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HomeMy WebLinkAbout9-22-22 REOC Agenda PacketCity of San Luis Obispo, Agenda, Planning Commission Agenda REVENUE ENHANCEMENT OVERSIGHT COMMISSION Thursday, September 22, 2022 5:30 p.m. REGULAR MEETING Council Hearing 990 Palm Street San Luis Obispo, CA CALL TO ORDER Vice-Chair Jim Hamari Administer Oath for new Commissioner, Anthony Bozzano (Teresa Purrington, City Clerk) ROLL CALL: Commissioners Christopher Ellwood, Tony Skapinsky, Keith Dunlop, and Anthony Bozzano PUBLIC COMMENT: At this time, people may address the Committee about items not on the agenda. Persons wishing to speak should come forward and state their name and address. Comments are limited to three minutes per person. Items raised at this time are generally referred to staff and, if action by the Committee is necessary, may be scheduled for a future meeting. CONSIDERATION OF MINUTES 1.Minutes of the Revenue Enhancement Oversight Commission of May 12, 2022 BUSINESS ITEMS 2.Review Purpose of the Revenue Enhancement Oversight Commission and Elect Officers (Natalie Harnett) Recommendation: Review the purpose and scope of the Revenue Enhancement Oversight Commission (REOC); and Elect a Chairperson and Vice-Chairperson to serve for a one-year term. 1 Revenue Enhancement Oversight Commission Agenda for September 22, 2022 Page 2 3. FY 2021-22 Unaudited Year End Report for the Local Revenue Measure (LRM) (Natalie Harnett) Recommendation: 1. Receive a report and review unaudited operating and capital expenditures of the Local Revenue Measure sales tax revenue for the last fiscal year. 2. Review and recommend to the City Council the proposed use of one-time Local Revenue Measure (LRM) fund balance as part of an amendment to the 2022-23 Supplemental Budget. 4. Discussion on the City’s Capital Improvement Plan and Budget Strategies (Emily Jackson) Recommendation: 1. Receive a report on the recommended approach to the budgeting and management of the Capital Improvement Plan, including: a. The structure of the Capital Improvement Plan budget and staff discretion to move funding within appropriated budget to approved projects as needed Development of policy language to clarify management of the Capital Improvement Plan; and b. Inclusion of the CIP Engineering program cost in the Capital Budget. c. The role of the Revenue Enhancement Oversight Commission in reviewing and recommending capital improvement projects to the City Council 2. Provide input and guidance to staff as necessary. COMMITTEE ANNOUNCEMENTS ADJOURNMENT The next Regular Meeting of the Revenue Enhancement Oversight Commission is tentatively scheduled for December 8, 2022. The City of San Luis Obispo wishes to make all of its public meetings accessible to the public. Upon request, this agenda will be made available in appropriate alternative formats to persons with disabilities. Any person with a disability who requires a modification or accommodation in order to participate in a meeting should direct such request to the City Clerk’s Office at (805) 781-7100 at least 48 hours before the meeting, if possible. Telecommunications Device for the Deaf (805) 781-7107. Meeting audio recordings can be found at the following web address: http://opengov.slocity.org/weblink/1/fol/61028/Row1.aspx 2 DRAFT Minutes – Revenue Enhancement Oversight Commission Meeting of Thursday, May 12, 2022 Page 1 Minutes - DRAFT REVENUE ENHANCEMENT OVERSIGHT COMMISSION Thursday, May 12, 2022 Regular Meeting of the Revenue Enhancement Oversight Commission CALL TO ORDER A Regular Meeting of the San Luis Obispo Revenue Enhancement Oversight Commission was called to order on Thursday, May 12, 2022, at 5:30 pm by Vice Chair Hamari. ROLL CALL Present: Commissioners Tony Skapinsky, Christopher Ellwood, Matt Quaglino, Keith Dunlop, Vice-Chair Jim Hamari Absent: Staff: Natalie Harnett, Principal Budget Analyst Brigitte Elke, Finance Director who also served as Recording Secretary Brian Nelson, Deputy Director of Public Works PUBLIC COMMENT ITEMS NOT ON THE AGENDA None. --End of Public Comment-- APPROVAL OF MINUTES 1. Consideration of Minutes of the Regular Revenue Enhancement Oversight Commission Meeting of March 24, 2022. ACTION: UPON MOTION BY COMMISSIONER SKAPINSKY SECONDED BY COMMISSIONER ELLWOOD, CARRIED 5-0-0, the Revenue Enhancement Oversight Commission approved the Minutes of the Regular Revenue Enhancement Oversight Commission Meeting of March 24, 2022, as presented. BUSINESS ITEMS 1. FY 2022-23 Supplemental Budget Recommendations (Natalie Harnett) Recommendation: Review and recommend to the City Council the proposed use of Local Revenue Measure funds as part of the 2022-23 Supplemental Budget. 3 DRAFT Minutes – Revenue Enhancement Oversight Commission Meeting of May 12, 2022 Page 2 Public Comment None ACTION: ACTION: UPON MOTION BY COMMISSIONER QUAGLINO, SECONDED BY COMMISIONER ELLWOOD, CARRIED 5-0-0 to recommend to the City Council the proposed use of Local Revenue Measure funds as part of the 2022-23 Supplemental Budget. COMMENT AND DISCUSSION 2. Staff Updates - none 3. Commission Communications - none ADJOURNMENT The meeting was adjourned at 6:18 p.m to the next Regular Revenue Enhancement Oversight Commission meeting scheduled for September 22, 2022, in the Council Hearing Room, 990 Palm Street, San Luis Obispo, California. APPROVED BY THE REVENUE ENHANCEMENT OVERSIGHT COMMISSION: 4 Revenue Enhancement Oversight Commission Agenda Report Meeting Date: 9/22/22 Item Number: 2 DATE: September 22, 2022 FROM: Brigitte Elke, Finance Director Prepared By: Natalie Harnett, Principal Budget Analyst SUBJECT: REVIEW PURPOSE OF THE REVENUE ENHANCEMENT OVERSIGHT COMMISSION AND ELECT OFFICERS RECOMMENDATIONS 1.Review the purpose and scope of the Revenue Enhancement Oversight Commission (REOC); and 2.Elect a Chairperson and Vice-Chairperson to serve for a one-year term. DISCUSSION Background The Citizens’ Revenue Enhancement Oversight Commission (REOC) role is to review the 1.5 percent local transaction tax revenues and applicable uses, report on the City’s stewardship of this general- purpose tax and provide recommendations directly to the City Council regarding uses of these tax revenues as an integral part of the budget process. The voter approved Ballot Measure G-20 that was approved in November 2020 stated: To protect City of San Luis Obispo’ s financial stability; maintain fire/community safety, health emergency/disaster preparedness; protect creeks from pollution; address homelessness; keep public areas clean/ safe; retain local businesses; maintain youth/senior services, streets, open space/natural areas, and other general services, by extending voter- approved funding at a 1.5¢ rate, providing approximately $21,600,000 annually until ended by voters; requiring audits/ all funds used locally. Purpose and Scope of the REOC The REOC is to consist of five members who must be residents of the City. The REOC is an advisory body to the City Council that will provide important citizen oversight of local transaction tax revenues and expenditures. The REOC will not be making final decisions on City spending. REOC meetings will be open to the public and serve as a venue for citizen engagement on revenue measure related expenditures. The REOC will also aid in community education and outreach about the level of local transaction tax revenue and the programs and projects the tax is supporting. Chapter 2.14 of the Municipal Code provides the full language of the commission’s purpose, appointment process, and assignments. REOC Bylaws The REOC bylaws contain the Commission’s purpose, and policies on conduct, membership, terms, officers, meetings, attendance, quorum, voting, subcommittees, public records and other rules and procedures (Attachment A). These bylaws state that the REOC shall select a Chairperson and Vice- Chairperson from among its members to serve for a one-year term. 5 Advisory Body Handbook September 21, 2021 City of San Luis Obispo 40 | P a g e D.Citizens' Revenue Enhancement Oversight Commission Bylaws (T/SP) MEMBERSHIP The Citizens’ Revenue Enhancement Oversight Commission (REOC) has five members. Members must be residents and registered voters of the City. When recruiting members, the City seeks members that have experience with finance, budgeting, or municipal accounting, though this is not a requirement of membership. PURPOSE REOC was established to provide transparency and maximize city accountability, as part of the passage of a ballot measure approving a transactions (sales) and use tax to protect and maintain essential services and facilities—such as open space preservation; bike lanes, sidewalks and other traffic congestion relief projects; public safety; neighborhood street paving and code enforcement; flood protection; senior citizen programs including services and facilities; and other vital general purpose services and capital improvement projects. REOC is responsible for reviewing and making budget recommendations directly to the City Council regarding expenditures from the essential services transactions (sales) and use tax, and reporting annually to the community on the City’s use of these tax revenues. (San Luis Obispo Municipal Code §3.15.020) ARTICLE 1. MEETINGS 1.The REOC shall meet a minimum of four times per year to conduct its business. 2.REOC regular meetings will follow the diagram on the next page and be integrated into the City’s budget processes for the two-year financial plan, fiscal year-end, and financial plan supplement. Meeting dates may change from year to year according to the actual budget schedule. 6 Item #2 - Attachment A Advisory Body Handbook September 21, 2021 City of San Luis Obispo 41 | P a g e 3.Agenda items shall be completed by 9:00 p.m. unless a majority of Commissioners agree to extend the meeting. 4.Regular meetings shall be held in the Council Hearing Room, City Hall, 990 Palm Street, San Luis Obispo, California. 5.Special meetings may be called by a majority of the REOC, or by City staff in consultation with the Chairperson, if additional meetings are necessary to accomplish the purpose and duties of the Commission. 6.In the event that the REOC desires to hold all or any portion of a regular meeting at a place other than the Council Hearing Room, then the place of such meeting shall be posted on at the doors of the Council Hearing Room prior to the time designated for the meeting in accordance with law. 7 Advisory Body Handbook September 21, 2021 City of San Luis Obispo 42 | P a g e ARTICLE 2. ELECTION OF OFFICERS 1.The Commission shall select a Chairperson and Vice-Chairperson from among its members to serve for a one-year term beginning with the first meeting following the start of each fiscal year (July 1). 2.Commissioners shall serve as Chairperson or Vice-Chairperson at the discretion of the Commission. 3.The Chairperson shall preside at all meetings of the Commission. The Vice-Chairperson is Chairperson in the absence of the Chairperson or in case of inability of the Chairperson to act. ARTICLE 3. CONDUCT OF MEETINGS 1.Commissioners should address questions through the Chairperson. 2.Members of the audience should address Commissioners or other persons present through the Chairperson. 3.Procedure for reviewing public hearing items: After roll call the Chairperson shall announce to the public the procedures to be followed to consider the items listed on the agenda and then proceed as follows: a.The Chairperson shall introduce the items and ask for oral staff reports, as appropriate. b.The staff report previously submitted to the REOC shall be placed into the record with all communications received regarding the item. Staff reports shall be submitted for all public hearing items in a form acceptable to the Commission. c.Members of the public wishing to speak on the topic of the agenda item shall be invited to make a presentation. Public comment shall be accepted for agenda items that are listed as presentations, business items, or public hearings. d.Following public testimony on an agenda item, the public hearing or public testimony portion of the meeting shall be closed to the public and discussion confined to members of the Commission; provided that the Commission may reopen the public hearing or invite additional testimony at any time prior to a decision on an item on an affirmative vote of the majority of those members present. e.The Commission, upon formal motion, shall take action on the item or recommendation. 8 Advisory Body Handbook September 21, 2021 City of San Luis Obispo 43 | P a g e ARTICLE 4. QUORUM 1. A quorum is the majority of the total number of established members of the commission. 2. No action of the Commission shall become effective without receiving the affirmative vote of a majority of the members present. ARTICLE 5. VOTING 1. Except as otherwise provided in the San Luis Obispo Municipal Code and state law, no motion or any other action shall be passed or become effective without receiving the affirmative vote of at least a majority of members present. 2. Failure to receive such an affirmative vote shall result in failure or denial, as appropriate, of the motion or other action. 3. Except as allowed under the Political Reform Action of 1974, any member abstaining due to a declared conflict of interest shall not participate in the discussion of the items or otherwise influence or attempt to influence in any manner the decision on the item. 4. All members, when present, must vote except when refraining from participating due to actual or potential conflict of interest. 5. Commissioners not supporting a motion for action shall summarize the reason for their vote. ARTICLE 6. PUBLIC RECORDS 1. Records of all public hearings shall be made available to the public in the office of the City Clerk. 2. Secretary Duties: The secretary shall be a representative of the City Clerk’s Office, and shall keep minutes of each meeting and shall record the official actions taken. The records of all proceedings shall be available to the Council and to the public. ARTICLE 7. ATTENDANCE 1. Any member of the REOC who fails, for any reason, to attend three regular, adjourned regular, or specially-scheduled meetings, within any 12 month period, shall be reviewed by the Chairperson for possible referral to the City Council. ARTICLE 8. TERM LIMITS, FILLING VACANCIES AND REMOVAL OF MEMBERS 1. Terms are for three years. 2. Vacancies shall be filled for unexpired terms. The Council, by majority action, may remove any Commissioner as provided in the City Charter. 9 Advisory Body Handbook September 21, 2021 City of San Luis Obispo 44 | P a g e ARTICLE 9. RULES, REGULATIONS AND PROCEDURES 1. The Commission may adopt rules, regulations and procedures as required for the transaction of its business. These rules shall become effective upon approval of the Council. 10 Revenue Enhancement Oversight Commission Agenda Report Meeting Date: 9/22/22 Item Number: 3 DATE: September 22, 2022 FROM: Brigitte Elke, Finance Director Prepared By: Natalie Harnett, Principal Budget Analyst SUBJECT: 2021-22 LOCAL REVENUE MEASURE UNAUDITED YEAR-END FINANCIALS RECOMMENDATION 1. Receive a report and review unaudited operating and capital expenditures of the Local Revenue Measure sales tax revenue for the last fiscal year. 2. Review and recommend to the City Council the proposed use of one-time Local Revenue Measure (LRM) fund balance as part of an amendment to the 2022-23 Supplemental Budget. DISCUSSION Background One of the roles of the Revenue Enhancement Oversight Commission (REOC) is to review the 1.5 percent local transaction tax revenues and applicable uses. This report provides the unaudited FY2021- 22 year-end (4th quarter) ending position for the Local Revenue Measure. During budget development, staff create revenue forecasts using available economic data in combination with the analysis and forecast from a third-party sales tax consultant. Subsequently, expenditure budgets are adjusted to the revenue forecast. FY 2021-22 is somewhat unique because the original budget was developed with the pandemic still raging and the full reopening of the economy including travel still in process. Fortunately, the revenue picture improved gradually and important tax revenues from sales and lodging improved exponentially allowing the Council to allocate over $2.5 million in additional one-time and ongoing budget appropriations with the mid-year review in February 2022. Ultimately the City ended the fiscal year in an even strong fiscal position than assumed at mid-year. The Local Revenue Measure exceeded projections by about $3.1 million. Some of this funding was ear- marked during the 2022-23 Supplemental Budget Development to replenish the Capital Reserve, which was almost entirely depleted during FY 2021-22 due to unprecedented construction cost increases, labor market woes, and supply shortages. The remaining balance is available for reappropriation by the Council. The report also gives an update on the economic development funding that was approved in December 2020. The staff report contains one recommendation to reappropriate some of FY 2021-22 Local Revenue Measure Unassigned Fund Balance. 11 City of San Luis Obispo, Title, Subtitle Item #3 2021-22 LRM Unaudited Year End Financials Year-End Results LRM Revenue Sales, Transaction, and Use tax revenue far exceeded the City’s (and its Sales Tax Consultants) projections for the year. This is consistent with trends across the state. High consumer spending accelerated by savings accumulation and pent-up demand continued with the gradual opening of the economy, the return of students to in-class sessions, and renewed travel activity. High inflation through labor and supply chain issues intertwined with Fed monetary policy to counteract inflation and a war driving gas prices to all-time highs, all greatly impacted sales tax and led to a year-end result far above anticipated revenue. A highly vulnerable revenue stream, sales tax remains a cautionary tale. Although unemployment rates remain low, fuel price instability, stock market woes, and rising consumer prices (as raw materials and components are more expensive) could further weaken consumer confidence and households will likely pull back on discretionary purchases as 2023 arrives. International supply chain issues show a steady recovery, but employee cost and labor shortages may impact future spending patterns, especially in the City’s tourism realm as household income realities catch up to pent-up demand from the pandemic lock- down. Table 1: 2021-22 Local Revenue Measure Variances a.Original Revenue Forecast b.Re-forecasted Revenue (mid-year) c.Actual Revenue Variance (c-b) $24,279,000 $25,810,000 $28,914,503 $3,107,453 LRM Expenditures FY 2021-22 marked the first year that the City realized the “tripling” of revenues from the previously approved local sales tax measure (G-20). That meant that important capital improvement projects that were larger in scale, budget, and community benefit could finally be funded. There was also an increase in allocation to operating expenditures during the Financial Plan period to help advance one‐time Major City Goal efforts and prepare staff resources to deliver on an extensive capital improvement plan that will dramatically ramp up over the next five years. The table below shows the total expenditure allocations by priority, including all adjustments made at mid-year. 12 City of San Luis Obispo, Title, Subtitle Item #3 2021-22 LRM Unaudited Year End Financials Table 2: LRM Budget Appropriations by Priority FY 2021-22 LRM Allocations Local Revenue Measure Priority Operating Capital 1 Address Homelessness $ 810,647 2 Community Safety and Emergency Preparedness $ 1,417,636 $ 2,035,973 3 Creek and Flood Protection $ 632,567 $ 960,000 4 Economic Development and Business Retention $ 998,688 $ 1,117,500 5 Open Space/Natural Areas Preservation and Maintenance $ 541,007 $ 1,690,000 6 Other Services and Projects $ 251,211 $ 1,165,500 7 Protect Financial Stability $ 328,811 8 Safe and Clean Public Areas $ 371,021 $ 805,000 9 Street Maintenance and Transportation (includes bicycle and pedestrian improvements) $ 1,141,455 $ 8,998,427 10 Youth/Senior Services and Recreation Facilities $ 341,009 $ 3,234,000 11 Establishment of Capital Reserve $ 3,426,000 12 Sub Total $ 6,834,052 $ 23,432,400 13 Grand Total $ 30,266,452 LRM Ending Position It is important to note that the actual revenue numbers remain unaudited and are subject to change slightly. Audited financials will be presented to the Council and the Revenue Enhancement Oversight Commission (REOC) in January 2023 at which time decisions on allocations of remaining fund balance can be re-visited. As required by the City’s Municipal Code, the City’s audited financial statements include a separate audit of the LRM which will include the remaining available balance for appropriation. Staff will also provide an updated long-term forecast with the FY 2022-23 Mid-Year Review. Table 3: Overall Local Revenue Measure Ending Position (UNAUDITED) 1 Beginning Balance $ 9,299,971 2 Revenue $ 28,914,503 3 Expenditures (not including encumbrances)1 $ (32,424,795) 4 Revenue Over/(under) Expenditures $ (3,510,292) 5 Ending Fund Balance $ 5,789,679 6 Assigned to Projects (encumbrances)2 $ 1,958,912 7 Transfer to Reserve (per supplemental budget) $ 907,000 8 Unassigned LRM Fund Balance $ 2,923,767 9 Recommended Allocation of Fund Balance (see next section) $ 1,160,846 10 Unaudited LRM Year End Fund Balance $ 1,762,921 1 This number is different than Table 2- line 13 because it includes expenditures on prior year project budgets (“Legacy Projects”). 2 This amount only includes remaining “Legacy Project” budgets which were funded prior to the 2021-23 Financial Plan. Historically, LRM-funded projects were budgeted and paid for directly out of the Local Revenue Fund. This method is not an accounting best practice, so as of FY 2021-22, Project Budgets are transferred from the Local Revenue Measure Fund into the appropriate Capital Fund at the beginning of the year. 13 City of San Luis Obispo, Title, Subtitle Item #3 2021-22 LRM Unaudited Year End Financials Update on Economic Development Funding Previously Approved Per Resolution 11203 and the Council Agenda Item #19 from December 14, 2020, $3.4 million of undesignated fiscal year 2018‐19 Local Revenue Measure funding was allocated towards economic development efforts and homeless services. One of the recommendations included local investment into short term Certificates of Deposit to generate interest for a grant program to help offset the cost of a Tenant Improvement permit. Due to the low interest rate environment that began shortly after, the City did not make these investments. Instead, it appropriated over $250,000 to directly offer credits for TI permits through the TIPP-Fast 2.0 permitting program and continues to seek opportunities to optimize the use of this assigned funding. At the end of FY 2021-22, $1.7 million remained in the balance. Staff will transfer $283,559 (table below) to fund carryover requests directly related to Economic Development, which coincides with the original intend of the use and will assist with further opportunity for economic recovery in the community. Staff will return to the REOC before the FY 2022-23 Mid-Year Review with recommendations on how to allocate the remaining balance ($1,416,441). Given construction cost escalation, staff will likely recommend that these funds be set aside in the Capital Reserve to bridge funding gaps for upcoming capital projects such as the arterial road improvements that anticipate a $3.5 million short for FY 2023- 24. ID Table 4: Economic Development Funding Balance Amount Beginning Balance: Assigned Economic Development Funding $ 1,700,000 3 Economic Development Branding $ 30,000 4 Economic Development Resources $ 44,000 5 Scorecard to Track Economic Development $ 5,000 7 Downtown Improvements (Holiday Activation, Lighting) $ 63,000 19 TIPP Fast 2.0 (Remaining Balance) $ 81,559 22 Shopping Cart Containment Program - City Grant Funding $ 60,000 Total Carryover Requests Using Economic Development Funding $ 283,559 Remaining Balance: Assigned Economic Development Funding $ 1,416,441 Recommendation Reappropriation of FY 2021-22 Local Revenue Measure Unassigned Fund Balance As previously presented in the adopted 2022-23 Budget3, $907,000 of FY 2021-22 LRM ending fund balance (due to revenues exceeding expenditures) will be transferred to the capital reserve to maintain the policy level of 20% of the Capital Improvement Plan Budget4. Additionally, given the record high sales tax remittances in FY 2021-22, staff recommend allocating a portion of the unassigned year-end balance towards additional requests that are ready to move forward now and align with the funding intent of the measure (See Table 5). The remaining unassigned fund balance will be considered with the FY 2022-23 mid-year review in February 2023. 3 2022-23 Supplemental Budget Pg. 102. https://www.slocity.org/home/showpublisheddocument/32355/637904651318570000 4 2021-23 Fiscal Policy Section 7 – “L” https://www.slocity.org/home/showpublisheddocument/30516/637957256176570000 14 City of San Luis Obispo, Title, Subtitle Item #3 2021-22 LRM Unaudited Year End Financials ID Table 5: Use of Local Revenue Measure (LRM) Fund Balance Amount Unaudited 2021-22 LRM Year End Unassigned Fund Balance $ 2,923,767 28 Type 3 Wildland Engine Replacement Additional Funding $ 85,000 $415,000 is budgeted for CIP ID#46 (Project #1000554) "Fire Heavy Duty Truck (Type 3 Wildland) in FY 2023. Due to inflation from the rising costs of commodities and the vehicle market, the existing budget is not sufficient to purchase the specifications needed to replace the current Type 3 fire engine, "Engine 6". An additional $85,000 is needed for a total budget of $500,000 to complete the replacement project. 30 Fire Recruit Academy to Address Paramedic Shortage $ 110,000 Funding to support a previously unplanned recruit academy needed to be held to fill existing firefighter paramedic vacancies. Presently the department has four vacancies and anticipates two additional for a total of six (6) firefighter openings by January 1st, 2023. In addition, a grievance filed by the labor group in accordance with Article 44 Staffing compels hiring minimum 4 firefighter paramedics as part of the resolution process identified by the fire labor/management and HR. 31 Accelerate Fire Pumper (Engine 4) Replacement $ 900,000 Accelerate Engine 4 Replacement to ensure a sustainable reserve engine fleet. The replacement is currently scheduled in FY 2024-25, however the aged reserve engine has been encountering more than an expected amount of mechanical issues and may not be a reliable reserve apparatus over the next several years. The current budgeted amount for the replacement project is $780,000 for FY 2024-25. Due to current market conditions, the specifications used to build the most recent Engine replacement (Engine 3) is now expected to cost $900,000. Staff can quickly move on this project to ensure funds get utilized in FY 2022-23. Alternative would be to pursue debt financing to reduce the amount of cash needed in FY 2022-23. 51 Public Works - Contract Coordinator $ 65,846 This funding is being requested to fund a contract staff position of a Public Works Maintenance Contract Coordinator following discussion with the Homeless Steering Committee. This position would assist the department with homeless encampment cleanups and the management of maintenance contracts and CIP projects that do not require engineering support. This position would be funded through 6/30/23. (9 month contract) $ 1,160,846 Remaining LRM Fund Unassigned Fund Balance $ 1,762,9215 5 It is recommended that these funds remain unappropriated until the final audit numbers are presented in January 2023. Once the final variance from forecast is finalized, staff will likely recommend that these funds be set aside to bridge the funding gap for arterial road improvements that are currently approximately $3.5 million short for the 2023-24 project. The arterial roads that are scheduled per the Councils pavement management plan for repaving are Johnson Avenue and Monterey Street. 15 Revenue Enhancement Oversight Commission Agenda Report Meeting Date: 9/22/22 Item Number: 4 DATE: September 22, 2022 FROM: Brigitte Elke, Finance Director Prepared By: Natalie Harnett, Principal Budget Analyst Emily Jackson, CIP Process Improvement Manager SUBJECT: Capital Improvement Plan Updates RECOMMENDATION 1.Receive a report on the recommended approach to the budgeting and management of the Capital Improvement Plan, including: a.The structure of the Capital Improvement Plan budget and staff discretion to move funding within appropriated budget to approved projects as needed b.Development of policy language to clarify management of the Capital Improvement Plan; and c.Inclusion of the CIP Engineering program cost in the Capital Budget. d.The role of the Revenue Enhancement Oversight Commission in reviewing and recommending capital improvement projects to the City Council 2.Provide input and guidance to staff as necessary. DISCUSSION Background All City construction projects and equipment purchases costing $25,000 or more are included in the City’s Capital Improvement Plan (CIP). The Five-Year CIP is refreshed and adopted as part of the budget in every Financial Plan and accomplishes several goals. Maintains and replaces existing City infrastructure in accordance with the City’s asset management plans, infrastructure replacement schedules, and other documents Meets community needs and desires as established during the Community Forum, Major City Goals and Council priorities. Plans, schedules, and finances projects to ensure cost-effectiveness and conformance with established policies. 16 City of San Luis Obispo, Title, Subtitle Item #4 Capital Improvement Plan Updates Comprehensive policies relative to the development of the City’s CIP are specified in the Budget Policies section of the 2021-23 Financial Plan1 including detailed information relative to both the two-year Financial Plan and the Five-Year CIP forecast. The 2021-23 Financial Plan includes funding for 115 construction projects (inclusive of new assets, asset replacements and asset maintenance) that are managed primarily by CIP Engineering, Transportation, Maintenance or Utilities project managers. City construction projects are carried out through seven distinct phases, shown to the right. While the construction phase is the most visible to the community, it is also the culmination of months to sometimes years’ worth of planning, scoping, design, engineering, and permitting; all leading up to the construction phase. As discussed previously, the 2021-23 Financial Plan represents significant growth to the City’s CIP largely due to the passage of the Local Revenue Measure (Measure G - 20) which increased the local sales tax rate from 0.5 percent to 1.5 percent which at the time of adoption was projected to generate approximately $25 million annually. General Fund capital expenditures in the current year have increased by 65% compared to pre-Measure G-20 levels. The growth of the CIP has exceeded the City’s existing organizational capacity to effectively deliver capital projects. To address this, the 2021-23 Financial Plan included budget augmentations of $500,0000 in FY 2021-22 and $1 million in FY 2022-23 and beyond to “right-size” the organization to address the increased project workload. In 2021, the City contracted with Management Partners, a local government consulting firm, to perform an assessment of the delivery of the CIP and provide both structural and process improvements to deliver projects. The Management Partners assessment resulted in 53 recommendations covering all aspects of the City’s CIP to improve project delivery. In addition to the expansion of the CIP due to the passage of Measure G-20, CIP delivery is currently also constrained by a number of different factors, including staffing constraints, supply chain issues, and construction cost escalation. 1 2021-23 Financial Plan, Pages 537-569. https://www.slocity.org/government/department-directory/finance/city-budget 17 City of San Luis Obispo, Title, Subtitle Item #4 Capital Improvement Plan Updates A CIP Process Improvement Manager was hired in November 2021 to lead the implementation of the Management Partners recommendations, as well as other identified areas for improvement. Process improvement work to date has included: 1. Creation of two new classifications: a. Capital Improvement Plan Administrative Manager to manage the non-technical aspects of the City’s CIP, and b. Capital Projects Coordinator to provide project management for capital projects that do not require a high degree of engineering expertise and to partner with Engineers to manage larger and more complex capital projects. 2. Addition of 4.00 FTE new positions to build capacity to address the growth of the annual CIP. 3. Development of a reporting database to centralize information about project status (including scope, timeline and budget) in a single document for streamlined reporting. 4. Collaboration with Finance and IT staff to improve financial system (Oracle) functionality to better track and control capital project budgets and expenditures. 5. Development of a recommended new budget structure for the Capital budget (discussed in more detail below). 6. Clarification of CIP processes through enhancement of CIP governance, including: a. Updates to CIP policies to clarify CIP processes, and support the recommended new budget structure noted above and discussed in more detail below b. Development of a Charter to clarify the role of the CIP Review Committee and meeting procedures c. Development of project evaluation criteria to be used on an ongoing basis, regardless of economic outlook and external impacts d. Development of a Project Request Form that departments will be required to complete in order to request funding for a new capital project. This form is intended to: i. assist departments in developing the scope of the requested project, ii. provide the CIP Review Committee with the information it needs in order to evaluate and prioritize projects for funding, and iii. provide a good starting point for project managers to develop project plans. It is expected that the work efforts following the Management Partners study will be reflected during the 2023-25 Financial Plan. To proceed with implementation of the process improvements, staff is seeking input from the Revenue Enhancement Oversight Commission (REOC). CIP ‘Funding Buckets’ As discussed in the FY 2021-22 Mid-Year Budget Update and FY 2022-23 Budget Supplement, supply chain issues and cost escalation have significantly impacted the delivery of the City’s capital projects; an example is the Summer 2022 Roadway Sealing project, which came in significantly over bid and required a budget adjustment of almost $1.6 million. To provide staff with flexibility to adjust the budgets of individual capital projects, staff is recommending that the City Council appropriate funding for Asset Maintenance and Asset Replacement costs in the CIP budget at a ‘funding bucket’ level, rather than at the individual project level. This approach would allocate a total budget to each category (see below) and in doing so, Council would provide staff with the flexibility to move money between projects within a ‘funding bucket’ administratively, without seeking approval from the Council. This approach 18 City of San Luis Obispo, Title, Subtitle Item #4 Capital Improvement Plan Updates will put emphasis on delivering projects and shift priorities to ensure projects are being constructed. Asset Maintenance projects are ones that address recurring and annual needs to maintain existing assets. Asset Replacement projects are ones that address periodically recurring and/or annual needs that replace existing assets with a similar new asset. This approach is not recommended for New Asset projects which expand the City’s infrastructure that serves the community—budget adjustments for those projects are recommended to remain under the purview of the City Council due to their scope, fiscal impacts including debt issuance, and generally higher level of community interest. The “funding buckets” are intended to group like projects within the Asset Maintenance and Asset Replacement project type and include: 1. Fleet 2. Facilities 3. Open Space and Natural Areas Preservation 4. Parking and Transit 5. Parks, Urban Forestry, and Public Art 6. Streets, Bridges and Multimodal Transportation 7. Creek and Flood Protection 8. Information Technology 9. Water Resources, Treatment and Distribution 10. Wastewater Collection and Treatment Use of “funding buckets” has several benefits, including: 1. Appropriation at the bucket level and staff discretion to move money within a bucket allows the City to be nimbler in responding to cost overruns, as well as changes to project prioritization to deliver projects instead of lengthy processes to re-allocate budget. Under current processes, staff must prepare City Manager Reports or Council Agenda Reports to seek a budget adjustment for a project. Drafting and routing these reports can take days to weeks, especially for the budget adjustments that require City Council approval; a process that can consume two months. 2. Projects are budgeted closer to when they are initiated, rather than during budget development, which can be two years before a project begins. Developing project budgets closer to when they are initiated allows for more accurate cost estimates, based on known scopes and the impact of external conditions (eg. cost escalation). 3. Staff has additional time to develop project scopes. Rather than scoping projects during budget development in order to identify a budget to seek Council appropriation, staff will have the ability to focus on scoping projects as they are assigned, which will result in more accurate and complete project scopes (more time to scope projects directly aligns with a Management Partners recommendation). Recognizing that the funding bucket approach changes the role of both the REOC and the City Council in appropriating funding for capital projects, staff has been working on updates to policies and procedures to assure that appropriate controls and checks and balances are in place. Staff will provide quarterly reporting about project status and use of funding within each bucket for transparency and increased communications. The processes being developed require coordination between multiple departments to address budget considerations in the broader context of the entire CIP. To that end, staff is developing policy language for consideration and approval by the City Council. As of the writing of 19 City of San Luis Obispo, Title, Subtitle Item #4 Capital Improvement Plan Updates this report, the language is under development and a summary of the changes to be recommended is included below: Recommended Changes to Existing Policies Policy Title Description and Rationale for Change Project Manager Reflects current role for project managers to manage project scope, budget allocation, timeline and communications with project stakeholders. Revisions clarify that project management is primarily performed by staff from CIP Engineering but can also be done by staff in other departments, as appropriate. CIP Review Committee Expands description of the CIP Review Committee’s role and reflects current membership of the Committee. Revisions clarify that the Committee is responsible for: 1. Assessing the City’s fiscal condition and staff capacity to deliver projects so that the recommended CIP represents what can realistically be accomplished; and 2. Recommending to the City Manager the projects that should be funded in the biennial financial plan, as well as appropriate funding levels for the CIP funding buckets; and 3. Considering requests for new projects that may be requested mid-year to address emergent needs; and 4. Evaluating the re-prioritization of projects as needs and conditions change to ensure consistency with project evaluation criteria, ability to deliver projects, and City priorities. CIP Appropriation Clarifies recommended new approach of City Council appropriation of CIP budget to ‘funding buckets’ for Asset Maintenance and Asset Replacement projects and provides staff discretion to administratively move funding within the buckets. Identifies the ‘buckets’ as: 1. Fleet 2. Facilities 3. Open Space and Natural Areas Preservation 4. Parking 5. Parks, Urban Forestry, and Public Art 6. Streets, Bridges and Multimodal Transportation 7. Creek and Flood Protection 8. Information Technology 9. Water Resources, Treatment and Distribution 10. Wastewater Collections and Treatment Clarifies that appropriation of budget for New Asset projects is made to individual projects and that budget adjustments for these projects require City Council authorization. Recommended New Policies Policy Title Description and Rationale for Change Project Type Identifies and defines project types, including Asset Maintenance, Asset Replacement, and New Asset projects, and clarifies existing process of considering Asset Maintenance needs before recommending funding for projects to replace existing assets or construct new assets. Project Request Forms Requires that departments submit a Project Request Form (PRF) to formally document and describe requested capital projects. Use of this new form is intended to ensure that the Committee has the information it needs to evaluate and prioritize projects for funding. This new practice is also intended to address a Management Partners recommendation that staff allocate additional time for project scoping. The info rmation provided on the PRF is intended to help address this recommendation by requiring requesti ng departments to articulate the scope of a project early on. Project Evaluation Criteria Identifies the criteria that will be used to evaluate and prioritiz e requested capital projects for funding. Evaluation criteria is as follows (equally weighted at 1 point each): 1. Does the project support economic sustainability of the community and organization? 2. Does project address a critical community health or safety need? 3. Does project make good on ongoing commitments? Consider: a. Previously budgeted (or existing external funding source) b. Approved planning documents 20 City of San Luis Obispo, Title, Subtitle Item #4 Capital Improvement Plan Updates c. Address mandates or legal requirements 4. Does the project address core infrastructure needs? 5. Does the project provide a visible and measurable community benefit? 6. Does the project align with Major City Goal s? 7. Does the project address Measure G priorities? a. Economic development and business retention b. Safe and clean public areas c. Youth/senior services and recreation facilities d. Open space/natural areas preservation and maintenance e. Street maintenance and transportation f. Community safety and emergency preparedness g. Protect financial stability h. Creek and flood protection i. Address homelessness 8. Does the project have a positive impact on ongoing operations? a. Reduction to operating costs b. Improved service delivery Creation of Projects Establishes that projects will only be created (outside of budget development) if they address an emergency need. Project Appropriations Clarifies the recommended new approach of appropriating CIP funding to ‘buckets’ by identifying that appropriation to individual projects does not occur with adoption of the budget. Identifies five options that staff can pursue if a project is expected to be considerably over estimated budget: 1. Eliminate the project 2. Defer the project for consideration to the next Financial Plan period 3. Rescope or change the phasing of the project to meet the budget 4. Appropriate additional budget from the appropriate bucket to the project to meet the need 5. Appropriate additional resources as necessary from the Capital Projects Reserve in the event that the balance in the appropriated funding bucket isn’t sufficient. Administrative Budget Adjustments Establishes the process staff must follow to process a budget adjustment administratively within a bucket. The process requires consultation between the project manager, City Engineer, CIP Administrative Manager, and Public Works Analyst to consider the request for additional funding for a project within the context of other projects intended to be funded within the bucket. To assure appropriate checks and balan ces, the policy also identifies the required routing for budget adjustments which must be signed off by staff from the proponent department, Public Works staff, and Finance staff. CIP Reporting Requires staff to publish reports on the CIP on a quarterly basis, as part of Quarterly Budget Reports provided to the REOC and City Council; and specifies that the reports should include a summary of administrative budget adjustments made within appropriated funding buckets as well as a status update on projects in progress. Policies Recommended to be Deleted Policy Title Description and Rationale for Change Program Objectives Eliminating policy that does not reflect current practice. The existing policy states that “Project phases will be listed as objectives in the program narratives of the programs, which manage projects.” Inclusion of the CIP Engineering program cost in the Capital Budget. In addition to the funding bucket approach, staff also plans to recommend the inclusion of the CIP Engineering program supporting project delivery in the capital budget. The intent of doing this is to accurately reflect the cost of delivering the City’s CIP. Many other organizations achieve this by charging staff time to individual projects, based on timecoding. Staff is building a list of employees in 21 City of San Luis Obispo, Title, Subtitle Item #4 Capital Improvement Plan Updates Public Works who play a significant role in capital project oversight and delivery and the percentage of time they spend doing this work. As a part of the 2023-25 Financial Plan, staff will recommend inclusion of this staff time in the capital budget, rather than the operating budget. REOC’s Review and Approval of Capital Projects. The REOC is an advisory body to the Council that provides important citizen oversight of local transaction tax revenues and expenditures. For the proposed CIP strategy, it is recommended that the REOC review the proposed funding distributions at bucket level and the projects proposed within each bucket during each budget development cycle. The new CIP approach will allow staff to engage the REOC in more strategic review of the use of the tax dollars as opposed to spending valuable time reviewing each project’s budget allocation. As part of the annual financial audit and the Annual LRM Community Report, a detailed report on Local Revenue Measure expenditures by project will still be provided. 22