February 19, 2008
City Council Meeting: February 12, 2008
Agenda Item: 8-B
To: Mayor and City Council
From:
Subject: Five Year Financial Forecast, Public
Comment on Budget Priorities Including Comments on Community Development Block
Grant and Home Investment Partnership Act (HOME) Programs and Discussion of
Community Priorities for FY2008-09 Budget Development.
Recommended
Action
Staff
recommends that City Council:
1) receive the FY2008-09 through FY2012-2013
Five Year Financial Forecast as background for development of the FY2008-09
budget;
2) receive public comments on FY2008-09 budget
priorities, including Community Development Block Grant (CDBG) and Home
Investment Partnership Act (HOME) program funds; and
3) based on this information provide staff with
direction on Community Priorities to guide the development of the FY2008-09
budget and FY2009-10 budget plan.
Executive
Summary
This report provides an update on the
current status of the economy and its potential impact on budget revenues;
presents a forecast of revenues and expenditures for the major City funds; and
provides an update on work efforts to the key Community Priorities for the
current year. The report requests that
Council receive public comments on community budget priorities and provide direction
to staff regarding Council recommendations on budget development for FY2008-09.
The economy has been giving mixed signals
for the past few months which have not been encouraging and even characterized
as “unstable” worldwide. The economic
uncertainty creates difficulties in revenue planning for the future. For this year’s Five Year Financial Forecast,
staff has projected three revenue scenarios.
The Baseline Scenario assumptions are detailed later in the report and
are the best estimates of expected revenues.
It would be considered the “most likely” scenario. The “Worst” Case Scenario projects a
recession and its impacts on Property, Sales, Business License, Transient
Occupancy and Parking Facility taxes along with a loss of Utility User Tax revenue
due to telecommunication changes. The
“Best” Case Scenario assumes very little economic downturn impact and increases
Sales, Property and Business License taxes above Baseline along with the
impacts of a new fee study in FY2011-12.
On the expenditure side, the Baseline and “Worst” Case include annual
labor increases of 4% while the “Best” Case reduces the labor increase in years
FY2009-10 through FY2012-13 at 3% consistent with the average estimated
Consumer Price Index for
The Five Year Financial Forecast for the
General Fund continues to reveal revenues growing at a slower rate than
expenditures. Under the assumptions in
the Baseline Scenario, the City can balance its budget in FY2008-09, but for
the next four years the budget deficit grows from $3.6 million to $16.4 million. It is important to note that the Baseline
Scenario does not factor in labor costs above cost-of-living increases,
additional positions, or revenue reductions from a loss of Utility Users Tax. As was stated last year, additional growth in
programs, enhanced labor benefits, more funding for deferred maintenance and
replacement of basic infrastructure will require additional resources. Other funds are also briefly presented and
also show structural imbalances in their forecasts. As always with limited resources, priorities
for funding will need to be made during the budget process.
To begin the prioritization, community
priorities have been sought over the past four months from community meetings,
e-mails to budget@smgov.net
and comments from City boards and commissions.
The majority of comments received to date, identified issues of concern
as:
- Mobility
- Public Safety and Violence Prevention
- Livable neighborhoods
Discussion
Economic Update
National and State
Economies
Economists are predicting the national
economy to continue its slowdown over the next six to twelve months with a 42%
chance of recession. Impacting the
economy at all economic levels is the fallout of the sub-prime mortgage problem. The housing market is in one of its deepest
slumps ever. Existing home sales in
December were down 13% from a year earlier with the median price dropping 6%,
the largest year-to-year drop on record.
December housing starts were down 38% from a year earlier. In addition, the national unemployment rate
unexpectedly rose to 5.0% in December and is projected to increase slightly in
2008 and 2009 and the Index of Leading Economic Indicators declined in November
for the seventh time in the last eleven months.
The decline for the last six months is 1.2%, the first reading greater
than 1% since the 2001 recession. A
decrease of 1% is often an indicator that a recession is two quarters away.
Inflation has been increasing recently due to higher energy prices
although “core inflation”, excluding food and energy, has moderated to a rate
acceptable to the Federal Reserve Board (FED).
The December 2007 UCLA Anderson Forecast projected that the annualized
growth rate of Real Gross Domestic Product (GDP) for the fourth quarter 2007
and first quarter 2008 will be below 1% before recovering slightly to a 1.9%
average rate for all of 2008. This forecast was released prior to the release
of December economic statistics and recent forecasts by a number of economists
are more pessimistic. Consumer spending,
which accounts for almost 70% of total GDP, is showing signs of weakness,
although still growing. Over the past
six months actions by the FED to stimulate the economy have lowered the yield
on 2-year Treasury notes by 2%. However,
the economy continues to suffer and further FED action is expected.
The economic outlook for
Santa Monica Economy
Within this context, the City's economy is
expected to be weaker over the forecast period than in the last few years. Historically,
Construction activity as measured by
building permit revenue is down due to fewer permits being issued and smaller
total valuation of permits issued. Sales
tax revenue have been flattening in recent quarters reflecting a decline in new
vehicle sales and leases, which make up almost 22% of Santa Monica’s sales tax
receipts. New auto sales for the quarter
ended September 30, 2007 were down 12.7% from the same quarter a year ago,
following national auto sales trends.
Retail sales activities will also be negatively impacted during the
remodel of
Five Year Forecast of Major Funds
Each year staff projects the status of the City’s major funds
for the five year period into the future, with a primary focus on the General
Fund. The projections update the status
of the available fund balances at the end of last fiscal year (6/30/2007),
review current revenue received to date (FY2007-08), update economic forecast
information, project revenue growth, identify expenditure growth assumptions
and project expenditure growth. These
forecasts set the stage for the development of the budgets for next year.
The assumptions used in preparing the FY2007-08 through
2012-13 Five Year Forecast reflect a review of information concerning the
national, state, regional, and local economies.
A number of respected sources of data were used including the UCLA
Graduate School of Management, the Los Angeles Economic Development Corporation
(LAEDC), chief economists of several different financial institutions, and
various consulting firms.
General Fund
This
year three scenarios are prepared based on staff’s assessment of Baseline (most
likely revenue case with conservative expenditure case), Best Case (minimal
recession and UUT impact with a modified expenditure case of tamed inflation)
and Worst Case (all recession and UUT impact with conservative expenditure
case).
For details in the development of the three scenarios, please
see the Attachment A.
BUDGET GAPS
With the revenue projections plus available balance sheet
resources and the expenditure projections, the City financial forecast shows a
structural deficit in both the baseline and worst case scenarios. A structural deficit is defined as a budget where
ongoing revenues are not sufficient to cover ongoing expenditures at current
service levels.
The baseline scenario shows a General Fund deficit beginning
in FY2009-10 of $3.7 million and growing to $16.4 million in the fifth year of
the Forecast.
·
Slower revenue growth ·
·
Two new hotels ·
Maintenance of UUT on telecomm ·
4% CPI on labor costs ·
CPI on Supplies & Expenses ·
No additional positions
The worst case scenario shows a General Fund structural
deficit of $8.0 million beginning next fiscal year (FY2008-09) due to the
reduced revenue projections identified above.
This deficit grows to $32.6 million in the fifth year.
·
Recession impact on most revenues ·
Loss of UUT on telecomm ·
4% CPI on labor costs ·
CPI on Supplies and Expenses
The “Best” Case Scenario, which projects a rosier revenue
outlook and lower labor projections, is essentially balanced throughout the
full five year period. This is by far
the least likely of all scenarios since it assumes that the economic downturn
will not impact
·
No recession impact ·
Maintaining UUT on telecomm ·
Higher ·
3% CPI on labor costs after 07/08 ·
CPI on Supplies and Expenses
Other Funds
Other major funds that are reviewed during the Five Year
Forecast fall into three categories:
·
o
Airport
/ Special Aviation
o
Big
Blue Bus
o
o
Wastewater
o
Water
·
o
Cemetery
o
Civic
Auditorium
o
Pier
·
Special Revenue Funds where fund are restricted for specific
purposes
o
Beach
o
Housing
Authority
For these funds, only one expenditure
scenario is developed which is the baseline forecast where labor costs are
increased from the FY2008-09 Budget Plan year at 4% per year beginning in
FY2009-10. In general, fee and utility
rate revenues are assumed to increase at CPI.
Where funds show a structural deficit, higher fee and rate increases are
proposed as alternatives. In summary,
the funds status is:
NON-SUBSIDIZED
Airport –
During the five year forecast period, the fund maintains a positive fund
balance; however, only minimal capital expenditures are assumed and no
re-payments to the General Fund are assumed on loans totaling $9.5 million until
2015 when rental rates on lease contracts are due for renewal and can be
adjusted to market rate. Recent loans to
the Airport fund include $2.4 million for capital expenditures in FY2004-05 and
$250,000 this year for litigation costs related to airport operating issues
with the Federal Aviation Administration.
Big Blue Bus – The forecasting of the status of the Big
Blue Bus Fund is different from other funds in that funds available to the Big
Blue Bus (BBB) are not always held by the City but are available from the Los
Angeles Metropolitan County Transportation Authority (MTA) in the form of grant
subsidy funds per the formula share allocated by the MTA to BBB. Annual allocations of funds not spent in the
year of allocation are available up to two years later for use by the transit
system. The majority of the subsidy
funds, including State transit Assistance Fund (STA), Transportation
Development Act funds (TDA), Proposition A and Proposition C are sales tax
based and grow by the sales tax growth rate of the
A structural
operating deficit still exists for the BBB and unless a fare increase is
adopted, the Big Blue Bus will be required to use available prior year subsidy
funds in FY2008-09 ($1.0) and FY2009-10 ($2.6). In future years the forecast
shows insufficient revenues to cover expenditures. BBB anticipates proposing to Council a fare
increase for FY2008-09. A study is
currently being conducted to assess operational efficiencies and financial
capacity of the organization.
In November,
Council authorized the City to take control of all commercial collections,
beginning January 2009. Staff has also
been reviewing options for a public-private partnership regarding transfer
station operations. These changes are
not included currently n the baseline forecast, but will impact the forecasted
fund balance and future rate changes. An
updated fund balance forecast will be presented to Council in the next few
months as a new public-private partnership for the transfer station is
implemented.
Water Fund – Under a baseline scenario where rates
increase at CPI, the fund in FY2009-10 will use almost $900,000 of the $1.0
million Rate Stabilization Reserve to fund operations. By FY2010-11, all reserves are depleted
(operating, rate stabilization and capital) with a total fund deficit of $0.8
million growing to $9.6 million with no reserve funds. Based on this analysis, rate increases above
CPI are required.
The baseline forecast
does not consider any impacts of a new Water Master Plan, which is expected to
be developed over the next several months.
The Water Fund is undergoing a rate study to evaluate the fund’s ability
to sustain services. It is anticipated
that rate recommendations, along with more detailed financial information, will
be presented to City Council in February with implementation of changes prior
to the end of the fiscal year.
Wastewater Fund – The baseline scenario reflects a fund
deficit in the current fiscal year of 6.0 million growing to $46.4 million in
FY2012-13. However, the fund has fronted
$6.5 million in earthquake related construction funds that are anticipated to
be reimbursed by FEMA by FY2009-10. If
these funds were loaned by another fund, the Wastewater Fund will end the
fiscal year on a more positive note.
Staff is studying other factors that could improve the fund position,
but these are not included in the baseline scenario. These options, along with proposed rate
increases will be presented to City Council in February for consideration.
SUBSIDIZED
Cemetery Fund – Under the baseline scenario, subsidies
from the General Fund to the Cemetery Fund are necessary throughout the five
year forecast period. FY2008-09 requires
$0.3 million growing to $0.6 million in FY2012-13.
Over the past
two years, staff has pursued several measures to improve the maintenance and
operations of the Cemetery and a Business Plan is currently in the final stages
of completion. It is anticipated that
the Plan will call for expansion capacity on the Cemetery property requiring
additional capital investments which will over time return higher revenues to
the Fund. Financing options will be
included in the Business Plan.
Civic Auditorium – The Civic Auditorium requires an ongoing
annual General Fund subsidy of $0.7 million in FY2008-09 and from $1.5 to 1.6
million in FY2009-10 through FY2012-13.
This baseline forecast does not include major infrastructure
improvements, which would increase the subsidy.
Pier Fund – The Pier Fund generates approximately $3.2 million in revenue and has
operating expenses of $4.2 million for FY2007-08. The structural deficit requires a General
Fund subsidy for the Fund to remain in balance.
The subsidies required annually are $1.1 million in FY2008-09 growing to
$1.6 million in FY2012-13. As with the
Civic Auditorium Fund, the Pier Fund baseline forecast does not include major
infrastructure improvements. CIP needs
have been identified as $5.3 million in FY2008-09 for infrastructure
improvements with $3.0 million annually thereafter for ongoing maintenance and
capital programs.
Housing Authority Fund – This year, the Five Year Financial
Forecast indicates the Housing Authority for the first time will require subsidy
funds in order to maintain the same level of service currently provided. Declining Federal subsidies have reduced the
funding below the level needed to administer the City’s housing programs. The subsidies required annually are $0.2
million in FY2008-09 growing to $0.5 million in FY20012-13.
SPECIAL REVENUE FUNDS
Beach Fund – A baseline scenario for the Beach Fund
where the Annenberg Community Beach House operating expenditures are
incorporated into the budget in FY2009-10 shows a need for Beach Fund subsidies
of $0.2 m in FY2010-11 growing to $2.0 million in FY2012-13. This scenario does not include any
Each of these funds will be updated and
further addressed during the development, presentations and discussions on the
FY2008-09 budget.
Community Priorities
Update on FY2007/08 Community Priorities
Work Plan
With the adoption
of the FY2007-08 budget, Council identified three areas of special work plan
focus for this year’s budget including:
Homelessness, Land Use and Circulation Element Update and Youth. In addition, overall Community Priorities
are: Culture, Sustainability, Education, Customer Service, Capital Needs &
Infrastructure and Recreation & Active Living
Attachment
A, identifies work plan accomplishments to date on Community Priorities for
FY2007-08. In addition to these, this
year staff has identified two other areas of priority and focus: maintaining
financial stability and ensuring adequate resources to meet workload and
service demands.
Council had
requested that staff provide information at the time of the mid-year budget
review on available youth employment services and investigate options for
expanding these opportunities. The results of this assessment are
transmitted to Council in a separate Information Item. The report provides a
menu of options for employing youth ages 14-24 for consideration. Given the
cost implications of the options, staff would need to evaluate them in the
context of planning next year’s budget, considering the availability of
resources and priority of other community needs.
Community Outreach for FY2008-09 Budget Priorities
During the
months of November, December, and January five neighborhood meetings were
cosponsored by the City Manager’s Office and the five active neighborhood
associations. The meetings conducted
throughout
Comments
received at the meetings through discussion and on comment cards, through
e-mail to the budget e-mail address (budget@smgov.net) or City Manager’s e-mail
box, and postal mail (Attachment C) can be categorized into the following major
areas:
Mobility
Mobility issues continue to be of major concern among residents.
Residents expressed frustration with traffic and described the difficulty of
getting around and through the City. While acknowledging that longer-term
solutions are in progress, residents expressed a need for more immediate
actions. Improved enforcement of traffic
laws and additional left turn lanes were suggested as methods to improve
traffic in
Community members agreed that a balanced approach to parking is needed;
one that gives residents and visitors equal consideration. Many agreed on the need to encourage the use
of alternative transportation to help alleviate traffic and decrease parking
demands.
Many suggested that the City improve crosswalks to increase pedestrian
visibility, increase the number of flashing smart crosswalks, increase the
length of time provided for pedestrian to clear crosswalk before signal
changes, and assess the use of diagonal crosswalks to avoid pedestrian and
vehicle conflicts.
Public Safety and Violence Prevention
Another message was the concern for public safety. Some requested
improved communication between the Police Department and residents, increased
police presence in neighborhoods, and continued efforts to combat youth
violence. Residents were receptive to
the new policing strategy and the desire to create improved partnerships
between the community and the Police Department.
As the number of bicycle riders increases, community members expressed
the needs for more innovative ways to ensure bicyclist safety (i.e. bike only
streets, bike pathways along congested streets, improved bike lanes &
signage) and enforcement to ensure that bicycle riders are stopping at stop
signs and obeying all traffic laws.
Livable Neighborhoods
Street Lighting, Underground Utilities,
Neighborhood Aesthetics,
Some residents expressed concern that their neighborhoods are too dark at
night and need additional neighborhood lights. Community residents felt that improved street lighting would deter crime
and improve pedestrian and bicycle safety. A few residents recommended
that utility lines should be placed underground and recommended formation of
assessment districts to identify and fund those projects or identify the most
opportune time to move forward on these projects based on other infrastructure
improvements. Residents expressed their desire that neighborhood improvements
be aesthetically pleasing. Community
members expressed concern over the community forest and the proposed removal of
the ficus trees on 2nd and 4th Streets.
More
detailed summaries of each Community Meeting are included in Attachment C, as
well as letters from the City’s Commissions and Boards. In addition, public
comments will be received tonight.
Financial Impacts & Budget Actions
There is no immediate budget impact as a
result of receiving the information provided tonight. Direction provided by City Council based on
information in this staff report and public input received during the Council
meetings will assist in determining the direction to be taken in deciding
budget recommendations for FY2008-09.
Prepared by:
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Approved: |
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Forwarded
to Council: |
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Director of
Finance |
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P. City Manager |