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Home My WebLink About05/00/1989, 2 - REVIEW OF THE CITY'S APPROPRIATION LIMIT MEETING DATE 4111mI11F,11��11 crty of San lU1S OBISp0 May 15, 1989 COUNCIL AGENDA R ORT MINGe MEM NUMBER: FROM: William C. Statler, Director of Finance SUBJECT: REVIEW OF THE CITY'S APPROPRIATION LIMIT CAO RECOMMENDATION Receive and file this report on the City's appropriation limit. OVERVIEW The purpose of this report is to review the status of the City's appropriation limit and to discuss the implications of projected trends. The following are key findings from the City's Comprehensive Financial Management Plan (which will be formally presented to the City Council at its May 24, 1989 meeting on budget issues) regarding the City's appropriation limit: • The City's favorable variance from its limit has decreased significantly since the base year of 1978-79. • A favorable variance from the limit of $1.4 million is projected for 1988-89. • Projected growth in the City's tax base (exclusive of any changes in tax rates such as Transient Occupancy Taxes) will cause the City to exceed its appropriations limit by 1991-92. BACKGROUND The Gann Spending-Limitation Initiative was approved by the voters on November 6, 1979 (establishing Article XIIIB of the State Constitution), which provided for the limitation of state and local governmental appropriations. As discussed in the following summary of the major provisions of the Gann Initiative as they relate to the City of San Luis Obispo, the Gann Initiative is actually a limitation on tax revenues rather than a direct limitation on appropriations: • Appropriations subject to limitation may not exceed appropriations made in 1978-79 except as adjusted for increases in the cost of living, population, and service responsibility transfers. Increases in the cost of living are defined as the lesser of the changes in the U.S. Consumer Price Index or California Personal Per Capita Income. • Appropriations financed through service fees (to the degree that they do not exceed the budgeted cost of performing the service), grant programs, fines and forfeitures, and other "non-tax" sources as defined by the Initiative and SB 1352, are not subject to the Appropriations Limit. Additionally, appropriations for long-term indebtedness incurred prior to FY 1978-79 as well as increased costs as a result of federally-mandated programs are also excluded from the limit. Essentially, with the exception of expenditures for debt service incurred prior to FY 1978-79, all appropriations funded through the proceeds of taxes are subject to limitation. • For the purposes of identifying proceeds from taxes under the Gann Initiative, state subventions which are unrestricted as to their use (such as Motor Vehicle 41111111111�1U city of San LUIS OBISpo 0098 COUNCIL AGENDA REPORT and Cigarette Tax In-Lieu revenues) are considered to be tax sources. Gas Tax, Local Transportation Fund, and SB 300 subventions are identified as non-tax sources as their use is restricted by the State. • All proceeds from taxes received in excess of the Appropriations Limit must be returned through refunds or revisions in tax rates or fee schedules within the next two fiscal years; or approval by the voters of an increase in the City's Appropriations Limit would be required. Any voter approved increase in the Appropriations Limit would be valid for a maximum of four years and would require another vote at the end of that period for continuance. • The Gann Initiative is self-executing; to the extent feasible, local agencies are expected to implement the initiative without further legislative direction (other than SB 1352) or administrative auditing by the State. The Appropriations Limit computations and subsequent implementation of these limits is the sole responsibility of the City, and no formal review by another governmental agency is required. • Major concepts in implementing the Gann Initiative include: appropriations funded through tax sources are subject to the limit, not actual expenditures; and any excess of actual tax revenues over the Appropriations Limit, not actual expenditures or appropriations, must be returned. FINDINGS Provided in Attachment A is a summary of the City's Appropriations Limit and actual proceeds from taxes subject to limitation from 1978-79 (the base year) through 1987-88 along with projections for 1988-89 through 1999-00 These projections have been made i based on the following assumptions: • Annual increases in the cost of living of 5%. • Population increases consistent with the General Plan of approximately 1% annually beginning with 1990-91. • Real growth in the tax base of approximately 6% annually based on historical trends over the past 10 years. As reflected by Attachment A and the graphic summary provided in Attachment B, the City's variance from its limit has consistently declined since the base year (1978-79), and the limit is projected to be exceeded by 1991-92. This timetable would be negatively impacted by the proposed increase of 2% to 3% in the Transient Occupancy Tax, which is estimated to generate between $400,000 to $600,000 in additional revenues subject to limitation. The impact of the Gann Initiative on local government finance is emerging as a critical issue throughout the State. Ultimately, any community which is exp. . encing real growth in its local economy will be faced with exceeding its appropriations limit. To date, 60 agencies have sought an override election. All overrides that were not linked to an increase in tax rates have been successful; and 63% of all overrides related to tax increases have been successful. el� �n��► i�01i1111p� �ll city of san Luis oBispo COUNCIL AGENDA REPORT POTENTIAL MODIFICATIONS TO THE GANN LIMIT In November of 1988, several ballot initiatives aimed at changing the Gann Appropriations Limit to better accommodate economic growth were submitted for voter approval. These initiatives were sponsored or supported by a number of groups including the League of California Cities, County Supervisors Association, the University and College Systems, California Tax Payers Association (Cal Tax), National Association of Realtors, the Chamber of Commerce and others. Several of these supporters were the initial authors of the Gann Initiative in 1979. All of these initiatives were narrowly defeated. Presently, a coalition referred to as "Project 90" and led by the California Tax Payers Association is developing a legislative measure which would modify Article XIIIB of the Gann appropriation limit and its effect on State and local government. Their analysis indicates its impact is not what was originally contemplated by the 1979 authors and, in fact, compromises economic growth and entrepreneurial actions by public jurisdictions. The Project 90 coalition presently includes Cal Tax, the California Chamber of Commerce, representatives of major public employee organizations, the University and College Systems, and the medical and health industry. As presently drafted, the Project 90 proposal is consistent with the League of California Cities' policy of favoring modifications to Gann which better accommodate economic growth and allows for the length of voter overrides to be determined in the ballot measure. Several sources indicate there is strong legislative support for the Project 90 proposal. However, should the proposal not be approved by the legislature, the coalition is prepared to pursue a ballot initiative in June of 1990. RECOMMENDED GANN POLICIES i The Comprehensive Financial Management Plan includes the following recommendations regarding the City's appropriations limit: 1. The City shall strive to develop revenue sources, both new and existing, which are considered non-tax proceeds and, therefore, not restricted by the expenditure limitation. 2 The City shall annually review user fees and charges and report to the City Council the amount of program subsidy, if any, that is being provided by the General or Enterprise Funds. 3. The City shall seek a vote of the public to amend its appropriations limit at such time that tax proceeds are in excess of allowable limits. 4. The City shall actively support League of California sponsored or supported legislation or initiatives which would modify Article XIIIB of the Constitution in a manner which would allow the City to retain projected tax revenues resulting from growth in the local economy for use as determined by the City Council. I city of san Luis oBispo COUNCIL AGENDA REPORT SUMMARY The purpose of this report is to provide an overview of the City's Appropriations Limit and to review the implications of projected trends on the City's future financial capacity to fund existing levels of service and projected capital programs. APPROVALS: City Administrative Officer City Attor ATTACHMENTS: 1. Attachment A - Summary of the City's Appropriations Limit and tax proceeds subject to limitation • 1978-79 through 1999-00. 2. Attachment B - Graphic summary of the City's appropriations limit trends. I AGENDA RPT/APPLIMIT 4 C \ CITY OF SAN LUIS OBISPO ATTACHMENT A SUMMARY OF APPROPRIATIONS LIMIT AND TAX PROCEEDS SUBJECT TO LIMITITATION ACTUAL AND PROJECTED • 1978-89 THROUGH 1999-00 -------------------------------------------------------------- PROCEEDS FROM VARIANCE- APPROPRIATIONS TAXES SUBJECT FAVORABLE LIMIT TO LIMITATION (UNFAVORABLE) --------------------------------------------------------------- ACTUAL 1978-79 $8,220,471 $8,220,471 $0 1979-80 9, 0251701 61355,807 2,669,894 1980-81 101171,331 6, 0571803 4, 113,528 1981=82 11,213,275 81577,460 21635,815 1982-83 12,284,800 81551, 198 3,733,602 1983-84 12,752, 036 9,798, 697 21953,339 1984-85 13, 640,976 10,739,997 21900,979 1985-86 14,439,832 11,877,293 2,562,539 1986-87 15,2101675 13,476,829 1,733,846 1987-88 15,7841358 14,854, 111 930,247 PROJECTED 1988-89 17,077,276 15, 666,454 1,4101822 1989-90 18,252, 192 17,.136, 012 1, 116,180 1990-91 19, 360, 100 18,819,448 540,652 1991-92 20,533,322 20, 679,220 (145,898) 1992-93 21,773,535 22,713, 103 (939,568) 1993-94 23 ,068,479 24,990, 612 (11922, 133) 1994-95 24,476,285 27,519,411 (3,0431126) 1995-96 25,959,548 301347,508 (4,387,960) . 1996-97 27, 530,101 33,446, 364 (5,916,263) .1997-98 29, 192,919 36, 886, 527 (7,693,608) 1998-99 30,953,252 40, 6971256 (91744,004) 1999-00 32, 8161638 45, 066, 226 (12,249,588) r ATTACHMENT B Z �N j T ' O r � � r J ; U i W 0 W m Z ~ � 0 U w O H LV Ono ¢ W - Ua3m0 � cm V � CO CD � ¢ � LU r r 'a XQ J W COCO CO � i ZWO Z t0_ LL. Z � Q H 0 Q a J (L N a a Z � O '- a Q a, O C i � p i CL i CL CO Qi Q �. ! 0 o O o W Nt cr) 04 r