 AGENDA November
13, 2002 CITY
HALL
TO: HONORABLE CHAIR AND MEMBERS OF THE FINANCE ADVISORY COMMITTEE FROM: DENNIS McLEAN, FINANCE DIRECTOR DATE: NOVEMBER 13, 2002 SUBJECT: FINANCING ALTERNATIVES Overview of Financing Needs The motivation for considering long-term ("LT") financing of infrastructure as well as developing the revenue sources to make scheduled payments thereof results from the fact that:
It appears that the City will need to increase its revenue sources in the future to: (1) to adequately maintain its infrastructure; (2) improve park facilities and (3) to enable any scheduled LT debt payments related to financing such improvements. Five Year Infrastructure Plan Public Works presented the Five Year Infrastructure Plan to the Finance Advisory committee (the "FAC") during a meeting on March 27, 2002. The Infrastructure Plan includes a citywide storm drain plan, a comprehensive Palos Verdes Drive East ("PVDE") area storm drain plan and a citywide supplemental sewer maintenance plan. Citywide Storm Drain Plan A comprehensive PVDE storm drain plan was presented to the City Council near the end of 2001 citing approximately 30 storm drain repair projects along PVDE. As a result of its significance (as well as the San Ramon experience), approximately $1.2 Million was included annually in the Infrastructure Plan prepared by Public Works staff. Because a financing source does not currently exist and the fact that General fund reserves are not sufficient to pay for the PVDE storm drain plan, none of the PVDE storm drain projects are included in either the FY 2002-2003 budget or the 2002 Five-Year Financial Model. The City had consultants prepare a citywide storm drain plan in 1996. Staff expects to update the plan near the end of FY 2002-2003. Public Works staff included $650,000 annually in the Five Year Infrastructure Plan for maintenance of storm drain facilities throughout the City (excluding the PVDE area). Because a financing source does not currently exist and General fund reserves are not sufficient, nothing is included in either the FY 2002-2003 budget or the 2002 Model for citywide storm drain projects. As you already know, the City is on the verge of completing the emergency San Ramon (PVDE area) storm drain project. The original budget for the project was about $1 Million. The final cost is expected to exceed $3.5 Million. Several important lessons must be learned as a result of this project experience:
Finance staff believes that establishing a funding source for the citywide storm drain plan should be a high priority for the City. Preliminary Citywide Sewer Maintenance Plan The County of Los Angeles has maintained the City sewer system since the formation of the City. Property owners currently pay about an $18 assessment annually for the County’s efforts. The County’s maintenance effort includes periodic lifting of manhole covers to ensure sewage is flowing and conducting on-demand repairs of known breakages. The County does not perform the use of video inspection of the sewer lines as a part of a preventive maintenance plan. No plan for systematic replacement of sewer lines exists. Additionally, the County has notified the City that regulatory compliance of the sewer system rests with the City. Staff believes that a significant portion of the sewer system is nearly fifty (50) years old. More than half of the City’s lift stations are beyond their estimated useful life. The replacement cost of the sewer system is in excess of $75 Million. As you may recall, the FY 2002-2003 budget includes $350,000 to conduct a partial line cleaning and video inspection of critical sections of the sewer system. The video filming will provide staff with a first impression about the condition of the City’s sewer system and establish a baseline for the development of a comprehensive citywide supplemental sewer plan. Public Works staff has included $640,000 annually in the Five Year Infrastructure Plan for sewer cleaning, video filming and repairs. Because the City currently has no funding source for a supplemental sewer maintenance plan, it has not been included in the 2002 Model. 2002 Model The following key assumptions were included during the preparation of the 2002 Model:
Based upon the key assumptions described above, the projected ending fund balances of the General fund, CIP fund and Gas Tax fund reported in the 2002 Model is expected to remain neutral over the five years ending in FY 2005-2006. Based upon the findings of the 2002 Model, sufficient revenue would not exist to make LT debt payments for financing infrastructure maintenance and improvements, as well as other worthwhile CIP projects in the City. See the attached excerpts from the 2002 Model. Note: Finance staff does not think it is fiscally prudent to rely on the potential tax revenue from the proposed Long Point Resort Project to finance the City’s future infrastructure. Financing Alternatives: Note: This report includes financial calculations and estimates of potential costs, fees and LT debt payment. They are presented as "examples" to assist the FAC (as well as any other reader) in developing its understanding about the financing alternatives contained herein. Engineering studies and calculation verifications have not performed. Therefore, no reliance should be placed on the accuracy of the examples contain herein. Actual cost and fees may be greater than those presented in this report. Revenue Sources Based upon the results contained in the 2002 Model, it appears that the City will need to increase its revenue sources in the future to: (1) to adequately maintain its infrastructure; (2) improve park facilities and (3) to enable any scheduled LT debt payments related to financing such improvements. Staff offers a combination of financing alternatives for consideration to finance the City’s infrastructure costs. The financing alternatives have not been included in either the FY 2002-2003 budget or the 2002 Model. Each will be discussed in this report, and are summarized as follows:
Establishing A Citywide Storm Drain User Fee Storm drain user fees are a common revenue source used by cities to pay for the cost of maintaining and improving storm drain facilities. Generally, an enterprise fund is created to an account for the revenue stream, operating expenditures, as well as the payment of debt borrowed to finance drainage improvements. A "property-related" fee may be imposed upon each property parcel pursuant to Article XIIID of the California Constitution. The procedure used to establish a storm drain user fee include:
Staff recently conducted an informal survey of California cities whether or not they charge a user fee to pay for the cost of maintaining their storm drain system. A summary of the results follows:
Greater than fifty (50%) percent of the responding cities charge storm drain fees. Most of responding cities that charge a storm drain fee have hillsides and canyons like the City of Rancho Palos Verdes. A schedule demonstrating the computation of the cost per parcel follows:
Establishing A Citywide Parks Benefit Assessment District A citywide park assessment district could be created to pay for a portion of the cost of the City’s effort to maintain, repair and improve park facilities. Based upon a rough preliminary calculation made by Harris Associates, the revenue derived from a park assessment charge could offset about fifty (50%) percent of existing costs of park maintenance and improvements. Because other cities are within close proximity of the City, the Engineers rough preliminary computation indicates that as much as fifty (50%) percent of non-residents benefit from use of the City’s park facilities, hence, only about fifty (50%) percent of the total park facility costs would be eligible for assessment. All parks, recreation and open space operating costs are funded using General fund monies. Upon the formation of a parks benefit assessment district, approximately $500,000 of park facility operating costs could be shifted to the district each year, saving the same amount in the General fund. Based upon a preliminary estimate prepared by staff, the assessment charges would cost parcel owners about $24 annually. A citywide park benefit assessment district would require a vote of parcel owners in accordance with Proposition 218. A park benefit assessment district would require the following action:
Less than one-third (1/3) of the responding cities reported levying an assessment to financing park operations and improvements. Proposition 218 (Article XIIID of the California Constitution) requires that a mailed ballot proceeding be conducted prior to the levy of an assessment. As part of this proceeding, at least forty-five days prior to holding a public hearing on a proposed assessment, the City would be required to mail an assessment ballot to the owner of each parcel subject to the assessment. The assessment could not be imposed if the ballots retuned in opposition to the assessment outweigh the ballots returned in support of the assessment. Each ballot would be weighed based on the proportionate financial obligation of the parcel (e.g. the amount of the proposed assessment against that parcel). A schedule demonstrating the computation of the cost per parcel assuming LT financing is not utilized follows:
The use of an assessment district may provide the City with a financing mechanism to provide residents with expanded park facilities (e.g. athletic fields), although, it would pass about one-half (˝) of the cost directly to property owners. Establishing Citywide Sewer User Fees Most California municipalities have established an enterprise operation, funded by user fees, for maintenance of local sewers. Sewer User fees may be established through a public hearing process and approval from the City Council. They may not be imposed if the owners of parcels subject to a majority of the amount of the fee submit written protests. The fees may be used for all or a portion of the system costs including construction, replacement, and maintenance. As described previously herein, the County’s maintenance effort includes periodic lifting of manhole covers to ensure sewage is flowing and conducting on-demand repairs of known breakages. Property owners currently pay about an $18 assessment annually for the County’s efforts. Public Works staff has decided to defer its discussion with the County regarding its maintenance effort until the initial video filming and analysis of a portion of the City’s sewer system is completed near the end of FY 2002-2003. A citywide sewer fee could be established to supplement the cost of maintaining the City’s sewer system. Because the estimated cost of supplemental sewer maintenance has not been included in the 2002 Model, establishing a user fee would provide a revenue stream that would entirely offset its cost. Based upon a preliminary estimate prepared by staff, the user fee would cost parcel owners about $42 annually. A citywide sewer user fee would not require a vote of parcel owners. The supplemental sewer user fee could be added to the property tax rolls for all the parcels of the City. The inclusion of sewer fees submitted to the County for inclusion on property tax bills in August 2003 would be billed during 2003-2004 and collected during November 2003 through June 2004. With the cooperation of California Water and payment of an administrative billing charge, the sewer user fee could be billed property owners along with the monthly California Water bills. The monthly billing via the water utility would likely enable quicker cash flow to the enterprise funds. The City would be responsible for uncollected sewer user fees. A schedule demonstrating the computation of the cost per parcel follows:
Utility Users Tax In 1993, the City imposed a three (3%) percent Utility Users Tax ("UUT") on the consumers of natural gas, water, electricity and telephone services. The tax currently accounts for approximately $1.8 Million or about fourteen (14%) percent of General fund revenues. Several factors to consider include:
A schedule demonstrating the computation of the estimated increase of the UUT rate to finance the cost of the preliminary sewer plan, citywide storm drain plan, citywide park assessment district, either combined or separately, follows:
As an alternative, a increase of the UUT could be proposed to the voters for the sole purpose of financing a "wish list" of improvements of interest to the community, perhaps including:
LT Financing Cities have the ability to issue bonds and other debt instruments to finance infrastructure improvements. Issuing debt would allow the City the opportunity to spread the cost of a project over time. Terms of repayment vary, but rarely exceed the useful life of the project being financed. If certain legal requirements are met, interest on bonds issued by a local government is generally exempt from state and federal income tax providing a significant advantage to the investor. Currently, the estimated annual cost of financing $1 million is $90,000. Qualified financial advisors, investment bankers and bond counsel should be consulted early in the debt financing process. Following is a list of commonly used debt financing methods. Additionally, staff has attached a Matrix of Financing Alternatives for storm drains, sewers, parks and utility undergrounding districts for your review. Certificates of Participation Certificates of Participation (COPs) may be used for acquisition or construction of major public improvements or equipment. Issuance only requires City Council resolution, but borrowing costs are more expensive that other forms of debt financing. No new revenue is established for debt service payments; therefore, General and/or Enterprise fund revenue (e.g. sewer user fees) must be used to repay the debt. General Obligation Bonds General Obligation Bonds (GO Bonds) may be used for the acquisition or improvements of public land and property. Issuance requires City Council resolution and a 2/3-majority vote of the City’s residents. Borrowing costs are lower than COP’s. An ad valorem tax is established on all taxable property to pay for debt service payments. Special Benefit Assessment Bonds Special Benefit Assessment Bonds may be used for infrastructure improvements and additional facilities needed for development. Issuance requires mailed notices and a majority vote by the assessed property owners, as well as public hearings. Assessments based on benefit, paid by the property owners within an improvement district, are the source for debt service payments. Mello-Roos Bonds Mello-Roos Bonds may be used for public facilities with useful lives of more than 5 years and certain City services (police, fire, recreation, park maintenance, removal of hazardous substances, and maintenance of storm drainage systems). Issuance requires a 2/3-majority vote of the affected property owners or registered voters if more than 12 reside in the district. A Mello-Roos tax is levied on the affected property owners to pay for the debt service. State Loan Programs State loan programs, such as Infrastructure Bank loans and State Water Resource Board loans, may be available to the City. Loan proceeds are used to finance infrastructure improvements unique to each program. Because financing only requires a City application, this form of debt carries the lowest borrowing costs available. However, participation in the loan program is subject to a competitive project approval process; and only a portion of the project may be funded. The competitive process favors projects that have cleared environmental approvals and are ready for construction. The State of California recently injected new monies into the revolving fund for the State Water Resource Board (SWRB) for worthy projects. Based upon staff’s discussion with members of the SWRB, the City will be required to pledge a dedicated (restricted) revenue source as collateral in conjunction with obtaining a SWRB loan. Therefore, establishing a storm drain user fee would enable the City to possibly obtain low interest debt under this program. Financial Advisors With the concurrence of the FAC, as well as the City Council, staff would like to select a financial advisor to assist staff with the financing alternatives described above. Though staff and the FAC exhibit a substantial amount of financial skill, a financial advisor would assist staff with many financing alternatives, including:
Recommendation Staff encourages discussion, comments and ideas in anticipation of the presentation of the Financing Alternatives project findings at a future City Council meeting. Respectfully submitted, Dennis McLean RPV FINANCIAL MODEL REVIEW J. Curtis 10/10/02 The ‘Model’ encompasses approximately 10 columns and more than 1400 lines divided into 3 fundamental sections; Economic Input Factor (p1), Top Level ‘Funds’ balance and Summary (p2-3), followed by detail pages for each ‘Fund’ with Expenditures, Transfers and Summary (pp3-35). Each ‘Fund’ is detailed in a virtually identical structure: Revenues, Expenditures, Net Income before transfers, Transfers In/Out and an overall Summary. The General Fund appears to be different, however it’s appearance primarily varies due to the sheer number of items detailed. Columns provide data for two years Past Actuals (for ref.), the Past Fiscal Year End estimates (at close?), the Current Year Budget (approved?) and four out-years forecasted. The ‘Economic Model Input Factors’ provide escalation factors used to model changes anticipated over time for many ‘Fund’ detail lines. Each is translated down the model to various line items in each fund and is appropriately noted in the Factor column (i.e. "(a)"). Some year-to-year forecasts are based on multi-column averages to more accurately estimate the value to which the escalations factor applies. The structure of formulae is consistent over the 36-page length and across the Forecasting columns of the model. The modeling concept is straight forward, driven by past actuals, special event adjustments by staff and escalated thru the out-years via the ‘Economic Model Input Factors’. The most significant factors observed while reviewing the model are:
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