HomeMy WebLinkAbout01/00/1990, 3 - REVIEW OF COMPREHENSIVE FINANCIAL MANAGEMENT PLAN MEETING DATE:
City Of San WAS OB1SPO 1/30/90
A ME
COUNCIL AGENDA REPORT "''NUMBER:
FROM William C. Statler, Director of Finance
SUBJECT: REVIEW OF COMPREHENSIVE FINANCIAL MANAGEMENT PLAN
CAO RECOMMENDATION
1. Review the findings and recommendations of the Comprehensive Financial
Management Plan(Phase II of the Financial Services Study)previously submitted to the
Council as part of the 1989-91 Financial Plan process.
2. Approve general concepts for the development of a comprehensive user fee policy.
3. Approve action plan for the implementation of the Comprehensive Financial
Management Plan.
OVERVIEW
The need to analyze and address the City's long-term financial health was identified as a
major objective during the 1987-89 Financial Plan process. To accomplish this objective, the
City initiated a comprehensive financial planning effort comprised of two key phases:
1. Development of a cost allocation plan to identify the total cost (direct and indirect)of
providing services and a resulting user fee analysis.
2. Preparation of a Comprehensive Financial Management Plan (CFMP) which identifies
the City's operating, capital, and related revenue needs through the year 2000, and
recommends policies, capital financing plans, and revenue sources to meet those needs.
The findings and recommendations of the CFMP, which was prepared with consultant
assistance from the firms of Evensen Dodge and Vertex Cost Systems, are concisely addressed
in the Executive Summary of the CFMP; however, the following are highlights from the
Consultant's report:
• The City has adopted comprehensive budget and financial policies which place
the City at the forefront of municipal financial planning in California. These
policies have provided a prudent financial course of action while being flexible
to respond to changing needs and conditions.
• The City's current financial condition is strong by California and national
standards, and significantly contributes to its favorable credit rating and
financial stability.
• Although the City has exhibited prudence in its current and past financial
management and policies, significant financial challenges continue to face the
City in achieving its capital improvement plan goals while maintaining
operating program levels: by 1991-92, $4.1 million In new revenues will be
required annually for the City's governmental (non-enterprise) operations; and
significant rate increases will be required for the City's water and sewer
operations. However, through this planning effort, the City has taken the
opportunity to identify and respond to problem areas before, rather than after,
• they occur.
The results of this work effort were presented to the City Council in conjunction with the
1989-91 Financial Plan process, and implementation of the CFMP's findings and
recommendations was adopted as a major objective in the 1989=91 Financial Plan (page B-51).
Accordingly, the purpose of this Study Session is threefold: RECEIVED
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• Review the findings and recommendations of the CFMP. Special Study Sessions
have already been scheduled in the near future to address the long-term
financial needs of the City's parking program(February 26, 1990)and water and
wastewater operations (February 20, 1990). Accordingly, the focus of this
review will be on the City's "non-enterprise" activities.
• Approve general concepts for the development of a comprehensive user fee
policy.
• Approve action plan for the implementation of the CFMP.
The following provides a discussion of each of these three topics.
REVIEW OF COMPREHENSIVE FINANCIAL MANAGEMENT PLAN
At their February 23, 1988 meeting, the Council approved the performance of a Financial
Services Study with consultant assistance from the firms of Evensen Dodge and Vertex Cost
Systems. The overall Financial Services Study is composed of three major phases summarized
as follows:
Phase I - City-Wide Cost Allocation Plan and Cot Recovery Program
This portion of the work program was primarily the responsibility of Vertex Cost Systems
acting as a subcontractor to Evensen Dodge, and includes the following elements:
• Development of a City-wide cost allocation plan to determine the total operating
costs of providing municipal services.
• Determine current and potential user fees and related activity costs.
• Comparison of the City's current and proposed fees with other agencies.
• Development of indirect cost rates for use in federal and state grant programs.
This component of the workscope is completed, and the report findings were submitted to the
Council on January 9, 1989. Although previously distributed to the Council, reference copies
have been provided in the City Clerk's Office, and additional copies are available upon
request.
Phase II - Comorehensive Financial Management Plan
Using the cost of service information developed under Phase I, this portion of the workscope
was the responsibility of Evensen Dodge, and includes the following elements:
• Review of capital financing requirements.
• Evaluation of existing debt.
• Review of existing financial policies.
• Analysis of current financial position.
• Development of financial projections through the year 2000.
• Identification of financing alternatives.
0 Recommendations regarding financing plans, policies, and funding sources.
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This component of the workscope has also been completed, and the report findings were
submitted to the Council on May 24, 1989 in conjunction with the 1989-91 Financial Plan
process. Although previously distributed to the Council, reference copies have been provided
in the City Clerk's Office, and additional copies are available upon request.
As noted in above,the CFMP identified the need for$4.1 million in additional"non-enterprise"
revenues if existing service levels are to be maintained and currently identified capital
improvement goals are to be achieved. In considering the implications of this finding, the
following factors should be considered:
• The revenue shortfall can be accommodated by reducing service levels and
deferring or eliminating current capital improvement plans. Additionally,
productivity improvements should not be discounted as a major source of
augmenting the City's revenue base. The importance of productivity in
improving the City's financial condition and managing resources was
highlighted in the 1989-91 Financial Plan through the adoption of a new policy
on productivity (page B-13)and Management Team Objectives for Productivity
Review (page B-48) and Organizational Development (page B-49).
• Conversely, the need to augment revenues will be even greater if the Council
desires to augment existing service levels and implement additional capital
improvement plans. For example, the 1989-91 Financial Plan includes a wide
range of new activities in a variety of program areas (transit, drug education,
environmental coordination, hazardous materials, historical preservation,
property regulation, and open space/parkland acquisition) that were not
specifically addressed in the CFMP.
• The CFMP represents a significant step in the City's effort to plan and manage
its financial future. However, it is based on a number of assumptions(for both
revenues and expenditures)that are subject to changing economic conditions and
community needs and expectations. As such, the findings of the CFMP should
be viewed as an "order-of-magnitude" forecast; it is not intended to be a ten-
year budget and accounting document.
Phase III - Plan Imolementation
Implementation of the findings and recommendations of the CFMP is a major objective in the
1989-91 Financial Plan. At this time, recommendations of the CFMP regarding financial
management policies have been adopted by the Council, and have been incorporated into the
Policies section of the 1989-91 Financial Plan. Remaining actions include the implementation
of revenue sources and capital financing plans to meet the City's projected operating and
capital needs through the year 2000.
As provided on pages 7 to 10 of the CFMP Executive Summary, there are a number of revenue
sources in addition to user charges that can be used in developing the $4.1 million in new
revenues required, including:
• An increase in transient occupancy taxes
• Benefit assessments
• Capital improvement impact fees
• Local option sales tax
In addition to these sources, the City also has control in setting tax rates for business license
and utility users taxes, sources which have significant revenue potential. However, before
determining the appropriate use of additional tax revenues, the development of a
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comprehensive user fee policy should be pursued, which is one of the key purposes of this
Study Session and is discussed in the next section of this Agenda Report.
USER FEE COST RECOVERY CONCEPTS
Phase I of the Financial Services Study identified $2.1 million in potential "non-enterprise"
user charges which can be used as a significant source of funding in meeting the City's
projected revenue needs as developed in the CFMP. However, prior to implementing any
specific fee increases, the Council identified the need to establish an overall policy regarding
the appropriate mix and use of tax revenues and user charges in funding the City's operating
and capital programs. Accordingly, as outlined in the attached status report on the
Management Team Objective for Long-Term Financial Health (page B-51 of the 1989-91
Financial Plan), the next step in implementing the CFMP is, the development of a
comprehensive user fee cost recovery policy.
In developing this policy, the following general concepts are presented for Council discussion
and approval regarding:
• The use and purpose of tax revenues versus service charges.
• Factors which support high levels of cost recovery and those which support some
level of subsidy from tax revenues.
Use of Tax Revenues vs Service Charee
Phase I of the Financial Services Study identifies the maximum revenue potential available
from each of the City's non-enterprise operating activities. However, the major policy issue
associated with this component of the Financial Services Study is not addressed in this
document
• What level of cost recovery should be achieved through user charges?
Cost recovery policies have been formally established for the enterprise funds and recreation
programs; however, no specific cost recovery goals have been developed for other program
areas such as planning, engineering, or building and safety. In determining cost recovery
policies, the following concepts concerning the level of cost recovery and the beneficiaries of
the service should be considered:
Community-Wide vs Special Benefit
The level of user fee cost recovery should consider the community-wide versus special service
nature of the program or activity. The use of general purpose (tax) revenues is appropriate
for community-wide services,while user fees are appropriate for special services. Any specific
program or activity may possess elements of both of these aspects in varying degrees, and as
such, a policy of charging user fees ranging from 0% to 100% (similar to the City's policy
regarding recreation user fees) may be appropriate depending on the nature and type of
service.
Service Recipient vs Service Driver
After considering community-wide versus special benefit of the service,the concept of service
recipient versus service driver should also be considered. For example, it could be argued that
the applicant is not the beneficiary of the City's development review efforts: the community
is the primary beneficiary. However, the applicant is the driver of development review costs,
and as such, some level of cost recovery from the applicant is appropriate.
Historical Use of Taxes vs User Charges
In comparison to other California cities, the City of San Luis Obispo has traditionally used
a lower level of user fees (and correspondingly, has relied more heavily on tax sources) in
funding its "non-enterprise" operations. This difference in approach is reflected by the
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COUNCIL AGENDA REPORT
following summary of revenue sources for "non-enterprise" operations:.
California Cities
City of
Source of San Luis Population All
Funding Obispo 25,000-50,000 Cities
Taxes 72% 54% 52%
From other governments 12 20 19
Service charges 6 11 11
Other 10 15 18
TOTAL 1 100% 10
As reflected above, the City's reliance on tax sources is 33% greater than other cities in
California. Correspondingly,other California cities rely on service charges significantly more
(83%) than does the City of San Luis Obispo. These other cities have identified three key
benefits associated with a higher reliance on service charges:
• Directly relates resources to costs and service levels.
• Because of this relationship,forces organizations to be more entrepreneurial and
responsive to consumer needs.
• Increases the City's financial independence by reducing its reliance on revenue
sources over which it has little or no control.
Effect of Pricing on the Demand for Services
The level of cost recovery and related pricing of services can significantly affect the demand
and subsequent level of services provided. At full cost recovery, this has the specific
advantage of ensuring that the City is providing services for which there is genuinely a
market that is not overly-stimulated by artificially low prices. Conversely, high levels of cost
recovery will negatively impact on the delivery of services to lower income groups. This
negative feature if especially pronounced, and works against public policy, if the services
are targeted to low income groups.
Feasibility of Collection and Recovery
Although it may be determined that a high level of cost recovery may be appropriate for
specific services, it might be impractical or too costly to establish a system to identify and
charge the user. Accordingly, the feasibility of assessing and collecting charges should also
be considered in developing a user charge policy, especially if significant program costs are
intended to be financed from that source.
Ability to Finance Operating Programs and Capital Projects
As discussed above, there are number of factors that support the use of service charges as a
major source of financing City services. However, even if taxes were determined to be the
most desirable form of financing these services, the reality is that there are legal constraints
which restrict the City's ability to increase tax revenues in meeting expanding community
needs. As such, if existing services levels are to be continued and identified capital
improvement goals achieved, the City must augment its overall revenue base, and service
charges can and should play a major role in this effort.
Factors Which Favor Use of Tax Revenues
The use of general purpose tax revenues as a major source of funding the delivery of services
is especially appropriate under the following circumstances:
• There is no intended relationship between the amount paid and the benefit
received. Almost all "social service" programs fall into this category as it is
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COUNCIL AGENDA REPORT
expected that one group will subsidize another.
• Collection of fees is not cost-effective or will significantly impact the efficient
delivery of the service.
• There is no intent to limit the use of (or entitlement to) the service. Again,
most "social service" programs fit into this category as well as many public
safety (police and fire) emergency responses. Historically, access to
neighborhood and community parks would also fit into this category.
• The service is non-recurring, generally delivered on a "peak demand" or
emergency basis,could not reasonably be planned for on an individual basis,and
there is not a readily available private sector source. Many public safety
services also fall into this category.
• Collection of fees would discourage compliance with regulatory requirements
when adherence is primarily self-identified and failure to comply would not
be readily detected by the City. Many small-scale licenses and permits might fall
into this category.
Factors Which Favor Hieb Cost Recovery Levels
The use of service charges as a major source of funding service levels is especially appropriate
under the following circumstances:
• The service is similar to services provided through the private sector.
• Other private or public sector alternatives could or do exist for the delivery of
the service.
• For equity or demand management purposes,it is intended that there be a direct
relationship between the amount paid and the level and cost of the service
received.
• The use of the service is specifically discouraged. Police responses to
disturbances or false alarms might fall into this category.
0 The service is regulatory in nature, enforces discretionary approvals, and
voluntary compliance is not expected to be the primary method of detecting
failure to meet regulatory requirements. Building permit, plan checks, and
subdivision review fees for large projects would fall into this category.
General Concents Regarding the Use of Service Charges
The use of service charges should be subject to the following general concepts:
• Revenues should never exceed the reasonable cost of providing the service.
• The method of assessing and collecting fees should be as simple as possible in
order to reduce the administrative cost of collection.
• Rate structures should be sensitive to the "market" for similar services as well
as to smaller, infrequent users of the service.
• A unified approach should be used in determining the mix of service fees and
tax revenues in funding various programs and activities based on the factors
discussed above.
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ACTION PLAN
With the Council's approval of the general concepts for user fees as outlined above, the next
steps in implementing the CFMP are outlined in Attachment A and summarized as follows:
Draft User Fee Policy
Based on Council direction at this Study Session, staff will begin drafting a comprehensive
user fee policy which will provide general cost recovery principles as well as specific cost
recovery goals (percentages) for each of the City's major fee categories. Rate structures will
also be developed during this phase.
Community Review
Concurrent with the drafting of a user fee policy, the findings of the CFMP will be presented
to various community groups such as the Chamber of Commerce, League of Women Voters,
Contractors Association,and any other interested or affected groups. Additionally,as outlined
in a memorandum previously distributed to Council, the CAO is forming an advisory group
composed of representatives from various sectors of the community to assist him in preparing
final recommendations to the Council. The scope of this community review process would
include all of the findings and recommendations of the CFMP, and would not be limited to
just user fees.
Final Recommendations to Council
The CAO's final recommendations regarding user fees and other new revenue sources will be
submitted to the Council for their approval.
Implementation Procedures
Specific resolutions and ordinances as required to implement Council policy will be submitted
for Council approval. This step would include adoption of specific fee schedules, phasing
(if appropriate) of any new or significantly increased fees, and process for ensuring ongoing
review and adjustment of fees.
SUMMARY
The findings and recommendations of Phases I and II of the Financial Services Study (User
Fee Analysis and Comprehensive Financial Managment Plan) have been completed and
previously submitted to the Council for review and discussion. To begin implementation of
these work products, Council approval of the general concepts for user fee cost recovery and
action plan for implementation as outlined in this Agenda Report is recommended.
APPROVALS:
rty Adm nistrative Officer
MID YR 6UD/REVCFMP.WPF
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ATTACHMENT A
OMANAGEMENT TEAM OBJECTIVE LONG-TERM FINANCIAL HEALTH
Objective
To implement programs that will ensure the long-term financial health of the City.
Final Product
Fiscal Independence: Implementation of financing policies,new revenue sources,and rate structures
that will support the City's commitment to an excellent program of municipal services and the
construction of necessary public facilities.
Responsibility
Department: Finance Project Manager: William C. Statler
Current Status
Recommended financial management policies have been adopted by the Council and a presentation
of implementation concepts has been scheduled for a Council Study Session on January 30, 1990.
Significant Next Steps
Develop policy guidelines for user fee cost recovery and develop methods/opportunities for
community review and input regarding the findings of the Comprehensive Financial Management
Plan.
Percentage Complete Completion
Milestones 0% 25% 50% 75% 100% Date
1. Adoption of recommended financial
management policies by Council *s*sssssssss:*ssss*ssssss*ss**** 7/89
2. Presentation of implementation concepts
to Council at Study Session *`**`***********`**`**" 1/90
3. Develop draft policy guidelines for
user fee cost recovery and ongoing review
of rates and charges *`**`**"******` 2/90
4. Provide opportunities for community input
and review * 3/90
5. Present final recommendations to Council
for review and discussion * 4/90
6. Adopt implementing ordinances and resolutions ` 5/90
Financial Pian References
Policies and Objectives (B-51)
.^,pirating Programs - Financial Administration (D-89)
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