MAY 31, 2005 2005 FIVE-YEAR FINANCIAL MODEL MAY 31, 2005 2005 FIVE-YEAR FINANCIAL MODEL

TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL

FROM: DENNIS McLEAN, DIRECTOR OF FINANCE AND INFORMATION TECHNOLOGY

DATE: MAY 31, 2005

SUBJECT: 2005 FIVE-YEAR FINANCIAL MODEL

Staff Coordinators: Kathryn Downs, Accounting Manager, Gary Gyves, Senior Administrative Analyst

RECOMMENDATION:

  1. Receive and file the 2005 Five-Year Financial Model; and
  2. Adopt Resolution No. 2005- , amending Resolution 2004-45, approving the City’s budget for FY04-05, to increase General fund Property Tax revenue in the amount of $193,965, based upon an estimate provided by the Los Angeles County Auditor Controller.

EXECUTIVE SUMMARY:

Finance & IT Staff prepared the 2005 Five-Year Financial Model (2005 Model) in conjunction with the development of the FY05-06 City Budget. Since the 2004 Model was last presented to the City Council, the following significant changes have been incorporated into the 2005 Model:

The 2005 Model also takes into account the following:

Reduction of Estimated General Fund Reserves Through FY09-10

Based upon the assumptions contained in the 2005 Model, General Fund Reserves will decrease by about $4 million through FY09-10. At June 30, 2010, General Fund Reserves are estimated to be $7.3 million. The General Fund Reserve Policy Level (50% of Estimated Annual General Fund Revenue) is expected to be about $8.1 million at that time.

Water Quality and Flood Protection Program

The 2005 Model does not include any costs for storm drain construction projects, except the storm drain costs included in the $3.05 million spending plan approved by the City Council on March 15, 2005 and previously budgeted FY04-05 storm drain projects totaling $1.55 million. The outcome of the Public Hearing regarding the possibility of conducting a mail ballot election to establish an annual Storm Drain User Fee, as well as the outcome of the proposed mail ballot election is uncertain.

Therefore, the 2005 Model was prepared based upon the assumption that the $3.05 spending plan authorized by the City Council on March 15, 2005 and the $1.55 million previously authorized by City Council, are the only sources of funds to perform projects and maintain the City’s storm drain system. Accordingly, the 2005 Model includes only $4.6 million of storm drain capital expenditures during FY04-05 and FY05-06. Assuming that the proposed annual Storm Drain User Fee is not established, any necessary storm drain projects would require the use of General Fund Reserves in the future. The FAC has previously recommended to the City Council to proceed with the process to establish a proposed annual Storm Drain User Fee to finance a long-term repair and maintenance program for the City’s storm drain system.

BACKGROUND AND DISCUSSION:

Overview

The 2005 Model is a financial schedule prepared by the Finance and Information Technology Department under the supervision of the City Manager. City Council Policy No. 18 requires preparation of the Model. The 2005 Model includes all funds of the City and its component units (Redevelopment Agency and Improvement Authority).

Compliance With Legislative Review Requirements

Utility Users Tax Legislative Review

Municipal Code Section 3.30.190 requires the City Manager submit to the City Council an analysis of the revenues derived from the Utility User Tax (UUT) annually. Based on the needs of the City, the City Council shall determine if any modifications to the tax rate is necessary or if the UUT is unnecessary. The review required by this section shall be completed by the City Council prior to the adoption of each year’s annual budget.

The proposed UUT revenue budget for FY05-06 is $1,827,900 (12.4% of total General fund revenue). The proposed General fund budget for FY05-06 includes sources of $14,927,550 and uses of $15,684,381, thereby reducing estimated General fund reserves by $756,831 to $10,422,960 at June 30, 2006. Based upon the needs of the City’s General fund, the current UUT rate of 3% continues to be a necessary General fund revenue source. Staff recommends the City Council review this analysis and determine the UUT is necessary, and the current rate of 3% be maintained.

Golf Tax Legislative Review

As described in the City’s Municipal Code (section 3.40.140) a legislative review of Golf Tax is required every four years. The Golf Tax ordinance directs that based on the needs of the City, the City Council shall determine if any modifications to the rate is necessary or if the tax should be repealed; and that the review shall be completed by the City Council prior to the adoption of the budget prepared for the next fiscal year. The City began receiving Golf Tax in December 2001 and is required to perform the legislative review prior to adoption of the FY05-06 budget.

The City’s General fund currently only receives Golf Tax from Trump National Golf Course, which closed in August 2004 to construct golf course improvements. The proposed Golf Tax revenue budget for FY05-06 is $195,500 based upon the anticipated re-opening of Trump National Golf Course in September 2005. Actual Golf Tax revenue received to date follows:

As noted above, the proposed General fund budget for FY05-06 includes a reduction of estimated General fund reserves in the amount of $756,831 during FY05-06. Based upon the needs of the City’s General fund, the current Golf Tax rate of 10% continues to be a necessary General fund revenue source. Staff recommends the City Council review this analysis and determine the Golf Tax is necessary, and the current rate of 10% be maintained.

Transient Occupancy Tax Legislative Review

The City’s Municipal Code does not require a legislative review of the City’s Transient Occupancy Tax (Municipal Code chapter 3.16).

Fiscal Impact of FY04-05 Adopted State Budget and Proposition 1A

The Governor signed the FY04-05 State Budget on July 31, 2004. The FY04-05 State Budget includes components of a "local government agreement" framed by representatives from local government and the California League of Cities and the Governor. Local governments helped finance the State’s deficit by agreeing to reductions in State shared revenues in exchange for constitutional protection of local government revenues. The protection of local government revenues (property tax, sales tax & VLF) is in the form of a constitutional amendment (Proposition 1A) that was passed by the voters of California on November 2, 2004. The major components of the local government agreement and its impact on the City are listed below.

The State’s FY04-05 Budget includes a $1.3 billion contribution of State shared revenues from cities, counties, special districts and redevelopment agencies in both FY04-05 and FY05-06. The City will lose approximately $350,000 in General fund property tax in both FY04-05 and FY05-06, for a total estimated loss to the City of approximately $700,000 over the two-year period.

The City’s share ($350,000) of the contribution is deducted from the Property Tax In-Lieu of VLF revenue payments (discussed below) made to the City by the State. The 2005 Model restores the City’s share of approximately $350,000 annually beginning with FY06-07.

Prior to 1999, State residents paid a Vehicle License Fee ("VLF") of 2% of the market value of their respective vehicles to the Department of Motor Vehicles. This VLF funding is passed through to cities and counties throughout California. The State legislature reduced the VLF tax rate from 2% to 0.65% over a period of three years ending in 2001. The same legislation also guaranteed cities and counties that the State would "backfill" the difference between the two rates.

Beginning with FY04-05, the property tax in-lieu of VLF component of the State budget process eliminated the backfill portion of the VLF payment and replaced it (dollar for dollar) with property tax withdrawn from the Educational Revenue Augmentation Fund (ERAF). Except for the City’s contributions to the State budget crisis totaling about $700,000 during FY04-05 and FY05-06 (described immediately beforehand), the City does not expect to realize any loss of revenues from the property tax in-lieu of VLF component of the State’s Budget. The property tax in-lieu of VLF is a permanent revision of state shared revenue financing with local government. The amount of property tax in-lieu of VLF increases each year with each jurisdiction’s change in their gross assessed value of taxable property.

On June 19, 2003, due to the State budget crisis, the VLF tax rate was restored to the pre-1999 rate of 2%. Due to the increase of the VLF tax rate, the need for the State to backfill local governments was eliminated. On November 17, 2003, the new Governor issued an executive order lowering the rate back down to 0.65% and reinstated the backfill to local governments. However, during the time it took the DMV to initiate the increase (approximately three months), the State did not make VLF backfill payments to local governments. The State Legislature has characterized the amount of VLF backfill revenues it failed to pay to cities and counties during this three-month period as a loan.

On February 1, 2005, the City Council adopted a resolution authorizing the sale of the City’s FY03-04 VLF Gap Loan receivable for a minimum sales price of $649,500. The City received $661,869, or 91.17% of the VLF Gap Loan Receivable on March 17, 2005.

Proposition 57, the one time Economic Recovery Bond of $15 billion, was approved by voters on March 2, 2004. The $15 billion will be used to finance the State’s accumulated General fund deficit carried over from FY02-03, FY03-04 and possibly a portion of the expected FY04-05 deficit.

The "Triple Flip", used to secure the $15 billion bond issue, redirects 0.25% of the sales and use tax going to cities and counties throughout the State. The State will then replace the lost revenues on a dollar-for-dollar basis with property tax taken from the ERAF. At this time, the City does not expect to realize any loss of revenues from the Triple Flip. The Triple Flip took effect on July 1, 2004. The Triple Flip will be discontinued when the Economic Recovery Bonds are retired. The property tax in-lieu of sales tax increases each year in relation to the sales and use tax each jurisdiction would otherwise have received.

As stated above, local governments agreed to help finance the State’s deficit by agreeing to reductions in State shared revenues in exchange for constitutional protection of local government revenues.

Property Tax:

Proposition 1A prevents the Legislature from reducing the combined property tax shares of cities, special districts, and the county, except to borrow the funds on a temporary basis to address a "severe State fiscal hardship". However, the State will retain the authority to transfer property taxes among cities, counties, and special districts with a 2/3 vote of the Legislature. Previously, the State could make this type of transfer with a majority vote of the Legislature. Additional restrictions on the State to borrow local government property tax would include:

Sales Tax:

Proposition 1A prevents the State from taking, borrowing or shifting sales and use taxes from local governments. Regarding the Proposition 57 bonds, Proposition 1A also prevents the State from:

Vehicle License Fees:

Proposition 1A constitutionally guarantees VLF revenue to cities and counties at the rate of 0.65% of the value of a vehicle. This is a significant change for cities and counties, because the constitution did not previously guarantee VLF revenues to cities and counties at any specific rate.

If the Legislature lowers the VLF rate below 0.65%, Proposition 1A requires the Legislature to enact a law that provides for an allocation to cities and counties equal to the difference between the revenues received from the 0.65% rate and the lower rate.

Water Quality And Flood Protection Program

On April 19, 2005, Staff presented the "Water Quality and Flood Protection Program – Proposed Storm Drain User Fee" staff report to the City Council. At the same meeting, the City Council:

  • Accepted and approved the Rate Analysis Report, dated April 13, 2005, prepared by Harris & Associates. The Rate Analysis Report was developed based on Version 7 of the Rate Model ($86/ERU) with the following assumptions:
    • Incorporation of the $3,050,000 spending plan, including acceleration of the McCarrell Canyon project;
    • Priority 1 and 2 projects were spread over 30 years, compared with 20 years in Version 6; and
    • The initial proposed Storm Drain User Fee rate could be decreased, increased annually, or left the same, although the maximum rate would increase by the percentage increase of CPI, not to exceed 2 percent annually.
  • Approved the establishment of a User Fee Assistance Program, whereby, the City would reimburse 50% of the proposed annual Storm Drain User Fee to eligible property owners with gross income under $35,000. To substantiate eligibility, property owners would be required to annually submit a copy of their prior year tax returns along with an application form before August 30th. A valid request for reimbursement would be paid before October 30th of the same year.
  • Adopted Resolution No. 2005-38, designating June 21, 2005 for hearing protests at a Public Hearing in connection with the proposed annual Storm Drain User Fee. If written protests against the proposed fee are presented by a majority of the parcel owners, the City shall not impose the fee.
  • The 2004 Five Year Financial Model – Revision 2, included a provision of $75,000 annually for minor storm drain improvements. Staff recommends that the same amount be re-allocated to finance the proposed User Fee Assistance Program approved by the City Council on April 19, 2005, with an estimated cost of $61,500, and the Storm Drain User Fees for City owned parcels with an estimated cost of $13,427. The 2005 Model has been prepared with the inclusion of the estimated cost of both the proposed User Fee Assistance Program and the Storm Drain User Fees for City owned parcels.

The 2005 Model does not include any costs for storm drain construction projects, except the storm drain costs included in the $3.05 million spending plan approved by the City Council on March 15, 2005 and previously budgeted FY04-05 storm drain projects totaling $1.55 million. The outcome of the Public Hearing regarding the possibility of conducting a mail ballot election to establish an annual Storm Drain User Fee, as well as the outcome of the proposed mail ballot election is uncertain.

Therefore, the 2005 Model was prepared based upon the assumption that the $3.05 spending plan authorized by the City Council on March 15, 2005 and the $1.55 million previously authorized by City Council, are the only sources of funds to perform projects and maintain the City’s storm drain system. Accordingly, the 2005 Model includes only $4.6 million of storm drain capital expenditures during FY04-05 and FY05-06. Assuming that the proposed annual Storm Drain User Fee is not established, any necessary storm drain projects would require the use of General Fund Reserves in the future.

Format of the 2005 Model

The 2005 Model includes the presentation of:

  • Actual FY03-04 revenue, expenditures and ending fund balances for all funds.
  • The Adopted FY04-05 Budget, including continuing appropriations and all subsequent City Council approved budget adjustments.
  • The Proposed Budgets for FY05-06 and FY06-07 that will be presented to the City Council on May 31, 2005.

The 2005 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 ballot measures.

The 2005 Model includes several schedules organized as follows:

Exhibit A Summary – 2005 Five-Year Financial Model (One Page Summary)

Exhibit B 2005 Five-Year Financial Model By Fund

Exhibit C CIP Plan Project Expenditures

Exhibit D Summary Of Fund Transfers

Complete List of 2005 Model Assumptions

General Assumptions

  1. The proposed Budget for FY05-06 and the budget document for FY06-07 are the basis for the first two years of the 2005 Model.
  2. Most expenditures have been increased annually using a factor of 3.12% beginning in FY07-08 and continuing through FY09-10.
  3. Most revenues have been increased annually based upon a general increase of 2%. Certain revenue categories (e.g. property taxes, projected changes in permit activity and retail sales) have been estimated 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 2005 Model using an alphabetical index (a through l) and are referenced throughout the 2005 Model.
  4. Assumptions Specific to the Funds and Program Revenues and Expenditures Included In The 2005 Model

  5. Excluding the Property Tax In-Lieu of VLF and Sales Tax components of the FY04-05 State Budget discussed above, 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.
  6. The Los Angeles County Auditor Controller has provided FY04-05 Property Tax estimates for the City totaling $4,296,095. Therefore, Staff requests a budget adjustment to increase FY04-05 Property Tax revenues in the amount of $193,965. Staff estimated FY05-06 Property Tax revenues by increasing the FY04-05 County estimate by 6.5%. The estimated rate of increase approximates the City’s actual annual increase in Property tax revenues from FY00-01 through FY03-04 and considers the continued strength of the local housing market.

    However, considering the cyclical nature of the real estate market, Staff has conservatively increased Property tax revenues at the rate of 3% in FY06-07 and 2% in FY07-08 through FY09-10.

  7. The 2005 Model assumes the continuation of the 3.0% utility user tax through FY09-10. Based on previous 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 consumer movement towards the use of cellular phones, resulting in an overall reduction of phone costs to consumers and a proportional decrease of 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 or decreases have been estimated for the remaining years of the 2005 Model.
  8. Trump National Golf Course closed in August 2004 to construct golf course improvements. Staff has assumed that Trump National will reopen in September of 2005 with the full use of all eighteen holes. Therefore, only $13,500 in Golf Tax revenue was budgeted for FY04-05. Golf Tax collected by the City is a percentage of golf operations revenue.
  9. Based on the anticipated reopening in September of 2005, Staff has conservatively estimated FY05-06 Golf Tax revenue at $195,500, increasing to $265,900 in FY06-07, assuming a full year of operation. Golf Tax revenues were increased at a rate of 2% annually in FY07-08 through FY09-10.

  10. The residential street overlay program is primarily funded with General fund monies. As detailed in Exhibit C, Capital expenditures associated with the residential pavement management program total approximately $6.9 million for FY05-06 through FY09-10.
  11. The 2005 Model includes expenditures for overlay projects in FY05-06 through FY09-10, as recommended by the Pavement Management Program, including expenditures for a Residential Overlay/Slurry Seal, Arterial Slurry, and Arterial Overlay Program.  Funding for each of these Programs is based upon the Pavement Management Program that recommends a schedule of roadway maintenance based upon pavement management principles.  The arterial roadway projects included in the CIP fund of the 2005 are primarily financed with a combination of Proposition C (transit) fund monies.

  12. $1 Million has been included in the City’s FY04-05 budget for the proposed purchase of 681 acres of coastal hillside property along Palos Verdes Drive South ("PVDS") in cooperation with the Palos Verdes Peninsula Land Conservancy ("PVPLC"). In the event the purchase is completed, the open space land would be transferred to the Reserve established by the NCCP Subarea Plan, which was approved by the City Council on August 31, 2004. The City would own the land and the PVPLC would hold the conservation easements and have the responsibility for managing the Reserve. The PVPLC has committed to raising about $6 Million towards the purchase. The County of Los Angeles is also expected to contribute $1 million towards the purchase. The City and the PVPLC are striving to raise the remainder of the funds from State and Federal grants totaling approximately $19 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.
  13. In order to create the preserve, 681 acres of privately owned land must be acquired from two property owners. The State has approved appraisals for both properties and has scheduled the request for funding to be heard by the State Wildlife Conservation Board on August 25, 2005. The City has entered into an agreement with one of the property owners to purchase 462 acres that expires on September 15, 2005. Based on negotiations with the second property owner, the 681-acre purchase and associated steps to receive funding may be completed in two phases. This two-step process may be utilized to ensure the purchase of the 462 acres prior to the September 15, 2005 expiration date.

    The additional costs related to the Proposed NCCP open space purchase have been included in the 2005 Model. Finance and information Technology Staff wrote a separate staff report to the City Council, titled "Proposed Natural Communities Conservation Plan And Proposed Purchase Of Open Space – Fiscal Impact", dated August 31, 2004, detailing these additional costs.

    The proposed NCCP and open space purchase includes a funding commitment for maintenance of the Reserve by the PVPLC. An annual Habitat Restoration fund expenditure of $100,000 has been included in all five years of the 2005 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 and FY09-10.

  14. The City Council approved the Proposed Long Point Resort Project on August 28, 2002. The Coastal Commission approved the Proposed Long Point Resort Project in the fall of 2003. Staff recently met with the Long Point’s project team to discuss the status of the project and the projected timeline for breaking ground. Long Point’s project team is contemplating minor adjustments to the site plan to improve the overall design of the project. Any revisions to the project will require approval of the Coastal Commission. The developer of Long Point anticipates opening for business in early 2008.
  15. 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 2005 Model.

  16. 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 2005 Model.
  17. EET revenue of approximately $717,000 has been included in the 2005 Model, including Crestridge Villas ($256,000), approximately one hundred new miscellaneous dwelling units over five years, Trump National residential units ($138,240), Ocean Front residential units ($33,280), and a 13-lot subdivision ($33,280). EET revenue may only be used for improving or purchasing City owned facilities. Due to the uncertainty of any development project, as well as its timing, no expenditures have been included in the 2005 Model utilizing this revenue source.
  18. 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 2005 Model.

  19. Currently, the LAIF investment interest rate hovers around 2.5%. The Adopted FY04-05 Budget was based upon an assumption that the average annual LAIF interest earnings rate will be 2.25%. In the preparation of the 2005 Model, staff has used an investment interest rate of 2.5% for FY05-06 and 3% for FY06-07, increasing it by 0.25% for each fiscal year thereafter.
  20. 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."
  21. 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 $5 million. It is unknown if Los Angeles County is willing to provide funding for the project. Based on discussions with Public Works Staff, the City’s estimated share of the total project cost is $1.6 million. This amount has been included as a priority 1 project in the City’s Proposed Water Quality and Flood Protection Program Rate Model.

  22. No expenditures have been included in the 2005 Model for major park facilities or open space improvements. Additionally, the 2005 Model does not include a provision for the following:
    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.

    In June 2004, the City Council directed Staff to complete preliminary construction design and cost estimates to construct two girls’ softball fields at Upper Hesse Park and Ryan Park and to study the impact the development of one or both of these sites would have on existing recreational uses. At the March 29, 2005 City Council meeting, the City Council approved the development of two girls’ softball fields at Upper Hesse Park. At this time the City does not anticipate using any General Fund monies for the construction of the softball fields. However, City Staff has requested $287,911 in grant funds for the fields that, if awarded, would require an additional 25 percent match ($95,970), for a total project cost estimate of $383,881. 

    In addition, at the March 29, 2005 City Council meeting, the City Council approved a conceptual plan for Upper Point Vicente Park, including a new building for the Palos Verdes Art Center, a remodeled City Hall with new Council Chambers, a band shell/amphitheater with an adjacent village green, trail heads, an outdoor pool, and a multi-purpose gymnasium. The City Council directed Staff to investigate the possibility of relocating the City maintenance yard to another property and ways to improve the ingress and egress to the Upper Point Vicente property. The City Council also directed Staff to work with the Palos Verdes Art Center to identify an architect to prepare a further refined site plan for the property. The City Council did not authorize appropriations for any conceptual design and/or feasibility studies.

  23. The 2005 Model includes the resumption of the transfer of $100,000 from the General fund to the Building Replacement fund for FY05-06 through FY09-10.
  24. The Proposed FY05-06 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 $460,000 from the General fund, an operating transfer of $115,500 from the Proposition C fund, an operating transfer of $38,000 from the Waste Reduction fund, $5,000 for miscellaneous revenues, $4,900 for interest earnings and $15,000 for sidewalk repair fee revenue, totaling approximately $1.72 Million. Street maintenance program expenditures are expected to be approximately $1.8 Million.
  25. The City has two affordable housing funds, the Affordable Housing In-Lieu fund and the RDA (20%) Housing Set-Aside fund. 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. In addition, the Redevelopment Agency is required to set-aside twenty percent (20%) of its gross annual tax increment into the Agency’s Low and Moderate Income housing Fund. The purpose of this fund is to increase, improve and preserve the City’s supply of low and moderate-income housing.
  26. In March 2000, the RDA Housing Set-Aside fund purchased the Crestridge property for $702,392, with the intention to construct affordable housing on the site. On March 1, 2005, the Board of the City of Rancho Palos Verdes Redevelopment Agency adopted Resolution No. 2005-02, which formally extended the time for development of low and moderate income housing on the Crestridge property to March 2010.

    The Crestridge Estates LLC's applicant has informed Staff that they plan to move forward expeditiously with the Crestridge Senior project. In fact, on January 24, 2005, the applicants re-submitted their application package, which has been deemed complete by Staff. If this project is approved, Staff estimates that funds could be expended towards the project in 2007.

    At the December 7th meeting, the City Council instructed staff to pursue a combined program to utilize the City’s affordable housing funds for: 1) A contribution toward development of an affordable housing component as part of the RDA owned Crestridge site, and 2) Implementation of a rental subsidy program managed by a non-profit housing agency.

    The expenditures for the RDA Housing Set-Aside fund detailed in the 2005 Model are consistent with the RDA’s 5-Year Implementation Plan, which was also presented to the City Council on December 7, 2004. The 2005 Model includes expenditures in FY06-07 in the Affordable Housing in-Lieu fund and RDA Housing Set Aside fund of $1 million and $1.2 million, respectively. These expenditures are based on an anticipated affordable housing project using monies from both funds.

    The 2005 Model includes the receipt of $931,910 in Affordable Housing In-Lieu revenue for FY04-05 from the proposed Long Point Resort project consistent with the FY04-05 adopted budget. Based on discussion with planning staff, actual receipt of this revenue will not occur during FY04-05, and it is unknown when it will be received. Therefore, this revenue has not been included in the affordable housing spending plan prepared by planning staff. Because the City Council decides whether or not to accept Affordable Housing In-Lieu fees vs. requiring the construction of affordable housing for each respective development project, no In-Lieu fees have been included in FY05-06 through FY09-10 of the 2005 Model.

  27. 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 $730,000 by the end of FY05-06. If a city has no qualifying projects to utilize restricted Proposition A monies, they may be sold to another local agency in exchange for unrestricted General fund monies. A proposed sale of Proposition A funds in the amount of $700,000 has been included in FY06-07 in the 2005 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 $490,000 of unreserved and undesignated General fund monies.
  28. On February 15, 2005, the City Council adopted Staff’s recommendations for fee increases, which were based on the Cost-Based Fee Study that was completed by Maximus in November of 2004. The 2005 Model conservatively estimates fee revenue based on the increased fees adopted by the City Council.
  29. 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 2005 Model.
  30. The 2005 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). 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.
  31. The PVIC Expansion Project is a 7,474 square foot single story addition to the existing PVIC building. Miscellaneous remodeling will occur in the existing building for the incorporation of interpretive exhibits. The 2005 Model assumes that renovation of PVIC will be completed in late 2005.
  32. The PVIC renovation project is funded with County Measure A grant monies ($2,874,785), EET monies ($579,212), Quimby monies ($492,511), Proposition C monies ($350,000), Roadway Beautification monies ($347,228), un-obligated CIP fund balance ($298,488), General fund monies ($56,500), Waste Reduction monies ($50,000) and a portion of the City’s Proposition 40 grant ($27,291). Finance & Information Technology Staff presented a technology plan for PVIC on May 17, 2005 to the City Council utilizing approximately $60,000 of EET and $20,000 of Equipment Replacement Fund monies respectively.

  33. The City’s full-time employees participate in the CalPERS defined benefit retirement system. The plan was designed to require a 14% contribution rate, based upon the sum of the 7% employer contribution and the 7% employee contribution. However, the actual contribution rate fluctuates based on CalPERS investment results.
  34. The City’s FY04-05 Budget was based upon a contribution rate of 15%. Based upon information provided by CalPERS, the City’s contribution rate is projected to be 19.5% and 19.8% for FY05-06 and FY06-07, respectively. The 2005 Model includes the additional costs associated with the projected rates.

    Staff anticipates that CalPERS investments will yield higher returns in the coming years as the economy improves. Therefore, staff anticipates that the CalPERS contribution rate will decrease over time. In addition, On April 20, 2005, the CalPERS Board of Administration approved an Employer Rate Stabilization Policy which would help reduce the volatility in employer contribution rates by increasing the actuarial value of assets corridor from 90%-110% of market value to 80%-120% of market value, spread market value asset gains and losses over 15 years instead of the current 3 years, and amortize all unamortized gains and losses over a rolling 30 year amortization.

  35. The City’s original FY04-05 adopted budget included $700,000 for legal services. The City Council has approved two separate FY04-05 Budget adjustments totaling $634,000 for additional legal services, for a total estimated expenditure of $1,334,000. Legal costs have been estimated at $1,000,000 for FY05-06 and increased at 3.12% for the remaining years of the 2005 Model. Nothing has been included in the 2005 Model for potential reimbursements from pending litigation and/or insurance claims, due to their uncertainty.
  36. The Los Angeles County Auditor Controller (Auditor/Controller) has revised the method to determine costs for the 40 cities that contract with the Los Angeles County Sheriff’s Department. The Auditor/Controller determined that the method previously used to apportion costs to contract cities was inequitable. Sheriff’s costs have been estimated at $3.12 million for FY05-06 and increased at 3.12% for the remaining years of the 2005 Model.
  37. 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 2005 Model.

SUMMARY:

Based upon the assumptions contained in the 2005 Model, General Fund Reserves will decrease by about $4 million through FY09-10. At June 30, 2010, General Fund Reserves are estimated to be $7.3 million. The General Fund Reserve Policy Level (50% of Estimated Annual General Fund Revenue) is expected to be about $8.1 million at that time.

RECOMMENDATION:

  1. Receive and file the 2005 Five-Year Financial Model; and
  2. Adopt Resolution No. 2005- , amending Resolution 2004-45, approving the City’s budget for FY04-05, to increase General fund Property Tax revenue in the amount of $193,965, based upon an estimate provided by the Los Angeles County Auditor Controller.

Water Quality and Flood Protection Program

The 2005 Model does not include any costs for storm drain construction projects, except the storm drain costs included in the $3.05 million spending plan approved by the City Council on March 15, 2005. The outcome of the Public Hearing regarding the possibility of conducting a mail ballot election to establish an annual Storm Drain User Fee, as well as the outcome of the proposed mail ballot election is uncertain.

Therefore, the 2005 Model was prepared based upon the assumption that the $2 million transfer from the General Fund to the Water Quality and Flood Protection Program, authorized by the City Council on March 15, 2005, is the only source of funds to perform projects and maintain the City’s storm drain system. Accordingly, the 2005 Model includes $2 million of capital expenditures (only) during FY04-05 and FY05-06. Assuming that the proposed annual Storm Drain User Fee is not established, any necessary storm drain projects would require the use of General Fund Reserves in the future. The FAC has previously recommended to the City Council to proceed with the process to establish a proposed annual Storm Drain User Fee to finance a long-term repair and maintenance program for the City’s storm drain system.

Respectfully submitted,

Dennis McLean

Director of Finance and Information Technology

Reviewed,

Les Evans

City Manager