REPORT OF CITIZENS' FINANCIAL ADVISORY COMMITTEE
TO THE MAYOR AND THE CITY COUNCIL OF PALOS VERDES ESTATES
ON LONG-TERM FINANCING OPTIONS FOR FUTURE CAPITAL IMPROVEMENTS

October 7, 2002

On May 28, 2002, the Palos Verdes Estates City Council adopted a resolution (Appendix A) to establish a Citizens' Financial Advisory Committee (the committee) to review the city's major capital improvement financing options and to make appropriate recommendations to the Council. The committee held seven open, noticed and televised meetings, and examined extensive material provided by or requested from the City Manager and staff. In addition, the committee reviewed material in Census 2000 on the demographic, social, economic and housing characteristics of the households of PVE (who will be paying any taxes proposed), compared with other cities on the Peninsula and the State of California.

The following interim report to the City Council has been prepared.

The Present Situation

The El Nino winter storms of 1982 and 1983 precipitated the Bluff Cove landslide, which resulted in tremendous exposure and liability to the City of Palos Verdes Estates as a result of the damage and loss of value to twelve Bluff Cove properties. Because a City storm drain failure was deemed a contributing cause, the City and its insurers paid more than $17,000,000 as a result of the landslide damage.

With the impetus of significant costs to the City due to the Bluff Cove losses and the critical need for then current and future infrastructure improvements, on May 1, 1983, the City Council passed a 10% Utility Users Tax (UUT) on monthly bills for telephone, electricity, water, natural gas, and cable television services. The tax was initially enacted for a ten-year period and then renewed for an additional ten years. It will expire on June 30, 2003.

During the past 18 years, the City has spent $29.3 million from the Capital Improvement Fund funded by the 10% UUT. Expenditure by major project categories include: storm drains 46.3%; streets 26.1%; Bluff Cove settlements 20.1% and parkland and City facility improvement projects 7.5%.

The City, with the assistance of outside consultants, has made an extensive study of the current infrastructure needs for the next 10 to 20 years. On June 25, 2002, the City Council approved an amount of $1.5 million per year to fund needed sewer projects. This amount represents the midpoint between a range of expenditures recommended by the consulting engineers that prepared a Sewer Master Plan and Program of Improvements. The funding addresses upgrades to pump stations, replacement of undersized pipes and replacement of those sewers rated as "very poor" by the consultants. The required funding for the complete capital program, both sewer and non-sewer projects (street improvements and storm drains) would range from $2.3 to $3.0 million annually through FY 2012-13. The cost of the refurbishment of the sewers and the storm drains is a permanent and ongoing expenditure that must be recognized and will be recognized in future city financial reports.

The Citizens' Financial Advisory Committee was charged with recommending financing options for the program approved by the Council.

Options Available

Options considered by the committee, which were considered less desirable than the alternatives recommended, included the following:

1. Debt issuance. The UUT could be replaced by borrowing state funds at relatively favorable interest rates. However, such a program requires a revenue stream to finance it, so that some form of taxation will be required. Borrowing does not solve the financing problem; it merely moves it to another level, with the additional burden of interest costs. Self-financing is preferable, if possible.

2. Increase other taxes, e.g., business license, parking fees, documentary transfer taxes. The revenues that could be generated by these programs are far less than would be needed to finance the necessary outlays.

3. Sell the properties the City now owns as a result of the Bluff Cove settlements. One insurance recovery case is still pending, and the city's attorneys strongly recommend that nothing be done until this suit is settled, the timing of which is not known. The properties could be sold, but the conditions of sale that would provide the desired protection for the city from a future lawsuit would drastically reduce the possible selling price. The committee believed that the best resolution of this question would be to recommend that the City Council transfer any insurance recovery settlement, whenever received, into the Capital Improvement Fund and that the City Council consider applying that amount or the income therefrom to lower or provide a moratorium on future utility taxes and/or sewer fees.

4. Use the emergency reserves the city has set aside for unusual and unexpected contingencies. The City Council has set a goal of a General Fund reserve equal to 50% of the annual operating budget, to be reached by June 30, 2004. This amount would be approximately $5.4 million; this fund is now about $5.3 million. In the committee's view, the City's limited tax base, the current uncertain economic situation and the serious financial position of California make such a reserve essential and it should not be touched for replacement or repair of sewers, storm drains, roads, etc. The state has a history of balancing its budget at the expense of the cities and other governmental bodies, resulting in serious curtailment of services to its citizens. This could easily happen again. Likewise, the committee believes a stable Capital Fund balance, currently $2.8 million, should be maintained in the event tax receipts decline and to fund projects not currently contemplated, such as future parkland improvements, or emergencies

5. Continue the UUT at the current 10% rate or at a somewhat lower rate that would produce the funds necessary for the required capital improvements to the infrastructure of the city. While the UUT is progressive in that it increases with greater utility use, it also is regressive in that homeowners with all or a portion of their income fixed (25% of PVE households collect retirement income, and private retirement income ordinarily is not inflation-indexed) have found the UUT an increasing burden as the amount collected has grown during the past two decades. Moreover, the UUT is affected by utility rates, which have increased significantly during this time, and their future path is unpredictable.

6. Pass a parcel tax. This tax would be based on a flat or variable rate per parcel and would require 2/3 voter approval. Based on approximately 5,000 parcels in the city, this would be an initial tax of about $430 annually on the average size parcel, more or less, if the tax rate were variable. However, a two-thirds voter approval at an election is hard to achieve. With the usual voter turnout of about 33%, a determined and organized minority of 11% of the voters could control the election results and impose its will on all of the households in the city.
Recommended Solution

After considerable discussion the committee recommends to the City Council the following funding methods:

1. Separate the funding into two segments: non-sewer and sewer.
2. Fund the non-sewer segment by a 2.5% UUT
3. Fund the sewer segment by a property-related fee

The advantages of the proposal for funding the non-sewer segment with a 2.5% UUT are the following:

1. A 2.5% UUT will be earmarked for non-sewer work required for the next 10 years and will enable a stable capital fund balance. It is the only feasible method of raising sufficient funds for roads, curbs/gutters, storm drains and other necessary capital improvements.
2. All householders are users of roads, gutters, storm drains, etc. and should be willing to pay a reasonable amount to cover costs of maintenance and repair.
3. A UUT of 2.5% will average about $10 a month per household based on 2001 receipts. Such a tax, reduced by 75% from the current 10% to 2.5%, should be acceptable to residents and have a good chance of getting the required 2/3 voters' approval.

The advantages of a property-related fee for sewers are as follows:

1. The funds raised would be restricted for sewer replacement and repairs only.
2. The fee is based on some measure of use of sewers (home size, water usage, number of bathrooms, etc.). With the UUT, the relationship of the cost to the benefit is tenuous at the best.
3. A notice and public hearing process is required and, if a majority of homeowners do not protest, sewer fees can be enacted by a majority vote of the City Council. This method provides greater flexibility in the administration of the fee, e.g., reducing or suspending the fee if the city receives a significant settlement from pending insurance litigation.
4. The sewer fee would appear on the property tax bill; any questions regarding tax deductibility should be determined in consultation with one's tax advisor.

Costs of new proposals:

1. According to staff estimates of 2003-04 revenues from a 10% UUT, and assuming about 5,000 households, the cost per average household would be $521. Under the proposed methods described above, sewer fees are estimated to be $300 per average household and the non-sewer UUT $130.25 per average household. This totals $430.25, more than a 17% reduction in cost to the average household.

Other issues:

1. Public buildings, including schools, libraries, churches and city-owned property should be exempt.
2. A standby sewer fee for vacant land should be enacted.
3. Both the sewer fee and utility users tax are recommended for an initial 10-year duration.

Future Actions

The next step is to submit this report to the City Council for general approval of the fund raising suggestions. The utility users tax would be submitted to the voters for approval at the March 4, 2003, General Municipal Election. An assessment engineer will have to be retained to work out the details of the property-related fee, including the standby fee, which could be concluded by the end of May 2003. The committee will be happy to work with the assessment engineer, receive his suggestions and make further recommendations to the City Council.

The committee members express their sincere thanks to the city staff, especially to Jim Hendrickson, Judy Smith and Allan Rigg, for their considerable effort in preparing material to be reviewed and also answering further questions and doing further research as requested by the committee. Their cheerful and ready assistance was of considerable help and made our task much easier.

Respectfully submitted,

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Cathy L. Allen
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Ronald W. Jones, Chair

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Donald M. Culler

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Edmund A. Mennis

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Les Fishman

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Joan M. Paulikas

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Myron A. Friedman

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Marilyn Prindle

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Ruth Gralow

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Joseph P. Sanford