AGENDA Wednesday, February
5, 2003 CITY HALL
TO:HONORABLE CHAIR AND MEMBERS OF THE FINANCE ADVISORY COMMITTEE FROM: DENNIS McLEAN, FINANCE DIRECTOR DATE: FEBRUARY 5, 2003 SUBJECT: FINANCING ALTERNATIVES THE FOLLOWING IS A DRAFT OF THE PROPOSED REPORT TO THE CITY COUNCIL: Overview of Financing Needs The consideration for the use of long-term ("LT") financing of infrastructure needs, as well as developing the necessary revenue sources to enable payment thereof, is based upon the following:
Based upon the findings of the 2002 Five-Year Financial Model, sufficient revenue does not exist to make LT debt payments to finance infrastructure maintenance and improvements, as well as other necessary Capital Improvement Program (CIP) fund projects in the City. The City will need to increase its revenue sources in the future to: (1) maintain and improve its infrastructure; (2) improve and add new open space and park facilities; and (3) enable necessary LT debt payments related to financing such improvements. Note: Finance staff and the FAC do not believe 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 needs. Overview of Infrastructure Issues Public Works presented an overview of the status of the City’s infrastructure to the Finance Advisory Committee (the "FAC") during a meeting on March 27, 2002. A summary of the FAC’s findings follows: Citywide Storm Drains A comprehensive PVDE storm drain plan was presented to the City Council near the end of 2001 citing approximately 33 storm drain repair projects along PVDE. The same comprehensive PVDE storm drain plan was presented to the FAC on March 27, 2002. Public Works staff reported to the FAC that about $1.2 Million is necessary annually for the cost of completing PVDE storm drain projects, based upon a ten-year completion schedule. 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. A citywide storm drain plan was presented to the City Council in 1996. Public Works staff reported to the FAC that about $640,000 is required annually for the cost of completing storm drain projects 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 Five-Year Financial Model for citywide storm drain projects. San Ramon Storm Drain Project – A Lesson Learned About Using General Fund Reserves 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 were learned as a result of this project experience:
Citywide Sewer System The County of Los Angeles has maintained the City’s sewer system since its incorporation in 1973. Property owners currently pay $18 annually for sewer services provided by the County. Comparatively, most California cities charge between $XX and $XX [the range is forthcoming] annually. The County’s maintenance effort includes periodic lifting of manhole covers to verify that sewage is flowing and repairs of breakages. The County does not perform video inspection of the sewer lines as a part of a preventive maintenance plan. No plan for systematic replacement of sewer lines exists. The $18 annual assessment is not sufficient to set aside monies for a preventive line segment replacement program. A significant portion of the sewer system is more than fifty (50) years old. More than half of the City’s lift (pumping) stations are beyond their estimated useful life. The replacement cost of the sewer system is in excess of $75 Million. Staff is aware of twelve (12) reported sewer overflows during the last two years. Additionally, the County has notified the City that regulatory compliance of the sewer system rests with the City. As you may recall, the FY 2002-2003 budget includes $350,000 to conduct 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 sewer plan based upon preventive maintenance and scheduled line replacement. Public Works staff reported to the FAC that about $640,000 annually is required for sewer cleaning, video filming and repairs, subject to the findings of the pending sewer system inspection. The estimate is based a ten (10) year cycle, including line cleaning at an estimated cost of $.70 per linear foot, video inspection at an estimated cost of $1 per linear foot and line replacement based upon $75 per linear foot. Because the City currently has no funding source for a supplemental sewer maintenance plan, it has not been included in future years of the 2002 Five-Year Financial Model. Ocean Trails Sewer Line Failure As you already know, the rupture of the sewer line running through the Ocean Trails Golf Course contributed to the 1999 landslide of three golf holes into the Pacific Ocean. The cost of the landslide repair at Ocean Trails has exceeded $42 Million. The City exists along seven (7) miles of ecologically sensitive coastline, the end-point for a number of canyons that serve as natural drains from the highest elevations of the Palos Verdes Peninsula. All City storm drains empty into the Pacific Ocean. The risk of a potential sewage spill into the ocean is a very real possibility. Arterial Roadways, Residential Streets And Related Infrastructure The condition of the City’s arterial roads and neighborhood streets has improved significantly over the last decade. The receipt of approximately $2 Million of supplemental county and state grant revenues (e.g. Traffic Congestion Funds) over the last several years has enabled the City to carry out several road improvement projects that would not have been possible otherwise. None of the supplemental county and state grant revenues are expected to continue to be received in light of the state budget crisis. In fact, payment of approximately $500,000 of previously legislated Traffic Congestion Funds has been suspended by the state. Each year, the Street Maintenance fund
incurs expenditures of approximately $1.7 Million for street maintenance
activities, including slurry seal, sidewalk repair, tree trimming, and
street sweeping. As the City receives only about $800,000 from
the state in the form of Highway Users Tax, the $900,000 balance
of street maintenance expenditures is funded with an operating transfer
from the General fund. If the Pavement Management Plan were strictly followed and other street maintenance activities are performed at current levels, the City would spend approximately $2.1 Million of General fund reserves to optimally maintain the City’s arterial roadway and residential street infrastructure. This based upon $900,000 for street maintenance and $1.2 Million for residential street overlay projects. When the voters of the City considered the re-affirmation of the City’s three (3%) percent utility users tax ("UUT") in 1996, staff represented that the tax revenue would be utilized to continue to maintain the City’s arterial roadway and residential street infrastructure and other capital improvement projects. UUT revenue was approximately $1.8 Million during FY 2001-2002. UUT revenue is not sufficient to maintain the City’s arterial roadway and residential street infrastructure in accordance with the Pavement Management Plan. Summary – Infrastructure Issues Based upon the key assumptions described above, the projected ending fund balances of the General fund, Capital Improvement Program fund (CIP) and Gas Tax fund reported in the 2002 Five-Year Financial Model is expected to remain neutral over the five years ending in FY 2006-2007. Therefore, sufficient revenue will not exist to make necessary LT debt payments for financing infrastructure maintenance and improvements, as well as other worthwhile CIP projects in the City (e.g. improving open space and park facilities). Financing Alternatives Revenue Sources Based upon the results contained in the 2002 Five-Year Financial Model, the City will need to increase its revenue sources in the future to: (1) adequately maintain and improve its infrastructure; (2) improve and add open space and park facilities; and (3) provide a source of new revenue to enable necessary LT debt payments related to financing such improvements. Staff offers a combination of financing alternatives to fund the City’s infrastructure needs for the City Council’s consideration. The financing alternatives have not been included in either the FY 2002-2003 budget or the 2002 Five-Year Financial Model. The City Council and property owners of the City could elect to:
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 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 parcel of real property to which a storm drain system is available in accordance with Article XIIID of the California Constitution ("Proposition 218"). The procedure used to establish a storm drain user fee include:
Staff recently conducted an informal survey of California cities to determine 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:
Although the results presented above were not derived from a scientific survey, 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. Generally, the cost of all of the improvements associated with storm drains could be spread over twenty or more years using LT debt. Additionally, the State Water Resource Control Board may be able to provide the City with low interest LT debt financing of storm drain projects through its federally mandated Cleanwater State Revolving Fund loan program. A storm drain user fee could be added to the property tax rolls of each parcel of real property to which a storm drain system is available in the City. Storm drain user fees submitted to the County in August 2004 would be billed during FY 2004-2005 and fee proceeds would be received by the City in unequal monthly installments during the months of December 2004 through June 2005. As an alternative, with the cooperation of California Water, along with the payment of an administrative billing charge, the storm drain user fee could be billed to property owners with their monthly California Water bills. The monthly billing via the water utility would likely enable quicker cash flow to the enterprise fund. In the event that California Water provides billing and collection services for the City, the City would ultimately be responsible for uncollected user fees. The overall cost of administration, including the amount of the administration charge assessed the City by either the County or California Water, the rate of the collection of fees and the mechanism and success rate of the collection of unpaid accounts, must be further evaluated in the event a user fee is considered further to determine which method is prudent. Citywide Sewer User Fees The Palos Verdes Estates Plan – Establishing A Property Related Sewer Fee The following is an excerpt from the December 2002 Palos Verdes Estates ("PVE") Newsletter regarding it’s sewer improvement financing plan: "The City Council has adopted a Sewer Master Plan that calls for an annual expenditure of $1,499,000 in each of the first 10 years. The Master Plan, prepared by AKM Consulting Engineers, estimates the cost of eliminating the "Very Poor" sewers, the "Poor" sewers, replacement of the two pump stations and replacement of undersized 6" drainage pipes with 8" pipes, to be $29.4 million., and recommends that these improvements be accomplished over the next 15 to 30 years. The fixed assets of the City (which include streets, storm drains, sewers, City buildings) must be depreciated, and refurbished, on a continual basis and changes in govèrnment financial reporting require us to recognize these costs. The program the Committee has recommended must be revisited at the conclusion of 10 years, and updated based on the condition of the City’s physical plant. The City’s financial capacities would be re-assessed at that time; and a new financing package presented to the voters and property owners. Today, the City levies a 10% Utility Users Tax (UUT) which expires on June 30, 2003. If the 10% UUT was continued in FY 03-04, it would cost the average household $521. The proposed 2.5% Utility Users Tax would average $130.25 per household; and the sewer fee would average $270 per household, totaling $400.25." It’s noteworthy that PVE has established a Sewer Master Plan, including the adoption of a sewer user fee. The FAC also feels that it’s noteworthy that the work of PVE’s Committee was limited to the Sewer Master Plan, rather than the all city infrastructure. Most California municipalities have established an enterprise operation, funded by user fees, for maintenance of local sewers. User fees may be established through a public hearing process and approval from the City Council. The fees may be used for all or a portion of the system costs including construction, replacement, and maintenance. As stated previously herein, the County’s maintenance effort includes periodic lifting of manhole covers to verify that sewage is flowing and repairs of breakages. The County does not perform video inspection of the sewer lines as a part of a preventive maintenance plan. No plan for systematic replacement of sewer lines exists. The $18 annual assessment is not sufficient to set aside monies for a preventive line segment replacement program. In the event the City Council ultimately decides to increase the maintenance effort of the existing sewer system beyond the current level, the City could contract with the County to provide additional services, including line cleaning, video filming and systematic line replacement. As an alternative, the City could assume responsibility for the entire maintenance of the sewer system and contract it privately pursuant to a request for proposal process. A citywide sewer fee could be established to pay for the entire cost of extending the maintenance of the City’s sewer system beyond the current level. A citywide sewer user fee would not require a vote of parcel owners. A sewer user fee could be added to the property tax rolls for all parcels in the City to which sewer service is available. In the event a sewer user fee is adopted, the mechanism for billing and collection of sewer user fees is nearly the same as a storm drain user fees, described previously herein in the Establishing A Citywide Storm Drain User Fee section. The procedure used to establish a sewer user fee includes:
Generally, the cost of all improvements associated with sewers could be spread over twenty or more years using LT debt. The State Water Resource Control Board may be able to provide the City with low interest LT debt financing of sewer projects as well. Park And Open Space Improvements As you already know, the Open Space Planning, Recreation and Parks Task Force (the "Task Force") is currently assessing the needs of the community. The Task Force’s goal is to present its report to the City Council before the end of 2003. Although the Task Force is expected to provide financing ideas, staff offers the following broad overview for future consideration by the City Council: Citywide Parks Benefit Assessment District A citywide park benefit assessment district could be created to pay for a portion of the cost of the City's effort to maintain, repair, and improve open space and park facilities. An assessment may be levied to fund the cost of special benefits to real property as set forth in a report prepared by a licensed civil engineer and approved by the City Council. Based on a preliminary estimate given by Harris and Associates, roughly 50% of the City's costs of park maintenance and improvements would likely be assessable. Most all park and open space operating costs are currently expended 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 an assessment district each year, saving the same amount in the General fund. A citywide park benefit assessment district would require a vote of parcel owners in accordance with Proposition 218. The establishment of a park benefit assessment district would require the following action:
ballots cast against the assessment do no outweigh the ballots cast in favor of the assessment, then the City Council may approve the assessment. Ballots are weighed based upon the amount of the assessment against the parcel for which the ballot has been cast. Staff recently conducted an informal survey of California cities to determine whether or not they created an assessment district to pay for the cost of maintaining their open space and park facilities. A summary of the results follows:
Less than one-third (1/3) of the responding cities reported charging an assessment fee for financing park operations and improvements. The requirements enacted with Proposition 218 (Article XIIID of the California Constitution) require the same notice, ballot and Public Hearing procedure for fee increases that are followed prior to the adoption of an assessment fee. Therefore, assessment districts have lost their popularity amongst municipalities. Mello-Roos Special Tax A Mello-Roos Community Facilities District could be formed to finance capital and/or operating costs associated with such public improvements, including open space and park facilities. Such a tax could be spread amongst parcels by any logical rationale. The procedure to establish a district would includes:
General Obligation Bond Override Tax The City could place a voter initiative on a future ballot to consider the levy of a General Obligation Bond Override (property) tax. The property tax would be added to the property tax rolls, based upon the assessed property value, of all homeowners and commercial property owners. The parcel tax would raise sufficient revenue to enable payment of voter approved LT debt to finance improvements to park and open space facilities. The cost of maintenance could not be paid for from the proceeds of the General Obligation Bond Override (property) tax. A General Obligation Bond Override (property) tax would require a 2/3 vote of the electorate in an election. 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 provides approximately $1.8 Million of General fund revenues. Several factors to consider include:
An increase of the UUT could be proposed to the voters to pay for a "wish list" of improvements of interest to the community, including improvements to park and open space facilities. However, the City could not commit to spending proceeds on these specific programs, and UUT proceeds must go into the general fund. Other Long Term Financing Methods As described previously herein, 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. 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. State Loan Programs State loan programs, such as Infrastructure Bank loans and State Water Resource Control Board loans (described previously herein), 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 to the City. 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 Control Board (SWRCB) for worthy projects. Based upon staff’s discussion with members of the SWRCB, 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 and/or a sewer user fee would enable the City to possibly obtain low interest debt under this program. Special Tax or Assessment Bonds If a Mello-Roos special tax or a special assessment is levied, then bonds may be issued in conjunction with that levy. Such bonds are secured by special tax or assessment revenues and are issued pursuant to the Mello-Roos Act or an Assessment Act. 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. The pledging of an existing revenue stream (e.g. a sewer user fee) or real property must be provided as collateral. Recommendations Summary
Recommended Action
Respectfully submitted,
Dennis McLean Finance Director
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