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HomeMy WebLinkAboutb4measurey FROM: Wayne Padilla, Director of Finance and I.T. SUBJECT: DISCUSSION OF CONTINGENCY PLANNING PROCESS TO ADDRESS THE POSSIBLE LOSS OF THE HALF-CENT SALES TAX (MEASURE Y) REVENUE STREAM RECOMMENDATION Receive an update on the contingency planning process to address the possible loss of the half-cent sales tax (Measure Y) revenue stream, and provide staff with direction on the following items: 1. Council concurrence on the form and level of detail to be included in the contingency plan. 2. Council concurrence on the process that will be used to gain community feedback regarding contingent budget reductions. REPORT-IN-BRIEF The Fiscal Health Major City Goal directs staff to plan for future revenues and prepare a contingency plan in the event the City’s ½-cent sales tax is not renewed in the November 2014 general election. Measure Y currently generates over $6.5 million annually to protect and maintain essential services. This equals 12% of the City’s general fund, and the City must be prepared to address the fiscal impact that would occur if is not renewed or replaced. If a revenue measure is not approved by city voters in November 2014, the City will stop collecting Measure Y revenue on March 31, 2014. These impacts will be felt during the last quarter of the 2014-15 fiscal year. Staff is recommending that the contingency plan include two parts. First, specific reductions will be identified to address the remainder of the 2014-15 fiscal year. Second, the contingency plan would include at least three different slates of options for reductions to inform the public and decision makers about reasonable alternatives available to produce structurally balanced budgets in the 2015- 17 Financial Plan. Staff is proposing to use the same criteria that were identified in the Service Categorization Project (completed as part of the 2011-13 Financial Plan) as a basis for prioritizing services and identifying potential reductions. Public input would be sought as part of the Revenue Measure Community Forum. In other words, when the slates of options are presented to the Council they will be informed by the opinions of residents and other interested stakeholders. Meeting Date Item Number B4 - 1 Measure Y Contingency Planning Page 2 DISCUSSION Background Measure Y is the half-cent sales tax that was enacted in 2006 by 65% of the voters. Currently the annual revenues derived from Measure Y exceed $6.5 million. The intent of the revenue measure was and continues to be, the protection and maintenance of essential services - such as neighborhood street paving and pothole repair; traffic congestion relief; public safety, including restoring eliminated traffic patrol, Fire Marshal and fire/paramedic training positions; flood protection; senior citizen services/facilities; neighborhood code enforcement; open space preservation and other vital general purpose services. The revenue measure has a sunset provision after eight years which means that it will lapse if it not reauthorized or replaced by the voters in November 2014. A Local Revenue Measure Advisory Committee has been formed and is currently developing a recommendation to the City Council on this issue. The Committee will be preparing a report to the City Council this March that will provide its recommendation on whether the City Council should consider putting a new revenue measure on the 2014 ballot, and if so, what the details of the revenue measure should be. Measure Y Expenditures It is important to understand how Measure Y revenues have been spent which provides context for the contingency planning process. This is not to suggest that the City would simply stop providing these essential services if the local ½-cent sales tax is lost. However, it is helpful for understanding the size and scope of the reductions that would have to occur. Between April 2007 and June 2012, the City spent $26.6 million in Measure Y revenue. These expenditures are categorized as follows: Open Space Acquisition and Maintenance, Flood Prevention, Traffic Congestion Relief, Public Safety, and Infrastructure Maintenance. B4 - 2 Measure Y Contingency Planning Page 3 These expenditures have been divided between capital improvements (60%), and operating expenditures (40%). Capital improvements include projects like street paving, storm drain replacements, and playground equipment replacements, and operating expenditures include people that provide services. A few of the major capital projects completed with Measure Y include the City’s annual street paving program; the City’s ongoing storm drain maintenance and replacement efforts; new bike paths including major portions of the Bob Jones Trail and Railroad Safety Trail; equipment purchases, including new fire engines and police patrol sedans; playground improvements at Mitchell Park, Laguna Lake Park and other parks; and the purchase of open space in the Irish Hills, Reservoir Canyon, and Stenner Springs locations. Operating expenditures have included staff positions desired by the community, including two neighborhood services specialists, parks maintenance workers, two stormdrain maintenance workers, a signal and streetlight technician, a traffic engineer, and a full-time fire marshal. As part of the 2013-15 Financial Plan, Measure Y is used to fund two new downtown daytime patrol officers and a ranger services maintenance worker to help maintain the City’s open space. In total, services to the community are provided by 17 full-time positions currently funded by Measure Y. The details of these expenditures are identified in the City’s budget documents and accounted for in the annual audit, which is published as the City’s Comprehensive Annual Financial Report. Why is Contingency Planning Needed? In November 2013, the City held a Measure Y Open House, which provided residents with an opportunity to provide direct input to Advisory Committee members. One of the most commonly asked questions was, “What services will be eliminated if Measure Y is not reauthorized?” This is a question that is not within the scope of work of the Advisory Committee, but is part of the City’s 2013-14 work program. The City Council has directed staff, through the Fiscal Health Major City Goal, to prepare a contingency plan for coping with the possible loss of the Measure Y revenue stream. Fiscal Health - Sustain essential services, infrastructure, and fiscal health: preserve public health and safety and provide essential services in line with residents’ priorities and sustain the City’s short and long term fiscal health by planning future revenues (including renewal of Measure Y or an alternative measure), while implementing contingency planning and efficiency and cost containment strategies (including implementation of the Compensation Philosophy and monitoring further pension and benefit issues). The language included in the Major City Goal provides that not only will cost reductions be considered but cost containment and efficiency strategies should be evaluated as well, and these elements will be a key part of the contingency plan process. Timing of Measure Y Vote and Issues Concerning Contingency Planning 1. Implications of Timing B4 - 3 Measure Y Contingency Planning Page 4 The timing of the local sales tax measure decisions allow for a two-step approach. If Measure Y or alternative revenue measure is not approved in November 2014, the City would stop collecting the sales tax after March 31, 2015. Therefore, the lost revenue impacts the last three months of the 2014-15 fiscal year. The first step of the contingency planning process is to identify immediate measures that would be taken to close this gap. That could include use of reserves (either amounts above the 20 percent or dipping below the policy goal of 20%) or taking other actions to reduce spending to achieve $2.8 million is savings during the last quarter of the year. The second step would be for the Council to make long range funding decisions to close the gap during the 2015-17 Financial Planning process. The status of the City’s local sales tax will be known before the 2015-17 Financial Plan process begins. As a result, the reductions that would have to occur to produce a balanced budget for that two-year period without a local sales tax can be fully considered in the context of the City’s two-year financial planning process. As a result of this timing, the Contingency Plan will present options to fill the gap for the remainder of fiscal year 2014-15 and set up the process for careful consideration of longer term solutions to address the loss of revenue as part of the 2015-17 Financial Planning process. This achieves the goals set out in the Fiscal Health Major City Goal, gives the community a sense of the changes that might be required to achieve a balanced budget if this amount of revenue is no longer available and accomplishes some preliminary planning for policy decisions that will be part of the 2015-17 Financial Plan 2. Approaches to Developing a Contingency Plan The proposed contingency plan can take a number of forms, from a very detailed “shadow budget” that would be put into effect if the local sales tax revenue is lost, to a conceptual plan that broadly identifies categories where reductions could occur to produce a balanced budget if needed. In this case, staff is recommending a hybrid process for contingency planning that will identify both immediate reductions that would occur to balance the 2014-15 budget, and slates of possible reductions that would inform decision-makers and the public about the scope and scale of cuts needed to be incorporated in the 2015-17 Financial Plan Process. Staff plans to present at least 3 slates of long-term service/budget reduction scenarios. Stated another way, the contingency plan will be like a menu with service and budget reductions presented as a number of complete meals that accomplish the reductions needed to produce a balanced budget. This is a way to conceptualize the magnitude of service changes that would be necessary to achieve this level of budget reductions. Fundamentally, the advantage of this approach is that it allows the community to understand the different combinations of reductions and the service impacts needed to balance the budget if the City no longer has a local revenue source. Ultimately, these decisions would be made by the City Council when the 2015-17 Financial Plan is adopted. Prepared in this way, the contingency plan would be an important resource for residents and decision-makers alike. B4 - 4 Measure Y Contingency Planning Page 5 3. Adjusting to a Lower Revenue Base The actual loss of revenues in 2014-15 would be incremental at first (currently estimated to be $2.8 million during the last quarter of the year), however, the eventual loss of revenue will exceed $7.0 million per year starting in 2015-16. Currently, the General Fund has $55.5 million in revenues and Measure Y accounts for 12% of that total. While the City already has a “Fiscal Health Contingency Plan” in place, which will certainly be activated if the City’s revenues are reduced by this amount, the significance of a 12% reduction in General Fund revenue requires more detailed planning. In order to prepare for this magnitude of revenue loss, the contingency plan must provide for the early implementation of cost adjustments and cost containment strategies to achieve the required amount of savings and enable a smooth transition to a lower expenditure level. Staff is proposing to use the contingency planning process to develop a list of specific reductions that would occur to eliminate $2.8 million in spending from the 2014-15 budget. These immediate reductions could be implemented following the November general election. In presenting the contingency plan options related to the short-term adjustments consideration will be given to a scenario where General Fund Reserves are used to close the gap created during Fiscal Year 2014-15. As the plan for cost reductions becomes more clearly identified, staff will consider through the contingency plan process that central service departments such as Administration, Finance & I.T., City Attorney, Human Resources, etc. generate reimbursement back to the General Fund through the cost allocation plan. Other departments that are not part of the cost allocation plan process may also generate fees that partially offset some of their costs and these must be considered as well. The result is that it is unlikely that a uniform amount of reduction will occur within each department. Ultimately these reductions will impact every department but the primary focus will be on the structural balance of the General Fund. The City Council will be presented options that consider whether the City should use funding above the 20% reserve or go below the minimum 20% General Fund reserve to minimize the impacts of budget reductions that would have to be implemented during 2014-15. Additionally, the longer-term slates of reductions will consider the implications of off-setting fees generated by the department and the City’s cost allocation plan. 4. Functional Areas, Service Categorization and Identification of Service Priorities One consideration that will be central to the contingency planning process is the need to consider the priority of services provided to the community. For the purpose of the contingency planning process, functional areas will be identified in the same manner that they are described in the audited financial statements and the Financial Plan: 1. Public Safety 2. Transportation 3. Leisure, Cultural and Social Services 4. Community Development 5. General Government 6. Capital Outlay and other transfers Working with the department heads and their staff, the highest priority public service provided by each function will be determined and those deemed to be both the highest priority and most critical B4 - 5 Measure Y Contingency Planning Page 6 will be preserved to the greatest extent possible. As stated previously, the goal will be to not only identify areas to cut costs but also to look at realistic efficiency measures that would help minimize or contain cost growth in the future. The method of assigning a priority to a given service or function can include the following criteria, which were first identified in the 2011-13 Financial Plan Service Categorization Project document: 1. Mandated - Is the service or function legally mandated? This would include stormwater system compliance and elections administration, which are legally mandated services. 2. Heath/Safety or Essential - Does the service or function impact the health and safety of residents to a material extent or compromise the maintenance of core facilities for which the City is responsible? For example, responding to emergency calls in a timely manner, conducting building inspections or maintaining city streets. 3. Organizational Management or Core Service - Is the service or function essential to the city’s on-going operations and management or is it a typical service expected by the community benefiting all community members but not tied to public health and safety? For example this can include risk management, payroll services and computer networks or parks, open spaces or neighborhood services. 4. Targeted Services- Is the service provided to select portions of the population? Senior Center and Affordable Housing services would fall into this category. 5. Other Services - Is the service or function not described above? Employee wellness and advisory body committees would be examples of these types of services. As staff works to determine the amount of reductions that should take place in each functional area, consideration may be given to the manner in which Measure Y has been spent in the past as described above (60% capital outlay / 40% operating programs). In other words, one slate or menu of reductions will likely mirror this breakdown of expenditures. This would result in the assignment of an amount of operating program and capital outlay reductions that would be absorbed by various departments and programs. The service/budget reductions slates that are presented will be informed by existing functional areas and service categories. Additionally, one of the scenarios for long term reductions will mirror the spending priorities that represent the funding decisions in adopted Financial Plans since the inception of Measure Y. 5. Public Participation Staff proposes to engage the community on the topic of Measure Y in March 2014 during the Measure Y Community Forum. Among other activities, an exercise planned for this forum will help participants prioritize services and provide input about how they would recommend the City proceed in a possible future without Measure Y. Community outreach measures to encourage participation in this forum will include messages in Utility Bills, press releases, advertisements in the local newspapers, an article in the Resources if time permits, social media notices, and B4 - 6 Measure Y Contingency Planning Page 7 announcements to all Advisory Bodies. If the City Council members have other suggestions it would be helpful to get your feedback so we can build them into the outreach plan now. The contingency plan should benefit from public input that will be gathered at the Measure Y Community Forum. Conclusion and Recommendations In conclusion, contingency planning with public input for a future without a local ½-cent sales tax is an important aspect of the City’s fiscal health. Planning for this potentiality will enable decision- makers to make timely decisions that could reduce the severity and impact of reductions needed to balance the budget. Strategic direction regarding use of the General Fund reserve and service priorities is needed from the City Council to ensure that the contingency plan reflects Council policy. At this time, direction on the following items is sought from the City Council: 1. Does the Council support a two-part contingency plan that includes specific reductions needed immediately to address the short-fall that would occur during 2014-15 (including options that have implications for the use of reserves to address this short-fall), and a more general menu of reductions that would inform the community and decision-makers about the scope of reductions that would have to occur with the 2015-17 Financial Plan to achieve a balanced budget, including at least three different options for achieving these reductions? 2. Does the council concur with the use of existing Functional Areas and the Service Categorization criteria in prioritizing services to consider service/budget reduction slates for inclusion in the contingency plan? 3. Does the Council support using the Measure Y Community Forum as a venue to discuss the contingency plan and receive input from the public on reductions needed to produce a balanced budget if the ½-cent sales tax is not continued? FISCAL IMPACT Although the City has a Fiscal Health Contingency Plan that can be implemented to deal with adverse economic conditions, the loss of the City’s ½-cent sales tax, which currently constitutes 12% of the General Fund, would be significant enough to require major structural changes to the City’s budget. As a result, a separate contingency plan must be put into place to guide staff and decision makers. The absence of a contingency plan would have a significant fiscal impact on the City if it resulted in delayed decisions or actions to adjust to a significantly lower level of General Fund revenue. By preparing a contingency plan and acting as soon as possible to the loss of revenue, the City would be able to phase in reductions in a more responsible and effective way. ALTERNATIVES 1. Prepare a shadow budget. The City could prepare a shadow budget that would go into effect if a revenue measure fails to pass in the November general election. This alternative is not recommended because the City’s normal financial planning process begins following the election of the Mayor and two council members in November. The City’s normal budget B4 - 7 Measure Y Contingency Planning Page 8 process is suited to the decisions that need to be made to produce a balanced 2015-17 Financial Plan. 2. Provide different direction to staff. The City Council can provide additional or different direction to staff than recommended in this agenda report. t:\council agenda reports\2014\2014-01-21\measure y contingency plan kick-off (padilla)\contingency planning overview and direction (car).docx B4 - 8