JANUARY 4, 2005 INFRASTRUCTURE FINANCING – PROPOSED WATER QUALITY AND FLOOD PROTECTION PROGRAM – ADDITIONAL INFORMATION JANUARY 4, 2005 INFRASTRUCTURE FINANCING PROPOSED WATER QUALITY AND FLOOD PROTECTION PROGRAM ADDITIONAL INFORMATION

TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL AND HONORABLE CHAIR AND MEMBERS OF THE FINANCE ADVISORY COMMITTEE

FROM: LES EVANS, CITY MANAGER

DENNIS McLEAN, DIRECTOR OF FINANCE AND INFORMATION TECHNOLOGY

DATE: JANUARY 4, 2005

SUBJECT: INFRASTRUCTURE FINANCING – PROPOSED WATER QUALITY AND FLOOD PROTECTION PROGRAM – ADDITIONAL INFORMATION

Co-Author: Kathryn Downs, Accounting Manager

RECOMMENDATION:

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

  1. Receive and file this Staff Report, including the preliminary Rate Model (formerly referred to as the Preliminary Financial Model), for the Water Quality And Flood Protection Program, the pro-forma calculations of the pro-forma user fee rate and "What If" Scenario Alternatives A-C, to be used solely for discussion and not to be considered "final" costs and the proposed user fee rate;
  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. Authorize Staff to 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;
  4. Authorize an additional budget appropriation during FY04-05 of $220,000 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 in accordance with the attached RESOLUTION OF THE CITY COUNCIL OF THE CITY OF RANCHO PALOS VERDES, AMENDING RESOLUTION 2004-45, THE BUDGET APPROPRIATION FOR FISCAL YEAR 2004-2005, FOR A BUDGET ADJUSTMENT TO THE CITY'S GENERAL FUND; or in the event the City Council elects to discontinue the development of the proposed Water Quality And Flood Protection Program at this time, authorize an additional budget appropriation during FY04-05 of $30,000 for services provided by MIG, Fieldman, Rolapp & Associates and Harris & Associates to date in accordance with the attached RESOLUTION OF THE CITY COUNCIL OF THE CITY OF RANCHO PALOS VERDES, AMENDING RESOLUTION 2004-45, THE BUDGET APPROPRIATION FOR FISCAL YEAR 2004-2005, FOR A BUDGET ADJUSTMENT TO THE CITY'S GENERAL FUND; and
  5. Provide the Team with direction, preferences and/or decisions regarding the preliminary Rate Model, Version 1-4, for the Water Quality And Flood Protection Program, the pro-forma calculations of the pro-forma user fee rate and "What If" Scenarios – Alternatives A-C.

EXECUTIVE SUMMARY:

The Public Works Department has completed extensive evaluations of the City Storm Drain system over the past five years and has found it to be in need of approximately $25 million of rehabilitation projects and $4.6 million for lining of degraded storm drains. The Public Works Department has proposed a 20-year program of rehabilitation and lining as well as the cost of maintenance of the system and administration of the overall storm drain program at a total cost of about $33 million.

City staff and an advisory team of consultants have recommended that the proposed Water Quality And Flood Protection Program be financed with a combination of general fund reserves and a new user fee. The financing proposal was presented to the City Council and Finance Advisory Committee at a Joint workshop on November 30, 2004. The Council directed staff to bring back a series of alternative financing scenarios.

The 56 storm drain projects making up the list of rehabilitation projects include about $6.7 million of Priority Three projects that are more a matter of nuisance than hazard and may be delayed indefinitely. Costs of maintenance are about $130,000 each year and could be paid for using General Fund annual operating revenues. By delaying the Priority Three projects for 20 years or more, removing the annual maintenance costs from the user fee calculation and stretching the program out to 22 years rather than 20 years, a "modified" program cost scenario was developed. The all-inclusive cost model originally proposed will be referred to as the "optimal" program.

Both the "optimal" cost model and the "modified" cost model assume construction cost increases of 3% annually.

In addition to the user fee proposal presented at the November 30th Workshop, staff has developed three additional user fee options using the "modified" cost model that explore the options of (1) Using a "flat fee" for the full 22 years that incorporates an automatic internal annual 3% adjustment for inflation; (2) Using an escalating fee that assumes the City Council will approve an increase of 3% annually and (3) Using an escalating fee (which also assumes the City Council will approve an increase of 3% annually) that is designed to repay any advances from the General Fund in FY09-10.

Staff has also developed three alternatives that assume a new source of revenue from transient occupancy tax (TOT) generated by the proposed Long Point Resort Hotel. In assuming this new source of revenue, staff has responded to direction from the Council to do so and has relied on the developer’s cash flow projections provided to the City in August 2004 and confirmed in a conversation with Mr. Robert Lowe, Mayor Clark and the City Manager on December 3, 2004. The hotel is projected (by the developer Robert Lowe) to open for business in approximately 30 months and generate $1.8 million in TOT in the first six months of operation. By the fourth year of operation (2011), Mr. Lowe has projected annual TOT revenues to the City of over $6 million.

If these projections are accurate, the hotel will provide a new source of significant revenue to the City.  In addition to providing funds to the City to offset any increased costs of providing municipal services that result from the operation of a major resort hotel, there should be funds for the storm drain renewal program, enhanced traffic enforcement, a variety of new sports facilities, as well as funds for new programs as yet not envisioned. 

Of course, placing the City’s future in the hands of a single revenue source that is not yet fully approved is not something that staff can recommend. If the Council decides to fund the storm drain renewal program with potential revenues from the Long Point Hotel, it may be more appropriate to wait until the hotel actually starts to generate significant TOT before implementing the program.

Staff offers the following Action Item Chart for your consideration and assistance:

 

If the City Council decides to proceed with a user fee

 

If the City Council decides not to proceed with a user fee

 

 

 

 

1

Adopt the attached budget resolution for FY04-05 of $220,000 for services to be provided by the Team for the development of the Program to establish a user fee.

1

Adopt the attached budget resolution for FY04-05 of $30,000 for services provided by the Team to date.

2

Direct Staff to include the proposed initial transfer of $2 million from the General Fund in the FY05-06 budget.

2

Direct Staff to include the proposed initial transfer of $3 million from the General Fund in the FY05-06 budget.

3

Direct Staff to begin the process to establish the user fee based upon Version 1, 2, 3 or 4 of the Rate Model, or a variation of it, subject to the approval by property owners.

City of Rancho Palos Verdes Proposed Water Quality And Flood Protection Program SUMMARY COMPARISON OF FUNDING ALTERNATIVES

  Program Cost Estimated User Fee (Debt Financing)* Estimated User Fee (Pay-As-You-Go)* 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014    
1 Optimal Program     1,284,000 844,000 1,249,000 2,808,000 924,000 3,207,000 3,378,000 3,339,000 2,506,000 2,049,000  
2 Modified Program     1,050,000 1,315,000 1,353,000 1,339,000 1,357,000 1,274,000 1,505,000 1,289,000 1,560,000 1,189,000  
                             
  Estimated Revenues from Storm Drain User Fee (Pay-As-You-Go)                          
3 Version 1 $142 $152 0 2,511,000 2,511,000 2,511,000 2,511,000 2,511,000 2,511,000 2,511,000 2,511,000 2,511,000  
4 Version 2 $109 $111   1,827,000 1,827,000 1,827,000 1,827,000 1,827,000 1,827,000 1,827,000 1,827,000 1,827,000  
5 Version 3 $82 $85   1,407,000 1,449,000 1,493,000 1,537,000 1,584,000 1,631,000 1,680,000 1,730,000 1,782,000  
6 Version 4 $95 $105   1,727,000 1,779,000 1,832,000 1,887,000 1,944,000 2,002,000 2,062,000 2,124,000 2,188,000  
                             
                             
7 Estimated Revenues from Long Point TOT     0 0 1,815,000 4,023,000 4,847,000 5,460,000 5,727,000 5,939,000 6,147,000 6,362,000  
                             
1 The "optimal" program costs include all 56 projects accomplished over 20 years as well as the storm drain lining projects, catch basin filters, a project engineer, costs of maintenance and an inflation factor of 3% annually.  
2 The "modified" program costs do not include $6.7 of priority three projects of $130,000 annual maintenance cost and spread the program over 22 years.      
3 Storm Drain User Fee Version 1 is based on the "optimal" program costs, a transfer of $2 million from the General Fund Reserve and a flat fee for the entire 20 year program.  
4 Storm Drain User Fee Version 2 is based on the "modified" program costs, a transfer of $2 million from the General Fund Reserve and a flat fee for the entire 22 year program.  
5 Storm Drain User Fee Version 3 is based on the "modified" program costs, a transfer of $2 million from the General Fund Reserve and an escalating fee adjusted each year for inflation.  
6 Storm Drain User Fee Version 4 is based on the "modified" program costs, a transfer of $2 million from the General Fund Reserve, an escalating fee adjusted each year for inflation and repayment of the $2 million from the General Fund Reserve.  
7 Although the following Staff Report suggests a "no fee" alternative and two low fee alternatives that are proposed to be phased out in later years, the funds generated by this scenario should easily fund the storm drain renewal program after 2008.  
* The estimated user fee is the ERU figure developed in the staff report and represents the first year only. The first number is the 48 year debt financing fee and the second number is the "pay as you go" fee.  
                             
                             
                             
                             
                             

 

BACKGROUND:

Joint Workshop With Finance Advisory Committee On November 30, 2004

Staff has attached the Staff Report, dated November 30, 2004, and titled "Infrastructure Financing – Proposed Water Quality And Flood Protection Program" (see Attachment A). During the meeting, Staff and the Team presented an overview regarding the Program and members of the Finance Advisory Committee and the City Council thoroughly discussed the following topics:

This Staff report is intended to build upon the Staff Report presented on November 30, 2004.

Direction From The City Council During The Joint Workshop On November 30, 2004

During the Joint Workshop that was conducted on November 30, 2004, the City Council requested Staff to prepare various financial scenarios regarding possible financing alternatives for the proposed Program. Three additional versions of the preliminary Rate Model have been prepared. Each of the three versions demonstrates the reduction of the user fee rate resulting from the elimination of Priority 3 projects and maintenance. The three additional versions are differentiated from one another based upon:

Additionally, What-If Scenarios A-C have been prepared to demonstrate the fiscal impact of the use of the potential TOT that would be derived from the proposed Long Point Resort project to finance the Program. The following Preliminary Rate Model and What-If Scenarios A-C have been prepared by Staff and reviewed by the Team.

Preliminary Rate Model - Versions 1-4

The preliminary Rate Model (hereafter referred to as "Versions 1-4 of the Rate Model") should not be considered the "final" plan for financing the Program. Versions 1-4 of the Rate Model were developed to serve as a financial tool to spread the project costs, as well as the recurring annual costs, over the initial 20-22 years of the proposed Program. Based upon the annual costs contained in Versions 1-4 of the Rate Model for the proposed Program, the "pro-forma" user fee rate has been calculated. The pro-forma user fee rate serves as a benchmark for discussion and should not be considered as the "final" user fee rate.

Assumptions For Versions 1-4 Of The Rate Model

Staff has prepared a comprehensive Summary Comparison Of Versions 1-4 of the Rate Model to provide a two-page overview (see Attachment B). Several significant assumptions that are identical for each of the respective Versions 1-4 of the Rate Model are as follows (annual costs presented immediately below are for the initial year of the Program only):

The City Council will always retain the right to decrease or eliminate the user fee in the future depending upon changes in the City’s financial resources.

Version 1 – Optimal - Priority 1, 2 & 3 Projects And Maintenance Included - Flat User Fee (see Attachment C)

Version 1 - Optimal - was originally presented to the City Council as Attachment F to the Staff Report titled "Proposed Water Quality And Flood Protection Program", dated November 30, 2004. The Team developed this version of the Rate Model including all 56 storm drain projects (Priority One, Two and Three) identified in the Master Plan of Drainage Update presented to the City Council on June 15, 2004. The assumptions that differentiate Version 1 from the other versions of the Rate Model include:

    1. Completion of all 56 Priority 1, 2 and 3 storm drain projects at the optimal pace;
    2. A flat user fee over 20 years;
    3. A flat fee that was developed with the incorporation of an internal cost inflator for all Program costs at the rate of 3% annually; and
    4. Inclusion of maintenance costs.

Version 2 - Maintenance & Priority 3 Projects Excluded, Flat User Fee (see Attachment D)

Version 2 - Maintenance & Priority 3 Excluded, Flat User Fee - was developed by the Team with the purpose of reducing the user fee rate, while retaining the flat fee concept. The rate reduction resulted from the following:

    1. Deletion of all eighteen Priority 3 projects;
    2. Deferral of several Priority 1 and 2 projects for several years, as well as extending the timeline for all projects by two years (22 years vs. 20 years); and
    3. Deletion of maintenance costs based upon $130,000 each year.

Version 3 - Maintenance & Priority 3 Projects Excluded, Escalating User Fee (see Attachment E)

Version 3 - Maintenance & Priority 3 Projects Excluded, Escalating User Fee - was developed by the Team with the purpose of reducing the user fee rate further. The additional rate reduction in Version 3 resulted from the elimination of the 3% internal cost inflator that is incorporated into the flat fee concept. If the escalating fee concept is selected by the City Council, rate increases for inflationary cost increases would be annually subject to a majority vote of the City Council at a duly noticed Public Hearing. Otherwise, the assumptions used in Version 2 were the same as Version 3.

In the event no additional inflationary cost fee increase is enacted by the City Council after the first year of the Program, a total of $10 million of projects or other costs would have to be reduced from the 20-year program. The Debt Financing alternative of Version 3 of the Rate Model was developed based upon the assumption of the issuance of debt in years 4, 9, 14 and 19. The timing and amount of debt financing alternative, if utilized, would have to be revised if annual fee increases for cost inflation does not occur in accordance with the Model.

What-If Scenarios Alternatives A-C

Pursuant to the request made during the November 30, 2004 Joint Workshop, the Team prepared What-If Scenarios, Alternatives A-C. The What-If Scenarios are based upon the assumption that the proposed Long Point Resort Project (hereafter referred to as the "Long Point Resort") is built and commences operations in accordance with the Developer’s projections. The purpose of the What-If Scenarios is to examine a mix of alternatives, including not establishing a user fee or supplementing a user fee with all, or nearly all of the proposed TOT that would be derived by the City’s General Fund from the operation of the Long Point Resort. What-If Scenarios, Alternatives A-C, also demonstrate that a future City Council could reduce or eliminate the user fee in the future if the Program is financed with the proposed TOT derived from the Long Point Resort.

In the event the Long Point Resort is built and becomes operational in accordance with the timeline established by the Developer and if the City Council elects to commit from the General Fund the equivalent of all, or nearly all of the TOT projected by the Developer, the projected TOT may be sufficient to operate the Program at the Optimal level in accordance with Version 1 of the Rate Model, including Priority 1, 2 and 3 projects and maintenance. The Team did not ascertain the feasibility of the Developer’s projections, especially the likelihood of the completion of the Resort project, the timing of completion, and the rate of occupancy in the early years of operations and the City Council’s willingness and commitment to dedicate future TOT to the Program and legal issues concerning such a commitment.

The What-If Scenarios are presented for five years through FY08-09, consistent with the 2004 Five-Year Financial Model – Revision 2. Staff has not prepared any reliable financial information (i.e. the Five-Year Financial Model) for the General Fund beyond FY08-09. Due to Finance Staff’s professional standards regarding financial models, projections and forecasts, including conservatism and the uncertainty of financial activities beyond FY08-09, What-If Scenario for years after FY08-09 have not been prepared. It is the standard practice for the preparation of financial models, projections and forecasts that their presentation be limited to five years, due to the increased uncertainty for years beyond.

Assumptions For What-If Scenarios

Each of the three What-If Scenarios Alternatives A-C contain the following assumptions for both the General Fund and the proposed Enterprise Fund for the Program:

  1. They are based upon the 2004 Five-Year Financial Model – Version 2, as presented to the City Council on December 21, 2004;
  2. The timing and estimates of General Fund transit occupancy taxes ("TOT") that would be collected by the Long Point Resort were based upon Schedule A: Comparison Of Operating Projections, dated August 6, 2004 (see Attachment H), prepared by Destination Development Corporation (the "Developer");
  3. An initial transfer of $2 or $3 million from the General Fund to the proposed Enterprise Fund; and
  4. The goal of operating the Enterprise Fund in accordance with the Optimal version of the Rate Model, including Priority 1, 2 and 3 projects and maintenance.

The What-If Scenarios A-C are based upon an assumption that General Fund TOT resulting from the Long Point Resort will be sufficient to finance the Program. The What-If Scenarios A-C also assumes that the Long Point Resort would be built and operational in accordance with the Developer’s schedule. The Developer’s schedule is based upon an optimal timeline and assumes Coastal Commission approval of the recent amendment in early 2005. Any substantial delay in completion of the Long Point Resort would impair the timely operation of the Program, especially based upon What If Scenario, Alternative A that assumes no user fee is established. The substantial delay in completion of the Long Point Resort would cause Priority 1 storm drain reconstruction projects and lining to be delayed, unless General Fund Reserves were utilized as a financing source.

Alternative A – No User Fee – Transfer Of General Fund Reserves To The Proposed Enterprise Fund Subsequent To Commencement Of Operations Of the Long Point Resort

Alternative A – No User Fee – Transfer Of General Fund Reserves To The Proposed Enterprise Fund Subsequent To Commencement Of Operations Of the Long Point Resort (see Attachment I) is based upon the following assumptions:

  1. A user fee is not adopted at this time;
  2. A $3 million transfer would be made from the General Fund to the proposed Water Quality And Flood Protection Program Enterprise Fund during FY05-06;
  3. The Interim Pro-Forma Spending Plan (described below) would be conducted during the initial two years of the proposed Program until the initial transfer of $3 million is depleted;
  4. Upon depletion of the initial transfer of $3 million, the Program would be suspended until after the commencement of operations of the Long Point Resort;
  5. Upon commencement of the operations of the Long Point Resort, General Fund transfers would begin to entirely finance Program costs of about $2.5 million annually (to the Optimal level per Version 1 of Rate Model); and
  6. Upon commencement of the operations of the Long Point Resort, General Fund transfers would enable catch-up of past year Program costs totaling about $1.5 million that were not expended while the Program was suspended.

In the event the Long Point Resort is completed and commences operations in accordance with the Developer’s timeline, the Alternative A Scenario:

Interim Pro-Forma Spending Plan
 
The $3 million spending plan for What-If Scenario Alternative A consists of constructing the Sunnyside Ridge storm drain improvements in year one, with the remainder of funds being programmed towards the storm drain lining program and engineering services to design additional improvements which would be constructed once an additional stream of funding was established.

Alternative B – Establish A User Fee Based Upon Version 2 - Maintenance & Priority 3 Projects Excluded, Flat Fee And Transfer General Fund Reserves To The Proposed Enterprise Fund Subsequent To Commencement Of Operations Of the Long Point Resort

Alternative B – Establish A User Fee Based Upon Version 2 - Maintenance & Priority 3 Projects Excluded, Flat Fee And Transfer General Fund Reserves To The Proposed Enterprise Fund Subsequent To Commencement Of Operations Of the Long Point Resort (see Attachment J) is based upon the following assumptions:

    1. Subject to approval by the property owners, the user fee would be established based upon Version 2 - Maintenance & Priority 3 Projects Excluded, Flat Fee, at the rate of $111/ERU (using the Pay-As-You-Go fee alternative);
    2. A $2 million initial transfer would be made to the proposed Enterprise Fund for the Program;
    3. Upon commencement of the operations of the Long Point Resort, General Fund transfers would begin to entirely finance Program costs of about $2.5 million annually to the Optimal level per Version 1 of Rate Model; and
    4. Upon commencement of the operations of the Long Point Resort, General Fund transfers would enable catch-up of past year Program costs totaling about $2 million that were not expended while the Program was suspended.

Alternative B is partially, but not solely dependent on the receipt of TOT from the Long Point Resort because it assumes that a user fee is established based upon the Version 2 - Maintenance & Priority 3 Projects Excluded, Flat User Fee. The combination of the user fee and TOT would entirely finance Program costs of about $1.8 million annually, without interruption, but at a level less than the Optimal Version of the Rate Model. The City Council will always retain the right to decrease or eliminate the user fee in the future depending upon changes in the City’s financial resources.

Alternative C – Establish A User Fee Based Upon Version 3 - Maintenance & Priority 3 Projects Excluded, Escalating Fee And Transfer General Fund Reserves To The Proposed Enterprise Fund Subsequent To Commencement Of Operations Of the Long Point Resort

Alternative C – Establish A User Fee Based Upon Version 3 - Maintenance & Priority 3 Projects Excluded, Escalating Fee And Transfer General Fund Reserves To The Proposed Enterprise Fund Subsequent To Commencement Of Operations Of the Long Point Resort (see Attachment K) is based upon the same assumption as Alternative B, except the following difference:

Subject to approval of the property owners, the user fee would be established based upon Version 3 - Maintenance & Priority 3 Projects Excluded, Escalating Fee, at the rate of $85/ERU (using the Pay-As-You-Go fee alternative).

Like alternative B, Alternative C is partially, but not solely dependent on the receipt of TOT from the Long Point Resort because it assumes that a user fee is established based upon Version 3 - Maintenance & Priority 3 Projects Excluded, Escalating Fee. The combination of the user fee and TOT would entirely finance Program costs of about $1.4 million annually, without interruption, but at a level less than the Optimal Version of the Rate Model. The City Council will always retain the right to decrease or eliminate the user fee in the future depending upon changes in the City’s financial resources.

What-If Scenarios A-C Significant Pros And Cons

Staff has prepared What-If Scenarios A-C Significant Pros And Cons (see Attachment L). The attached Pros and Cons is not intended to be all-inclusive, but offer the City Council with several considerations regarding the concepts included in the What-If Scenarios.

Recommendation Regarding What-If Scenario - Alternative A

The Team, including the City’s Financial Advisor, Fieldman & Rolapp, does not recommend the adoption of What-If Scenario Alternative A for the following reasons:

  1. Although the Team supports the construction and operation of the Long Point Resort Project, the timing and amount of General Fund revenue is uncertain at this time. The Finance Advisory Committee and Staff expressed the following caution in a staff report presented to the City Council, dated March 4, 2003:
  2. "Note: Finance staff and the FAC do not believe that it is prudent to rely on the potential tax revenue from the proposed Long Point Resort Project to finance the City’s infrastructure needs, at least until the Resort is operational and a sufficient tax revenue stream is realized."

  3. Based upon the uncertainty of the timing, amount and certainty of General Fund revenue and the accounting concept of conservatism, Staff has not included transit occupancy taxes (TOT), property taxes and sales taxes that would be collected by the Long Point Resort in the 2004 Five Year Financial Model – Revision Two. Accordingly, it is not prudent to rely on the potential revenue that would be derived from the Long Point Resort to finance the Program.
  4. A dedicated user fee revenue source could provide a secure source of collateral for lenders in the event the City would elect to use debt financing in the future. The reliance on transit occupancy taxes (TOT), property taxes and sales taxes that would be collected by the Long Point Resort Project would not provide a secure revenue source to lenders unless the City were willing to encumber its General Fund for any and all Program debt. The State Water Resource Control Board has cautioned Staff that a dedicated revenue source may be required to secure funds borrowed using the California Infrastructure Bank program.
  5. A decision to rely on transit occupancy taxes (TOT), property taxes and sales taxes that would be collected by the Long Point Resort Project to entirely, or partially, finance the proposed Program may impair the City Council’s prioritization of the use of the City’s financial resources in the future.
  6. General Fund revenue from transit occupancy taxes (TOT), property taxes and sales taxes that would be collected by the Long Point Resort Project is cyclical due to economic cycles and other factors that impact the hospitality industry, therefore, may not be a consistent, secure, financing source for the Program.
  7. The necessary catch-up of past year Program costs totaling about $1.5 million would cause the General Fund Reserves to fall below the 50% Reserve Policy Level during FY07-08 and 08-09.

Other What-If Considerations Discussed During the Joint Workshop on November 30, 2004

Competing Uses For Potential Tax Revenue From the Proposed Long Point Resort

What-If Scenarios A-C assume that the City Council would elect to commit from its General Fund the equivalent of all, or a significant portion, of the potential TOT expected to be received until all of the proposed expenditures in accordance with of the Rate Model are caught up. The catch-up would require about $2.5 million of TOT to be dedicated for every year the Program is suspended awaiting commencement of operations of the Resort.

During its discussion on November 30, 2004, the City Council asked Staff to analyze the fiscal impact of competing uses for potential TOT from the operation of the Resort. Although Staff is unable to quantify the annual costs of competing uses that have been discussed by the City Council, the following is a partial list of the competing uses:

The Fiscal Impact Of Residential Development Of The Long Point Tract In The Event The Long Point Resort Project Is Not Built

Notwithstanding the challenges that may be faced with re-zoning the Long Point tract to single family residences, property tax revenue resulting from a residential tract are always less than the fully burdened costs associated with it. Although this fact is widely accepted among municipal finance experts in California, sufficient information is not available to quantify it for the Long Point tract at this time.

Process To Establish A User Fee

The Deputy City Attorney presented the Summary Timeline for Proposition 218 Mailed Ballot Election to Establish Water Quality And Flood Protection Program Fees (see Attachment M) to the City Council and the Finance Advisory Committee during the Joint Workshop conducted on November 30, 2004. If the City Council wishes to proceed with the mail ballot election on August 30, 2005, the City would have to prepare and file with the City Clerk a written report containing the identity of each parcel upon which a fee is proposed, a description of each parcel of real property receiving storm drainage services, and the amount of fee for each parcel for the year (Step 1) on or before April 14, 2005. Additionally, the City would have to adopt a resolution stating the City’s intent to establish a storm drainage fee and set the date for public hearing on or before April 19, 2005. The following Table 1 is a visual representation of the calendar of events to get to an August 30, 2005 election.

Table 1

The Team discussed the above timeline during a conference call on December 20, 2004. MIG expressed it’s opinion that the planning and preparation of information for the community education program, the completion of the Final Rate Analysis and the phone and mail ballot survey must begin in early February 2005 to maintain the timeline for an August 30, 2005 mail ballot election. If the City Council decides to conduct a mail ballot election to establish a user fee at this meeting, the timeline is compressed, but manageable to:

  1. Update the Rate Model in accordance with the City Council’s direction;
  2. Plan and begin the Community Education Outreach Strategy described in Attachment;
  3. Direct Harris & Associates to perform the professional services leading to the creation of a custom impervious factor table for the SFR parcels within the City (see section below tiled "Request For Amendment To Harris & Associates Agreement, Dated April 7, 2004 – Additional Services")
  4. Enable Harris & Associates to complete the Final Rate Analysis; and
  5. Complete the phone and mail ballot surveys to assess the acceptance of the proposed user fee by property owners.

Revision Of Preliminary Rate Analysis Report For Storm Drains, Dated December 23, 2004

Harris & Associates has revised the Preliminary Rate Analysis Report (the "Rate Analysis"), dated December 23, 2004 (see Attachment N). The Rate Analysis was revised based upon their review of all Multi-Family Residence ("MFR" ), Commercial ("COM"), Institutional ("INST") and Governmental ("GOV") parcels within the City (hereafter referred to as "Non-Residential" parcels). The review was conducted using the City’s Geographic Information System ("GIS") database, including the parcel and aerial photographic layers. Using the GIS system, Harris & Associates was able to view the impervious areas for each parcel (i.e. buildings, driveways, parking lots) and calculate the impervious areas and percentage impervious factors for each Non-Residential parcel within the City.

Most every Non-Residential parcel would pay a greater user fee compared with the single-family residential parcels (hereafter "SFR") within the City. The impervious factor for the Non-Residential parcels will vary significantly from each other, due to their size, percentage of open space compared with impervious area and their use. Therefore, the Team determined that the calculation of the impervious area for Non-Residential parcels was important, compared with use of the estimates contained in the County Hydrology manual. If the City Council elects to proceed with a mail ballot measure to establish a user fee, the impervious factor calculations recently performed by Harris & Associates will be used for all Non-Residential parcels.

As a result of the review and impervious calculations of non-residential parcels made by Harris & Associates, the Team offers several noteworthy observations contained in the Rate Analysis Report, dated December 23, 2004:

Therefore, the overall user fee for residential parcels decreased by as much as $15/ERU. The estimated annual user fee for Governmental parcels, previously estimated to be about $30,000 each year, has been revised as follows:

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. Staff has included an estimated annual amount of about $258,000 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.

Request For Amendment To Harris & Associates Agreement, Dated April 7, 2004 – Additional Services

As described in the Staff report, dated November 30, 2004, the Preliminary Rate Analysis prepared by Harris & Associates, dated November 22, 2004, used the impervious factors based upon the County Hydrology Manual. The following excerpt regarding factors for single-family residential (SFR) parcels was extracted from Rate Analysis report, dated November 22, 2004:

Table 2 – County Impervious Factors for SFR Parcels

The Director of Public Works questioned whether or not the impervious factor averages contained in the County Hydrology Manual were comparable to the SFR parcels in the City. Many of the SFR parcels are: (1) located on hilly terrain; (2) located adjacent to canyons where the parcels extends down to or near the centerline of the canyon; (3) larger than the average parcel size throughout the County; and (4) include a substantial amount of open space. Therefore, the Team recommends the creation of a custom impervious factor table for the SFR parcels within the City, rather than use of the impervious factors contained in the County Hydrology Manual. The Team believes that creation of the custom impervious factor table for SFR parcels will provide more uniformity, accuracy and equity for SFR property owners in the City. (Multi-family residential, commercial and institutional parcels have now been reviewed individually.)

The creation of a custom impervious factor table for SFR parcels would be based upon the following:

The Team expects that the creation and use of a custom SFR impervious table would significantly reduce the frequency of user fee appeals based upon the contention that the impervious factor should be significantly less.

Harris & Associates has submitted the "Additional Research Services Proposal", dated December 14, 2004 (see Attachment O) for performing professional services leading to the creation of the Rancho Palos Verdes Single-Family Residential Impervious Factor Table ("RPV SFR Impervious Table) subject to the City Council decision to proceed with conducting the mail ballot election to establish a user fee. The Proposal includes a fee of $17,500. Subject to a decision to proceed, Staff recommends the amendment to the Professional Service Agreement between Harris & Associates and the City, dated January 4, 2005. If the City Council elects to proceed, Staff expects to present the First Amendment at the January 18, 2005 meeting of the City Council.

Appeals Process For Property Owners

If the City Council directs Staff to proceed with the process to establish the proposed Program, an appeals process will be established to enable property owners to request a reduction of their user fee. The following excerpt from the update of the Rate Analysis, dated December 23, 2004, provides additional information regarding the appeal process that would be afforded property owners:

"If a property owner disagrees with the calculation of his or her fee, based on the impervious factor and area assigned to the property, then the property owner may appeal the calculation by providing written documentation explaining the reason why the charge should be changed. This documentation must include to-scale drawings of the property in question and the impervious areas located on it with accompanying calculations. The Director of Public Works or his designee will review the information and make a determination as to whether or not the fee amount should be changed.

If an appeal is granted, any modification to the fee amount assigned to a particular parcel will be made prior to the submission of the fees to the Auditor-Controller’s office. Appeals will be accepted up until June 30 for inclusion on the following fiscal year’s property tax roll submittal. Any appeals received after June 30 will be reviewed for modifications in the next fiscal year following. No refunds will be processed for any prior submitted fees."

As described in the previous section, The Team expects that the creation and use of a custom SFR impervious table would significantly reduce the frequency of user fee appeals based upon the contention that the impervious factor should be significantly less.

FISCAL IMPACT:

Since the November 30th Joint Workshop, Finance Staff presented a Staff Report to the City Council, dated December 21, 2004, titled "2004 Five-Year Financial Model – Revision 2" (the "2004 Model – Revision 2"). The following excerpt is noteworthy in light of the proposed Program:

"The accompanying 2004 Model – Revision 2 includes the following significant revisions:

Reduction of Estimated General Fund Reserves Through FY08-09

Nothing has been included in the 2004 Model – Revision 2 for the proposed Water Quality And Flood Protection Program (storm drain renewal and maintenance) and increased traffic enforcement. Based upon the assumptions contained in the 2004 Model – Revision 2, Estimated General Fund Reserves will decrease by about $5 million through FY08-09 to about $8.8 million as of June 30, 2009. Staff also believes that the inclusion of about $2.6 million for cleaning, CCTV inspection and estimated line-segment replacement through FY08-09 is a worst-case scenario.

Time did not permit completion of this Staff Report prior to the December 15, 2004 meeting of the FAC. Therefore, the FAC had no basis to revise its Recommendation that it re-affirmed on August 25, 2004. Staff will communicate any comments or recommendations that the FAC may have, if any, during its presentation on December 21, 2004."

Two noteworthy assumptions are underlined in the excerpt above: (1) $2.6 million for sewer cleaning, CCTV inspection and estimated line-segment replacement through FY08-09 (a "worst-case scenario"); and (2) The combined total impact of additional litigation costs in FY04-05 and the remaining years of the Model is a General Fund balance decrease of $1.8 million. Nothing was included the 2004 Model – Revision 2 for any program for enhanced traffic enforcement or the Program.

The following Table 3 presents the fiscal impact of the following proposed expenditures on General Fund Reserves through FY08-09 based upon Version 1 – Optimal - Priority 1, 2 & 3, Maintenance Included - Flat User Fee of the Rate Model and the following assumptions:

A - FY04-05 Beginning General Fund Reserves are based upon the 2004 Five Year Financial Model - Revision 2;

B - Net Change Per 5-Year Model - Revision 2 is the net revenue for each respective year, after transfers to other funds and operating expenditures;

C –Additional consulting costs in FY04-05 that would be necessary to establish a Program user fee;

D – The proposed initial transfer of $2 million from the General Fund to the Enterprise Fund; and

E - User fees that would be paid by City for government-owned parcels.

Table 3 - Fiscal Impact Of Proposed Sewer And Water Quality And Flood Protection Program Expenditures On General Fund Reserves Based Upon The 2004 Model – Revision 2 And Version 1 – Optimal - Priority 1, 2 & 3, Maintenance Included - Flat User Fee of the Rate Model

FY04-05

FY05-06

FY06-07

FY07-08

FY08-09

A

Beginning General Fund Reserves

$14,066,002

$13,518,028

$11,399,108

$8,905,653

$8,002,296

B

Annual Net Change In General Fund Balance (Per 2004 Five-Year Model, Revision 2)

(297,974)

(118,920)

(2,234,773)

(644,674)

(1,918,364)

C

Additional consulting costs

(250,000)

-

-

-

-

D

Initial transfer to Enterprise Fund

-

(2,000,000)

-

-

-

E

User fees paid by City for government-owned parcels

-

-

(258,683)

(258,683)

(258,683)

F

Ending General Fund Reserves Including Potential and Proposed Expenditures (sum of A through E)

13,518,028

11,399,108

8,905,653

8,002,296

5,825,249

G

Policy Reserve Level (50% of Annual Estimated General Fund Revenue)

$7,147,989

$7,141,506

$7,056,163

$7,158,896

$7,262,782

Based upon the 2004 Model – Revision 2 (including the "worst case scenario" for sewers totaling $2.6 million), the establishment of a user fee would cause General Fund Reserves to fall below the Reserve Policy Level in FY08-09.

Request For Budget Adjustment

The Staff Report presented on November 30, 2004, included a request for a budget adjustment for additional costs for services provided by MIG, Fieldman, Rolapp & Associates and Harris & Associates during FY 04-05 to continue the Infrastructure Financing project in the amount of $200,000. Subsequent to the November 30th meeting, the Team developed the recommendation to create a custom SFR impervious table if the City Council elects to proceed with the process to establish a user fee for financing the Program. As described previously in the section titled "Request For Amendment To Harris & Associates Agreement, Dated April 7, 2004 – Additional Services, the cost of developing the custom SFR table would be $17,500.

Subsequent to presenting the Staff Report, the Team has continued to perform services in anticipation of making its presentation at the January 4, 2005 meeting of the City Council. As you may recall, the FY04-05 budget includes an appropriation totaling $69,800 to bring the Infrastructure Financing Plan to the City Council, completed on November 30th. Based upon services performed and invoices submitted during the month of December 2004, a budget adjustment totaling $30,000 is necessary, even if the City Council elects to discontinue the Infrastructure Financing Plan, especially the Water Quality And Flood Protection Program at this time.

Finance Staff has prepared two separate resolutions for the City Council. One Resolution has been prepared for $30,000, in the event the City Council elects to discontinue the Infrastructure Financing Plan, especially the Water Quality And Flood Protection Program at this time. A second Resolution has been prepared for $220,000, in the event the City Council elects to continue the Infrastructure Financing Plan, especially the Water Quality And Flood Protection Program.

Respectfully submitted,

Les Evans

City Manager

Dennis McLean

Director of Finance and Information Technology

 

Attachments:

A – Infrastructure Financing – Proposed Water Quality And Flood Protection Program Staff Report to City Council and the Finance Advisory Committee, dated November 30, 2004

B – Summary Comparison Of Versions 1 - 4 Of The Rate Model

C – Version 1 Of The Rate Model - Optimal - Flat User Fee

D – Version 2 Of The Rate Model - Maintenance & Priority 3 Projects Excluded, Flat Fee

E – Version 3 Of The Rate Model - Maintenance & Priority 3 Projects Excluded, Escalating Fee

F – Version 4 - Maintenance & Priority 3 Projects Excluded, Escalating Fee, General Fund Loan Repayment in FY 09-10

G – Pros and Cons of Significant Alternatives Contained In Versions 1-4 of the Rate Model

H - Schedule A: Comparison Of Operating Projections, dated August 6, 2004 (provided by Destination Development Corporation

I – What-If Scenario Alternative A – No User Fee – Transfer Of General Fund Reserves To The Proposed Enterprise Fund Subsequent To Commencement Of Operations Of the Long Point Resort

J – What-If Scenario Alternative B – Establish A User Fee Based Upon Version 2 - Maintenance & Priority 3 Projects Excluded, Flat Fee And Transfer General Fund Reserves To The Proposed Enterprise Fund Subsequent To Commencement Of Operations Of the Long Point Resort

K – What-If Scenario Alternative C – Establish A User Fee Based Upon Version 3 - Maintenance & Priority 3 Projects Excluded, Escalating Fee And Transfer General Fund Reserves To The Proposed Enterprise Fund Subsequent To Commencement Of Operations Of the Long Point Resort

L - What-If Scenarios A-C Significant Pros And Cons

M - Summary Timeline for Proposition 218 Mailed Ballot Election to Establish Water Quality And Flood Protection Program Fees

N - Preliminary Rate Analysis Report (the "Rate Analysis"), dated December 23, 2004

O - Harris & Associates "Additional Research Services Proposal", dated December 14, 2004