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HomeMy WebLinkAbout08/04/2009, B 3 - UPDATE ON STATE BUDGET IMPACTS ON THE CITY council Mad" 8-4-2009 j ac,Enba Report '"N..ba B3 CITY O F SAN LUIS OBISPO FROM: Ken Hampian, City Manager Bill Statler, Director of Finance& Information Technologyi&" " SUBJECT: UPDATE ON STATE BUDGET IMPACTS ON THE CITY RECOMMENDATION Receive an update at the August 4 meeting on the status of State budget impacts on the City and recommended strategies for responding to them. DISCUSSION Background On the heals of closing a $42 billion budget gap in Spring 2009, the State is confronted with an added $26 billion budget gap for 2009-10. At the time of preparation of this report, the "Big Five" (Governor and majority and minority party leadership in the Assembly and Senate) appear to have reached agreement on a State budget for 2009-10, which requires two-thirds approval in both houses for adoption along with the Governor's approval. Many of the details are unclear at this point; and the legislature and Governor have not yet adopted the budget, although we expect that this will have occurred by the August 4 meeting. Accordingly, we will brief the Council at this meeting on the best information we have at that time on the impact of State budget takeaways from local government on the City and recommended strategies for responding to them. Likely Impacts on the City Provided in Attachments 1 and 2 are summaries of the impact of State budget proposals on cities in California prepared by the League of California Cities (League). The following outlines the fiscal impact on the City if the proposals approved by the "Big Five" are adopted by the legislature and the Governor. 1. Proposition IA Loan. As approved by the voters in November 2004, Proposition I allows the State to borrow up to $2 billion from cities, counties and special districts, which must be paid back within three years with interest. While no details have emerged about how this takeaway would be implemented, the "best guessing" is that it will take the form of an 8% reduction in property tax revenues (which have already been reduced by 18% from past State budget grabs). In this case, the impact on the City would be$1.2 million in 2009-10. B3 -/ Update on State Budget Impacts on the City Page 2 On its surface, this would appear to be a one-time takeaway that will be repaid in three years with interest, resulting in a modest long-term impact on the City. The obvious concern is that the State will be in no better shape to repay this borrowing three years from now than it is today. One of the mitigations that has surfaced in addressing this concern is to allow local government agencies to "securitize" the loan, which would result in no net fiscal impacts to cities in 2009-10. Under this approach, local agencies would sell notes to investors, which would be"securitized" solely from the proceeds of loan repayments by the State. The interest costs of doing so would be offset by interest payments from the State. In short, since the only pledge of repayment by cities to bond holders would be loan repayment by the State, cities would be held harmless if the State defaults on its commitment: instead, it would be the bond holders who would be adversely impacted. However, as summarized by the League in Attachment 3, there are a number of obstacles to implementing this option. These include the likelihood that as currently proposed, there simply is no market for a financing based on a State commitment to repay. In short, if we don't believe the State will repay this loan, why would investors? While the Proposition IA takeaways are terrible public policy and make no fiscal sense, at least they are legal. This is what makes the other likely takeaways especially egregious, representing the depth of State cynicism when it comes to its financial management: they aren't legal — and the State knows this. 2. Gas Tax Takeaway. The proposed illegal grab of $1 billion in gas tax revenues from the Highway Users Tax Account ("HUTA") that are restricted constitutionally for local street purposes would cost the City$787,000 in 2009-10 and a similar amount annually thereafter. If this occurs, the League has already retained a law firm and will immediately sue the State to prevent this unconstitutional taking of local revenues. 3. Redevelopment Agency (RDA) Takeaway. This would cost RDA's $1.3 billion in 2009-10 and another $350 million in 2010-11. Based on a recent court decision, this is clearly an illegal diversion of revenues dedicated for specific local purposes to State purposes. If this occurs, the California Redevelopment Association has already signaled its intent to immediately sue the State to prevent this unconstitutional taking of local revenues (as it successfully did last year when the State attempted the same kind of taking). In the case of the City, we do not have an RDA, and accordingly, we do not have funds immediately at risk. However, the cautionary tale for the City is this: if the State is committed to local government revenue grabs like this that are clearly illegal, what limits are there to State grabs of local revenues? 4. Public Transportation Account Takeaway. According to the League, this also-illegal grab has a potential statewide impact on transit agencies of$739 million. In the past, these funds would have been available on a discretionary, competitive basis to transit agencies, so it is not possible to assess the direct impact of this State budget grab on the City. However, we 8 3 -c;� Update on State Budget Impacts on the City Page 3 have used these funds in the past in making transit improvements, although no receipt of these funds are projected in the 2009-11 Financial Plan. Recent Historic Local Government Summit As the Council is aware, on July 17 and 18 over 500 representatives from cities, counties and schools attended a "summit" in Sacramento to explore State governance and fiscal reforms in light of the obvious weaknesses of the current system. This summit, sponsored by the Cities Counties School (CCS) Partnership, a joint effort of the League of California Cities, California State Association of Counties and California School Board Association, is the first time that elected officials from all three of these local government agencies (along with special districts) have met together. Its theme was"Rebuilding California-From the Ground Up." The summit was attended by Vice-Mayor Settle and Council Members Ashbaugh and Carter. Locally, Chris Ungar, Trustee with the San Luis Costal Unified School District, and Bruce Gibson with the County Board of Supervisors, also attended the summit, along with Mayor Tony Ferraro of Arroyo Grande and Mayor John Shoals of Grover Beach. It was also attended by Bill Statler, Director of Finance & Information Technology, who serves on the CCS Partnership Task Force that hosted the summit in his role as the Fiscal Officers representative on the League's Board of Directors. In his July 21 report to the Council (Attachment 4), Council Member Carter provided an excellent summary of the purpose and results of the summit. As discussed in his summary, the summit is likely to result in a two-step approach to improving State governance: 1. Immediate actions to protect local revenues sources As reflected in the sidebar chart, of the many issues that summit participants considered, four stood-out among the rest, with protecting local revenues by far the most significant concern. Protea Local Revenue Sources 256 2. Longer term actions to improve governance. The Reform term limits 111 other three top concerns of -- - - —----- the many considered were Approve local taxes with less than 2/3 vote '�71 reforming term limits, improving local voter Require new funding sources for statewide control over local revenues; ballot measures that impose new obligations 56 and requiring statewide —------------ ----------' - ballot measure to identify 0 loo 200 300 funding sources if they impose added fiscal obligations. We will report on any updates to the CCS Partnership efforts at the August 4 meeting. B3 -3 Update on State Budget Impacts on the City Page 4 ATTACHMENTS 1. State Budget Impacts on Cities: "Enronifornia" 2. State Budget Impacts on Cities: "California's Ponzi Scheme" 3. League and California State Association of Counties Response to Proposition IA Loan Proposal 4. Summary of Summit Results from Council Member Carter G:Finance/Budget Folders/Financial Plans/2009-1 I Financial Plan/State Budget Issues/Council Agenda Report,8-4-09 i33 -`f ..: Ajochmen California at a Crossroacis Will we enact an honest, balanced state budget that respects the will of the people and our constitution? Or will we choose a budget full of bad debt,sleight-of-hand and illegal accounting gimmicks? We can choose a budget that is worthy of California or one that is . essentially a house of cards that will undermine our success and hurt everyone in our great state. Sound Familiar....? 0 Californians Paid for that Scheme, too. Don't adopt a budget that breaks the law and mortgages our future by: Illegally taking$2 billion of local gas tax funds that are used to repair our streets and traffic signals, power our street lights,and reduce traffic hazards. 4 Illegally taking$1.7 billion of local redevelopment funds that are used to remove blight,build affordable housing,and construct basic infrastructure in older urban areas. (Decided:Sacramento Superior Court,April 30,2009) 4� Illegally taking$739 million of public transit funds that are needed to keep millions of Californians off our freeways,streets and roads.(Decided:Sacramento Third Appellate District,June 30,2009) 11 i Recklessly borrowing$1.9 billion of local property taxes needed to finance local police and fire services—borrowing that will have to be repaid in three years when the state is broke. Enough os Enough. Craft a Real Budget. A message from the League of California Cities,established in 1898, B3 —5 representing the 480 cities that provide critical services for the people of California. umch = California's Ponzi scheme: Don't be fooled THE SACRAMENTO BEEV "Were California a corporation, rather than a state, its officers would be playing tiddlywinks with Bernie Madoff in the federal slammer, having engaged in years of hide-the-pea accounting tricks, under-the-table loans and other gimmicks to cover up the state's perpetual operating deficits... ...they will attempt to cover the gap largely with raids on local government funds, bookkeeping tricks such as shifting a month of the 2009-10 state payroll into the 2010- 11 fiscal year, overly optimistic revenue estimates and wishful-thinking spending reductions..." -Dan Walters, Sacramento Bee, July 21, 2009 t, t THWAMs MOUKE "...Borrowing from Wall Street could be difficult," said dr Hallye Jordan, a spokeswoman for California Controller John Chiang. "If there are a bunch of gimmicks in the budget, then Wall Street will likely use that against us." "[Gabriel Petek, an analyst at Standard and Poor's] cautioned that California's [credit] rating, already the lowest of the 50 states, still has the potential to be downgraded because the budget deal relies on "unconventional"fixes and its revenue forecast may be too optimistic.... _I ..."The budget is a pure Band-aid," said [Roger] Noll, [a Stanford University economist]. "It just transfers the problem to next year." -Wall Street Journal, July 22, 2009 Don't adopt a budget full of ugly gimmicks and borrowing: ➢ Unconstitutionally stealing $2 billion in local street and road maintenance funds that are used to repair our streets and traffic signals, power our street lights, and reduce traffic hazards. 8.3-6 ➢ Unconstitutionally stealing $1.7 billion in local redevelopment funds that are used to remove blight, build affordable housing, and construct At hment LEAGUE 1400 K Street.Suite 400 1100 K Street,Suite 101 OFCALIFORNIA Sacramento,California 95814 Sacramento, California 95814 CITIES Phone:916.658.8200 Phone:916.327.7500 www.cacities.org www.csac.counties.org League of California Cities and California State Association of Counties Response to Assembly Leader Blakeslee's Comments About the Prop. IA Loan Background: The League and CSAC were involved in designing the 2003 VLF loan securitization and sponsor the.JPA that did that financing, California Communities. Unlike state government,we have had direct experience with a similar transaction and are not convinced securitization of the Prop. I loan is feasible in this environment for the reasons stated below in response to the Assembly Republican Leaders's comments. Leader's Comment:There has been a lot of discussion about 1 a. I've heard from several local agencies that were unaware of the loan mechanism and repayment provisions that will accompany the suspension. Response: (1)the language of the Prop. IA trailer bill has not been shared with the League, CSAC or CSCDA by legislative staff. These assurances below mean nothing unless the bill is written properly, and past experience tells us it will not be; (2)there remain major complications with securitizing a Prop. IA loan, including: • State's Damaged Bond Rating.The state's bond rating is just above junk bond status and financial advisors tell us it can still go lower. This is important because any securitization of the Prop. IA loan relies on the state's credit rating. Local agencies with strong credit ratings have been in the market for months attempting to sell their TRANs,a routine short-term cashflow borrowing mechanism. Due to the anxiety in the market over anything even associated with California, they have not been able to attract investors to purchase these notes. • No Municipal Bond Insurance. Unlike the 2003 VLF securitization which relied on municipal bond insurance,none exists today or is affordable. This means the cost of the borrowing will be higher, and the language in the authorizing legislation has to be 100%workable to even stand a ghost of a chance of doing it correctly(see City of Industry problem next). • City of Industry Trigger. The reported inclusion of the "City of Industry" voluntary RDA plan will effectively kill any securitization in 2009. No state or bonds can be issued with reliance on the state's credit between Nov. 20 and Feb. 1, because the state does not want to disclose confidential information about the condition of the budget to the market. If the City of Industry"trigger" is not "[Gabriel Petek,an analyst at Standard and Poor's]cautioned that California's[credit]rating,already the lowest of the 50 states,still has the potential to be downgraded because the budget deal relies on `unconventional' fixes and its revenue forecast may be too optimistic."—Wall Street Journal,July 22,2009 B3 -7- Ah achme1otA. pulled until December 1, that means a serious loss of property tax funds for all local government for months after the December property tax distribution, creating significant, unanticipated cashflow shortfalls. This will undoubtedly lead to cuts in public safety and other services. Leader's Comment. I wanted to make sure you had information on the loan/repayment provisions. This was an important part of the final agreement since we wanted to make sure local agencies would not be adversely impacted by the 1 a provision. This repayment mechanism will be in a budget trailer bill. Proposition 1 a—Repayment Guarantee 1) Repayment Guarantee: a. Contingent Appropriation. We will pass a bill at the same time which appropriates the repayment within 3 years. (required by the Constitution)This bill could not be altered because it will be part of the JPA bond covenants. Response: a contingent appropriation is meaningless if all other expenses have been paid first. What we need assurance of is that there will be cash available to make the full repayment, and, at this point, that is in great doubt. Leader's Comment. b. Repayment priority. Bill will place la repayment above all other payments except education(gets first call under the constitution) and bond debt. Payroll and revenue lease bonds are paid after Ia. Response: if the repayment date is June 30, 2013, as we understand, this is meaningless because the state will face serious cash shortages at this time in 2013,based on its own projections. The repayment date has to be moved up to May 1, 2013. Leader's Comment. C. Repayment terms. The state pays local agencies back 100%plus interest. Response: conflicts with 2)b below. Leader's Comment. 2) Loan Mechanism. Provide legislative authority for a loan mechanism similar to the VLF Gap loan authorized through CSCDA. a. CSCDA would have borrowing authority for a single issuance upon application for all locals who wanted it. The Department of Finance has already worked with CSCDA to set up the loan mechanism. Response: Incorrect. The Department of Finance has shared its bill draft, but it is seriously flawed in a number of respects mentioned herein that put the entire financing at risk. We have shared our concerns,but any subsequent conversations have not assured Atta,, "ment 3 city, county and special district representatives that the concerns will be addressed adequately. Leader's Comment: b. Local agencies should receive 95% of their anticipated funds through this loan mechanism. Response: this is totally inconsistent with 1. c)above. Local agencies can't get both 100%and 95% of the funds. Plus, our view is that a I borrowing requires the state to pay locals back IN FULL. Leader's Comment: 3) Impact: The 1 a represents 8%of local property tax. There are no exemptions from the I trigger. All agencies will be eligible to borrow using the JPA mechanism. Response: Incorrect. We have been advised there is a provision to allow local agencies facing financial hardships to be exempted and for their financial burden to be spread among other local agencies in the county. CSCDA: The California Statewide Communities Development Authority (CSCDA or California Communities®) is a joint powers authority sponsored by the California State Association of Counties and the League of California Cities. California Communities& mission is to provide local governments and private entities access to low-cost, tax-exempt financing for projects that provide a tangible public benefit, contribute to social and economic growth and improve the overall quality of life in local communities throughout California. 63-7 RED FILE rCOUNCI aCDD DIR p1dEM iz---FIN-DIR Aftec� &'RRE CHIEF pq ONI diux{CR�ot1s ATTORNEY ff PW DIR :D_. __._ ._- _ _ _ _ -- --- I!rCLERK/ORIO " " GTPOI ICE CHF Local Authority, Local Control O DEPT HEADS LTRECbIR ��--�.g 1!rUTIL DIR .- —�- by Andrew Carter, 07/21/09 �� 0`HR Din 595 words ) �Ce>u vcc c IC i�4 MG2 "We're mad as hell, and we're not going to take it anymore!" That was the sentiment -- cL&re*c expressed by city council members, county supervisors, and school board members from across the state who met in Sacramento on the 17`h and 18d,to discuss the mess that is California state government. There were 500 local elected officials in attendance at the first-ever joint conference of the three statewide organizations which represent California cities,counties, and schools. Attendees from San Luis Obispo County included Supervisor Bruce Gibson, Mayor John Shoals of Grover Beach, Mayor Tony Ferrara of Arroyo Grande, San Luis Coastal School Board Member Chris Ungar, and San Luis Obispo City Council Members Allan Settle, John Ashbaugh, and Andrew Carter. The conference was billed as a"summit on state governance and fiscal reform." The overall theme was "rebuilding California from the ground up." Like most citizens, local officials throughout California have lost all confidence in state government,in particular its ability to deal effectively with the current budget crisis. What's more, local officials are painfully aware that Sacramento's efforts to deal with this mess rely primarily on diverting(read, stealing)or borrowing(perhaps never paying back)revenues which are either legally obligated or traditionally obligated to local government—cities, counties, and schools. The impact is cuts to local services like education,police and fire protection,parks and recreation, and street maintenance—the very services that local residents count on the most and believe in the most. What can we do about the mess in Sacramento? That was the key focus of the cities- counties-schools summit. As many are aware, there's been discussion lately about the possibility of holding a convention to rewrite the state constitution. A key proponent for such action is the San Francisco-based Bay Area Council. That council's CEO, Jim Wunderman, attended the . summit to make his pitch. Because some of the measures such a convention might propose are controversial,another suggestion is to draft individual initiatives which California citizens could vote on. A statewide organization called California Forward is the major proponent of this approach. That organization's executive director,James Mayer, also spoke to conference attendees. What became clear over the two days of meetings,however, is that most local officials believe they need to act independently of such broad-based reform efforts. That's not because we necessarily disagree with the need for broad-based reform. It's because we realize that broad-based reform may not have the support of a majority of voters. More importantly,it's because we recognize our responsibility to local residents demands that S3 -/o AtLcichment.�L we take direct action now against state raids on local revenues and the local services those revenues support. The plan coming out of the cities-counties-schools summit is for our three statewide organizations to work together to draft initiatives which will fundamentally change the current balance of power between state government and local government. Most importantly, we need to make it unconstitutional for the state to divert or borrow local revenue. We also need to make it much more difficult for state government to pass along unfunded state mandates to local government entities. What is needed,in essence,is a local government bill of rights. Local government has an enviable track record of acting responsibly even when times are tough. That's not the case with Sacramento. Statewide polling shows that citizens tend to trust their local elected officials. Almost no one trusts our statewide leaders. Citizens also believe they can impact local government. They've given up hope on changing Sacramento. For all our sakes, it's time for local authority and local control. 03-I/ i• Update on State Budget Impacts on the City Page 4 ATTACHMENTS 1. State Budget Impacts on Cities: "Enronifornia" 2. State Budget Impacts on Cities: "California's Ponzi Scheme" 3. League and California State Association of Counties Response to Proposition IA Loan Proposal 4. Summary of Summit Results from Council Member Carter T. G:Finance/Budget Folders/Financial Plans/2009-1 l Financial Plan/State Budget Issues/Council Agenda Report,8-4-09 133- /� C � 1 council mcmoizanOum r . O'COUNCIL ET"CDD DIR RED FILE 21GAe"maa. ErFIN DIR July 31, 2009 BAG_ MEETING AGENDA aORNEY� 2-PW DIR HIEF TO: City Council DAi CQl .SEL. o rtEm B3 LEAK/ORIG 3"POLICECHF DEPT HEADS a-REC DIR 1 ��B 3-LITIL DIR FROM: Ken Hampian, City Administrative Officer '_�_ '�'" Er HR DIR Bill Statler, Director of Finance & Information Technology Ct" m6 tz- SUBJECT: STATE BUDGET UPDATE ctc-.ruc On July 28, 2009, the Governor signed the 30 or so individual budget.bills that make-up the 2009-10 State budget. The following is a brief update on the"good, the bad and the ugly"of the adopted State budget as it relates to direct fiscal impacts on the City: 0 The Good: In adopting the very difficult 2009-11 Financial Plan, one of the key reasons that we maintained our General Fund reserve at our policy level (20% of operating expenditures) was to strategically position ourselves in the (likely) event of added State budget takeaways. With the Governor's approval of the State budget, that shoe has now dropped. The State budget includes a Proposition IA "borrowing" from cities, counties and special districts of$1.9 billion. Under the State constitution, this loan must be paid back in three years, with interest. The City's share of this loan to the State is $1.2 million. So how can this be good? Because we planned ahead for it and it is our recommendation that we use our reserve in funding this loan. Since this is a "one-time" takeaway, it makes sense - and is consistent with the City's fiscal policies-to use our reserves to cover this. Doing so will take our reserve down to 18% of operating expenditures at the end of 2009-11: not ideal in such a volatile environment but still reasonable. Another option besides using reserves may be to "securitize" the loan via a three-year bond issue, where only the State's commitment to repay the Proposition I loan would be pledged as the payment source to bondholders. Under this approach, which was specifically authorized as part of the State's budget adoption, we would not lose the $1.2 million. Instead, bondholders would be repaid three years from now from the State's repayment at that time; and interest payments to bondholders would be covered by interest payments from the State. There are many details to be worked-out in assessing whether this approach makes sense for the City(and among these is whether this approach is even feasible, given current market conditions and the State's low credit rating). As more details become available, we will report back to the Council with an update and recommendation. And Some More Good News. The proposal to take away $1 billion in gas tax funds from cities and counties (which would have been bad public policy, not to mention illegal) did not happen. This would have cost the City about$800,000 annually. 0 The Bad: A number of State agencies and services will be severely slashed with this budget. There will be significant adverse impacts on community service �C a ucgtion and JUL 2 9 2009 SLO CITY CLERK I� State Budget Update Page 2 health and human services. And given the number of State jobs in our County, there will be adverse impacts on our local economy — and related City revenues — due to State employment cutbacks and furloughs at Cal Poly, California Men's Colony, Atascadero State Hospital, Caltrans, Camp San Luis and other State agencies. We will also see adverse employment impacts from cutbacks at the County, Cuesta College and local school districts due to State budget cuts to them. We do not know the magnitude of these economic impacts — or their resulting impact on the City's revenues — at this time. However, as always, we will closely monitor our revenues throughout the year. © The Ugly: There are there are still many details to be worked-out in implementing this State budget— so what looks like the light at the end of the tunnel could tum-out to be something else. And it probably is not over yet: as columnist Dan Walters recently noted, the State now budgets in five month increments. So, it is possible that threats to cities could back on the table in the near future. Until the State system is fundamentally overhauled, this is just California's sad reality. And speaking of reality: we have to deal with things the way they are and not how they should be. As such, this was the best possible outcome for cities, given the times and the many structural constraints in the State constitution. We will present an overview of these results, including any further updates, at the August 4 meeting. In the interim, call Bill Statler at extension 7125 if you have any questions concerning the status of State budget and its fiscal impact on the City. 17 77 77 GABudget Folders.Financial Plans\2009-11 Financial Plan\State Budget Issues\84 Council Update\84 Council Update.doc