TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: DENNIS McLEAN, DIRECTOR OF FINANCE AND INFORMATION
DATE: APRIL 20, 2004
SUBJECT: 2004 FIVE-YEAR FINANCIAL MODEL
Staff Coordinator: Gary Gyves, Senior Administrative Analyst
Receive and file the 2004 Five-Year Financial Model, including the recommendation
by the Finance Advisory Committee presented at the end of this report.
BACKGROUND AND DISCUSSION:
The 2004 Five-Year Financial Model (the "2004 Model") is a financial
schedule prepared by the Finance Department under the supervision of the City
Manager. City Council Policy No. 18 requires preparation of the Model. The
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 will be met when the City Council receives and files the final 2004
Utility Users Tax
Section 3.30.180 of the Municipal Code requires the City Manager to submit
an analysis of revenues derived from the City’s Utility Users Tax ("UUT")
in connection with the preparation of the City’s annual budget. The 2004
Model includes the projection of UUT revenue, as well as all other revenues
and expenditures for the City and its agencies.
The UUT rate has always been 3% since its inception during FY93-94. The City
Council may vote to decrease or eliminate the UUT rate at any time. In the
event the rate is decreased, the City Council may elect to increase the rate
at a later date, but not to exceed 3%. As a result of the 1996 municipal election,
the UUT rate may only be increased in excess of 3% with the majority vote of
City Impacts/Possible Impacts of State Budget Crisis
Locally derived State shared revenues are at risk of being reduced further
due to the State’s ongoing fiscal crisis. State shared revenues include,
but are not limited to, Motor Vehicle License Fees, Sales Tax and Highway User
Tax (Gas Tax). Staff has been monitoring the State fiscal crisis closely to
ensure that we incorporate the impact of State budgetary decisions in the City’s
FY03-04 estimate of State shared revenues, as well as the Proposed FY04-05
Budget. The State budget issues with the most severe consequences for the City
are listed and discussed below. Staff will continue to monitor the State budget
situation and periodically report any significant developments.
- Vehicle License Fee Revenue:
Prior to 1999, State residents paid a Vehicle License Fee ("VLF")
of 2% of the market value of their respective vehicle’s 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 legislation also contained a "trigger" mechanism
for the tax rate to be reinstated to 2% if the State could no longer afford
to backfill the reduced rate.
On June 19, 2003, due to the State budget crisis, the VLF trigger was pulled
restoring the VLF tax rate from 0.65% back 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. 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 revenues it failed to pay to cities and counties during this three-month
period as a loan. City Staff has not included any expectation of its receipt
in the 2004 Model.
On November 17, 2003, the Governor issued an executive order lowering the
rate back down to 0.65% and reinstating the backfill to local governments.
Currently, the City is still receiving backfill funding from the State. However,
due to the ongoing State budget crisis, staff believes that the backfill revenues
are still at risk. Due to the uncertainty pertaining to the VLF backfill payments,
the backfill portion of VLF revenue was not included in the adopted FY03-04
Budget, Proposed FY04-05 Budget or the 2004 Model. In addition, staff also
believes that the State could confiscate backfill payments the City has already
received by offsetting backfill amounts against future payments of VLF.
- Educational Revenue Augmentation Fund:
In response to serious State budgetary shortfalls in FY92-93 and FY93-94,
the State Legislature permanently redirected over $4 billion of property taxes
from cities, counties, and special districts to school and community college
districts. The permanent redirection of these funds, which has occurred annually
since its inception and will continue into the future indefinitely, allows
the State to decrease its use of general funds for schools by the same amount.
In each county, these property taxes were deposited into a countywide fund
for schools know as the Educational Revenue Augmentation Fund ("ERAF").
The Governor recently released the first draft of the State’s FY04-05
Budget. The State’s FY04-05 Budget includes an additional ERAF shift
of $1.3 billion in property taxes from cities, counties and special districts.
If the State’s FY04-05 Budget is adopted "as is" by the State
Legislature the City will lose approximately $109,000 in General fund property
tax and $8,200 in property tax increment associated with the redevelopment
agency of the City. Staff is concerned that the proposed ERAF shift will be
- Propositions 57 and Associated "Triple Flip":
Proposition 57, the one time Economic Recovery Bond of $15 billion, was approved
by voters on March 2, 2004. The $15 billion will be used to pay off the State’s
accumulated General fund deficit as of June 30, 2004. However, based on the
State’s Legislative Analyst Office review of the State’s FY04-05
Budget, the State still has a FY04-05 operating deficit of $2 billion.
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 funds set aside from property tax revenues (primarily ERAF).
At this time, the City does not expect to realize any loss of revenues from
the Triple Flip. In addition, a lawsuit has been filed by a group of local
agencies challenging the reduction in sales tax. The Triple Flip is set to
go into effect on July 1, 2004.
Material Additions to the Proposed FY04-05 Budget
When the FY03-04 Budget was adopted, staff also presented the Proposed FY04-05
Budget. Staff has made the following material revisions to the Proposed FY04-05
Budget column of the 2004 Model:
- $1.1 million transfer from the General fund to the Capital Improvements
Project fund for residential overlay/slurry projects.
- $500,000 transfer from the General fund to the Capital Improvements Project
fund for the start of a storm drain lining program. The $500,000 would alleviate
10% of the City’s identified storm drain lining needs. Public Works
staff expects to present a report regarding the proposed storm drain lining
program in the near future.
- Various expenditure increases totaling approximately $50,000 from the General,
AQMD, and Street Maintenance funds for neighborhood compatibility noticing,
view restoration tree trimming and NCCP lobbyist services.
The aforementioned proposed capital improvement project expenditures totaling
$1.6 million would be funded by the non-recurring $1.7 million insurance settlement
received during FY03-04 resulting from the emergency San Ramon drainage project.
Format of the 2004 Model
The 2004 Model includes the presentation of actual FY02-03 revenue, expenditures
and ending fund balances for all funds. The City’s independent auditors
expressed an unqualified (clean) opinion regarding the fair presentation of
the FY02-03 financial statements as a result of their audit.
After conducting a public hearing, the City Council adopted the FY03-04 Budget
on June 3, 2003. The FY03-04 Budget has been amended periodically throughout
the fiscal year. Additionally, Finance staff presented the FY03-04 Midyear
Report, which details projected deviations from the adopted FY03-04 Budget,
to the City Council on February 17, 2004. The City Council adopted expenditure
increases for the General fund, Street Maintenance fund and Capital Improvement
Projects fund detailed in the FY03-04 Midyear Report. The FY03-04 Midyear Report
also details projected changes in General fund revenues. The 2004 Model has
not been revised to include the budget expenditure adjustments adopted by the
City Council after preparation of the FY03-04 Midyear Report, totaling about
$100,000. Therefore, the projected ending General fund balance presented in
the 2004 Model for FY04-05 exceeds Attachment A, accompanying the FY04-05 Budget
Workshop staff report, by the same $100,000. The Proposed FY04-05 Budget is
the basis for the first year of the 2004 Model.
The 2004 Model includes the segregation of funds as follows:
- General fund – The General fund balance represents the City’s
unrestricted reserve monies. These monies may be used for any City expenditure,
including general operations of the City.
- Funds restricted by action of the City Council – The fund balances
of these funds represent monies restricted by City Council action for a particular
purpose. The funds were formed with transfers from the General fund. These
monies may be returned to the General fund or used for other purposes (e.g.
infrastructure projects) upon the action of the City Council.
- Funds restricted by law or external agencies – The fund balances
of these funds represent monies restricted by law or external agencies, such
as the Federal Government, State of California, or Los Angeles County. These
monies can only be used for the purpose outlined by the restricting agency
in accordance with the terms and conditions set by legislation and voter
The 2004 Model includes several schedules organized as follows:
Exhibit A Summary – 2004 Five-Year Financial Model (One Page
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
- The Proposed FY04-05 Budget is the basis for the first year of the 2004
- Most expenditures have been increased annually using a factor of 3.12%
beginning in FY05-06 and continuing through FY08-09.
- Most revenues have been increased annually based upon a general increase
of 2%. Certain revenue categories (e.g. projected changes in permit activity
and retail sales) have been increased based upon staff’s discussions
with other agencies, reports provided by other agencies or staff’s
own expectations. The factors (% rate of change) are presented on Page 1
of the 2004 Model using an alphabetical index (a through l) and are referenced
throughout the 2004 Model.
Assumptions Specific to the Funds and Program Revenues and Expenditures
Included In The 2004 Model
- It is assumed that the City's share of property tax will remain constant
at approximately 6.35% of the one-percent rate assessed by the County. Property
tax revenues have been conservatively increased at the rate of 2% in FY05-06
- The 2004 Model assumes the continuation of the 3.0% utility user tax through
FY08-09. Based on conversations with telephone company representatives and
recent newspaper articles, staff is concerned that UUT derived from telephone
usage may decrease in the future due to the movement toward cellular phones
resulting in an overall reduction of phone costs to consumers, therefore,
utility users tax revenue to the City. However, staff believes that increases
associated with other utilities, such as cable television, gas and electric,
will likely offset losses from the decrease in telephone usage. Therefore,
no increases have been estimated for the remaining years of the 2004 Model.
- During the preparation of the FY03-04 budget, Staff anticipated an increase
in Golf Fee revenue from the FY02-03 amount of $149,917 to approximately
$175,000 for FY03-04. The anticipated increase was due to the expected grand
opening of all eighteen holes at Ocean Trails. However, FY03-04 Golf Fee
revenue received for July through December are twelve percent (12%) less
than FY02-03 Golf Fees received for the same period. Based on year-to-date
receipts and the status of the construction for the golf course amenities,
Staff anticipates that only about $135,000 will be received for FY03-04.
Due to the anticipated completion of landslide repairs and the expected grand
opening of all eighteen holes at Ocean Trails, Staff estimated that the golf
tax revenue derived from Ocean Trails will be $178,500 in FY04-05. Golf fees
collected by the City are a percentage of golf operations revenue. Staff
has assumed that it will increase at a rate of 2% for the remaining four
years of the 2004 Model.
- The residential street overlay program is primarily funded with General
fund monies. Expenditures for this program have been included in FY03-04
at a reduced rate (less than half of the annual work recommended by the Pavement
Management Program). The Proposed FY04-05 budget includes a one-time transfer
of $1.1 million from the General fund to the Capital Improvement Projects
fund for residential street overlay projects. The 2004 Model does not include
expenditures for overlay projects in FY05-06 through FY08-09, as General
fund revenues in excess of General fund expenditures are not expected to
be adequate to fund activities 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.
- Public Works staff presented a revised spending plan for the use of state
legislated grants, Quimby fund reserves and EET fund reserves to the City
Council on March 4, 2003. The 2004 Model includes the use of these funds
in accordance with the spending plan.
$1 Million is budgeted in FY03-04 for the City’s participation towards
the proposed purchase of about 722 acres of coastal hillside along Palos
Verdes Drive South ("PVDS") in cooperation with the Palos Verdes
Peninsula Land Conservancy ("PVPLC"). The PVPLC has committed to
raising about $6 Million. The City and the PVPLC are striving to raise the
remainder of the funds from State and federal grants totaling approximately
$23 Million. Based on a staff report prepared by the Public Works Department,
dated March 4, 2003, the $1 Million budgeted by the City will be funded in
the amounts of $538,878, $332,500 and $128,622 from Proposition 12, Proposition
40 and Measure A funds, respectively.
The Open Space Acquisition Ad-Hoc Committee of the City Council recently
requested that Staff and the Executive Director of the PVPLC brief the Finance
Advisory Committee ("FAC") about the proposed purchase of the proposed
open space preserve, including the cost of maintenance. The matter will be
agendized for the April 28, 2004 meeting of the FAC.
- The Coastal Commission approved the Proposed Long Point Resort Project
in the fall of 2003. Due to the uncertainty of project completion, as well
as its timing, no revenues (e.g. transient occupancy tax, sales tax, developer
fees, etc.) or expenditures have been included in the 2004 Model.
- Currently, the LAIF investment interest rate hovers around 1.5%. The Proposed
FY04-05 includes an assumption that the LAIF interest earnings rate will
be 2.25%. In the preparation of the 2004 Model, staff has used an investment
interest rate of 2.25% for FY05-06, increasing it 0.25% for each fiscal year
- The parks and trails amenities included in the Conditions of Approval of
the Long Point Resort project satisfy any and all of its Quimby requirements.
Due to the uncertainty of completion, a Quimby fund developer fee for the
Point View residential project has not been included in the 2004 Model.
- Environmental Excise Tax ("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). 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 has been included in the 2004 Model.
- In 1997, the City Council approved the establishment of an in-lieu affordable
housing fee pursuant to the City’s General Plan and Development Code.
The fee is charged to developers of large commercial and residential projects,
in-lieu of the developer constructing on-site affordable housing units, as
required by State Law. Because the decision whether or not to accept Affordable
Housing In-Lieu fees vs. requiring affordable housing to be provided is decided
for each respective project, no In-Lieu fees have been included in the 2004
- An amount of $75,000 has been included in FY04-05 through FY08-09 for Miscellaneous
Drainage. The intended use of this miscellaneous allocation is to provide
for small emergency repairs. No expenditures for storm drain renewal projects
have been included in the 2004 Model. General fund reserves are not sufficient
to perform storm drain renewal projects. No dedicated revenue source currently
exists to provide monies to perform storm drain infrastructure renewal, as
well as any long-term debt that could be used to finance such improvements.
The FY02-03 budget includes appropriations for the preparation of an update
of the citywide storm drain plan anticipated to be completed in April of
2004. On April 6, 2004, the City Council approved the preparation of an Engineer’s
rate structure analysis report for the City’s storm drain system. In
addition, an update to the citywide master plan of sewers is anticipated
to be completed in the summer of 2004.
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.
- At the June 17, 2003 meeting, the City Council approved a revised CDBG
spending plan, which excludes the now terminated Altamira Canyon Storm Drain
project. The revised spending plan includes two sales of unspent CDBG monies
to other agencies. On November 6, 2003, the City received $230,000 of General
fund monies from the sale of $400,000 of CDBG funds to the City of West Hollywood.
On February 3, 2004, the City Council authorized an additional sale to West
Hollywood of $150,000 of CDBG funds in exchange for $93,750 of General funds.
The 2004 Model has been revised to reflect the revised plan for CDBG funds.
CDBG fund expenditures are completely reimbursed with CDBG grant monies;
therefore, the CDBG fund balance is always projected to be zero, regardless
of the level of expenditure activity within the fund.
The Public Works Department solicited bids for the construction of an elevator
at City Hall. Two firms submitted bids to the Public Works Department, both
of which were substantially over the cost estimated by the City’s architectural
consultant. The elevator design has been modified and the project will soon
be re-released for bids. The elevator is planned to be built with CDBG funds.
- The Director of Public Works presented an overview regarding the Tarapaca
Landslide to the City Council on April 15, 2003. The staff report described
the following: "GeoSyntec Consultants, Inc. recently completed its investigation
and concluded that a landslide exists along the eastern side of the San Ramon
canyon just east of the PVDE switchbacks. The landslide, named the Tarapaca
Landslide, is an active landslide that borders the eastern edge of the larger
and inactive South Shores Landslide. The Tarapaca Landslide is presently
sliding westerly into the San Ramon canyon, partially blocking stream flow,
and contributing sediment for transport to downstream areas of the canyon."
The landslide is principally within the City; however, a portion of the
landslide lies within the City of Los Angeles. The potential sharing of the
liability and cost for the project between the City, Los Angeles County and
the City of Los Angeles is currently being discussed by all parties. However,
the City of Los Angeles has budgeted approximately $1 million for the project
that has been estimated to reach at least $2.5 million. It is unknown if
Los Angeles County is willing to provide funding for the project. Because
the amount of shared liability for the City is not known at this time, as
well as the lack of a funding source and competing storm drain projects,
nothing has been included in the 2004 Model at this time.
- No expenditures have been included in the 2004 Model for major park facilities
or open space improvements. Additionally, the 2004 Model does not include
a provision for projects being considered by the Open Space, Planning and
Parks and Recreation Task Force ("Task Force"), including:
- Additional athletic fields;
- A permanent home for the Peninsula Seniors;
- Improvement to Upper Pointe Vicente Park (surrounding City Hall);
- An Equestrian park facility; and
- Improvements to the City Hall facility.
- The 2004 Model includes the resumption of the transfer of $100,000 from
the General fund to the Building Replacement fund for FY05-06 through FY08-09.
- The City’s Natural Community Conservation Plan includes a City funding
commitment for habitat restoration and reserve maintenance and monitoring.
An annual Habitat Restoration fund expenditure of $100,000 has been included
in all five years of the 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.
As described previously in Assumption 8, the Open Space Acquisition Ad-Hoc
Committee of the City Council recently requested that Staff and the Executive
Director of the PVPLC brief the FAC about the proposed purchase of the proposed
open space preserve, including the cost of maintenance. The matter will be
agendized for the April 28, 2004 meeting of the FAC.
- The proposed FY04-05 budget for the Street Maintenance fund includes about
$800,000 of State apportioned Highway Users tax revenue, an operating transfer
of $285,000 from the 1972 Act fund, an operating transfer of $300,000 from
the General fund, an operating transfer of $112,000 from the Proposition
C fund, an operating transfer of $48,000 from the Waste Reduction fund, $20,000
for miscellaneous revenues and $20,000 for sidewalk repair fee revenue, totaling
approximately $1.59 Million. Street maintenance program expenditures are
expected to be approximately $1.59 Million.
- Staff has included an assumption that approximately $1 Million will be
spent from the Affordable Housing In-Lieu fund and an additional $1 Million
form the RDA Housing Set-Aside fund during FY05-06 for an affordable housing
project. The project may include use of the Crestridge property purchased
with RDA Housing Set-Aside funds in FY99-00.
- Proposition A funds are provided by the half-cent sales tax distributed
to cities on a per capita basis. These funds are restricted and may only
be used for transit services. Currently, the City uses Proposition A funds
for the City’s contribution to Peninsula area transit systems (Palos
Verdes Peninsula Transit Authority and Municipal Area Express). Staff estimates
the Proposition A fund will build a reserve of about $613,000 by the end
of FY04-05. A proposed sale of Proposition A funds in the amount of $550,000
has been included in FY05-06 in the 2004 Model. Based on the 1999 sale of
Proposition A funds to the City of Torrance, staff has estimated the sale
will be exchanged for approximately $385,000 of unreserved and undesignated
General fund monies. Proposition A funds can be sold for unrestricted General
fund monies when these restricted funds can’t be utilized.
- On May 6, 2003, the City Council approved the preparation of a Cost Based
Fee Study ("Fee Study"). Staff anticipates that the Fee Study will
be complete prior to the start of FY04-05. Although staff expects fee revenue
increases will be realized in FY04-05 as a result of the Fee Study, a reasonable
estimate is not known at this time. Therefore, the possible impacts of increases
to cost based fees have not been included in the 2004 Model.
- All RDA – Abalone Cove projects, including the installation of the
sewer system, are completed and the fund balance has been depleted. Accordingly,
no additional project expenditures are included in the 2004 Model.
- The 2004 Model indicates that the fund balance of the Improvement Authority’s
Abalone Cove fund will steadily decrease over the five years of the Model.
This decrease is due to a commitment to fund a portion of the Abalone Cove
Landslide Abatement District (ACLAD) in the amount of $54,000 annually. Interest
income on the non-expendable $1,000,000 portion of the fund balance is not
sufficient to pay for the estimated annual expenditures including the ACLAD
- The 2004 Model assumes that renovation of PVIC will be completed during
FY04-05. The renovation project budget is currently $3.5 million, and will
be funded with a County Measure A grant monies ($2,824,785), Quimby monies
($337,900), EET monies ($310,024), and a portion of the City’s Proposition
40 grant ($27,291).
- The City has been experiencing an over-funded position in its CalPERS retirement
account during the last couple of years. As of a result of the excess funded
status, no employer retirement contributions have been required. However,
the Adopted FY03-04 Budget and Proposed FY04-05 Budget include an increase
of the employer portion of the CalPERS retirement contribution of 2.5% and
8%, respectively. The estimated fiscal impact is expected to be about $64,000
and $221,000, respectively, when compared with no employer contributions
being required the last couple of years. The increase of the employer contribution
is a result of unfavorable investment earnings experienced in the retirement
portfolio managed by CalPERS.
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 the assumptions described above, the projected ending fund balance
of the General fund would increase slightly in FY05-06. This increase is primarily
due to the proposed sale of Proposition A monies (Assumption 22 above) in FY05-06.
However, the ending fund balance of the General fund would decrease over the
remaining three years of the 2004 Model by an average of approximately $740,000
annually. Additionally, the proposed activities of the CIP fund and the costs
of the Street Maintenance fund will require transfers from the General fund
totaling about $5 million over the five-year period included in the 2004 Model.
Recommendation of the Finance Advisory Committee:
The Finance Advisory Committee reviewed the 2004 Model during its meeting
on March 24, 2004 and offer the following recommendation:
Based upon the findings of the 2004 Model, it appears the City will need to
increase its revenue and other cash inflow sources 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
Director of Finance and Information Technology