TO: MAYOR AND CITY COUNCIL
CITIZENS’ FINANCIAL ADVISORY COMMITTEE

FROM: JAMES B. HENDRICKSON, CITY MANAGER

SUBJECT: RESOURCES AVAILABLE TO FUND CAPITAL IMPROVEMENT PROJECT NEEDS

DATE: MAY 21, 2002

In two separate discussion papers, we have provided (1) a retrospective on capital improvement projects undertaken since 1983; and (2) a listing of capital improvement needs in the City over the next 10 to 20 years. This paper will identify and discuss four potential sources of funds to finance these needs.

Utility Users Tax

As articulated in the "Utility Users Tax – Enactment of Measure and Uses of Funds", the Utility Users Tax has been the bulwark of the City’s capital improvement building program over the past 19 years. The UUT has been augmented, to some extent, by grant funds from the federal, State and County governments for very specific projects. However, these are not a continuing, nor predictable, source of money. The enclosed chart (Attachment 1) details actual Utility User Tax receipts from FY 94-95 through FY 02-03 (budgeted). Some observations on the trends…..

• From 94-95 to 99-00, total revenue only increased an average 2% per year. In a couple of years, it actually declined. The largest increase was 6.18%.
• Significant jump in revenue of 12.45% in 00-01. This coincides with the onset of the energy crisis in California. A lion’s share of the increase was in natural gas revenues ($200,000+). Interestingly, electric revenues actually declined due to the rate cap on what Southern California Edison could charge its customers for electricity.
• In 01-02, revenue is expected to grow 7.0%. There is a reversal in the source of the increase from the prior year. Significant growth in electric revenues ($181,800) and telephone receipts ($95,000), while gas revenues show a precipitous decline (~$159,000). Decrease primarily attributable to considerable drop in natural gas prices, and secondarily to energy conservation efforts by consumers; and the spike in electric revenues is due to substantial rate increases approved by PUC in May 2001.
• In 02-03, we anticipate a leveling-off in UUT receipts – slight 2% decline to $2,525,850. While we expect modest increases in gas and water receipts, we expect a slight downturn in electric revenues due to energy conservation.

Based on the revenues budgeted for FY 02-03, each 1% of the Utility Users Tax brings in $252,600 of revenue over the course of the year. In that the tax is scheduled to expire June 30, 2003, no monies are budgeted in FY 03-04.

General Fund Resources

A second potential source of monies for capital improvement projects would be general fund revenues generated in "excess" of general fund expenditures. During the recession in the early-to-mid 1990’s, and the seizure of local property taxes by the State to fund its obligations for education, the City instituted several cost-saving measures in the Operating Budget to lower our expenditures to meet our revenues. With the economic recovery in the late 1990’s, our revenues increased significantly – translating to some very positive results in our fund balance.

As shown on Attachment 2, between FY 97-98 and FY 01-02 (est.), general fund revenues exceeded general fund expenditures by an average $1,245,000 per year. In May 1999, the City Council adopted a policy that we should seek to establish an unobligated General Fund balance equal to 25% of the Annual Operating Budget expenditures (Attachment 3). This would serve as a prudent "reserve for economic uncertainties". Any balance in excess of the targeted amount would be transferred to the Capital Improvement Fund. As a result, $700,000 was transferred to the CIF in FY 98-99 and an additional $1,238,000 in FY 99-00 – a total of $1,938,000.

In May 2001, the Council re-visited this policy and concluded that based on the uncertain economic situation, and the reserve policies of our neighboring cities, it would elevate the targeted reserve to 50% of the Annual Operating Budget. We expect that this goal will be met by the end of the two-year budget cycle – June 30, 2004.

Regrettably, it is difficult to project, with any degree of certainty, what looms in the future for General Fund revenues. There are a number of factors over which we have little control. We are intimately connected to the overall level of economic activity in the nation, the state, and the region. Approximately 45% of our General Fund revenues (exclusive of the UUT) are derived from property taxes. These are dramatically affected by the health of the Southland economy and the activity in the housing market, both of which are closely tied to national and international factors.

By far the most volatile and unpredictable element impacting our budget in FY 02-03 is the State of California budget situation. We, as all cities, are inextricably linked to their fiscal situation. The State now projects a deficit of $23.6 billion in FY 02-03 (a revenue shortfall of ~30% of projected general fund revenues). The last time the State faced such a tremendous gap (in the early 1990’s), they seized a large portion of local government property taxes to fund their obligations for education. Today, that shift is costing the City of Palos Verdes Estates $750,750 on an annual basis. It took us 7 years to meet or exceed the property taxes we received prior to that action.

Presently, the revenue most at-risk for cities and counties is Motor Vehicle In-Lieu Fees. This amounts to $3.7 billion statewide. It is the second, single largest source of General Fund revenue for Palos Verdes Estates (next to property taxes). We face the potential loss of approximately $500,000 – which represents 6.7% of our General Fund revenues. Fortunately, the Governor’s recommendations to close the gap do not propose the discontinuance of this critical source of revenue.

As of this writing, we still do not know how the State will ultimately balance its budget. We have received several assurances from the Governor, our local legislators and other key committee members, that the State will not "balance its budget on the backs of cities". But we have received similar assurances in the past, and still suffered significant budgetary impacts. It may take some time to fully sort the situation out.

The State has utilized every device and gimmick it can think of (including proposed tax increases) to make ends meet for the current fiscal year. Governor Davis’s plan closes $7.775 billion of this gap through fund shifts, loans, accelerations and deferrals, and another $4.5 billion by borrowing against the State’s future receipts of tobacco settlement money. Even if these "one-time" measures work this year, the State must address some long-term structural impacts on the revenue side of the equation. Due to the implosion of the dot com industry, the windfalls they have received in the past few years from the exercise of stock options and capital gains cannot be anticipated in the future. As a result, most State legislators expect the fiscal situation in FY 03-04 to be far more difficult to address than in the current year. This will surely have dramatic consequences for cities and counties.

The City Council has adopted a Two-Year Budget for FY 02-03 and FY 03-04. Assuming that the State does not take away our MVL monies or other subventions, we anticipate an excess of $697,600 of General Fund revenues over expenditures in the upcoming year. In FY 03-04, we project an excess of $490,700. However, this must all be considered in the context of the highly unpredictable State budget situation.

It should be noted that the City Council does have some authority to increase the rates for some General Fund revenues, but this is very limited. The major revenue sources are dictated by state law, the Government Code, or some other means that is beyond the authority of the Council. The ones that can be altered, and the amount of revenue derived in FY 2001-02, are the following…..

• Parking Fines ($80,000)
• False Alarm Fees ($8,000)
• Dog Licenses ($13,000)
• Film Permits ($6,000)

It is evident that only a nominal dollar amount can be gleaned from tapping these sources. The City also receives $655,100 in Concession Fees from City Clubs – but most have long-term Concession Agreements. In addition, we derive ~$220,000 a year from business licenses. Any increase in these rates requires voter approval under Proposition 218.

Gasoline Tax Monies

The State of California charges an 18¢ per gallon tax on the consumption of motor vehicle and aircraft fuel. The City is allocated a portion of these funds under 3 different formulas (Section 2105, 2106 and 2107/2107.5). It is, most generally, a per capita formula. Gasoline tax monies are restricted as to use – for the repair, maintenance and upkeep of City streets and roads (with a small amount allocated for engineering and administration costs).

For the past several years, the City has received slightly in excess of $300,00 per year. We expend slightly less than $300,000 a year to support the Street Maintenance Division budget. These funds cover ~70% of the annual Street Maintenance budget. The gas tax fund balance has grown incrementally each year to the point it is projected to total about $500,400 as of June 30, 2004.

In November 2002, the California voters approved Proposition 42, which earmarks the sales tax on gasoline purchases exclusively for transportation purposes. A portion of these monies will be remitted on a per capita basis to cities and counties to repair, improve and maintain the roads. This is "new money" to the City which is not programmed for any use. It would be available to fund street capital improvement projects in the next several years. Attachment 4 outlines the amount of money the City of Palos Verdes Estates is expected to receive in the next 25 years…..

2003-2008: $170,140 (total)
2008-2028: $3,406,911 (averages $170,345 per year)

Capital Improvement Fund Balance

Attachment 5 details the capital improvement projects budgeted for FY 02-03 and FY 04, broken down by the several categories: City Property, Streets, Sewers and Storm Drains, and Parklands. All the major storm drain projects identified in the Ten Year Master Storm Drain Plan are funded through FY 03-04. The only item not included is the Lunada Bay Channel Drain Project, which is discussed separately in the Capital Improvement "Needs" Paper. $821,200 of various street improvement projects (traffic calming, slurry seal, alley reconstruction, annual overlay project, curb and gutter improvements) are budgeted in FY 03-04, as well.

We project an ending balance in the Capital Improvement fund of slightly more than $2.0 million as of June 30, 2004. Interestingly, this number is quite close to the $1,938,000 of "excess’ General Fund Revenues transferred to the Capital Fund in FY 98-99 and FY 99-00.

JBH:s
Attachments