TO: MAYOR AND CITY COUNCIL
CITIZENS FINANCIAL ADVISORY COMMITTEE

FROM: JAMES B. HENDRICKSON, CITY MANAGER

SUBJECT: UTILITY USERS’ TAX – ENACTMENT OF MEASURE AND USES OF FUNDS

DATE: DECEMBER 1, 2001

The Utility Users’ Tax was enacted by the City Council in April 1983 to take effect May 1, 1983. It was established as a 10% surcharge on the monthly bills for: intra state telephone communication service, electricity charges, natural gas charges, water service and cable television service. At that time, it was stipulated that the tax would sunset on June 30, 1993.

The impetus for the measure was the tremendous exposure and liability the City faced with the Bluff Cove landslide that occurred in the El Nino winter, 1982-83. The City utilized corrugated metal pipes (which punched through the middle of the hillside) to drain water flowing from the interior of the City. Due to California’s joint and several liability laws, the City, as the only "deep pocket", was held culpable for payment of 100% of the loss of value to 12 properties in the Bluff Cove area. Had the City invested $820,000 in a concrete storm drainpipe (which it subsequently did) that drained the water to outlet at the mean high tide line, it could have averted $17,189,450 of costs which it, and its insurers, paid in the ensuing 15 years.

What the Council did was enact the 10% UUT to serve as a source of funds to replace all CMP drains on the bluffs throughout the City. Concurrent with the enactment of the tax, the Council adopted a Resolution (#1043) (Exhibit 1) which established that the City Manager set, aside, "a sum not less than $1,200,000 (each year) to improve and repair streets and storm drains, until all such repairs are completed." In addition, it required an annual report detailing all expenditures on streets and storm drain installation, repair and maintenance since the tax was first enacted, the revenues received since the inception of the tax, and streets and storm drains yet to be completed (along with anticipated costs).

Based upon an assessment of storm drain reconstruction projects and street rehabilitation needs that were yet to be accomplished (and critical to undertake), the City Council voted unanimously in June 1990 to extend the UUT an additional 10 years – to expire June 30, 2003. (Exhibit 2)

Exhibit 3 depicts the UUT revenue received and transferred to the Capital Improvement Fund (and "other revenue") from FY 1983-84 through FY 2000-01. It also shows the total expenditures each fiscal year broken down into 4 major categories – Storm Drains, Streets, Bluff Cove Settlements/Judgements, and Other Projects.

In the 18 year period, the City has transferred $29.6 million of UUT from the General Fund to the Capital Improvement Fund. The revenues have been derived from the following sources…..

Exhibit 4 provides some interesting information on the Utility Users Tax…..

• Utility Tax revenues have doubled from $1,183,275 in FY 83-84 to $2,403,285 in FY 00-01. This amounts to an average annual increase of 4.4%.
• UUT revenue as a percentage of total City revenues has remained a fairly constant 16%-18% over the 18 years. Thus, total City revenues have increased at about the same average annual rate as UUT revenues.
• Cable TV taxes have grown by far the most of any of the 5 components of the UUT in the 18 year period – 1,833.6%. In FY 83-84, Cable TV represented 1.2% of total revenues; in 00-01, it represented 11.0%. It must be pointed out that the significant growth in Cable TV is attributable to the expanded penetration of service after 1989, and the increased array of services afforded in the past couple of years. The lowest growth rate of any of the 5 components was recorded for telephone revenues – 64.3%.
• The average household payment of UUT has doubled from $241.09 in FY 83-84 to $481.33 in FY 00-01. The CPI has increased 65.7% in this 18 year period. (The average household payment is derived by taking the total UUT and dividing it by the number of households in 1990 and in 2000. Smaller-size households will actually pay a lessor amount and larger-size households a greater amount. Three of the five utilities – water, gas, electricity – upon which the UUT is collected are directly related to the size of the home and a family. In this sense, it is a progressive tax).
• When we remove Cable TV revenues from the mix, we find that the average household payment of UUT has risen 77.7% from FY 83-84 to FY 00-01. This is not much higher than the CPI growth in that time period.

Beginning in FY 91-92, an amount equivalent to 100% of the UUT was transferred from the General Fund to the Capital Fund. This practice has continued to the present. Prior to that, portions were retained in the General Fund to defray on-going operating expenses.

Through FY 2000-01, the City has expended $29.2 million from the Capital Improvement Fund. This is broken down as follows…..

1. Storm Drains

As indicated earlier, the Bluff Cove slides activated the Council to adopt the 10% Utility users’ Tax in 1983 and dedicate the bulk of the monies to rebuilding the storm drain system. The City concentrated the monies on bluff-top drains that traversed private property. The result is that the City has suffered no other additional "Bluff Coves".

In March 1991, the City sustained significant damage from some extraordinary rains in a concentrated period of time. This heightened the need to incorporate the upgrade of interior storm drains into the overall program. In 1993, the Council adopted a Ten Year Master Storm Drain Plan that prioritized City drains for upgrade and replacement based on a rating scale which considered: (a) flow/capacity ratios, (b) recorded drainage concerns, (c) maintenance impact, and (d) damage to private property. Most of the drains that emerged at the top of the list were interior drains. The Plan was based on dedicating an average $1.2 million per year of UUT to accomplish the projects.

Five years later, the City commissioned an update to the Master Storm Drain Plan which re-examined the priorities of the remaining, unconstructed drains identified in the original report, updated the design/construction costs for these drains, and included an analysis (priority and cost) of several newly identified trouble areas. The revised plan was adopted by the Council in September 1998. It also increased the UUT allocation to the storm drain rebuilding program to $1.4 million per year.

The Master Storm Drain Plan has served as the blueprint for the City’s annual Capital Improvement Program for storm drains. In the 18 year period (1983-2001), the City has completed 36 discrete storm drain projects at a total cost of $13.5 million.

2. Street Improvements

Likewise, the City commissioned the preparation of a Pavement Management System in FY 95-96 with the intent of accomplishing the following…..

• A complete field inventory of all City streets, which recorded data for street dimensions, as well as street conditions.
• A determination of the rehabilitation needs for each street based on the physical condition.
• A prioritization of each street rehabilitation program based on the traffic volume on the street, the construction cost of the recommended improvement, and the amount of added life achieved by the improvement to each street.

The Council adopted the report in June 1996, and elevated the allocation of monies to street improvement projects from $310,000 to $420,000 per year. This has been increased annually to the point where we are now funding the program to the tune of $621,000 in FY 2001-02 (which includes an alley reconstruction component). This permits us to slurry seal every street in the City on a regular 7 years cycle, and address major street reconstruction needs in a timely fashion. It should be pointed out that such a program is an aberration among California cities. Few have anywhere near the resources that PVE does to upgrade their streets on a regular basis. By way of example, the City of Fresno is on a ~100 year cycle for street repairs; and the City of San Clemente has no monies to re-pave residential streets.

Over the 18 year period, PVE has expended $7.6 million on City street improvement projects.

3. Bluff Cove Settlements/Judgements

Since 1983, the City has expended $5.9 million of UUT to pay for the cost of a series of settlements and judgements related to the 12 Bluff Cove properties. In this time period, $868,000 has been returned to the Capital Improvement Fund as partial settlements for insurance recovery cases initiated by the City (with an additional $645,000 remitted to the Insurance Fund and $470,000 to the General Fund). More money should be forthcoming in the future.

4. Other Projects

This category includes such disparate items as Palos Verdes Beach and Athletic Club capital costs, Stable improvements (white barn and brown barn) parklands improvements and Neptune Fountain refurbishment, among others. These projects have consumed $2.2 million of the Capital Improvement Funds.

The City is a member of the California Joint Powers Insurance Authority, which is comprised of 84 California public entities. The Authority exists to arrange and administer programs for the pooling of self-insured losses, to purchase excess insurance or reinsurance, and to arrange for group-pooled insurance for property and other coverages. For general liability coverage, each member pays a primary deposit to cover estimated costs for a fiscal year (claims year). Six months after the close of a fiscal year, outstanding claims are valued. A retrospective deposit computation is then made for each open claims year.

Exhibit 5 traces the City’s costs from FY 1989-90 through FY 2000-01. Due to some heavy, intensive storms in the early 1990’s, and a storm drain system that was undersized and inadequate, the City was required to pay some costly claims to property owners. The so-called "high water mark" was FY 95-96, when the City’s net payment to the CJPIA amounted to $517,374.

However, we can see the dramatic effect of the storm drain rebuilding and refurbishment program that the City was undertaking in these years. Our annual payments to the CJPIA declined precipitously to a "low water mark" of $65,698 in FY 1999-00. Despite the heavy, sustained rains in the El Nino year of 1997-98, the City only experienced minor damage in 3 isolated areas of the City.

In the 5 years since FY 95-96, the City has saved an average of $386,400 per year in its payment to the CJPIA. This translates to overall savings of, $1,932,154! And this is apart from the human and emotional toll that is suffered by those who incur the storm damage.

This review attests to the truth of the old adage that "An ounce of prevention is worth a pound of cure." The City’s investment in the rebuilding of its storm drain system has had a dramatic and tangible effect on the well-being of its citizens.

This paper is intended to serve as a backdrop for the renewal of the Utility Users’ Tax, which will be scheduled for the General Municipal Election in March 2003. An important consideration in any request for renewal is an assessment of how well the City performed with the monies it was previously allocated.

It is fairly evident from this review that the City accomplished a tremendous amount in the 18 fiscal years that have passed since the enactment of the tax…..

• City has expended $21.2 million during this time period to improve and repair streets and storm drains throughout the City. This constitutes 72.4% of the UUT monies spent from the Capital Improvement Fund.
• Completed 36 discrete storm drain projects.
• Presently allocating sufficient funds each year to the street improvement program such that at the end of the 10 year period, all City streets will be rated "good" to "excellent".
• Paid all judgement and settlements for the 12 Bluff Cove properties. We are presently in the insurance recovery phase of the litigation and have already been remitted $1,983,000, with more to come.
• Realized savings of $1,781,100 over the past 5 years in our contributions to the California Joint Powers Insurance Authority, as a result of refurbishing and rebuilding the storm drain system. This is an average savings of $356,200 per year.
• Plan to construct 15 additional storm drains in FY 01-02 and FY 02-03 with UUT monies.

Once the Sewer Master Plan is completed, we will return to you with a second report delineating the City’s capital needs beyond the date of expiration of the Utility Users’ Tax (6-30-03). We will compare our storm drain, street and sewer needs to the funds that are likely to be derived from different levels of the Utility Users’ Tax.

JBH:s

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