TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL

FROM: DENNIS McLEAN, DIRECTOR OF FINANCE AND INFORMATION TECHNOLOGY

DATE: MAY 4, 2004

SUBJECT: 2004 FIVE-YEAR FINANCIAL MODEL

Staff Coordinator: Gary Gyves, Senior Administrative Analyst

RECOMMENDATION:

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:

Overview

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 Model.

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 the people.

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.

1. The Proposed FY04-05 Budget is the basis for the first year of the 2004 Model.
2. Most expenditures have been increased annually using a factor of 3.12% beginning in FY05-06 and continuing through FY08-09.
3. Most revenues have been increased annually based upon a general increase of 2%. Certain revenue categories (e.g. projected changes in permit activity and retail sales) have been increased based upon staff’s discussions with other agencies, reports provided by other agencies or staff’s own expectations. The factors (% rate of change) are presented on Page 1 of the 2004 Model using an alphabetical index (a through l) and are referenced throughout the 2004 Model.

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

4. 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 through FY08-09.
5. 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 and therefore, utility users tax revenue to the City. However, staff believes that increases associated with other utilities, such as cable television, gas and electric, will likely offset losses from the decrease in telephone usage. Therefore, no increases have been estimated for the remaining years of the 2004 Model.
6. During the preparation of the FY03-04 budget, Staff anticipated an increase in Golf Tax 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 Tax revenue received for July through December is twelve percent (12%) less than FY02-03 Golf Tax revenue 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 Tax collected by the City is 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.
7. The residential street overlay program is primarily funded with General fund monies. Expenditures for this program were included in the original FY03-04 Budget at a reduced rate (less than half of the annual work recommended by the Pavement Management Program). 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.

8. 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 700 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 briefing began during the April 28, 2004 meeting of the FAC, including a presentation by the Executive Director of the PVPLC about its role in the event the open space is purchased and transferred to the preserve as proposed. Additional information shall be presented to the FAC at its next regular meeting on May 26, 2004.

9. 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.
10. 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 thereafter.
11. 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.
12. 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 for those projects has been included in the 2004 Model.

13. In 1997, the City Council approved the establishment of an in-lieu affordable housing fee pursuant to the City’s General Plan and Development Code. The fee is charged to developers of large commercial and residential projects, in-lieu of the developer constructing on-site affordable housing units, as required by State Law. Because the decision whether or not to accept Affordable Housing In-Lieu fees vs. requiring affordable housing to be provided is decided for each respective project, no In-Lieu fees have been included in the 2004 Model.
14. 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.

15. 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.

16. 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.

17. No expenditures have been included in the 2004 Model for major park facilities or open space improvements. Additionally, the 2004 Model does not include a provision for projects being considered by the Open Space, Planning and Parks and Recreation Task Force ("Task Force"), including:
1. Additional athletic fields;
2. A permanent home for the Peninsula Seniors;
3. Improvement to Upper Pointe Vicente Park (surrounding City Hall);
4. An Equestrian park facility; and
5. Improvements to the City Hall facility.
18. 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.
19. 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 briefing began during the April 28, 2004 meeting of the FAC, including a presentation by the Executive Director of the PVPLC about its role in the event the open space is purchased and transferred to the preserve as proposed. Additional information shall be presented to the FAC at its next regular meeting on May 26, 2004.

20. 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.
21. 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.
22. 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.
23. 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.
24. 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.
25. The 2004 Model indicates that the fund balance of the Improvement Authority’s Abalone Cove fund will steadily decrease over the five years of the Model. This decrease is due to a commitment to fund a portion of the Abalone Cove Landslide Abatement District (ACLAD) in the amount of $54,000 annually. Interest income on the non-expendable $1,000,000 portion of the fund balance is not sufficient to pay for the estimated annual expenditures including the ACLAD contribution.
26. 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). Construction bids were received recently and are currently under review by Staff.
27. 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.