish a user fee. The Matrix also provides an overview of the pros and cons of financing methods that could be used for future financing needs of the City (e.g. improvement of park facilities and athletic fields).

Upon conclusion of discussion by the City Council at a joint workshop conducted on March 4, 2003, the City Council took the following action:

• Authorized Public Works staff to proceed with the preparation of an update to the 1998 citywide storm drain master plan, including estimates of the cost of drainage improvements and repairs; and

• Authorized Finance and Public Works staff to proceed with the preparation of an Engineer’s Report for the possible formation of a user fee.

Staff has completed the action items that were directed by the City Council on March 4, 2003.

Although the FAC has been continuously informed about the progress of the Team, time did not enable a formal presentation of this Staff Report prior to the City Council. Current Chair, Becky Clark and Vice Chair, Gina McLeod, reviewed the Preliminary Financial Model. Their questions were answered and their comments were integrated in to the Preliminary Financial Model attached to this Staff Report.

The Infrastructure Financing Team (the "Team") includes:

Fieldman, Rolapp & Associates, the City’s Financial Advisor:

• Larry Rolapp, Chief Executive Officer
• Jim Fabian, Principal and Project Manager

Harris & Associates, the City’s Assessment-Engineering Consultant:

• Joan Cox, Engineer and Project Manager
• Dennis Anderson, Engineer

Moore, Iacofano & Goltsman, Inc. ("MIG"), the City’s Public Information Consultant:

• Pat McLaughlin, Principal
• Joyce Vollmer, Project Manager

Richards, Watson & Gershon, Office of the City Attorney:

• Carol Lynch, Esq., City Attorney
• Robin Harris, Esq., Municipal Finance Expert

Staff:

• Les Evans, City Manager
• Dean Allison, Director of Public Works
• Ron Dragoo, Senior Engineer, Water Quality And Flood Protection Program and Sewer Project Manager
• Dennis McLean, Director of Finance & Information Technology, Infrastructure Financing Project Manager
• Kathryn Downs, Accounting Manager
• Gary Gyves, Senior Administrative Analyst

A chronological overview of the actions of the City Council and the Team that led to the recommendation contained in this Staff report follows.

On June 17, 2003, the City Council approved the retention of a financial advisor, for the Infrastructure Renewal and Maintenance Project and any other relevant financial matters that Staff and/or the City Council deem appropriate. The City retained Fieldman, Rolapp & Associates as its financial advisor during July 2003.

On August 5, 2003, the City Council authorized the execution of a Professional Services Agreement for the Sewer System Master Plan Study with Dudek & Associates, Inc.

On August 19, 2003, the City Council authorized the execution of a Professional Services Agreement for the Storm Drain Master Plan Study Update with AKM Consulting Engineers.

On January 10, 2004, the City Council established the following goals for the years 2004 and 2005 regarding infrastructure renewal and maintenance during a Tactical Planning Workshop conducted between the City Council and Staff:

• By March 31, 2004, the Public Works Director will complete an update of the Storm Drain Master Plan.
• By July 31, 2004, the Public Works Director will complete the initial phase of the Sewer Investigative Program.
• By September 30, 2004, the Team will present a tax/fee/assessment/bond/loan proposal for the financing of street/storm drain/sewer maintenance to the City Council and the Finance Advisory Committee at a public workshop.
• The City Council directed staff to proceed with selection of a public information consultant as soon as possible to advise the Team and the City Council regarding the development and implementation of an educational program, citizen surveys and other community outreach programs, the design of ballot initiatives, assessment districts or other funding mechanisms, as deemed necessary.
• By July 1, 2005 the Council will approve the final infrastructure renewal plan and, if required, a ballot initiative will be prepared for the November 2005 general election.

During its discussion at the Tactical Planning Workshop, the Council informed Staff that proposed storm-drain and sewer financing should be based upon a sustainable long-term program for renewal and maintenance of storm drain and sewer assets.

On March 2, 2004, the City Council approved the selection of MIG as the City’s public information consultant for the Infrastructure Project.

On March 18, 2004, MIG conducted a "kick-off" meeting with the Team that served to establish MIG’s role in the Project, their scope of work and the implementation plan, including timelines and schedules for conducting stakeholder interviews and a baseline phone survey with residents regarding Water Quality And Flood Protection Program and/or sewer financing. A brief outline of the Team’s strategy follows:

• Upon completion of the Water Quality And Flood Protection master plan update, develop a Preliminary Financial Model under the supervision of the City’s financial advisor, Fieldman, Rolapp & Associates.
• Develop a pro-forma user fee rate analysis that would be based upon a citywide parcel analysis and the Preliminary Financial Model.
• Review and/or develop a financing plan for renewal and maintenance of streets and sewers.
• Upon completion of the Preliminary Financial Model, the pro-forma user fee rate analysis and the financing plan for renewal and maintenance of streets and sewers, MIG would conduct stakeholder interviews and a baseline phone survey with residents regarding Water Quality And Flood Protection Program and/or sewer financing.
• Make a recommendation for an infrastructure-financing plan to the City Council and the Finance Advisory Committee at a joint workshop.

On April 6, 2004, the City Council approved the selection of Harris & Associates for the preparation of a Preliminary Methodology and Rate Analysis (or "Rate Analysis") for the possible formation of a user fee.

On June 15, 2004, Staff presented the Storm Drain Master Plan Update to the City Council. Staff’s conclusion included the following:

Engineering studies have identified a number of deficiencies in the City’s storm drain infrastructure. Storm drains were found to be undersized, lacking inlets, configured such that it discharged drainage in an unacceptable manner, and in a state of disrepair. The total cost of reconstruction is $24.8 million. The total cost for lining is $ 4.5 million. Not all projects are urgent. For example, approximately $6.7 million of the reconstruction costs are considered priority three projects and can be deferred with little consequence.

To address these deficiencies staff recommends that two new programs be established. The first program would construct new storm drains where deficiencies related to pipe size, lack of inlets, or configuration are found. The second program would line those corrugated metal pipes that are found to be in a state of disrepair. The two programs would not be independent since many corrugated metal pipes were found to be in need of lining and were undersized. A decision as to if a corrugated metal pipe should be lined or reconstruct will be made only after consideration of risks is made.

Funding for these two programs will be challenging for the City. Currently funding is not available on a consistent basis for either program. For example the adopted FY04-05 budget includes no funding for storm drain construction, and it includes $500,000 for a storm drain lining program only because the City received one-time insurance funds regarding the San Ramon project.

The City Council adopted Staff’s recommendation to:

• Request the Team to review the update and propose a spending and finance program for storm drain improvements.
• Establish a new program and authorize an expenditure of $500,000 to line corrugated metal storm drains for FY04-05.

On October 1, 2004, Staff informed the City Council about the pending Stakeholder Interview process in the Friday Report. MIG conducted Stakeholder Interviews with approximately 30 residents of the City during the first two weeks of October 2004 to derive feedback regarding Water Quality And Flood Protection Program financing issues.

On October 15, 2004, Staff informed the City Council about the completion of the Stakeholder Interview in the Friday Report.

On October 19, 2004, Staff presented its report regarding the Sewer Master Plan Study. Staff’s Conclusion included the following:

Engineering studies have identified a number of deficiencies in the City’s sewer infrastructure. Most of the deficiencies are related to inadequate system maintenance. The City is beginning a proactive effort to address problems identified in the Master Planning process. By conducting a CCTV inspection in a well-dispersed sample area, the need to clean and CCTV inspect the entire system was affirmed. Only through additional CCTV inspection will the true condition and the total extent of rehabilitation is determined. As a result of these considerations our immediate recommendations include the following:

• Clean and CCTV inspect the entire system
• Pursue Replacement of failed pipe with the County

The County is planning to CCTV the entire sewer system over the course of the next ten years. Following the County’s plan could result in the continued slow degradation of the sewage collection system. Staff is in the process of meeting with the County to develop a more aggressive maintenance plan, one that will complete CCTV and cleaning activities over a 5-year period. Replacement of cracked pipes should be accelerated as well.

Staff reported that the cost of cleaning and the performance of CCTV inspection would be approximately $1.1 million over 5 years. Staff also reported that the cost of the cleaning and CCTV could probably be paid for using General Fund Reserves, if necessary.

The Staff Report, dated October 19, 2004, also included the following:

Staff also reported that the cost of the line segment replacement could be paid for using General Fund Reserves, if necessary.

On October 21, 2004, the Team conducted a conference call to discuss Water Quality And Flood Protection Program and sewer financing matters. Based upon the feedback from residents during the Stakeholder Interviews, the Team concluded that it should proceed with the recommendation for a citywide user fee, rather than a user fee based upon the location of known Water Quality And Flood Protection projects. A citywide fee is more appropriate because the user fee system is proposed to have an indefinite duration and the Water Quality And Flood Protection project locations will change over time. Prior to conducting the interviews, the plan for a user fee was based on three areas, rather than the citywide system that is recommended by the Team. The pro-forma user rates would have been substantially different under the three area-based proposal. Parcels along the Palos Verdes East Drive corridor would have been charged a rate approximately 20 times greater than parcels along the Hawthorne Boulevard corridor of the City. The Team concluded that MIG should proceed with conducting the baseline phone survey of residents regarding the proposed user fee.

The Team also concluded to recommend to the City Council and the Finance Advisory Committee to defer consideration of establishing a sewer user fee and utilize General Fund Reserves, augmented by County Sewer District funds and services, to complete the cleaning and video inspection of the City’s entire sewer system, as well as line segment repairs deemed essential over the next five years.

The Sewer Master Plan identified few deficiencies and noted that the overall condition of the sewer system is fair. Unlike the Storm Drain Master Plan, the Sewer Master Plan includes an extrapolated estimate of $2.1 million for line segment replacement based upon a sample of only 6% of the system. As the sewer system does not appear to be in need of immediate large-scale reconstruction, the Team concluded that further investigation of the entire sewer system at a cost of $1.1 million is necessary to determine the full extent of required line segment replacement. In addition, Staff is currently pursuing the County’s willingness to perform additional cleaning and ability to complete line segment replacement projects within an acceptable period of time. The extent of the County’s responsibility and ability to satisfy sewer system needs has not been finalized at this time. The additional information obtained from further cleaning and CCTV inspection will enable the City to fully identify sewer system needs to the County.

The Team concluded that the City could pay for the entire cost of cleaning and inspection of the sewer system over the next five years as a "worst case scenario", if necessary. Staff believes that General Fund Reserves are sufficient to pay for the total cost of about $3.2 million, if necessary. The need for a sewer user fee could be revisited at a later date, perhaps at the end of the five-year period depending on the results of the inspection program and determination of the County’s ability to satisfy sewer system needs.

On November 11, 2004, MIG began conducting the baseline phone survey of residents regarding the pro-forma user fee.

On November 15, 2004, the Team conducted a conference call to discuss the preliminary results of the baseline phone survey of residents regarding the pro-forma user fee. Based upon the preliminary results, the Team decided to slightly revise the baseline phone survey. Sufficient time does not exist for MIG to complete a written report regarding the baseline phone survey at the time of completion of this Staff Report. Therefore, Staff expects that MIG will present its findings and recommendation resulting from the baseline phone survey on November 30, 2004. Based upon MIG’s findings and recommendation, the Team may alter its recommendation to the Finance Advisory Committee and the City Council during the meeting on November 30, 2004.

Based upon the Pavement Management Program report, dated June 1, 2004, prepared by Harris & Associates, Staff included the estimated costs of arterial and residential streets and roadways over the five years ending FY08-09 in the 2004 Five-Year Financial Model – Revision One. Fieldman & Rolapp & Associates reviewed the Pavement Management Program report, as well as Staff’s inclusion in the 2004 Five-Year Financial Model – Revision One, dated September 7, 2004. Based upon its review, Fieldman & Rolapp, and other members of the Team determined that General Fund revenue resources are sufficient to finance the estimated costs of arterial and residential streets and roadways through FY08-09.

Following the direction of the City Council, the Team has developed a Preliminary Financial Model for the Water Quality And Flood Protection Program. The Preliminary Financial Model should not be considered the "final" plan for financing the Water Quality And Flood Protection Program. The Preliminary Financial Model was developed to serve as a financial tool to spread the project costs, as well as the recurring annual costs over the initial 20 years of the proposed Water Quality And Flood Protection Program. Based upon the smoothing of the annual costs of the proposed Water Quality And Flood Protection Program, the Preliminary Financial Model calculates the "pro-forma" user fee rate (defined in the subsequent section of this Report). The pro-forma user fee rate serves as a benchmark for discussion and should not be considered as the "final" user fee rate.

The Team considered several alternatives (described below) during the preparation of the Preliminary Financial Model and the related pro-forma user fee rate. The facts and assumptions that will be used in the preparation of the "final" Financial Model and the "final" calculation of user fee rate will be based upon further engineering, financial and risk analysis, as well as the results of the survey currently being conducted by MIG. The Team decided it was prudent to prepare the Preliminary Financial Model and the related pro-forma user fee rate based upon a near "maximum cost" scenario to avoid cost surprises for both the City Council and the property owners, if and when, a final analysis is prepared.

The following overview explains the assumptions used in the preparation of the Preliminary Financial Model and the related pro-forma user fee rate, as well as several factors that may be considered during the preparation of the final Financial Model and user fee rate:

Harris & Associates developed a Preliminary Rate Analysis for the City’s proposed Water Quality And Flood Protection Program and issued a draft during summer 2004. The Preliminary Rate Analysis established the methodology for calculating the pro-forma user fee for each parcel that would be served by the City’s Water Quality And Flood Protection Program. The Team reviewed the draft Preliminary Rate Analysis, and revisions thereof, prior to completing this Staff Report.

Harris & Associates would review the impervious factors of certain large commercial parcels, government-owned parcels and update the County parcel database prior to finalizing the Preliminary Rate Analysis for presentation to the City Council at a rate hearing. The Final Preliminary Rate Analysis may result in a slight decrease of the number of drainage units (defined below).

Based upon the determination of the annual cost of the proposed Water Quality And Flood Protection Program using the Preliminary Financial Model, the Team developed the annual pro-forma user fee rate. The Preliminary Rate Analysis report, titled "Preliminary Rate Analysis Report For Storm Drains", dated November 22, 2004 is attached to this Staff Report (See Attachment C).

Several noteworthy excerpts from the Preliminary Rate Analysis include:

• "This new [user] fee must comply with the provisions of Article XIIID of the California Constitution (Proposition 218).

• The amount each parcel uses the storm drain system is directly proportional to the amount of impervious cover on the property (such as buildings and concrete).

• The following Table shows the Impervious Factors for land uses within the City. These Impervious Factors are the estimated percent impervious cover on a property based on the Los Angeles County Hydrology Manual and the City‘s Drainage Master Plan. These Impervious Factors are used to calculate the storm drain system utilization for parcels within the City."

The following table summarizes the estimated impervious factors used in the Preliminary Rate Analysis:

A parcel with an estimated impervious factor of 0.42 has an estimated 42% of its area covered in buildings and concrete. The amount each parcel uses the Water Quality And Flood Protection system is computed by the following formula:

Parcel Area x Impervious Factor = Drainage Units

Since 95% of the parcels within the City are designated Single Family Residential (SFR) parcels, and the median parcel size is 0.22 acres, it makes sense to relate all parcels to this median residential property, so it is set equal to one Equivalent Residential Unit ("ERU"). Therefore the ERU is calculated as:

0.22 acres X 0.42 estimated impervious factor = 0.092 median drainage units = 1 ERU

The Preliminary Rate Analysis has identified a total of 11,884 parcels with about 3,600 acres. The database of parcels used for the Preliminary Rate Analysis calculated an estimated total of 1,380 drainage units or 14,932 ERUs being served by the City’s Water Quality And Flood Protection system.

1. A single family residence with 3.5 acres has an estimated impervious factor of 0.10:
1. 3.5 acres X 0.10 = 0.35 drainage units
2. 0.35 drainage units / 0.092 median drainage units = 3.8 ERUs
3. 3.8 ERUs X $168 user fee per ERU = $639 user fee
2. A commercial property with 3.5 acres has an estimated impervious factor of 0.82:
1. 3.5 acres X 0.82 = 2.87 drainage units
2. 2.87 drainage units / 0.092 median drainage units = 31.2 ERUs
3. 31.2 ERUs X $168 user fee per ERU = $5,242 user fee
3. A single family residence with 0.3 acres has an estimated impervious factor of 0.42:
1. 0.3 acres X 0.42 = 0.126 drainage units
2. 0.126 drainage units / 0.092 median drainage units = 1.37 ERUs
3. 1.37 ERUs X $168 user fee per ERU = $230 user fee
4. A condo unit with 0.03 acre (approximately 1,307 square feet) has an estimated impervious factor of 0.80:
1. 0.03 acres X 0.80 = 0.024 drainage units
2. 0.024 drainage units / 0.092 median drainage units = 0.26 ERUs
3. 0.26 ERUs X $168 user fee per ERU = $44 user fee

In the example calculations above, the single family residence with 3.5 acres pays more than the single family residence with 0.3 acres, but the user fee per acre is $183 compared with the smaller parcel’s $767 per acre.

After the Preliminary Rate Analysis is finalized, the user fee rate would likely be proposed to the City Council as the maximum user fee rate. Subject to the approval of the property owners, the maximum user rate proposed would be increased automatically by the annual change in Consumer Price Index for all Urban Consumers (CPI) for the Los Angeles, Riverside, and Orange County Areas. The actual rate to be levied each year will be as approved by the City Council at a public hearing, after they consider an Annual Fee Report outlining the estimated annual costs of the program. The actual rate levied each year could be decreased or increased each year, but not to exceed the maximum fee rate. Any increase in excess of the maximum fee rate would require a vote of the property owners identical to the initial mail ballot measure.

Areas within the City that flow out of the City without going through any City-maintained drainage infrastructure are not included in this fee. There are also a number of County-maintained drain facilities within the City. If properties drain exclusively to either County-owned drains or drains owned by other cities, the properties would not be included in the Water Quality And Flood Protection Program. There are approximately 2,800 parcels that would be excluded from the Water Quality And Flood Protection Program.

If the City Council directs Staff to proceed with the process to establish a Water Quality And Flood Protection Program, an appeals process will be established to enable property owners to request a reduction of their user fee. Staff would work closely with the City Attorney and Harris & Associates in the development of appeal procedures.

The appeal process would enable property owners to submit documentation evidencing that the percent impervious surface on their property is less than the amount estimated in Preliminary Rate Analysis performed by Harris & Associates. If the City agrees with the property owner’s documentation supporting any proposed reduction, the fee will be recalculated based on the new information.

Proposition 218 requires that the amount of a fee imposed on any parcel not exceed the proportional cost of the service attributable to the parcel. Therefore, the City cannot waive the user fee for senior citizens on fixed incomes, disabled property owners and low-income property owners by spreading the costs to the other parcels.

In addition, the State of California (State) has a Property Tax Postponement Program (the "Program") that allows eligible senior citizens and blind or disabled citizens to postpone payment of part or all of the total due on their property tax bills (including a potential User Fee). The following eligibility requirements must be met to participate in the Program: (1) the homeowner must be either 62 years of age or older, or be blind or disabled; (2) the homeowner must use the property as their principal place of residence; (3) the total household income must not exceed $24,000; and (4) the homeowner must have a 20% equity interest in the home.

If eligibility is determined, the State Controller’s Office records a lien against the property and interest is charged on the postponed taxes and fees. The postponed amount and interest are not due until: (1) the homeowner moves from the qualified property; (2) the homeowner sells or conveys title to the home; (3) the homeowner dies and does not have a spouse; or (4) future property taxes or other senior liens are allowed to become delinquent. The homeowner may pay all or part of the obligation before it becomes due.

The City may fund a waiver program using other funds (e.g. General fund monies). The City Council previously decided not to provide a funding mechanism for the benefit of senior citizens on fixed incomes, disabled property owners and low-income property owners who may participate in a utility undergrounding assessment district program, citing limited General fund monies and staffing. The Team does not recommend establishing a waiver program at this time. The Team encourages the City Council to reconsider a waiver program if, and when, General Fund cash flow improves (e.g. increased tax revenue from the proposed Long Point Resort project). Based on the 2000 Census, about 25% of the households reported income less than $50,000 per year. If this percentage is applied to recommended Water Quality And Flood Protection Program costs, up to $600,000 of user fees could be waived. If the qualifying criteria were set at less than $35,000, up to $250,000 of user fees could be waived.

As stated previously, Proposition 218 requires that the amount of a fee imposed on any parcel not exceed the proportional cost of the service attributable to the parcel. Therefore, parcels owned by the City, County and Palos Verdes Peninsula Unified School District ("PVPUSD") would be charged a user fee. It is customary for the agency charging the user fee to pay the cost of a user fee on behalf of the local school district. The Preliminary Rate Analysis has been prepared by Harris & Associates based upon the assumption that the City would pay the user fee on behalf of the PVPUSD. The City will pay the appropriate user fee for all of the parcels it owns. Although the total amount of the annual user fees for the government-owned parcels is not known at this time, Staff has included an estimated annual amount of $30,000 in the Fiscal Impact section of this Staff Report. It is anticipated that the County will pay its appropriate user fee charged by the City.

The City of Rancho Palos Verdes has installed catch basin inserts in twenty-two of the City’s 584 catch basins in order to capture trash and other pollutants before they go into our storm drain system. This is being done in response to a federally mandated program to eliminate all trash and other pollutants from entering our storm drain system, which eventually leads to the ocean.

Catch basins are openings that are typically located next to street curbs that catch rainwater runoff on its way to the ocean. Catch basin inserts are fine mesh screens that attach to or mount inside the catch basin entrance. The inserts are designed to improve storm water quality by preventing debris and pollutants from entering the catch basin or by detaining and treating the water in the basin. The 22 existing inserts capture several hundred pounds of debris every year. The inserts can also absorb oil with absorbent materials such as a polymer or charcoal layer at the bottom of the basket. The polymer changes color and gets darker as more pollutants are captured. With this information, the City can roughly estimate the amount of pollutants flowing off City streets based on how often the filter must be replaced. The polymers can absorb up to four times their weight in oil.

As described previously, the pro-forma user fee is calculated based upon: (1) the ERU factor for each parcel served by the City’s Water Quality And Flood Protection Program; and (2) the cost per ERU. The pro-forma cost per ERU is determined by calculations using the Preliminary Financial Model. The annual cost of the Water Quality And Flood Protection Program, including installation of catch basin filtration devices, staffing and consulting services are included in the calculation of the pro-forma user fee per ERU.

The Team developed the Preliminary Financial Model based upon the Water Quality And Flood Protection projects cited in the Storm Drain Master Plan Update presented to City Council on June 15, 2004. A subcommittee of the Team, including the Directors and professional staff of the Public Works and Finance & Information Technology departments worked closely with Harris & Associates in the development of the Preliminary Financial Model, under the supervision of the City’s financial advisor Fieldman, Rolapp & Associates. Fieldman, Rolapp & Associates performed a review of various drafts of the Preliminary Financial Model, as well as the most current version of it, as a part of their advisory engagement.

As described previously, The Preliminary Financial Model should not be considered the "final" plan for financing the Water Quality And Flood Protection Program. The Preliminary Financial Model was developed to serve as a financial tool to spread the project costs, as well as the recurring annual costs over the initial 20 years of the proposed Water Quality And Flood Protection Program. Based upon the smoothing of the annual costs of the proposed Water Quality And Flood Protection Program, the Preliminary Financial Model calculates the "pro-forma" user fee rate (defined in the subsequent section of this Report). The pro-forma user fee rate serves as a benchmark for discussion and should not be considered as the "final" user fee rate. The Team decided it was prudent to prepare the Preliminary Financial Model and the related pro-forma user fee rate based upon a near "maximum cost" scenario to avoid cost surprises for both the City Council and the property owners in the future.

Public Works Staff prepared a 20-year priority-based schedule for all 56 storm-drain renewal projects identified in the Storm Drain Master Plan update. Public Works Staff also prepared a five-year schedule for installing catch basin insert filtration devices for the entire City Water Quality And Flood Protection Program system. The catch basin insert liners are made from non-woven polypropylene designed to catch contaminated suspended solids. The insert liners are a cost effective method to reduce pollutants and assist in compliance with NPDES and Clean Water requirements. Although the Team recommends that the user fee should be charged in perpetuity, the Preliminary Financial Model calculated the pro-forma user fee based upon the initial 20-years of the program. Staff expects that as the Water Quality And Flood Protection Program Master Plan is updated every five years, priorities will change and new renewal projects will be identified. The Preliminary Financial Model was based upon the following key assumptions (all costs are stated in current-year dollars):

• An initial one-time transfer of $2 million from the General fund to the new Water Quality And Flood Protection Program enterprise fund;
• 56 Water Quality And Flood Protection improvement projects over the initial 20 years of the Preliminary Financial Model with a total cost of $25 million;
• Water Quality And Flood Protection lining projects over 19 years of the Preliminary Financial Model with a total cost of $4.6 million;
• Installation of approximately 600 catch basin filtration devices over 5 years of the Preliminary Financial Model with a cost of $82,524 each year;
• Water Quality And Flood Protection Program maintenance with an annual cost of $130,000;
• Catch basin filtration device maintenance with an annual cost of $75,000;
• One additional staff employee to manage the program with an annual cost of $110,000, including benefits;
• Contract engineer services, including periodic updates of the Water Quality And Flood Protection Program Master Plan with an annual average cost of $14,000;
• An annual cost inflation factor of 3%; and
• Interest earnings of 2% for excess cash.

The Preliminary Financial Model was prepared using both Pay-As-You-Go and Debt-Financing scenarios. Using the Pay-As-You-Go scenario, the pro-forma user fee pays for the entire annual cost of the Water Quality And Flood Protection Program, including reconstruction projects, installation of catch basin filtration devices, maintenance, and administrative costs. The Debt-Financing scenario was based upon the assumption that bond debt would be issued every three to six years to provide financing for reconstruction projects. Debt cannot be issued for maintenance and administrative costs. User fees would be collected to repay the bond debt principal and interest over a 30-year term, as well as annual maintenance and administrative costs. Additional assumptions used within the Debt-Financing scenario include:

• Debt interest expense of 6% for years 1 through 9 and 6.5% for years 10 through 20;
• Debt would be issued in years 4, 7, 10 and 16 to provide project funding as scheduled;
• Repayment of each debt issue over 30 years; and
• Borrowing costs (e.g. underwriting fees and financial advisor fees) have been estimated as 20% of the debt issue amount, as recommended by Fieldman, Rolapp & Associates, the City’s financial advisor.

The pro-forma user fee rate is a level-fee over the initial 20 years of the Water Quality And Flood Protection Program. The flat pro-forma user fee was accomplished using a rate stabilization concept. In years when project costs are less than the total amount of user fees collected, a portion of the user fee revenue is transferred into a Reserve For Future Projects account. In years when project costs are more than the user fees collected, the shortfall will be spent from the Reserve For Future Projects account. This concept allows the City to levy the same user fee each year even though program costs fluctuate. Any balance in the Reserve For Future Projects account will earn interest that will also be used to fund program costs.

The following table summarizes the pro-forma user fees and program costs for each scenario.

Although the Debt-Financing scenario creates a lower Annual Program Cost and Pro-Forma User Fee Per ERU than the Pay-As-You-Go scenario, the Total 20-Year Program Cost is significantly greater due to an additional 25 years of debt service payments that would continue after the initial 20 years of the program. The computation of the Pro-Forma User Fee Per ERU for both the Pay-As-You-Go and Debt-Financing scenarios is as follows:

Debt-Financing Annual Cost $2,338,000 / 14,932 ERUs in City = $157/ERU

Pay-As-You-Go Annual Cost $2,508,500 / 14,932 ERUs in City = $168/ERU

Project maintenance and administration costs for both Debt-Financing and Pay-As-You-Go scenarios are identical; and, as stated previously, each scenario includes an initial, one-time General fund transfer of $2 million. The notable cost differences between the two scenarios are the result of: 1) the Debt-Financing scenario includes a $34 million cost of debt financing costs, including interest and borrowing costs; and 2) the Pay-As-You-Go scenario builds a $3.5 million reserve by year 20.

The following table compares the program costs (including inflation factors) for both Debt-Financing and Pay-As-You-Go scenarios:

Reasons for establishing the user fee rate utilizing the Pay-As-You-Go methodology of program funding include:

• Using the Pay-As-You-Go scenario, 100% of the Pro-Forma User Fees pay for actual program costs included in the Preliminary Financial Model. Using the Debt-Financing scenario, only 56% of the estimated Pro-Forma User Fee funds actual program costs. Based upon the Preliminary Financial Model, the total additional cost of the Debt-Financing scenario was about $34 million.
• Because there is no debt processing and documentation time, the City would have the ability to react quickly to construct a project as the need develops.
• The Pay-As-You-Go scenario provides more flexibility to reduce the user fee in later years, in the event the City’s tax revenue from other sources increases (e.g. tax revenue from a major development in the City) or if the cost to maintain the Water Quality And Flood Protection system decreases.
• Using the Pay-As-You-Go scenario, an estimated $3.5 million reserve may be available for additional projects not scheduled within the first 20 years of the Water Quality And Flood Protection Program.
• Using the Pay-As-You-Go scenario, the higher average balance maintained in the Reserve For Future Projects account earns interest to help fund additional future projects.

Considerations for utilizing debt in the future include:

• Debt-Financing may provide additional immediate funding, without increasing user fees, if a need to construct several high cost projects in a short period of time develops.
• In addition, Debt-Financing may provide additional immediate funding for a previously unidentified emergency Water Quality And Flood Protection project (e.g. a project similar to the $4.1 million San Ramon project).
• To pay for future projects that will be discovered when the Water Quality And Flood Protection Master Plan is updated every 5 years.
• Debt-Financing is a more attractive option in time periods when interest rates are low.

As described previously, current Chair, Becky Clark and Vice Chair, Gina McLeod, reviewed the Preliminary Financial Model. Their questions were answered and their comments were integrated in to the Preliminary Financial Model attached to this Staff Report.

The City Attorney has developed the following Summary Timeline for Proposition 218 Mailed Ballot Election to Establish Water Quality And Flood Protection Program Fees:

Staff has also attached the Schedule to Meet August 30, 2005 "Election" Mandate (see Attachment G) to provide a quick visual chronological view of the timeline for establishing a user fee.

For an election in 2005, recent state legislation mandates that mail ballots be tallied on either May 3, 2005 or August 30, 2005. The Team Staff has determined that an adequate amount of time does not exist to carry out the process leading to a mail ballot on May 3, 2005. The Team recommends that the City proceed with the process leading to a mail ballot on August 30, 2005 as described in the previous table titled Summary Timeline for Proposition 218 Mailed Ballot Election to Establish Water Quality And Flood Protection Program Fees. If the mail ballot is tallied on August 30, 2005, it cannot be timely submitted for the FY05-06 tax rolls. It would be submitted for the FY06-07 tax rolls by August 10, 2006.

The City’s Public Information Consultant, MIG, conducted confidential, one-on-one interviews with community stakeholders identified by the Team between October 7 and October 20, 2004. These interviewees represented a range of community interests and experience.

Interviewees were asked questions regarding their knowledge of the City’s storm drain master plan, storm drain deficiencies and their receptiveness to a user fee that’s under consideration. The interviewees were presented with the pro-forma user fee for their respective property.

Prior to conducting the interviews, the plan for developing the pro-forma user fee was based on the formation of three areas. The three areas were based upon the location of known storm drain renewal projects, the direction of drainage flow, whether the drainage pipes were generally made of corrugated metal or concrete and the age of drainage pipes. The pro-forma user rates would have been substantially different under the area-based proposal. Parcels along the Palos Verdes East Drive corridor would have been charged a rate approximately 20 times greater than parcels along the Hawthorne Boulevard corridor of the City.

The Team considered whether the user fee should be based upon the location of known projects to be equitable. Ultimately, the Team concluded that the Water Quality And Flood Protection Program would likely be established in perpetuity. The sense of priority to perform renewal projects in one area of the City would likely change over the long-term. Therefore, a citywide approach was ultimately used for the Preliminary Rate Analysis and pro-forma user rate.

Highlights of the interviews include:

• All of those interviewed who were longtime residents and active in homeowner associations were well aware of the City’s infrastructure challenges, specifically the problems with storm drains.
• Newer residents who were not active usually were not familiar with any storm drain problems.
• Every stakeholder said they believed the veracity of the engineering report. The term "engineers report" held weight. All said that storm drain failures could be extremely bad, even those who hadn’t thought about storm drains until prompted.
• The most striking observation was that interviewees strongly felt that the area-based fee structure was not equitable. Most felt it was a citywide issue, with liability and benefits for all residents.
• Everyone recognized that a new fee would not be popular, but many suggested that if the user fee were based on solid research and analysis of potential funding, residents would accept it. These same interviewees believed the education process would need to be very open and include details about City revenues and expenditures.
• Most did not see the need for a sunset provision if the money is spent wisely and carefully, and the City only asks for the amount needed. However, some suggested lowering the fee or canceling it if other sources of funds are found.
• Most believe that the average Rancho Palos Verdes resident is unaware of the magnitude of the problem.
• Many interviewees mentioned that a selling point could include environmental issues, such as pollution, sediment flowing into the ocean, erosion of coastal bluffs and habitat.

Based on interview results, the Team felt that a citywide rate method would be most acceptable to the City’s residents, rather than the area-based concept. In addition, a citywide fee is more appropriate because the user fee system is proposed to have an indefinite duration and the Water Quality And Flood Protection project locations will change over time. Thus, even though Water Quality And Flood Protection facilities on the east side of the City currently are in the most need of repair and will be improved first, City facilities in other areas will need to be improved in the future as they continue to age and deteriorate.

MIG have prepared a Community Education and Outreach Strategy for the proposed Water Quality And Flood Protection Program. The education process for the proposed user fee would include development of public education materials, facilitation at community workshops, development of multimedia campaign (i.e. Channel 33 and 3), development of direct mail educational material, development of press releases, preparation and completion of a mail survey with property owners prior to the actual ballot measure and coordination of the preparation of the actual mail ballot and notices.

The Team would develop the education process with input from community stakeholders, members of the FAC and the City Council. MIG has prepared a preliminary timeline that integrates with the table titled Timeline for Proposition 218 Mailed Ballot Election to Establish Water Quality And Flood Protection Program Fees prepared by the City Attorney.

Staff has attached the Schedule Of Estimated Ending General Fund Reserves For FY04-05 (see Attachment G). The Schedule has been updated to reflect the fiscal impact resulting from closing the books and the issuance of the audited financial statements for FY03-04. Based on the pending financial statements for FY03-04 and the recent sale of the Tyler property, Staff estimates that Ending General Fund Reserves for FY04-05 will be about $14 million.

The Finance Advisory Committee reviewed the 2004 Five-Year Financial Model – Revision One on August 25, 2004 and re-affirmed the following recommendation:

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.

General fund revenue and expenditure increases were based upon an increase of 2% and 3.12%, respectively, through FY08-09. Several noteworthy assumptions included in the preparation of the 2004 Five-Year Financial Model – Revision One were as follows:

1. Included the expected restoration of state shared revenues (i.e. Vehicle License Fee revenue) to the General Fund.
2. Included the estimated costs of arterial and residential streets and roadways in accordance with the Pavement Management Plan through FY08-09.
3. Did not include Water Quality And Flood Protection renewal and maintenance projects.
4. Did not include sewer renewal and maintenance projects.
5. Did not include any costs for the NCCP open space preserve.
6. Did not include any costs for the proposed Team RPV to reduce citywide speeding by increasing traffic enforcement and public education.
7. Did not include revenues from the proposed Long Point Resort project.

Subsequent to the completion of the 2004 Five-Year Financial Model – Revision One, the City Council approved the NCCP, including the acquisition and preservation of open space. Staff has prepared a summary schedule titled "Fiscal Impact Of NCCP And Proposed Sewer And Water Quality And Flood Protection Program Expenditures On General Fund Reserves As Presented In The 2004 Five-Year Financial Model". The schedule presents the fiscal impact of the following proposed expenditures on General Fund Reserves through FY08-09:

3. The potential annual payment of $220,000 for sewer cleaning and video-filming during FY05-06 through FY08-09, assuming that the City pays the entire cost and none of the work is performed by the County (a worst-case scenario).
4. The annual payment of $432,000 for sewer line replacement during FY05-06 through FY08-09, assuming the City pays the entire cost of estimated projects extrapolated from the Sewer Master Plan and no costs are borne by the County (a worst-case scenario).
5. The estimated annual payment of $30,000 of user fees by the City for certain government owned properties located within the City.
6. The additional annual cost of the NCCP and open space preservation totaling about $250,000 through FY08-09.
7. An initial, one-time transfer of $2 million from the General Fund to the Water Quality And Flood Protection Program in early FY05-06.
8. The estimated additional cost of $200,000 for Infrastructure Financing Consultants in FY04-05.

Based upon the proposed expenditures included in the Schedule above (see C through H), including the "worst-case scenario" that the City must bear the entire cost of sewer cleaning and video-filming and sewer line replacement at the annual rate of $220,000 and $432,000 respectively, Ending General Fund Reserves through FY08-09 would exceed $8.3 million, in excess of the General Fund Policy Reserve Level (see J). It appears as though Ending General Fund Reserves would exceed the General Fund Policy Reserve Level even through FY09-10, the fifth year of the sewer cleaning and video-filming and sewer line replacement proposed by Staff.

Subject to approval of the proposed user fee by the City’s property owners, the Team recommends that the City Council authorize a transfer of $2 million of General Fund Reserves to a new Water Quality And Flood Protection Program Enterprise Fund in early FY05-06. This transfer will fund the first project (Sunnyside Ridge) before user fees are collected in FY06-07. The transfer will also contribute to construction in the early years of costly Water Quality And Flood Protection projects that currently are needed without having to increase the amount of the user fee during the first several years of the program. In fact, a portion of the proposed transfer of $2 million will reduce the user fee for each property owner by an average of approximately $6 per year.

Based upon the summary schedule titled "Fiscal Impact Of NCCP And Proposed Sewer And Water Quality And Flood Protection Program Expenditures On General Fund Reserves As Presented In The 2004 Five-Year Financial Model", the Team believes that a prudent level of General Fund Reserves will be maintained, even if the City Council approves the $2 million transfer of General Fund Reserves to the Water Quality And Flood Protection Program Enterprise Fund and bears the entire $3.2 million cost of cleaning and video-inspecting the sewer lines over the next five years. Based on the pending Comprehensive Annual Financial Report (the "CAFR") for FY 03-04 and the recent sale of the Tyler property, Staff estimates that Ending General Fund Reserves for FY 04-05 will be about $14 million.

The proposed Water Quality And Flood Protection Program Enterprise Fund would account for all of the financial activities of the proposed user fee system. The Fund would be included in the annual budget process of the City and would be audited by independent Certified Public Accountants. The City Council may wish to establish an independent oversight committee to monitor the Water Quality And Flood Protection Program.

The Team considered two alternatives for the collection of user fees from property owners: (1) billing and collection with the monthly water bills, or (2) billing and collection with semi-annual property tax bills administered by the County. Based upon discussions with other agencies and the advice of Harris & Associates, the Team strongly recommends billing and collection with semi-annual property tax bills administered by the County. Based upon Harris & Associates past experience, the County’s property tax rolls are more reliable for collection of user fees.

State loan programs, such as Infrastructure Bank loans and State Water Resources Control Board loans may be available to the City. Loan proceeds are used to finance infrastructure improvements unique to each program. Because financing may only require a City application, this form of debt may offer lower borrowing costs than traditional revenue bond financing for the Water Quality And Flood Protection Program Enterprise Fund.

However, participation in the loan program is subject to a competitive project approval process; and only a portion of the project may be funded. The competitive process favors projects that have cleared environmental approvals and are ready for construction. Based upon staff’s recent discussion with members of the SWRCB, the City will be required to pledge a dedicated revenue source (e.g. user fees) as collateral in conjunction with obtaining a SWRCB loan. Therefore, establishing a user fee may enable the City to possibly obtain low interest debt under this program.

SWRCB staff recently indicated that funding for Water Quality And Flood Protection Program renewal projects like those being proposed by the City may be of special interest to the Board. Staff will continue to pursue the SWRCB loan process and inform the Council with its progress.

Staff has determined, through research and discussions with colleagues, that the likelihood of obtaining grants and low cost financing alternatives is remote at this time. Finance Staff members attended a funding fair provided by the California Financing Coordinating Committee (CFCC) earlier this year. The CFCC, created in 1998, consists of state and federal agencies that work together to offer coordinated and streamlined access to infrastructure financing for California's local communities. The CFCC Funding Fairs provide opportunities to obtain information about currently available infrastructure grant, loan and bond financing programs and options. The following six agencies gave brief presentations at the February 24 meeting:

• California Infrastructure and Economic Development Bank
• Department of Water Resources
• State Water Resources Control Board
• USDA Rural Development
• Department of Health Services
• Department of Housing and Community Development

Based on the competitive bid nature, as well as the stringent requirements of the programs, it is very unlikely that the City would be eligible for any of the programs discussed at the Funding Fair. For example, the median household income of city residents would have to fall below $35,680 to qualify for many of the programs. Based on 2000 Census, the City of Rancho Palos Verdes’ median household income is $95,643. Staff will continue to monitor programs offered by the CFCC and related agencies.

The following schedule provides the details of the Estimated additional costs for services provided by MIG, Fieldman, Rolapp & Associates and Harris & Associates during FY 04-05 to continue the Infrastructure Financing project and proceed with the process to establish a user fee:

The services described in the schedule above are consistent with the proposals submitted by the consultants prior to their retention by the City Council. If the City Council authorizes Staff to proceed with the process leading to establishing a user fee, Staff will bring a budget resolution in the amount of $200,000 and any necessary contract amendments for consideration and approval at a future meeting.

The City of San Clemente established an Urban Management Runoff fee in 2002, similar to what the City is currently considering. San Clemente is a coastal community with a population of about 55,000, therefore, similar to the City of Rancho Palos Verdes. San Clemente Staff recently discussed the fee system with San Clemente staff and offer the following information:

• The fee is charged citywide, regardless of the priorities and locations of storm drain projects, similar to the approach used in the Preliminary Rate Analysis and the Preliminary Financial Model used to calculate the pro-forma user fee;
• The voters approved a flat fee for residential parcels of about $96 per year;
• The fee is expected to raise about $4 million during 2005 (the Preliminary Financial Model is based upon raising about $2.5 million annually);
• The Surfrider Foundation contributed financial and advocacy resources that was viewed has being significantly helpful by San Clemente staff; and
• The mail ballot measure passed with a 57% "yes" rate.

Respectfully submitted,

Les Evans

City Manager

Dennis McLean

Director of Finance and Information Technology

Attachments:

A – Financing Alternatives staff report to City Council, dated March 4, 2003

B – Financing Alternatives Matrix

C – Harris & Associates Preliminary Rate Analysis Report

D – MIG Stakeholder Interviews – Synopsis of Findings

E – MIG User fee Community Education and Outreach Strategy

F – Water Quality And Flood Protection Program Preliminary Financial Model

G – Schedule of FY04-05 Estimated Ending General Fund Reserves