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HomeMy WebLinkAbout11/21/2000, C2 - PERFORMING ARTS CENTER OPERATING SUBSIDY council Meeting DAD n1e +r - zr-va acEnaa aEpont CITY OF SAN LUIS OBISPP�O� FROM: John Dunn, City Administrative Officer �' SUBJECT: PERFORMING ARTS CENTER OPERATING SUBSIDY CAO RECOMMENDATION 1. Approve increase in the City's on-going annual operational support to the Performing Arts Center from$65,000 to $100,000. 2. Appropriate $35,000 from the unreserved General Fund balance to pay for the increased subsidy for 2000-01. DISCUSSION Background As the Council is aware, the Operating Agreement for the Performing Arts Center(the partners are Cal Poly, Foundation for the Performing Arts Center (FPAC), and the City) requires that the City and FPAC make up any year-end "operating deficits" of the Center. For the last several years, the actual practice for the two agencies has been to put up $65,000 each as an "upfront" operational support contribution, and Cal Poly has put up about $260,000 per year for operational support, in addition to the agreement by the University to cover the costs of routine maintenance and utilities. As was discussed at the recent meeting of the partners and the City Council, we have just about reached the practical limitation on the amount the Center is able to charge to using or event sponsoring groups, as well as the amount that can be charged for ticket prices. These two operational revenues only support approximately half of the annual operations budget. The balance of the budget, of necessity, has been made up by contributions (or operating subsidies) from the three partners. However, even these special contributions over the years have produced a "bare bones" operating budget. In the first year or two of the Center's operation, this situation could be more easily adapted to because all the building systems and furnishings were new, and the new equipment was under warranty. As the Center is now in its fifth season, it has become evident that additional funds are necessary not only to cover the operational shortfall, but also to address the issue of establishing sufficient operating accounts or dedicated reserves to deal with furnishings and equipment needing maintenance,refurbishment,or replacement. Proposals to Eliminate Operating Deficit In the last six months, there have been three meetings of the partners, with these meetings having two primary subjects of discussion: 1. What should be done in the short term in order to buttress the annual operating budget so that the Center maintains a quality operation and has sufficient funds to attend to the maintenance C2-1 Council Agenda Report—Performing Arts Center Operating Subsidy Page 2 and replacement of facility equipment and furnishings? 2. What should be done for the long term in order to reduce the reliance of the Center upon the annual operating contributions of the three partners? The answer reached to the first question is for each of the three partners to "step up to the plate"and . do its fair share to address the chronic underfeeding of the Center's operation and the maintenance of the facility. The specific agreement, suggested by the City's representatives, was that both FPAC and the City would increase their upfront annual operating subsidy from $65,000 to $100,000 per year. Cal Poly indicated it would increase its previous commitment on the annual contribution from $260,000 to $300,000, and extend its commitment from the first five years of operation to the first seven years of operation. The recommendation before the Council relates to the City's portion of this collective approach of the partners. The answer to the second question, relating to the longer term, is that there has to be a sufficient permanent endowment so that the interest income would equal the present annual operating contributions from the three partners, or the creation of an endowment of about $10,000,000 producing at least $500,000 in annual income. The three partners concur that the creation of such an endowment is the best long-term answer to the on-going issue of annual operating subsidies, and that, although FPAC would be the lead agency for this campaign, a successful campaign will demand the full involvement and participation of all three partners. As this campaign develops,the City will need to consider carefully the role it plays in the process. Maintenance Reserve Fund This past year, both the City and FPAC allocated an additional $50,000 each to establish, for the first time, a reserve fund for the maintenance and repair of Center equipment and furnishings. The Council will recall that Cal Poly, as part of its initial contribution, agreed to assume the custodial service, routine maintenance and care of the facility, as well as the cost of utilities. They do this at an annual cost of about $300,000. The additional repair, maintenance and replacement funding put up by the two partners has enabled the Center to commence the process of addressing equipment and furnishing maintenance issues. However, it is anticipated that annual contributions to both the maintenance/replacement reserve and the operational budget are necessary to maintain a quality operation and a well-maintained and attractive facility. While the amount of City future contributions to such a reserve has yet to be determined, it is anticipated that a recommendation for such funding will be made as part of the upcoming Financial Plan. Conclusion Basically, what is being addressed in this agenda report is the question of the City's cost for the operation and maintenance of the Center compared to the benefit the City, and the citizens we represent, receive in return. Staff believes the benefits fall in three areas: artistic and cultural; improving the City's image and intensifying the spirit of community; and economic. On the first, there is no doubt that the Center has greatly enhanced the cultural life of the community through the availability of a sufficient-sized venue and an aesthetically uplifting facility. On the second, there is general agreement that the Center has added a new and important"gathering place"that advances C2-2 Council Agenda Report—Performing Arts Center Operating Subsidy Page 3 the feeling and spirit of community. On the last, the Council will recall that the City contractedwith the University of California Santa Barbara Economic Forecast Group for a study of the Center's impact on the area's economy during the second year of the Center's operation. The conclusion of the study, based on the first year of operation,was that the Center contributed about $8,000,000 annually to the area's economy, to area restaurants, hotels and motels and other businesses. At that time, it was estimated that the City received about $211,000 in direct benefit in the increased transient occupancy and sales tax revenues. The recommendation to increase the on-going annual operational subsidy to $100,000 is recognized as a short-term necessity until a longer-term solution is in place. The City should encourage FPAC, and Cal Poly to join us in commencing to address the longer-term solution, the creation of a dedicated endowment of sufficient size so that the annual operating contributions of the three partners are no longer necessary. CONCURRENCES: Cal Poly and FPAC concur with the recommendation to increase the annual operational subsidies of the partners. FISCAL IMPACTS: Increasing the City's operating subsidy to the Performing Arts Center from $65,000 to $100,000 will increase annual costs by $35,000. As such, we recommend appropriating $35,000 from the unreserved General Fund balance. Based on the 1999-01 Financial Plan Supplement, Council- approved changes since then and interim year-end results for 1999-01, this will result in an ending fiord balance that is 22.2%of operating expenditures compared with our policy minimum of 20%. Funding for future years operational subsidy will be included in the upcoming Financial Plan. C2-3