1. Roll Call.
2. Approval of Agenda.
3. Approval of Minutes for the meeting of June 13, 2001. (Butler)
4. Presentation of Developer’s Background and Capability - Proposed Long Point Resort Project. (Lowe Enterprises)
5. Methodology Employed By Hospitality Valuation Services International (HVSI) - Proposed Long Point Resort Project. (McLean)
6. Requested Information for The Finance Advisory Committee - Proposed Long Point Resort Project. (McLean)
7. 2001 Five Year Financial Model. (McLean)
8. Status report of economic trends that may have an impact on the City (if any). (McLean)
9. Public Comments.
10. Adjournment.

The City’s consultant, Hospitality Valuation Services International (hereafter referred to as "HVSI"), completed their limited study regarding the proposed Long Point Resort Project (hereafter referred to as "Resort Project") and issued their report, dated June 8, 2001. During its discussion about the HVSI report, the members of the FAC asked many questions, including several questions about the methodology used by HVSI in the conduct of its study. As a part of its study, HVSI reviewed the financial projections, requested revisions of the same projections using HVSI’s own assumptions and conducted interviews with the staff of Lowe Enterprises, the parent company of Destination Development Corporation.

Finance Staff discussed the methodology with HVSI during the duration of HVSI’s study. Unfortunately, it was not practical for the members of the FAC to participate in those same discussions. Therefore, the members of the FAC have been unable to develop the same understanding of the work performed by HVSI. Accordingly, Finance Staff has requested HVSI to prepare the attached letter, dated June 21, 2001, detailing the methodology used in the conduct of its study.

To receive, discuss and file the HVSI methodology letter dated June 21, 2001. Staff has written a separate report regarding the FAC’s directions and questions resulting from its discussion of the HVSI report. As always, Finance Staff remains ready to answer any questions regarding the HVSI methodology letter, or re-direct them to HVSI for their reply.

Respectively submitted,

Dennis McLean

Finance Director

Re: Long Point Resort - Rancho Palos Verdes
HVS Reference Number: 2000040229

Dear Mr. McLean:

I have been asked to set forth my experience and qualifications for performing the review undertaken in this assignment. By education I am a hotel consultant and designated real estate appraiser. I began consulting on hotels in 1976, and have specialized in the appraisal and/or evaluation of hotels exclusively since January of 1978, giving me over 22 years of experience in this area. I established my practice in California in 1985 and have been significantly involved in assignments pertaining to most of the resorts in California at some point in time during the last 16 years. We appraise or evaluate 200 to 300 existing and proposed hotels from my office alone each year. My office also shares a database of hotel income and expense statements with the other 11 offices of our firm, four of which are in the United States. I review numerous hotel and resort hotel development budgets each year. While not a lender or mortgage broker, we do keep current on lending parameters for existing and proposed hotels in order to perform our appraisal assignments. During the course of our consulting work we have reviewed or performed our own modeling of development cash inflows and outflows, including project financing. I have been designated as an expert in hotel feasibility studies, market analysis, and valuation in numerous courts of law. I am a teacher, author, and speaker on this topic and I would be pleased to further share with you my qualifications and references.

Brian Rodgers, who assisted me in the review and analysis, holds a Master’s degree in Hotel Administration from Cornell University. He has substantial hotel operating experience and for the past three years has been performing varied hotel and appraisal and consulting assignments for HVS. Brian worked as the pre-opening assistant to the General Manager of the Four Seasons Aviara, is a resident of San Diego, and is extremely knowledgeable about Southern California resorts.

Both the Appraisal Institute and the Counselors of Real Estate have Standards of Professional Practice and a Code of Ethics that must be adhered to by their members when performing consulting assignments. As an MAI (member of the Appraisal Institute) and a CRE (Counselor of Real Estate) I am required to adhere to these ethics and standards and have done so for this review assignment. Our work was independently performed and we believe that we had sufficient evidence to reach our conclusions.

The original scope of our assignment was to review the studies performed by PKF and to opine on the reasonableness of their occupancy and average rate forecasts and the need for a nine-hole golf course, as opposed to an 18-hole golf course, based upon information contained in the reports. PKF’s October 2000 letter report set forth their conclusions regarding average rate and occupancy but did not contain any analysis pertaining to the impact on the resort of a nine-hole golf course, as opposed to an 18-hole golf course. We can infer, based upon our review of their 1997 study, that they have forecast the resort with a nine hole course to obtain an average rate approximately $10 to $12 lower than the same resort with an 18-hole resort course. No data or analysis was provided to substantiate this conclusion. HVS had not been retained, as of the time of our review, to perform our own independent data collection and analysis of the impact of a nine-hole golf course as opposed to an 18-hole golf course.

Our conclusion that the occupancy and average rate forecast for the proposed resort is reasonable is based upon our own in-house database of the occupancy and average rate results of other Southern California resorts. We have not undertaken a complete supply and demand analysis to develop our own independent conclusions regarding average rate and occupancy. The PKF report provided us with their analysis of the projected average rate for standard rooms as well as the casita units, but we were not provided any specific individual comparable property data supporting their forecasts. Destination Resorts then took the PKF forecasts and applied discounts to the average rate in the first through third years of operation for the hotel to buildup to the stabilized average rate as projected by PKF ($285 in 2000 dollars).

The second phase of our work entailed reviewing the developer’s development pro formas for reasonableness. The development pro formas prepared by Destination Resorts, which we were given to review, are comprised of several components, as delineated below:

1. Forecast of Income and Expense for Hotel – Summary Format
2. Forecast of Income and Expense for Golf Course – Summary Format
3. Forecast of Villa Sales Revenue and Expenses and Ongoing Management Income to the Hotel – Summary Format
4. Summary Development Budgets for Each Component: Golf, Hotel and Villas
5. Forecast of Project Financing Inflows and Outflows.

In reviewing the hotel and golf pro formas prepared by Destination Resorts, we looked over the forecasts of income and expense and had approximately four hours of discussions with the developer regarding the resort’s various sources of revenue and expense. We did not review all of the supporting analysis that the developer likely has as the basis for the analysis; rather, we requested and received supporting data for those specific revenue and expense line items for which we had a question. Without the benefit of a detailed written report setting forth the basis for each line item of the forecasts, such a review would take an estimated two days of our time. We would normally review a number of "comparable" income and expense statements and gain an understanding of the basis for the developer’s rationale behind each revenue and expense item, looking at operating ratios, and dollar amounts per occupied and per available room. Our review in this instance consisted primarily of the review of operating ratios. Our opinion of the reasonableness of the forecast was based upon our years of experience in reviewing income and expense statements for existing hotels and golf courses and preparing forecasts of income and expense for proposed resorts in Southern California. Based upon our experience, the income and expense ratios set forth by Destination Resorts fall within the range of typical industry norms.

In our review of the villas’ sales revenue we relied upon the ERA May 2001 report, which sets forth a forecast of villa pricing and sales pace. The forecast of ongoing management income appeared reasonable based upon our experience with income generated by resorts with comparably structured rental-pool agreements.

The development pro formas hypothesized certain construction and permanent financing that we determined was reasonable based upon our knowledge of the current market for hotel financing. The quarterly inflow and outflow of debt proceeds and debt service payments were reviewed and appear to be accurately modeled. We tested the internal rate of return calculations for accuracy; in our opinion, the derived equity yields appear fundamentally sound and reasonable.

The summary development budgets for each component of the project were reviewed. The development cost forecast for the resort and golf components falls within a reasonable range based upon our familiarity with the development costs of other California resorts and golf courses in recent years. However, note that development costs for these types of projects vary widely.

Please contact us if you have further questions or if you would like additional clarification regarding our methodology in this assignment.

Sincerely,

HVS International

Suzanne R. Mellen, CRE, MAI

Managing Director

SRM/dft

The City’s resort consultant, Hospitality Valuation Services International (hereafter referred to as "HVSI"), recently completed their limited study regarding the feasibility of the proposed Long Point Resort Project (hereafter referred to as "Resort Project") and issued their report, dated June 8, 2001. A copy of the report is attached to this staff report.

During its discussion regarding the HVSI report, the members of the FAC directed Finance Staff, HVSI and Keyser Marston (the City’s golf and financial consultant), to research the answers to several questions and obtain additional information (hereafter referred to as the "Requested Information") described on page 2 of this report. Both HVSI and Keyser Marston have offered many comments and recommendations that are incorporated into this staff report.

Subsequent to the June 13^th FAC meeting, the FAC Chair requested that this matter be added to the June 27^th FAC agenda. Additionally, the FAC Chair requested the Developer to provide an overview about the Lowe Enterprises organization, especially its capabilities.

A brief summary of the purpose of the FAC’s involvement and the HVSI study follows:

During the month of August 2000, the City Council directed the FAC to review the financial reports submitted by the Destination Development Corporation (hereafter referred to as the "Developer"). The City Council specifically requested the FAC to review the financial reports provided by the Developer and, if possible, recommend to the City Council: (1) whether or not the Developers basis for computing the projected tax and fee revenue is reliable; and (2) whether the projected revenue to the City is achievable.

The primary purpose for of the limited review conducted by HVSI was to answer the primary question:

Finance Staff, HVSI and Keyser Marston have exchanged emails and conducted several phone conferences since the June 13^th FAC meeting. During the phone conferences, Finance Staff, HVSI and Keyser Marston reviewed the details of the Requested Information, developed its approach for obtaining the Requested Information, established a few questions of its own and determined a recommended timeline for providing the Requested Information. A list of the Requested Information follows:

1. HVSI was directed to obtain additional comparatives of other resort projects;
2. HVSI is to perform a break-even analysis of the financial projections prepared by the Developer;
3. HVSI was to request the amount of money provided in the Developer’s financial projections for concession payments to the city for use of the Point Vicente Park land for golf;
4. HVSI was to request the Developer to revise its financial projections and determine the impact on internal rate of return resulting from the elimination of golf on city land with and without a joint marketing agreement with Ocean Trails;
5. HVSI is to compare and determine the significance of the Developer’s estimates of the land cost vs. the total overall cost of the resort project; and
6. Keyser Marston was to conduct a review of the feasibility of the proposed golf operation.

A background summary, recommendation and the proposed timeline follows for each of the six items included as a part of the Requested Information:

The Developer’s application to build the Resort Project, filed in July 2000, includes a regulation nine-hole golf course, with adjoining practice facility and golf learning center. During 1997, the Developer retained PKF Consulting (hereafter referred to as "PKF") to perform a market feasibility study for a resort project at the Marineland site based upon assumptions under consideration at that time. The 1997-resort project included an eighteen-hole course, rather than the 9-hole course included with the Developer’s application. At the request of the FAC, the Developer’s consultant, PKF updated the 1997 study and issued the report in October 2000 (hereafter referred to as the "Bridge Update").

The Bridge Update is silent regarding the impact on the Resort Project resulting from the inclusion of a regulation nine-hole golf course, rather than the 18-hole course made apart of the 1997 market feasibility study. Upon request by the FAC and the City’s consultants, the Developer was instructed to consider the impact resulting from changing the application to include a regulation nine-hole golf course, rather the eighteen-hole course. PKF issued a letter, dated November 13, 2000, asserting the following:

"While we believe that an 18 hole course at the subject site [Long Point] would be preferable, a high quality nine hole course with an ocean orientation, driving range and learning center should be strong enough amenity for the hotel to enable it, along with its other attributes, to compete in the regional marketplace. It should be noted, however, that the aforementioned nine hole course would be a minimum to allow the property to compete effectively."

The November 13, 2000 letter did not include any statements whether or not PKF conducted any quantitative research (e.g. a market feasibility study) to support the assertion that the Resort Project is feasible with a regulation length nine-hole golf course, rather than an 18-hole course.

It is Finance Staff’s understanding that PKF did not conduct a market feasibility study to determine whether or not a nine-hole course would cause reduced room rates and occupancy levels, compared with those reported in the 1997 market feasibility study. Accordingly, HVSI will perform a limited study to determine whether or not any comparable resorts with a nine-hole course exist. If so, HVSI will interview resort operators that currently manage properties with nine-hole regulation length golf courses. HVSI will also interview resort operators that have expanded from nine-hole courses to eighteen-hole courses. HVSI will also interview operators of resorts with 27 holes of golf to determine the demand for 9-hole play.

HVSI expects to complete this study on or before July 18^th. This would enable HVSI to present its findings at a Special Meeting of the FAC that could be held on July 25^th.

Several members of the community have said that the City would become an "equity partner" in the event all, or a portion of Point Vicente Park, is provided for the proposed Resort Project with golf course. With a lender’s perspective in mind, several members of the FAC have requested that a "break-even" analysis be performed.

HVSI and Keyser Marston have expressed several noteworthy comments regarding the financing risks of resort properties during discussion with Finance Staff since the June 13^th FAC meeting. HVSI’s comments and recommendation follow (in italic fonts):

"It is extremely rare for resort properties to cease operations. In the event a resort property is unable to generate sufficient cash flow to service debt, the property’s capitalization is restructured and the lender generally reduces interest and/or principle payments to enable continued operations and manageable debt service payments. If a resort property defaults to the hands of a creditor, it is generally sold to another investor for an amount less than the original investment. The sale is financed by either the original lender or a new lender at a dollar amount appropriate for the then market value of the property.

The cessation of operations of a resort property in the Western United States is a rare occurrence. The City’s consultants see this as a "worst – worst case scenario".

HVSI’s recommendation is as follows:

HVSI expects to complete this study on or before July 18^th. This would enable HVSI to present its findings at a Special Meeting of the FAC that could be held on July 25^th.

In the event the City’s provides Point Vicente Park for use of the proposed nine-hole gold course, it would do so pursuant to the terms and conditions of a concession agreement. Among other terms, the concession agreement would require payments to the City for use of the City’s land. Members of the community have expressed concerns about the non-economic value of the Point Vicente Park land. During the June 13^th FAC meeting, a member of the community raised the question regarding the amount the Developer has included in its financial projections for an annual concession payment. The FAC directed the City’s consultants to obtain the amount provided in the Developer’s financial projections.

Finance Staff and the City’s consultants have discussed this request several times since the June 13^th FAC meeting. Though the proposed concession amount is meaningful to the City, it will not be a significant annual operating cost of the Resort Project. Based upon Finance Staff’s own "what-if" calculation, the concession amount may even be less than one (1%) percent of the annual cash outlay of the Resort Project. Likewise, the golf operation will not be a significant revenue center for the Resort Project.

As you may recall, HVSI has conducted its review, including the cash flow projections of the Resort Project, pursuant to a binding confidentiality agreement with the Developer. Finance Staff and the City’s consultants recommend that the concession amount included in the Developer’s financial projections not be disclosed at this time.

HVSI will inquire whether the financial projections include a sufficient provision for the annual concession expense for six golf holes, rather than four golf holes included in the Developer’s original application. HVSI expects to present its findings at a Special Meeting of the FAC that could be held on July 25^th.

During its discussion of the HVSI report, several members of the FAC asked whether or not the Resort Project (or any other resort project at the Marineland site) is feasible without golf as an amenity. The question was also asked whether or not the Resort Project is feasible without a golf course on the City’s land, but available as an amenity via a joint marketing agreement with Ocean Trails. The inherent assumption includes the willingness for both the Developer (or any other developer) and Ocean Trails to enter into the proposed joint marketing agreement.

The Developer has already prepared projections that purport that its 20% internal rate of return (IRR) benchmark is achievable only with a 9-hole course and 550 keys. Any further revisions based on no golf and fewer units will only reduce the project’s IRR. The Developer is not interested in revising its plan to exclude golf and/or significantly reduce the number of units.

It is HVSI’s opinion that it is unlikely that these various options would render the project feasible. Dedicated spa resorts are generally smaller, more intimate properties that require an owner’s personal expertise to be successful. They also generally evolve through expansions and build up a strong reputation over time. A resort may contain a significant spa component without being a dedicated spa resort, but a spa operation does not enhance a hotel’s average rate, occupancy and overall marketability to near the same degree as a golf course. Lenders are wary of significant reliance upon a spa component to render a resort hotel feasible. Dedicated conference centers are extremely expensive to develop and are also smaller than the proposed subject. Conference centers have had mixed success and are extremely challenging to finance and operate. A concept comparable to the leisure and group oriented Coronado Marriott would likely not be feasible or financeable in the current hotel investment environment. Few such resorts have been built over the past decade because their obtainable room rates are not sufficient to support the high land, infrastructure and overall development costs of a resort. For the most part, throughout the United States, only those full service hotels and resorts targeted to the highest rated consumer have been successfully developed during this most recent development cycle. There has been a marked absence of full service hotel and resort development because average rates are not sufficient to support the high construction costs of these projects. The majority of hotel development since 1994 has been of limited service hotels such as Holiday Inn Express, extended-stay hotels such as Extended Stay America and Residence Inn by Marriott, or luxury hotels and resorts, such as Ritz Carltons and Four Seasons. It is only at the luxury end of the market that new resort development has been feasible in recent years.

HVSI has estimated that the study could be completed in about three (3) months, at a cost of approximately $25,000. In light of the time required to perform the feasibility study, its cost, as well as the uncertainty of its conclusions, its justification is questionable. In the event the members of the FAC feel such a study is necessary, Finance Staff suggests that it direct the matter to the City Council immediately.

Finance Staff has raised the question regarding the ratio of the Developer’s land cost, in conjunction with the overall development cost of the Resort Project. After reviewing the internal rate of return results included in the HVSI report, dated June 8th, Finance Staff questioned whether the land cost is excessive for the Resort Project.

HVSI replied to the Finance Staff’s inquiry as follows:

"The project’s actual land cost is confidential. HVSI has reviewed the hotel land cost set forth in the development proforma, together with the cost of obtaining entitlements, and they opine that the combined cost, while substantial, is at the low end of the typical range of land costs when analyzed as a percentage of total development cost for resorts of this nature. Based upon the development of a 550 room resort with 32 villas, the land cost falls at the low end of the typical range of land percentages and land value per unit. Assuming the development of a 400 unit hotel the land percentage and amount per unit rises to the high end of the range evidenced by comparable properties. The cost of the land and entitlements clearly play a significant role in the sizing of the resort.

Finance Staff sees no further need for any follow-up inquiries regarding this matter at this time.

In the event the City provides all, or a portion of, its Point Vicente Park for a part of the 9-hole course, it will be necessary to include adequate protections for the city in the agreement, to cover a variety of potential contingencies. These protections typically include the requirement that the operator continuously operate the improvements, with failure to do so constituting an event of default.

Keyser Marston feels that it noteworthy to point out:

Neither Keyser Marston, HVSI nor Finance Staff believes a feasibility study of the proposed golf operation is warranted. The proposed golf operation is a proposed amenity, not a significant revenue center. As stated previously, the protection of the City's interest in the agreement is a vital aspect of the overall business terms to be included in a concession agreement that would be negotiated. It is likely that any secured lender of the Resort Project will not permit the operation of the golf course to pass to the City, except in the event of its cessation.

Based upon a recent discussion with the Director of Planning, Building Safety and Code Enforcement, it appears as though the Planning Commission will make its recommendation to the City Council at its September 4^th meeting. Finance Staff continues to encourage the FAC to complete its review in coordination of the Planning Commission timeline. Accordingly, Finance Staff recommends and seeks direction regarding the following:

• To provide Finance Staff with direction regarding the Requested Information, as well as the City’s consultant’s and Finance Staff’s recommendations described herein;
• Establish a definite timeline for obtaining the Requested Information;
• Direct Finance Staff and the City’s consultant’s to obtain any other information the FAC deems necessary to make a recommendation to the City Council;
• Coordinate personal schedules to enable setting the date for a Special Meeting of the FAC during July, and August (if necessary) to continue its review of the Resort Project; and
• Establish a timeline to provide a recommendation to the City Council.

Finance Staff is available to assist the FAC with any necessary Special Meetings during the Summer to enable the FAC to make a recommendation to the City Council during the month of August or September, although the Director would really like to take a weeks vacation in August as well.

Respectively submitted,

Dennis McLean

Finance Director

Due to the late hour of the June 13^th meeting of the Finance Advisory Committee (the "FAC"), its members acted to continue Agenda item #5, 2001 Five Year Financial Model (hereafter referred to as the "2001 Model"), to the agenda for the Special Meeting on June 27th. For the convenience of the FAC members, as well as other readers, Finance Staff has incorporated the content of the staff report dated June 13, 2001 into this staff report.

During its meeting on June 5^th, the City Council acted to approve a purchase agreement for the acquisition of approximately 626 acres of open-space land as follows:

1. The purchase of approximately 463 acres of open space land known as the Portuguese Bend property from Palos Verdes Portuguese Bend LLC for $20 Million; and
2. The purchase of approximately 163 acres of open space known as the Upper Filiorum property from York Long Point Associates for $7,335,000.

The estimated combined purchase price for the Portuguese Bend and Filiorum properties is $27,335,000. The City is eligible to receive up to approximately $400,000 of Proposition 12 state funds for open space purchases. The remainder of the financing required to complete the purchase will require the combined effort of the City, Palos Verdes Peninsula Land Conservancy, state and local agencies and private monies. The Palos Verdes Peninsula Land Conservancy has pledged $6 Million in private donations to finance the purchase.

The FAC reviewed the first draft of the 2001 Model at its meeting on April 11, 2001. Upon finishing its review, the FAC acted to: (1) accept the 2001 Model: and (2) forward it to the City Council with a recommendation to continue the utility users tax at a rate of 3%, in light of the uncertainty of the state of the national and state economic future, its potential impact on future revenue to the City, as well as the potential (and unknown) cost of storm drain repairs and improvements. During the meeting, the members discussed the possibility of reviewing the 2001 Model at a later date.

The 2001 Model was presented to the City Council on May 1, 2001. As a result of its review, the City Council directed Finance Staff to revise the 2001 Model as follows:

• To create the Roadway Beautification CIP fund and the Utility Undergrounding CIP fund. The funds will be capitalized with initial transfers of $200,000 and $225,000 from the General fund to the Roadway Beautification CIP fund and Utility Undergrounding CIP fund respectively. An additional $100,000 will be transferred from the Recycling fund to the Roadway Beautification fund in both FY 01-02 and FY 02-03 of the Budget Document as well.

Finance Staff included the same fund transfers in the remaining three years of the 2001 Model. Therefore, assuming the City Council directs Finance Staff to include the transfers through FY 05-06, General fund reserves would be decreased by an additional $2,125,000 ($225,000 plus $200,000 x 5 years), compared with the 2001 Model reviewed by the FAC during its April 11^th meeting. The Recycling fund would be decreased $500,000 through FY 05-06 ($100,000 x 5 years).

The City Council further directed staff to clearly explain in the Budget Document that the monies transferred to the newly created funds are not appropriated for spending until the City Council approves appropriate CIP projects. The City Council has the discretion to transfer the monies back from the Roadway Beautification CIP fund and Utility Undergrounding CIP fund at any time, subject to a majority vote of the City Council.

• Approximately $500,000 was added to the San Ramon Storm Drain CIP project during the preparation of the FY 01-02 budget. The revision was based upon new information developed by the Public Works department. Considering the fact that engineering and design has not been completed for this project, the $2 Million estimate is subject to further revision before construction begins later this year.

• Finance Staff has included the Employee Benefit and El Prado funds. Both funds were previously excluded due to their insignificant nature. The Employee benefits funds is a "pass through" fund used to collect transfers from the every City department for the cost of each department’s respective share of employee benefit costs. The actual payments for CALPers contributions, payroll taxes and other employee benefits are made from this fund. Because of its passthrough nature, the inclusion of this fund has no impact on fund reserves included in the 2001 Model.

• During the preparation of the Budget Document for FY 01-02 and FY 02-03, the City Council authorized the formation of the Abalone Cove Sewer Maintenance District. The fund was established to provide for annual sewer maintenance assessments and to provide accountability for the cost of operating the nearly completed Abalone Cove Sewer system in the Abalone Cove RDA project area. The creation of the Abalone Cove Sewer Maintenance District results in projected transfers from the General fund to the District in the amount of $35,000 annually. Since completion of the 2001 Model, Public works staff has reported that the annual General fund transfer will be approximately $20,000.

During the course of completion of the FY 01-02 and FY 02-03 Budget Document, Finance Staff made several refinements, based upon new information provided from state, county and internal sources. Most of the revisions were immaterial, except for the changes directed by the City Council (described in the previous section), as well as several increases and decreases of General fund revenues and program expenditures. A summary of the material changes in the General fund follows on the subsequent page of this report. Also, the Economic Model Input Factors for FY 01-02 (Adopted Budget) and FY 02-03 (Proposed Budget) included on Page 1 of the 2001 Model are meaningless.

The 2001 Model includes the presentation of revenue, expenditures and ending fund balances for all funds for the FY 98-99 and FY 99-00. The financial statements for FY 98-99 and FY 99-00 were audited by the City’s independent auditors, who expressed an unqualified (clean) opinion regarding the fair presentation of the statements. Estimates of revenue, expenditures and ending fund balances are presented for the current fiscal year that will end June 30, 2001. The first two years of the 2001 Model include estimates of revenues, expenditures and ending fund balances based on the adopted FY 01-02 budget and the proposed FY 02-03 budget. The remaining three years of the 2001 Model through FY 05-06 are based upon the assumptions described on Page 1 of the 2001 Model.

The following assumptions (remained unchanged) and were used in the preparation of the 2001 Model:

• Most expenditures have been increased 3.0% in the final three years of the Model through FY 05-06. A 3% inflation factor was used during the preparation of the 2000 Model, as well as previous years. Staff has increased the inflation factor in light of the anticipated increases of contractor costs (resulting from the increase of the California minimum wage rate) as well as the increasing trend of the CPI in the Los Angeles area.

• Most revenues have been increased annually in the final three years of the Model through FY 05-06, using an inflation factor, projected changes in permit activity and retail sales, staff’s expectations, etc. The factors (% rate of change) are presented on Page 1 of the 2001 Model using an alphabetical index (a through k) and are referenced throughout the 2001 Model.

• The 2001 Model does not include any additional services or programs and assumes that "one-time" projects paid for out of the General fund (i.e. NCCP and the Update of the City’s Housing Element) will be replaced by other similar "one-time" projects in future years.

• It is assumed that the State will not reduce Vehicle in Lieu Fee revenue (VLF). Approximately sixty-seven (67%) percent of the City’s share of VLF revenue is currently "back-filled" by the California legislature in conjunction with the state legislated reduction of VLF costs for consumers. In light of the states financial burden created by the energy crisis, the future back-fill of VLF revenue is less certain. Motor Vehicle in Lieu Fees are nearly 20% of total General fund revenues.

• It is impossible to accurately project future UUT revenue through FY 05-06. The adopted FY 01-02 and proposed FY 02-03 budgets include an increase in excess of $270,000 in FY 01-02 and $330,000 in FY 02-03 respectively. Staff has included the estimated results of the 9% January 2001 PUC increase as well as the April 2001 PUC rate increase. Staff was unable to evaluate the impact of the 26% increase suggested by Governor Davis on April 5, 2001. The 2001 Model assumes the continuation of the 3.0% utility users tax through FY 05-06.

• Revenue from the proposed hotel and golf course at Long Point has not been included in the 2001 Model, nor was it included in the 2000 Model.

• The adopted budget for FY 01-02 includes a reduced expectation of golf tax revenue from Ocean Trails, based upon the uncertainty of the timing of the opening of the entire 18-hole course. The golf tax revenue included in the proposed budget for the FY 02-03 is based upon a full year of operation. The golf tax revenue was based upon an utilization rate of about fifty (50%) percent, subject to the City’s ten (10%) percent tax rate @ $150 per round. The golf tax revenue for the remaining years through FY 05-06 is based upon the same assumptions used in the FY 02-03 proposed budget.

• The $2,000,000 appropriation in the CIP fund for soil remediation at the Point Vicente Interpretive Center (PVIC) will not be expended during FY 00-01. As part of the year-end budget review, the full amount of unexpended appropriations will be carried forward to subsequent years until the soil remediation project is completed or cancelled. The soil remediation project will be funded by a transfer from the General fund. Nothing has been included in the 2001 Model for any possible reimbursement from county, state or federal agencies.

• The PVIC expansion project will not be continued until after the soil remediation is completed. As part of the year-end budget review, the full amount of unexpended appropriations will be carried forward to subsequent years until the expansion project is completed or cancelled. The same accounting treatment has been applied to all other CIP projects budgeted in FY 00-01.

• The adopted FY 01-02 budget includes a deficit ending fund balance in the Environmental Excise Tax (EET). The PVIC expansion project is included in the "Adopted Budget FY 01-02" column of the 2001 Model, even though it will not be completed until later years. One of the funding sources for the project is the EET fund. Staff expects that sufficient EET funds will be accumulated prior to the completion of the PVIC project.

• The City has been allocated $4,000,000 of Measure A County grant funds, restricted for the sole purpose of acquiring open space land. The FY 01-02 adopted budget includes the receipt and expenditure of the grant proceeds. On February 20, 2001, the City Council agreed to purchase approximately 98 acres of open space land known as Parcel 4, or the Barkentine property, from Palos Verdes Land Holding Company.

• The 2001 Model does not include the expected receipt or use of $408,000 of proposition 12 park funds.

• The City formed the Building Replacement fund (BRF) with a lump sum transfer of $782,000 from General fund reserves in FY 1999-00. The adopted FY 01-02 and proposed FY 02-03 budgets include a provision for an additional transfer from the General fund of $500,000 each year. The 2001 Model includes additional transfers of slightly over $250,000 from the General fund to the Building Replacement fund for the remaining years of the 2001 Model through FY 05-06.

• The 2001 Model assumes that the Abalone Cove Sewer project and additional RDA Abalone Cove projects will be completed on or before the end of FY 01-02. The Improvement Authority will continue to fund the maintenance of other improvements developed in the Abalone Cove section of the RDA.

• The 2001 Model assumes that the RDA - Portuguese Bend projects will continue to be funded by General Fund loans and no additional developer revenue will be received by the City to offset future project costs. As described previously, the Model assumes that the RDA will complete its mission upon completion of Abalone Cove projects. The Improvement Authority will continue to fund the maintenance of other improvements developed in the Portuguese Bend section of the RDA.

• The 2001 Model assumes that the majority of accumulated monies in the Affordable Housing Set-Aside Fund (Non-RDA) will be expended on eligible low and moderate income housing projects prior to June 30, 2004. The specific details of these housing projects have not yet been identified.

Respectfully submitted,

Dennis McLean

Finance Director