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HomeMy WebLinkAbout12-04-2018 Item 15 - Financial Plan Process - Economic Outlook - Budget Policies - Capital Improvement Plan Review Department Name: Finance Cost Center: Budget For Agenda of: December 4, 2018 Placement: Business Item Estimated Time: 90 minutes FROM: Derek Johnson, City Manager Brigitte Elke, Finance Director Prepared By: Alex Ferreira, Budget Manager SUBJECT: 2019-21 FINANCIAL PLAN PROCESS; ECONOMIC OUTLOOK, BUDGET POLICIES, AND CAPITAL IMPROVEMENT PLAN REVIEW RECOMMENDATION 1. Review and approve the 2019-21 Financial Plan Goal Setting Process. 2. Review the City’s budget policies. 3. Review and discuss the Economic Outlook for the 2019-21 Financial Plan development. 4. Review the current and long-term capital improvement plan. REPORT-IN-BRIEF The City of San Luis Obispo utilizes a two -year financial planning process to create its budget. This process includes extensive public outreach to assist the City Council in establishing Major City Goals. The benefits of this process are two -fold; it ensures that resources are allocated in the budget to accomplish the community’s highest priority, most important objectives while also addressing the support and maintenance of the City’s current services and capital assets. It therefore provides a process to help create a mutual understanding among community members, decision makers, and City staff and a platform of collaboration toward a common goal. The process includes a wide-reaching community priorities survey, the Community Forum, advisory body recommendations, and several other inputs to prepare the City Council for selecting community goals and priorities for the next fina ncial plan during its Goal-Setting Workshop. Subsequent Council meetings will provide direction to City staff for work programs in support of these goals. Also, the Financial Plan process includes a review of the local economy and its potential impact to the City’s forecast financial position. Beacon Economics presented its Central Coast Economic Forecast on November 2, 2018 which included positive overall trends for the County of San Luis Obispo as the overall economy of California continues to grow. Ad ditionally, a major feature in the City’s Financial Plan process is reliance upon clear polices. In looking at cities across the nation that have reputations for being financially well -managed and have maintained their fiscal health through good times and bad, one finds that they have in common clearly articulated fiscal policies used in financial decision-making. This report Packet Pg. 205 Item 15 Major City Goals represent the most important, highest priority goals for the City to accomplish over the next two years, and as such, resources should be included in the 2019-21 Financial Plan. highlights two new policies adopted in the 2018-19 Budget Supplement that will also be included as part of the 2019-21 Financial Plan. DISCUSSION Two-Year Financial Plan Process For over thirty years, the City has used a two -year financial planning process to create its budgets. The benefits of budgeting based on a two -year plan include: 1. Reinforcing the importance of long-range planning in managing the City's fiscal affairs. 2. Concentrating on developing and budgeting to accomplish significant objectives. 3. Establishing realistic timeframes for achieving objectives. 4. Creating a pro -active budget that provides for stable operations and assures the City's long-term fiscal health. 5. Reducing the amount of time and resources allocated to preparing annual budgets. The fundamental purpose of the City’s budget process is to link, through public engagement and strategic deliberation, the interest of the community to the available financial resources to achieve the desired outcome. The process allows the City Council to engage the community in identifying Major City Goals for the City while also providing information regarding the City’s core services, including the day-to-day work and responsibilities carried out by City employees to support residents’ quality of life. 2019-21 Goal-Setting Process There are a variety of possibilities to provide input to the City Council to enable them to establish Major City Goals with the community’s interest in mind. These opportunities are highlighted on the following chart: Packet Pg. 206 Item 15 Many of these efforts are already under way. For example, City Advisory Bodies have developed recommended goals, the Community Priorities Survey (Attachment C) has been mailed out and was posted on-line at www.slocity.org/opencityhall, and the Council has held the November 13 “Setting the Stage” workshop. Notice has also been sent to ove r 200 community groups and individuals inviting their input and participation (Attachment B). The two principal elements of the City’s goal setting process still to come are the Community Forum, to be held on Wednesday, January 23, 2019, at 5:00 PM at the Veterans Hall on Grand Avenue, and the Council Goal-Setting Workshop to be held all day on Monday, February 4, 2019 in City Hall’s Council Chamber. Staff plans to build on past successes in integrating Council goal-setting into the budget process including the integration of proposed uses for the City’s local half-percent sales tax. 1. Community Forum The Community Forum, scheduled on January 23, 2019, is intended to solicit suggestions from residents, community groups stakeholders and interested ind ividuals on City goals. It is also intended to meet the requirements regarding the City’s half-percent local sales tax, by providing an opportunity for the Revenue Enhancement Oversight Comm ission (REOC) to “review and discuss the use of the revenue generated by the Local Revenue Measure.” As such, the Community Forum will be a joint meeting of both the City Council and REOC. Due to the significant attendance at previous Community Forums, this year’s forum will be held at the Veteran’s Hall on Grand Avenue. Packet Pg. 207 Item 15 The proposed agenda for the Community Forum is included in Attachment A. This Community Forum will build on best practices from prior years as well as implement several changes based on feedback. Those changes include: 1. Incorporation of a workshop format which will allow for more interaction and conversation with staff and the public. Public comment will be included for those that wish to address the Council and REOC directly and elaborate on an idea or concept. 2. The use of stations to build on input already received through the survey including existing Major City Goals. This will allow community members to provide more specific feedback and ideas on what could be included future workplans. There will also be a station for new Major City Goal ideas. 3. A dot exercise that will allow community members to prioritize potential Major City Goals. 4. An opportunity to prioritize project and services categories for Local Revenue Measure funding. 5. Opportunities to learn more about the City’s core services, Fiscal Healt h Response Plan and other topics. The proposed changes are intended to broaden the ways in which the public can provide feedback, provide additional focus on core services and current Major City Goals and build on input already received through the survey. 2. Council Assignment Based on all the feedback and input received, Council Members are asked to prepare and submit up to seven candidate goals as Major City Goals by 9:00 a.m. on Friday, January 25, 2019 for consideration during the February 4, 2019, Goal Setting Workshop (Attachment D). Council Members are also asked to prepare and submit suggestions for changes in current programs and services that might help fund their desired goals. Staff will compile verbatim, compose lists, organized by common topics, without identifying who submitted the particular statements, for review and consideration before the workshop. This list will be distributed to all Council Members and made available to the community at the close of business on Friday, February 1, 2019. While staff will retain individual submissions in the working files, it is recommended that Council members refrain from releasing their personal lists so that each Council member can review all of the submissions and discuss them at the Goal-Setting Workshop before taking a position. 3. Council Goal-Setting Workshop At the February 4, 2019, workshop, the Council will review the consolidated goals presented by Council Members to ensure clarity, completeness and understanding; and then narrow the lis t to finalist goals that are supported by a majority of Council Members. Packet Pg. 208 Item 15 While the Council proceeds with the discussion outlined above, staff will prepare a final listing that the Council can use in prioritizing goals. In years past, the Council has us ed a ranking system of 0 through 5 for each candidate goal and staff recommends continuing its use for 2019 - 21, summarized as follows: 5 - most important, highest priorities for City to achieve over the next two years. 4 - very important goal to achieve. 3 - important goal to achieve. 2 - address if resources are available. 1 - defer to 2021-23 for consideration. 0 - not a priority goal. The number of points used for ranking is typically figured out through discussion on the day of the workshop. Based on experience, it is likely that two priority “tiers” will emerge from this process: 1. Major City Goals. These represent the most important, highest priority goals for the City to accomplish over the next two years, and as such, resources to accomplish them s hould be included in the 2019-21 Financial Plan. The initial list of Major City Goals following the ranking will include only those goals where a majority of Council Members rank the goal as a 4 or 5. Subsequent discussion will allow the Council to refine the goal list, however, the list should remain consistent with the “Criteria for Major City Goals” (Attachment G). 2. Other Important Objectives. Goals in this category are important for the City to accomplish, and resources should be made available in the 2019-21 Financial Plan if possible. The outline for the Goal Setting Workshop is provided in Attachment E; and suggested guidelines for Council Members during the goal-setting process are provided in Attachment F. Included as Attachment G are the suggested “Criteria for Major City Goals” which have been used by the Council for many years. These criteria capture the relevant considerations to determine a Major City Goal, but the Council could refine the criteria at this time if desired. No follow-up meeting has been needed in the last several goal-setting sessions as the Council concluded all necessary actions at the Goal-Setting Workshop. Continued consideration of goals for 2019-21 can be scheduled for the next regular Council meeting following the wo rkshop if needed. Packet Pg. 209 Item 15 Local Revenue Measure Priorities • Open Space Preservation • Bicycle and Pedestrian Improvements • Traffic Congestion Relief/Safety Improvements • Public Safety • Neighborhood Street Paving • Code Enforcement • Flood Protection • Parks and Recreation/Senior Programs and Facilities • Other Vital Services and Capital Projects 4. Local Revenue Measure As previously mentioned, the Community Forum will also be the Annual Citizens’ Oversight Meeting for the Local Revenue Measure. This allows for integration of the Local Revenue Measure into the City's budget and goal-setting process. The estimated revenue and proposed use of funds generated by the Local Revenue Measure shall be an integral part of the City's budget and goal- setting process, and significant opportunities will be provided for meaningful particip ation by citizens in determining priority uses of these funds. It is important to know that the Local Revenue Measure is a general-purpose measure, and the proceeds are not restricted to specific purposes. However, the language on the ballot measure approved by voters in 2014 provides the types of uses that would be funded. The language on the ballot was: “To protect and maintain essential services and facilities – such as open space preservation; bike lanes and sidewalks; public safety; neighborhood street paving and code enforcement; flood protection; senior programs; and other vital services and capital improvement projects – shall the City’s Municipal Code be amended to extend the current one-half percent local sales tax for eight years, with independent annual audits, public goal-setting and budgeting, and a Citizens’ Oversight Commission?” While the ballot language provided examples of the types of uses that could be funded - based on community input received before placing the measure on the ballot – the Local Revenue Measure is a general-purpose tax providing Council with flexibility to respond to new circumstances and challenges. For 2017-18, total expenditures were $7.2 million and an additional $5,618,008 in funding was carried over for several projects (many of which are now under construction). The Revenue Oversight Committee will ho ld a meeting on December 6, 2018 and reviewed a preliminary 2017-18 year-end financial report in detail. These are still the unaudited results. The final informatio n will be included in the Certified Annual Financial Report, which will be published before the end of the calendar year. ECONOMIC FORECAST On November 2, 2018, the annual Central Coast Economic Forecast presented national, state, and countywide economic trends. The information, together with the audited financials and internal analysis will provide the basis for the City’s own five -year fiscal forecast which will be presented to Council with the mid-year report on February 5, 2019. Overall, the outlook for San Luis Obispo is stable for now and into 2019, but all signs point to a slowdown into 2020. Packet Pg. 210 Item 15 Employment: Employment growth slowed from 2017 levels, but still shows growth in non-farm jobs. These sustained gains in payroll jobs have helped drive the u nemployment rate down to 2.8%, the lowest in nearly two decades. Natural Resources and Construction added the most jobs and nearly one third of non-farm jobs gains. In San Luis Obispo, 1,350 jobs were added in 2017. However, total non-farm employment is likely to increase less than 2% for all of 2018, and growth will slow further beyond 2018. Mounting labor shortages and affordability remain key challenges that will only worsen in the coming years. Sales Tax: Overall, sales tax revenue increased modestly from the first half of 2017 to the first half of 2018. The main force behind the slowdown in consumer and business spending was a decrease in business-to-business spending which fell significantly during that time. Although it is expected that taxable sale s continue to grow into 2019, it will be more modest in San Luis Obispo as population growth lags behind other parts of California. As such, San Luis Obispo will rely on continued growth in business activity and tourism. Tourism: Tourism and hospitality are becoming a bigger part of the economy in San Luis Obispo as is seen with the County airport reaching two years of record -breaking passenger levels, making it the fifth-fastest growing airport in the nation. However, income from transient occupancy tax is expected to grow only 2.2% in San Luis Obispo; slightly above the countywide increase of 1.6%. Spending by tourists remains strong as is evident in an increase in hospitality employment and the continued increase in spending at restaurants. Real Estate: The housing market has begun to show signs of slowing and housing inventory remains tight. Though price appreciation continues, it is at a smaller percentage gain compared to recent years. Sales are little changed from a year ago, but the median number o f days on the market has increased significantly. In San Luis Obispo, the median house price has increased by 6.7%, but single-family home sales dropped by 9.5%. Construction Activity: Though development permitting activities have been disappointing in the county overall, it remains strong in the City of San Luis Obispo. Year -to-date permit numbers for single-family residences as well as multi-family building are up significantly. There is also noticeable commercial real estate construction either under wa y or in various permitting stages. Development revenue continues to be strong as planning and building activity continues into 2019. Overall, the economic forecast indicates modest growth relative to the local economy and should be beneficial for the City’s revenue projections into 2019. However, as mentioned above, the possibly of an economic slow-down sometime in the near future is likely. Short term interest rates have climbed over the past year flattening the Treasury yield curve. An increase in inte rest rates translates into increase loan rates for consumers making purchases on credit. This could lead to a possible slowdown in home sales as mortgage payments increase as well as in overall consumer confidence and spending. Additionally, along with its regional partners, the City continues to address the closure of the Diablo Canyon Power Plant and prepare for the impacts to the region due to significant loss of Packet Pg. 211 Item 15 jobs and property taxes. On September 19, 2018, Governor Brown signed SB 1090, directing t he CPUC to approve the $85 million economic mitigation settlement and PG&E’s full $350 million proposed employee retention and retraining program. The City enters the 2019-21 Financial Planning period in a stable economic condition, but will face challenges and economic uncertainty. As a result, the City has positioned itself to address these challenges with the adoption and implementation of the Fiscal Health Response Plan adopted on April 17, 2018. The City is committed to maintaining quality core servic es for the community and will be asking for the community’s priorities throughout the goal setting process as described in this report. The City continues to have substantial advantages compared with many communities in California due to the following: 1. A balanced budget and reserves above minimum policy levels; 2. Dedication to fiscal responsibility; 3. Strong financial systems, policies and procedures; 4. Commitment to transparency and principles of engagement; 5. Strong Council leadership; 6. Citizens who care deeply about the City’s quality of life and services; 7. Staff committed, dedicated and passionate about achieving the City’s mission and serving the community; and 8. A great tradition of responsible stewardship. The civic infrastructure will serve San Luis Obispo well in successfully meeting challenges ahead. 2019-21 FINANCIAL PLAN POLICIES As noted in the discussion above, Council goal-setting is an important “first step” in the City’s Financial Plan process. The second major feature in the City’s Financial Plan process is reliance upon clear polices. In looking at cities across the nation that have reputations for being financially well-managed and have maintained their fiscal health through good times and bad, one finds that they have in common clearly articulated fiscal policies for financial decision- making. This best practice, as implemented by the City of San Luis Obispo, has been acknowledged repeatedly by the bond rating agencies as an important factor in sustaining the City’s excellent credit rating. Formal statements of key budget and fiscal policies provide the foundation for assuring long - term fiscal health by establishing a clear framework for effective and prudent financial decision- making. The City’s Budget and Fiscal Policies are traditionally set forth in the reference section of the Financial Plan. The policies cover a broad range of fiscal topics, including: • Financial Plan organization • General Revenue Management • User Fee Cost Recovery Goals • Enterprise Fund Fees and Rates Packet Pg. 212 Item 15 • Revenue Distribution • Investments • Appropriations Limitation • Fund Balances and Reserves • Capital Improvement Management • Capital Financing and Debt Management • Human Resource Management • Productivity • Contracting for Services At the outset of each financial planning cycle, the City reviews the policies in place to see if any updates are necessary. Changes are generally intended to create consistency amongst City fiscal policies and create a system that is efficient and effective to administer. As staff begins preparing the 2019-21 Financial Plan, other additions or revisions to the City’s current budget and fiscal policies may arise; if so, these will be presented for Council consideration at that time. The most recent additions were two policy additions adopted by the City Council with the 2018- 19 Budget Supplement. 1. General Fund Revenue Stabilization Fund. The City will maintain a reserve for the purposes of offsetting unanticipated fluctuations in general fund revenues to provide financial stability. The funding target for the Revenue Stabilization Reserve will be $1,000,000 during the term of the adopted Fiscal Health Response Plan. Use and allocations of funds of the Revenue Stabilization Fund will be made upon Council approvals of the Financial Plan or as becomes necessary dur ing any fiscal year. 2. Capital Projects Reserve Fund. The City will maintain a reserve for the purposes of offsetting unanticipated cost increases, unforeseen conditions, and urgent unanticipated projects to provide continued investment in infrastructure ma intenance and enhancement. Use and allocations of funds from the Capital Projects Reserve Fund will be made to Capital Projects including Fleet, Information Technology, and Major Facility Replacement upon Council approvals of the Financial Plan or as necessary during any fiscal year. The General Fund Revenue Stabilization Fund has been accounted for in the financial forecast at $1,000,000. Staff plans on returning to Council with a recommendation regarding a Section 115 Trust fund with the mid-year report on February 5, 2019. The recommendation will include the release of a request for proposal to review the available options in the market. Packet Pg. 213 Item 15 CAPITAL IMPROVEMENT PLAN (CIP STATUS) As part of the budget process, the City reviews its capital improvement plan and the maintenance of its assets. Attachment J provide the Council with a summary of the status of the City’s Capital Improvement Plan (CIP) projects. As discussed in greater detail within the attachment, the City is making excellent progress in achieving its current CIP goals. Of the 97 active projects in the 2017-19 Financial Plan period: 1. 20 are complete, 2. 29 will be complete within 6 months, 3. 21 will be complete within 12 months, 4. 27 are longer term and projected to be completed beyond a 12-month period. In preparation of the goal-setting process for the 2019-21 Financial Plan, it is important to understand the status of current status of the CIP projects, as well as the long -term need of the City’s assets (Attachment K). LONG TERM CIP AND FUNDING THE FUTURE As Council is aware, in 2018, as an element of the Fiscal Sustainability Major City Goal, staff analyzed long-term capital needs and explored potential funding scenarios. Council discussed this issue at several meetings in early 2018. In April, Council directed staff to continue to explore funding options and time frames for potential future ballot measures. Council also requested staff to pursue additional public engagement and project refinement. Below is a summary of the conclusions of the analysis to date relative to Funding the Future of SLO: 1. The City’s Capital needs can be categorized into 1) Maintenance of Existing Assets, 2) Replacement of Existing Assets, and 3) New Assets. 2. Current funding, primarily through the Local Revenue Measure (Measure G) and 2017 Road Repair and Accountability Act funds, can fund most of the identified needs in the first category, Maintenance of Existing Assets. 3. The second and third categories, Replacement of Existing Assets and New Assets, are primarily unfunded, to the extent that funding for Maintenance of Existing Assets is prioritized. The City could choose to fund projects in the Rehabilitation and New project categories, the tradeoff would be deterioration of existing City assets. 4. As a result of extensive review of approved City planning documents, the General Plan, and Area Specific Plans, the total General Fund allocation for Replacement of Existing Assets and New Assets is approximately $400 M. 5. That amount of funding is currently not available, again, assuming priority allocation to Maintenance of Existing Assets. 6. The projects identified as necessary by various planning documents, over the next 30 years, is currently referred to as ‘Funding the Future of SLO’ 7. That General Fund allocation for projects within the AB 1600 Capital Facilities Fee Program was increased by Council decision to provide credits and incentives for other important City goals, specifically, the provision of affordable housing stock in the City. 8. The General Fund allocation could also increase pending actual receipt of the regional funds Packet Pg. 214 Item 15 assumed for regional AB 1600 projects. 9. The Council determined a property tax increase was not a feasible funding mechanism for Funding the Future of SLO. 10. Council asked staff do additional project analysis, public outreach, and considerations for funding options for their future Council discussion., At the February 4th Council meeting, staff will present information regarding proposed next steps for the Funding the Future of SLO proposal. As part of the Budget Foundation discussion, staff is presenting the City’s Long -Range Capital Program (Attachment K). This program is presented to Council as part of the Goal Setting Process in order to present Council with the long-range context of capital needs. In past years, the Long-Range Capital Program was presented without a proposed strategy to address those needs. Funding the Future of SLO represents a proposal to address the long -term General Fund obligations for the city’s capital needs. Regarding both the Long-Range Capital Project list, and the list of projects for Funding the Future of SLO; it is important to remember some individual project costs will be modified in the future. Some projects are still be refined relative to costs for property acquisition, staffing and delivery, and other issues. In addition, the Facilities Master Plan (due at Council in early 2019), Parks and Recreation Master Plan (still in process), and the ADA Transition Plan are pending final adoption. It is important, however, to understand the difference between the Long-Range Capital Program and the projects within Funding the Future of SLO. The chart below is a visual representation of the differences. Essentially, the characteristics of the two lists are: Long Range Capital Program Funding the Future of SLO Includes all projects for all funds, including Enterprise Fund needs Includes all projects which have any General Fund obligation Includes Ideal funding levels of Annual Asset Maintenance Does not include any Annual asset maintenance projects under the assumption they are funded – not at Ideal level in the Long-Range Plan, but at levels to provide public safety and improved quality of life Time frame – current to beyond 2040 Time frame – current to 2040 Total need is $995 million – all funds Total need is approx. $400 million – General Fund only Packet Pg. 215 Item 15 CONCURRENCES The City’s internal Financial Plan Steering Committee and the Department Head Team concurs with the recommendations included in this report. PUBLIC ENGAGEMENT This Financial Plan development process involves significant public engagement and outreach as described above. The approach will follow the collaborate model from the City’s Public Engagement and Noticing Manual which involves interactive processes and partnering with the public to develop ideas and identify priorities using a variety of the tools available to the City. POLICY CONTEXT FOR FINANCIAL PLAN The City’s budget polices address a multitude of areas that govern the production of the two - financial plan and the annual budget. In addition to the Council adopted policies, several other codes dictate the need for the budget process. California State Law Though there is no explicit requirement in state law for a California city to adopt a budget, there are many laws that make the budget procedures essential for every city. 1. A city may not spend public funds without the legal authorization to do so. Among other things, a budget appropriates public funds, thereby providing the legal authorization from the governing body to expend these funds. 2. Like other California public agencies, each city must annually establish its appropriations limit pertaining to the proceeds from taxes in compliance with Article XIIIB of the California Packet Pg. 216 Item 15 Constitution and California Government Code Sec. 7910. The City of San Luis Obispo uses the annual budget to establish its appropriations limit. 3. The California Constitution (Section 18 of Article XVI) states that no city or county may incur any debt or liability in any year that exceeds the income and revenue anticipated for that year without two-thirds voter approval. By determine the anticipated income and revenue, the budget process verifies these thresholds. 4. California Government Code Sec. 53901 requires each local agency to file its budget with the county auditor within 60 days after the beginning of its fiscal year. 5. In order to qualify to receive federal funds, a local agency must comply with the federal single audit act and must retain a certified public accountant to prepare an annual audit of its financial records. This compliance will be very difficult without an adopted budget. City Charter Article VIII of the City’s Charter contains the requirements for the fiscal administration for the City. The following sectio ns provide guidance regarding the budget: 801. Fiscal Year – determines the City’s fiscal year from July through June. 802. Annual Budget – determines the mandate of the City Manager to bring forth an annual estimate of income and expenditures. 803. Public Hearing – sets forth the requirement for a public hearing to adopt the annual budget. 804. Adoption of Budget – requires the Council to adopt the budget after necessary revisions after input from the public hearing. City Budget and Fiscal Police s The City’s adopted fiscal policies set forth the purpose of the Financial Plan. They determine under section: A. The Financial Plan Objectives B. The two -year budget C. Measurable objectives D. The Second-Year budget E. Operating Carryover F. Goal Status Reports G. Mid-Year budget reviews Additionally, under long-term financial planning, the policies stipulate the requirement for a balanced budget and the addressing of long-term liabilities and the maintenance of infrastructure. They also outline the requirements for annual and interim reporting and the City’s budget administration in accordance with the City Charter. Packet Pg. 217 Item 15 ENVIRONMENTAL REVIEW The California Environmental Quality Act does not apply to the recommended action in this report, because the action does not constitute a “Project” under CEQA Guidelines Sec. 15278. FISCAL IMPACT Budgeted: N/A Budget Year: Funding Identified: Fiscal Analysis: Funding Sources Current FY Cost Annualized On-going Cost Total Project Cost General Fund State Federal Fees Other: Total There is no fiscal impact associated with the conduct of the City’s two -year financial planning process. The City budgets for all of the planned activities that are part of this process. Preparing budgets are one of the core government functions that the City is responsible for carrying out. ALTERNATIVE Modify the proposed Goal Setting activities. The Council could direct staff to pursue a different process for goal-setting this year. Staff does not recommend this alternative because there is value in conducting a similar process that residents are familiar with. If the Council is interested in making changes, staff recommends that they be incremental adjustments to the activities planned. If major changes are desired, they should be discussed and planned during the first year of the next financial plan. Packet Pg. 218 Item 15 Attachments: a - 2019-21 Community Forum Outline b - Invitation to Community to Participate in Goal Setting c - Community Survey d - Homework for Council Goal-Setting e - Outline for Goal-Setting Workshop f - Guidelines for Council Members During Goal-Setting Process g - Criteria for Major City Goals h - Economic Outlook i - Budget and Fiscal Policies for 2019-21 j - CIP Status Report 2019-21 k - Long Term CIP 2019-21 Packet Pg. 219 Item 15 ATTACHMENT A Community Forum 6:00 PM to 9:00 PM, Wednesday, January 23, 2019 San Luis Obispo Veteran’s Memorial Building 6:00-6:05 Individually Welcomed at the Door Staff 1. Agenda with instructions on how to participate and receive dots 2. Informational Flyer – Financial Plan process, current Major City Goals/Other Important Objective, Local Revenue Measure priorities, Fiscal Health Response Plan and Community Survey results 6:05-6:10 Welcome & Instructions Facilitator 1. Incorporation of a workshop component to allow more ways to provide feedback 2. Dot placement can occur during the workshop 3. Public comment is available, but not required 4. Focus on building on the results of the Community Survey including current Major City Goals 6:10-6:25 Presentation on 2019-21 Financial Plan Process and Fiscal Outlook Derek Johnson, City Manager Brigitte Elke, Finance Director 6:25-6:30 Reminder on the Instructions Facilitator 6:30-7:30 Open House/Workshop 1. Community Forum Stations i. Input Stations: Current MCG/OIO, New/Other, Local Revenue Measure Uses ii. Information Stations: Core Services, Fiscal Health Response Plan, Capital Improvement Program 2. Each station is attended by staff. a. Printed posters with examples of current projects, services and results from the Community Survey. 3. Participants express their top priorities with dots for Major City Goals. a. Attendees receive 5 dots for goals at the input stations 4. Attendees prioritize Local Revenue Measure uses based upon the nine categories at the LRM station. Note: Instruction reminder provided every 15 minutes Facilitator Open House/Workshop Breaks, Public Comment Begins Facilitator 7:30-8:30 Public Comment Packet Pg. 220 Item 15 1. Attendees will be encouraged to post all ideas and concepts during the open house/workshop and do not need to stay for public comment . 2. Members of public who desire to directly address the Council and REOC or elaborate on an idea or concept will complete public comment cards and indicate the topic. a. Where a group has several members present, we encourage them to select a spokesperson and have others in their group indicate support for the same position with a show of hands. 3. Facilitator organizes cards by topic, identifies general topic, and calls upon the speakers. 8:30-9:00 Closing Remarks & Adjournment Mayor & Facilitator 9:00 Informal Discussion and Continuation of Open House/Workshop Packet Pg. 221 Item 15 DATE: October 19, 2018 RELEASE: IMMEDIATE CONTACT: Alex Ferreira, Budget Manager aferreir@slocity.org, 805-781-7132 City Seeks Community Input on Priorities Before Setting 2 -Year Goals Survey allows community to weigh in on discussion for the 2019-21 financial plan SAN LUIS OBISPO—The City of San Luis Obispo is asking the community to help identify priorities for the 2019-21 financial plan cycle. Every two years, the City establishes the top priorities that will make San Luis Obispo a better place to live, work, and play. The City Council then matches the resources necessary to achieve these priorities through adopting the budget in June. The adopt ed budget sets the City’s course of action for the next two years and helps the City to continue to provide high-quality services that maintain an excellent quality of life for the community. 2017-19 City goals were identified as housing, multi-modal transportation, climate action, and fiscal sustainability and responsibility. Downtown vitality was identified as an other important objective. This year, the City implemented the Fiscal Health Response Plan (FHRP) to address significant financial challenges due to increased pension costs. Continuing this progress toward long-term fiscal health, the 2019-21 Financial Plan will emphasize maintaining existing City infrastructure, providing core services, and advancing FHRP objectives (employee concessions, new ways of doing business, operating reductions and new revenues). Given this, it is critical to have an effective process for setting the most important, highest priority things for the City to accomplish in the next two years. Community members can help by completing an online survey at www.slocity.org/opencityhall by Sunday, December 16. Surveys will also be mailed in November utilities bills, will be available at City Hall and at the Senior Center. They can also attend a community forum on Wednesday, January 23 from 6 to 9 p.m. at the SLO Vet’s Hall, 801 Grand Ave nue. At the forum the community will have an opportunity to present ideas to council and discuss them with other members of the public. City staff will compile community feedback for council to review in advance of its goal-setting workshop on February 7. During the workshop, council will officially set the goals for the next two years. The financial plan will be adopted in June. ### Packet Pg. 222 Item 15 What are the most importantpriorities for the City in 2019-21? Every two years the City establishes the top priorities to make San Luis Obispo an even better place to live, work, and play. The City Council then matches the resources necessary to achieve these priorities through adopting the budget in June. The adopted budget sets the City’s course of action for the next two years and helps the City to continue to provide high-quality services that maintain an excellent quality of life for the community. This year, the City implemented the Fiscal Health Response Plan to address significant financial challenges due to increased pension costs. Continuing this progress toward long-term fiscal health, the 2019-21 Financial Plan will emphasize maintaining existing City infrastructure, providing core services, and advancing the Fiscal Health Response Plan objectives (employee concessions, new ways of doing business, operating reductions and new revenues). Given this, it is critical we have an effective process for setting the most important, highest priority things for the City to accomplish in the next two years and this survey is the first step! Complete the survey by visiting www.slocity.org/opencityhall or fill out the survey below and mail it back or drop it by any City office. Should the current Major City Goals & Other Important Objective continue, or should the City Council consider other priorities during the next two years? (Please choose 5 priorities) All surveys must be completed and returned to the City by December 16, 2018. City staff will then compile feedback for the council to review ahead of the community forum (Jan. 23) and goal-setting workshop (Feb. 9). If you have any questions about the City’s goal-setting and budget process, please contact Alex Ferreira Budget Manager, at (805) 781-7132 or aferreir@slocity.org. Current Major City Goals: Housing (Facilitate increased production of all housing types designed to be economically accessible to the area workforce and low and very low-income residents) Multi-Modal Transportation (Prioritize implementation of the Bicycle Master Plan, pedestrian safety, and the Short-Range Transit Plan) Climate Action (Implement the Climate Action Plan, carbon neutral by 2035 target, and complete a Green House Gas emissions update) Fiscal Sustainability & Responsibility (Continue implementing the Fiscal Health Response Plan in addition to focusing on economic development and infrastructure financing) Current Other Important Objective: Downtown Vitality (Continue to improve safety, infrastructure investment, and maintenance in the Downtown) Neighborhood Wellness Open Space Preservation Traffic Reduction Addressing Homelessness Growth Management Infrastructure Maintenance (Roads, sidewalks, and bike paths) Public Safety Water Management Economic Development Other: Other: Other: Other: Other: Packet Pg. 223 Item 15 For mailing – FOLDTHIS END FIRST BUSINESS REPLY MAILFIRST-CLASS MAIL PERMIT NO. 369 SAN LUIS OBISPO, CA POSTAGE WILL BE PAID BY ADDRESSEENOPOSTAGE NECESSARY IF MAILED IN THE UNITED STATES CITY ADMINISTRATIVE OFFICER CITY OF SAN LUIS OBISPO 990 PALM ST SAN LUIS OBISPO CA 93401-9938 -------------------------------------------------------------------------------------------------------------------------------------- Tape Here Given the current fiscal constraints, new projects or services will require prioritization and potential trade-offs unless they can generate offsetting revenue. How might the City adjust current projects or services to accomplish any new priorities? FOLD FOLD Email (optional):Providing your email will enable you to view your statement online and see statements from others. Your email address will not be included with your statement and the City will not share it. Your voice matters! www.slocity.org/opencityhall Also, attend our Community Forum on Wednesday, January 23, 2019 from 6 to 9 p.m. at the SLO Vets Hall, 801 Grand Avenue, where you’ll have an opportunity to present your ideas to the Council and discuss them with other community members. Packet Pg. 224 Item 15 ATTACHMENT D Council Member Candidate Major City Goals Please prepare up to 7 candidates for Major City Goals below and submit them to Finance by 9:00 a.m., January 25, 2019. Finance will then compile a verbatim, composite list by topic without identifying who submitted the particular statements. Please refrain from releasing your personal list so that each Council member has flexibility to review all of the submissions and discuss them at the Council Goal-Setting Workshop before staking a position.        Packet Pg. 225 Item 15 ATTACHMENT D Suggestions for Changes in Other Programs and Services Please provide ideas about possible changes in other programs and services to fund desired goals. Please submit them to Finance by 9:00 a.m., January 25, 2019. Finance will then compile a verbatim, composite list by topic without identifying who submitted the particular statements. Please refrain from releasing your personal list so that each Council member has flexibility to review all of the submissions and discuss them at the Council Goal -Setting Workshop before taking a position.      Packet Pg. 226 Item 15 ATTACHMENT E Council Goal-Setting Workshop 5:00 PM to 9:30 PM Monday, February 4, 2019 Council Chambers 5:00 p.m. Welcome and Introductions Mayor 5:00 – 5:15 p.m. Purpose, Process & Guidelines Facilitator 5:15 – 7:00 p.m. Review Submitted Goals by Category Council Discuss Relationship of Goals to Current Activities Formulate and Select Candidate Goals 7:00 – 7:15 p.m. [Council may accept further comments from the public that have not been previously presented] 7:15 – 7:45 p.m. Council Each Member Prepares a Written Ballot Ranking the Goals 7:45 – 8:45 p.m. Break while staff tabulates the results Staff 8:45– 9:15 p.m. Review and Identify Major City Goals Council 9:15 – 9:30 p.m. Discuss Next Steps Council/Staff Preparation • Staff compiles and distributes composite list of candidate goals to Council members . • Staff prepares a template for Council ballot sheet. • Assign staff to enter goal statements into spreadsheet as Council formulates them. Packet Pg. 227 Item 15 ATTACHMENT F Suggested Guidelines for Council Members During the Goal-Setting Process Things to Consider: • The City of San Luis Obispo is asking the community to help identify priorities for the 2019 -21 financial plan cycle. Every two years, the City establishes the top priorities that will make San Luis Obispo a better place to live, work, and plan, which help drive the budget that staff prepares for council to approve in June. • 2017-19 City goals were identified as housing, multi-modal transportation, climate action, and fiscal sustainability and responsibility. Downtown vitality was identified as an “Other Important Objective.” • The Fiscal Health Response Plan (FHRP) addresses significant financial challenges due to increased pension costs and the 2019 -21 Financial Plan will emphasize: o Maintaining existing City infrastructure o Providing core services o Advancing FHRP objectives: o Employee concessions, new ways of doing business, operating reductions and new revenues. 1. Encourage advisory boards, community groups and citizens to submit written comments about desired goals. 2. Invite citizens to participate in Community Forum and to listen and learn from their neighbors. In 2017 -19, the City saw record participation (300% increase) in the goal setting process and hopes for even more community members to participate this year. 3. Receive comments from community and acknowledge their input without prematurely expressing your point of view. 4. Assure the community that you are willing to listen openly to all perspectives. 5. Focus your submission of suggested goals on a short list of ke y priorities to target City resources (not to exceed seven candidate goals for consideration). Packet Pg. 228 Item 15 6. Avoid publicizing your submission of suggested goals. Let staff compile your submissions verbatim into a composite list of goals by category without identification of who made each suggestion. This enables you to see the whole picture. 7. Give yourself flexibility by not publicly taking positions in advance of the February 4, 2019 Council Goal-Setting Workshop. 8. Use this process as a way to learn from citizens a nd Council colleagues about what’s important. 9. Explore areas where the Council can come together for positive action. 10. Recognize that this is an important step, but only the first step, in the planning and budgeting for the next two years. Packet Pg. 229 Item 15 ATTACHMENT G Criteria for Major City Goals 1. Understanding that MCG’s are a statement of organizational priorities and that other initiatives have to be set aside. 2. Ground Major City Goals in policies and/or community priorities (real, supported). 3. Agreed upon by a Council majority. 4. Limited in number for comprehension, communication and focus. 5. Set forth in one document—the Financial Plan. 6. Be clear, understandable and actionable. 7. Established as a high priority and a real commitment. 8. Reflect major goals that cannot be achieved without Council support. 9. Can be translated into the performance goals and objectives of employees at all levels of the organization. 10. Created within a supportive atmosphere where participants are not afraid to state their suggestions for improving goals or objectives. 11. Reflect genuine consensus: while unanimous agreement is not required, they should be accepted to the point where resistance to them is reduced or eliminated. Packet Pg. 230 Item 15 Central Coast Economic Forecast 2018 Beacon Economics5777 W Century Blvd, Ste 895 Los Angeles, CA 90045 (310) 571-3399 Beaconecon.com Packet Pg. 231 Item 15 THE CENTRAL COAST ECONOMIC FORECAST THANKS OUR SPONSORS PLATINUM SPONSORS 2018 Board of Directors ECONOMIC FORECAST CONTENT PROVIDED BY BEACON ECONOMICS, © 2018, BEACONECON.COM | DESIGN BY AMF MEDIA GROUP Officers JIM DUNNING, CHAIRPERSON DIRECTOR OF ECONOMIC DEVELOPMENT AND TECHNOLOGY TRANSFER CAL POLY JEFF THOMA, VICE CHAIR VICE PRESIDENT THOMA ELECTRIC, INC. STEVEN L. HARDING, TREASURER CHAIRMAN, COMMUNITY LEADERSHIP GROUPS RABOBANK, N.A. MATT TURRENTINE, SECRETARY PRINCIPAL GRAPEVINE CAPITAL PARTNERS Board Michael Bradley California Mid-State Fair Maggie Cox AMF Media Group Chuck Davison Visit SLO CAL Michael Manchak Economic Vitality Corp. of SLO County Steve McCarty McCarty Davis Commercial Real Estate Michelle McCovey-Good Taylor & Syfan Consulting Engineers, Inc. Pat Mullen Pacific Gas & Electric Co. Ziyad Naccasha Carmel & Naccasha, LLP, Attorneys at Law Anthony Palazzo Cal Poly Bruce Ray Cannon Anita Robinson 1st Capital Bank Ed Stettler Zurn Wilkins Emeritus Jim Brabeck Farm Supply Company Carrol Pruett Rabobank, N.A. centralcoasteconomicforecast.com ADVISORY SPONSORS LEAD SPONSORS BUSINESS ASSOCIATE SPONSORS ASSOCIATE SPONSORS Packet Pg. 232 Item 15 United States Forecast California Forecast San Luis Obispo Forecast Diablo Canyon Employment Business Activity Agriculture Residential Real Estate Commercial Real Estate Demographics 2018 CENTRAL COAST ECONOMIC FORECAST TABLE OF CONTENTS This publication was prepared by: Beacon Economics, LCC Christopher Thornberg Founding Partner 5777 W. Century Blvd., Suite 895 Los Angeles, California 90045 310.571.3399 Chris@BeaconEcon.com Robert Kleinhenz Economist/Executive Director of Research 5777 W. Century Blvd., Suite 895 Los Angeles, California 90045 424.646.4652 Robert@BeaconEcon.com For further information about this publication please contact: Victoria Pike Bond Director of Communications 415.457.6030 Victoria@BeaconEcon.com Rick Smith Director of Business Development 858.997.1834 Rick@BeaconEcon.com Or visit our website at www.BeaconEcon.com 2018 CENTRAL COAST ECONOMIC FORECAST 2018 CENTRAL COAST ECONOMIC FORECAST 4 10 16 24 26 34 40 48 56 70 Packet Pg. 233 Item 15 4 5 The United States is currently in the midst of the second longest expansion in the nation’s history at 111 months and counting. In July of next year, we will officially be in the midst of the longest expansion on record. Will we make it? Odds are almost certain we will. Far from losing steam, the U.S. economy has been on a solid upswing lately. But as always, a deeper look at the data suggests that there are issues to keep an eye on. All in all, we remain pessimistically optimistic. Or perhaps optimistically pessimistic. Consider some recent statistics. U.S. GDP growth in the second quarter came in above 4%, the best reading since 2014 and driven by strong growth in business and consumer spending. Industrial production is up 4% from one year ago—another recent best. Employment growth over the last 3 months has totaled over 200,000 jobs added per month even with unemployment below 4%. More importantly, the job openings rate is at 4.2%, suggesting that employers would hire even more workers, if they could find them. United States Forecast Control Your Enthusiasm 2018 CCEF FORECAST - UNITED STATES FORECAST 2018 CCEF FORECAST - UNITED STATES FORECAST by Christopher Thornberg, Beacon Economics LLC Packet Pg. 234 Item 15 6 7 The recent GDP release came with (as is usual every couple of years) a revision of the last few years of data on the basis of better data and improved techniques. While the revision didn’t change much in terms of the estimation of economic output, it did change the estimated flow of income. In particular, the Bureau of Economic Analysis increased their estimate of proprietor incomes (earnings for the self-employed) substantially. This had the impact of completely erasing the decline in consumer savings rates we have been fretting about in recent reports. Combine this with the low rate of consumer debt increases, and it is clear the overall financial health of U.S. households is as good as it has ever been. As positive as all this news is, don’t be fooled into believing the U.S. economy has truly achieved a new pace of growth. Scratch away at the surface and there are any number of reasons to conclude that the current growth surge is, at best, temporary. At worst, the seeds of the next recession are possibly being sown in these current numbers. REAL GROSS DOMESTIC PRODUCT Percent Change from Preceding period, April 2008 to April 2018 Source: Federal Reserve Bank of St. Louis, Analysis by Beacon Economics, LLC Jul 20080 2 4 6 12 Percent (Seasonally Adjusted)8 10 May 2009Mar 2010Jan 2011Nov 2011Sep 2012Jul 2013May 2014Mar 2015Jan 2016Nov 2016Sep 2017May 2018Unemployment Rate Job Openings Rate UNEMPLOYMENT RATE AND TOTAL NONFARM Job Openings Rate, July 2008 to May 2018 Source: Federal Reserve Bank of St. Louis, Analysis by Beacon Economics, LLCApr 2008-10.0 -8.0 -6.0 -4.0 2.0 6.0 Percent Change (Seasonally Adjusted Annual Rate)-2.0 0.0 4.0 Dec 2008Aug 2009Apr 2010Dec 2010Aug 2011Apr 2012Dec 2012Aug 2013Apr 2014Dec 2014Aug 2015Apr 2016Dec 2016Aug 2017Apr 2018Jan 20020.0 2.0 4.0 6.0 12.0 Personal Saving (%, Seasonally Adjusted Annual Rate)8.0 10.0 Dec 2002Nov 2003Oct 2004Sep 2005Aug 2006Jul 2007Jun 2008May 2009Apr 2010Mar 2011Feb 2012Jan 201314.0 Dec 2013Nov 2014Oct 2015Sep 2016Aug 2017First, we need to take a bit of a gut check on the recent numbers. The 4.1% growth rate in the second quarter was certainly impressive. But most of that growth came from a surge in consumer spending— an anticipated surge given the weak first quarter for consumer spending growth. In other words, it was a reversion to the trend, not a permanent jump. Business spending was solid, but similar to the last few years. Housing remains weak, as does state and local spending. The consensus outlook suggests growth will come in at a far more reasonable 3% for the balance of the year, with an average growth rate of 3% for the entire year. PERSONAL SAVINGS RATE January 2002 to August 2017 Source: Federal Reserve Bank of St. Louis, Analysis by Beacon Economics, LLC 2018 CCEF FORECAST - UNITED STATES FORECAST 2018 CCEF FORECAST - UNITED STATES FORECAST Packet Pg. 235 Item 15 8 9 This 3% pace of growth isn’t bad relative to the 2% to 2.5% pace seen since the end of the Great Recession. But even here, it is important to recognize that this modest bump is being driven by a surge in government borrowing rather than any true shift in fundamentals. The tax plan passed at the end of last year was not the major overhaul of a broken tax system that the United States desperately needs. Rather, it was a nothing more than a fiscal stimulus plan, something that would typically be used in times of economic trouble—not in the midst of a record tight labor market. The problem with any fiscal debt driven stimulus is that you are borrowing from the future to accelerate the ‘now’. And like most stimulants, the buzz you get feels good in the short run, but diminishes over time unless you continue to increase the dosage. Then there is always the inevitable crash, when you finally have to get off of the stimulant completely. When that crash will occur for the economy is unclear, but the current path is guaranteeing that when that day comes, it will be ugly. 2018 CCEF FORECAST - UNITED STATES FORECAST 2018 CCEF FORECAST - UNITED STATES FORECAST -1,600 -1,400 -1,200 -1,000 -200 Net Saving ($, Billions, Seasonally Adjusted)-800 -600 -400 0.0 Jan 2008Dec 2008Nov 2009Oct 2010Sep 2011Aug 2012Jul 2013Jun 2014May 2015Apr 2016 Mar 2017NET FEDERAL GOVERNMENT SAVING January 2008 to March 2017 Source: Federal Reserve Bank of St. Louis, Analysis by Beacon Economics, LLC 80 85 105 Indexed, 2012=100 (Seasonally Adjusted)90 95 100 110 Jul 2008Jun 2009May 2010Apr 2011Mar 2012Feb 2013Jan 2014Dec 2014Nov 2015Oct 2016Sep 2017INDUSTRIAL PRODUCTION: MANUFACTURING July 2008 to September 2017 Source: Federal Reserve Bank of St. Louis, Analysis by Beacon Economics, LLC Second, are the international trade battles currently in play. While the problems with the European Union seem to be on hold for the moment, the U.S. disputes with China are growing worse with both sides continuing to ratchet up the tariffs being levered on the other. Much has been made of the effects on U.S. exporters to China, particularly those that export agricultural products. But the U.S. imports almost four times as much from China as it exports to them. And what we do import are critical components of U.S. supply chains. As solid as industrial production looks from a growth perspective, recent data suggests overall production is starting to plateau. This isn’t to say that some of this isn’t good pain—the Chinese have been flouting international norms on trade, intellectual property rights, and foreign investment for years and that needs to end. The U.S. does need to push back, but to do so negotiations must start with a clear and logical set of goals. War for war’s sake is never a good plan. Unfortunately, the current administration appears to have no clear path forward, and with other troubles brewing, including possible legal problems, it seems unlikely that it will be able to develop a coherent and effective plan any time soon. And let’s not forget that NAFTA—by far the most important trade group for the U.S.—is also under threat. Lastly, there is the Federal Reserve. Inflation has heated up as of late with the CPI getting close to 3%, the fastest since 2011. Beacon Economics, however, still doesn’t believe there is a real chance of higher permanent inflation. M2 growth remains below 4%, and bank lending is tepid. But with employment costs and import prices on the untick, the Fed will surely continue to tighten regardless of the impact on the yield curve. This too will place stress on the economy. Add it up and the rest of this year looks solid, but expect slower growth next year. Additionally, the long term stressors of heavy Federal borrowing, rising interest rates, and ongoing political chaos, make it clear that while there is no reason to expect a recession anytime soon, we should remain more vigilant than ever in watching for the unanticipated shock. The nation’s capacity to absorb a blow to its economy is substantially diminished and it won’t take much to end the current expansion. Packet Pg. 236 Item 15 10 11 2018 CCEF FORECAST - CALIFORNIA FORECAST 2018 CCEF FORECAST - CALIFORNIA FORECAST California Forecast OK for Now... With two quarters down and sights turning toward the last part of the year, it is apparent that the California economic engine continues to hum along, much like the nation as a whole. Job gains have been steady and the state’s leading industries have expanded despite ongoing concerns on the international trade front. Still, good news notwithstanding, anxieties linger about California’s extremely tight housing market and the resulting affordability challenges it presents, and the long term consequences of slow growth in the state’s labor force. 2018 Shaping Up to Be a Good Year California continues to land in record territory, with its unemployment rate at 4.2% for the fourth month in a row as of July 2018. At the same time, job growth so far this year has outpaced 2017 by a slim margin, with wage and salary jobs in July increasing by 2.0% or 332,700 jobs compared to one year earlier. Of the 332,700 jobs added in July, Health Care and Leisure and Hospitality each contributed 58,000 positions, or more than one-third of the total, with Construction, Professional Scientific and Technical Services, and Transportation and Warehousing also reporting sizable gains among the private sector industries. This set of industries has consistently made the largest contributions to job gains in the state over the last several years. The Government sector added to its ranks as well, increasing by 33,300 workers with roughly two-thirds of the increase occurring in Local Government and one-third in State Government (the Federal Government trimmed 2,500 jobs). All but one of the state’s major industries experienced job gains in July, with only Mining and Logging seeing a loss of 300 jobs. Industry Jul 2017 (000s, SA*)Jul 2018 (000s, SA*)Yr to Yr Change Yr to Yr % Change Total Nonfarm 16,826.7 17,159.4 332.7 2.0 Health Care 2,280.4 2,338.4 58.0 2.5 Leisure and Hospitality 1,948.6 2,006.6 58.0 3.0 Construction 812.7 851.2 38.5 4.7 Government 2,552.5 2,585.8 33.3 1.3 Prof Sci and Tech 1,234.8 1,267.2 32.4 2.6 Transport/Warehouse 565.1 591.4 26.3 4.7 Admin Support 1,107.9 1,133.0 25.1 2.3 Educational Services 362.3 378.4 16.1 4.4 Information 528.7 544.0 15.3 2.9 Retail Trade 1,692.8 1,706.3 13.5 0.8 Manufacturing 1,309.5 1,317.4 7.9 0.6 Wholesale Trade 723.8 727.2 3.4 0.5 Management 231.9 235.1 3.2 1.4 Finance and Insurance 547.2 548.2 1.0 0.2 Real Estate 283.4 284.1 0.7 0.2 Other Services 563.9 564.4 0.5 0.1 NR/Mining 22.3 22.0 -0.3 -1.3 STEADY JOB GAINS ACROSS CALIFORNIA INDUSTRIES Source: Federal Reserve Bank of St. Louis, Analysis by Beacon Economics, LLC Industry Jul-17 (000s, SA)Jul-18 (000s,SA)Y-T-Y Change Y-T-Y % Change by Robert Kleinhenz, Beacon Economics LLC Packet Pg. 237 Item 15 12 13 Similarly, headline numbers for California’s Gross State Product and Taxable Receipts reveal continued growth in the statewide economy in the first part of the year. Real Gross State Product advanced by 3.5% year-to-year in the first quarter, the fastest rate of growth since late 2015, while current dollar Taxable Receipts grew by 4.3%. A look at more detailed data shows healthy spending on the part of both house- holds and businesses: Taxable receipts on consumer goods rose 4.8% year-to-year while receipts on busi- ness and industry spending increased by 3.6% over the same period. Both the coastal and inland regions of the state have enjoyed economic and job gains for several years running. Through the first seven months of this year, every metro area in California experienced job growth. Across the large metro areas, job gains in the San Francisco Bay Area reflect the staying power of the tech sector, with the largest absolute and percentage increases occurring in San Jose. In Southern Califor- nia, the Inland Empire has consistently registered the largest percentage gains in jobs for the last couple of years, although Los Angeles County generally reports the largest absolute gains because of its size. Much of the growth in the entire region has come from Health Care, Professional Scientific and Technical Services, Construction, and Logistics. Metro areas in the Cen- tral Valley have also seen employment growth overall, supported by job gains across a variety of sectors. 2018 CCEF FORECAST - CALIFORNIA FORECAST 2018 CCEF FORECAST - CALIFORNIA FORECAST 0.0%Ventura Los Angeles Orange Barkersfield East Bay San Diego Sacramento 0.5%1.0%1.5%2.0%2.5%3.0%3.5%San Francisco Santa Rosa Fresno Inland Empire Stockton San Jose YEAR TO YEAR PERCENTAGE CHANGE IN NONFARM JOBS Largest CA MSAs, July 2018 Source: California Economic Development; Analysis by Beacon Economics, LLC The Housing Market’s Mixed Performance California’s housing market has been a mixed bag so far this year. According to Corelogic, the statewide median home price was $481,100 in the second quarter, up 8.6% year-to-year. The median price is still about 7% below its pre-recession peak despite a string of yearly price gains going back several years. Meanwhile, home sales have been average, at best, and disappointing when considered against the backdrop of the state’s long economic expansion. Home sales fell 0.9% year-to-year in July, and over the first seven months of the year, were 1.4% lower in year-to-date terms. Sluggish sales are symptomatic of the state’s housing market, and due in part to tight lending standards on mortgages and lean supply (unsold inventory is still low at 3.3 months). It is noteworthy, however, that the number of listings over the period spanning February through July was higher than in 2017, with listings in July 2018 alone up 15.2% from one year earlier. More listings should temper price increases going forward and slow the recent declines in affordability, which fell to a 10-year low in the second quarter of this year. New home construction moved up a notch in the first half of this year compared with last year, a development that should also temper, but not halt, price increases. Overall, housing permits rose 9.4% in the first half of 2018 compared to one year earlier, with increases of 7.3% in single-family permits and 11.4% in multi-family permits. The state is on track to add about 130,000 new units this year, still far below its needs, which are closer to 200,000 units annually. As long as home construction lags what the state needs, high housing costs will be a painful thorn in the side of the California economy. Packet Pg. 238 Item 15 14 15 2018 CCEF FORECAST - CALIFORNIA FORECAST 2018 CCEF FORECAST - CALIFORNIA FORECAST High housing costs impede California’s economic growth over the long-term to the extent that these costs serve as a deterrent to labor force growth. The state’s labor force growth rate has experienced sig- nificant slowing since the fall of 2017, with the year- to-year growth rate at just 0.2% in July 2018. Monthly labor force data are notoriously volatile, so a more consistent picture results from looking at 12-month moving averages of growth. If anything, the lon- ger-term story that emerges is more concerning. Over the last few years, the growth rate of California’s la- bor force followed roughly the same direction as the growth rate of the U.S. labor force – until the second half of 2017, when California’s growth rate began a steady decline even as the U.S. growth rate has accel- erated in recent months. In looking at the future growth trajectory of the Cali- fornia economy, the elephant in the room is the high cost of housing and its impact on labor force growth. State-to-state migration data show an ongoing outmi- gration from California going back many years, which fortunately has been more than offset in most years by positive international migration into the state. This is no accident: The California median home price has consistently been more than double the national me- dian home price for several years. The rental market is no different, with a number of California metro areas ranking among the least affordable rental markets in the nation. As growth in the state’s labor force slows further, it will tighten like a noose on the economy and limit future growth and business development. Long Run Concerns Linger Jan 20130.0% 0.5% 1.0%May 2013Sep 2013Jan 2014May 2014Sep 20141.5%Jan 2015May 2015Sep 2015Jan 2016May 2016Sep 2016Jan 2017May 2017Sep 2017Jan 2018May 2018CA YTY % Change US YTY % Change YEARLY PERCENTAGE CHANGE IN LABOR FORCE California and U.S. 12-Month Moving Average Source: Federal Reserve Bank St. Louis; Analysis by Beacon Economics, LLC 14 15 Packet Pg. 239 Item 15 16 17 Despite a gradual slowing of overall growth in the San Luis Obispo County economy, the labor market continued to expand in 2018. Total nonfarm employment continues to reach record highs, and the unemployment rate has gradually reached new lows. Business activity has been mixed in the most recent data, and hospitality and tourism are becoming a larger part of the local economy. And although the drought ended early last year, it did not translate to higher crop yields compared with 2016. Farm employment held steady in 2017, but there has been a shift in farm labor toward more profitable fruit and nut crops and also a general labor shortage. Housing remains a key concern and will continue to be a headwind for growth absent any major shifts in policy. As was the case last year, total nonfarm employment has gradually cooled as more residents are finding work, and the unemployment rate continues to reach record low levels. A sustained increase in overall payrolls has cut the unemployment rate to 2.8%, well below the State’s 4.1%. For five consecutive years, total nonfarm employment growth decelerated, from 3.7% in 2013 to 1.5% through August 2018. Total nonfarm employment is likely to increase less than 2% for all of 2018, and growth will slow further beyond 2018. Mounting labor shortages and affordability remain key challenges that will only worsen in the coming years. LABOR MARKET PERFORMANCE IN SAN LUIS OBISPO 2013 to 2018 YTD* Source: California Employment Development Department; Analysis by Beacon Economics, LLC *year to date through Aug-18 -1.5 -0.5 3.5 0.5 1.5 2.5 4.5 Annual Growth (%)Household EmploymentNonfarm Employment Overview Labor Force20132014201520162017 2018 YTD*San Luis Obispo Forecast 2018 CCEF FORECAST - SAN LUIS OBISPO FORECAST 2018 CCEF FORECAST - SAN LUIS OBISPO FORECAST by Justin Niakamal, Beacon Economics LLC Packet Pg. 240 Item 15 18 19 At the industry level, employment and wages continue to post positive gains. The county’s strong Manufacturing industry has continued to expand with the beverage sector being a principal component of such growth. The county’s Education & Health Care sector (+3.6%) and Leisure & Hospitality sector posted the strongest year-over- year absolute gains, both adding 600 jobs. It was also in these two sectors where there were the largest absolute increases in business starts for 2017. The growth in Leisure & Hospitality reflects the Central Coast county’s growing stature as a pleasant and tourist destination for those in nearby heavily populated regions of the state. Indeed, the county will benefit by playing to its nonfarm industry strengths, especially since their county crop exports declined by over 30% in 2017. Wage gains in 2017 were distributed across many sectors in San Luis Obispo County, with the largest in Information and Professional & Business Services sectors. The Natural Resource & Construction sector is experiencing a resurgence, with employment and wages increasing considerably. The County should expect wages to face upward pressure as the labor market becomes ever tighter. Drought Classification None D0 (Abnormally Dry)D1 (Moderate Drought)D2 (Severe Drought)D3 (Extreme Drought)D4 (Exceptional Drought) Although the drought was declared over in 2017, 2018 is shaping up to be a particularly dry year with some areas of the county already experiencing moderate to severe drought. However, throughout 2017, the strongest gains that did occur the farm industry were from wine grapes and strawberries. San Luis Obispo County can expect to see demand increase for these two crops through the next couple of years, but punitive tariffs slapped on our trading partners remains a concern for the outlook. Indexed crop values confirm that San Luis Obispo growth in agricultural real output continues to win the footrace between neighboring Santa Barbara and Monterey Counties as well as the state of California as a whole. Given the latest data, it may be the case that Monterey County comes at least within an arm of length should San Luis Obispo’s agricultural sector see more unfavorable conditions. Business activity in San Luis Obispo County was mixed in 2017 and through the first half of 2018. Overall local spending activity slowed in 2018, mainly because of a decline in Business and Industry spending. A surge in Building and Construction, however, partially offset the contraction. Although we expect business activity to continue to grow, the region faces several headwinds. One ongoing local concern is the closure of the Diablo Canyon power plant. One ongoing local concern is the closure of the Diablo Canyon power plant. The plant has long been a key part of the local economy, and its closure will undoubtedly impact growth. Proposed settlements to help cushion the blow have recently moved forward. Gov. Brown signed legislation (SB 1090) that mandates that Pacific Gas & Electric, which owns and operates the plant, pay over $85 million to mitigate the plant’s closing. 1 The bill will also fully fund the $350 million employee retention program. Additionally, Congress via the Department of Energy is looking to find money to support local communities where nuclear power plants are being decommissioned.2 In other words, San Luis Obispo County could get additional funding once Diablo Canyon decommissioning begins. As the situation develops, Beacon Economics will be keeping a close eye on the closure and will continue to assess how it will affect the local economy. Left (October 2018) Right (October 2017) Source: United States Drought Monitor 1California governor signs Diablo Canyon settlement bill. Cal Coast Times. Accessed October 23, 2018. Retrieved from https://calcoasttimes.com/2018/09/20/california-governor-signs-diablo-canyon-settlement-bill/ 2Leslie, K. (2018, September 17). Congress looking for money for cities hit by nuclear plant closures — including Diablo Canyon. San Luis Obispo Tribune. Accessed October 23, 2018. Retrieved from https://www.sanlu- isobispo.com/news/local/article218563600.html 2018 CCEF FORECAST - SAN LUIS OBISPO FORECAST 2018 CCEF FORECAST - SAN LUIS OBISPO FORECAST Packet Pg. 241 Item 15 -40 -20 0 20 40 20 21 San Francisco San Mateo Santa Clara Alameda Marin Los Angeles Kings Orange San Diego Sonoma Napa San Luis Obispo Contra Costa Ventura Riverside Tulare Solano Monterey San Benito San Bernardino Santa Barbara San Francisco San Mateo Santa Clara Alameda Marin Los Angeles Kings Orange San Diego Sonoma Napa San Luis Obispo Contra Costa Ventura Riverside Tulare Solano Monterey San Benito San Bernardino Santa Barbara Beacon Economics expects San Luis Obispo County to continue on-trend through 2018 and into the next couple of years. Growth in the labor market will continue, albeit at a slower pace than in previous years, through the rest of 2018 and at least through 2019. Business activity is expected to trend up as well. To be sure, headwinds exist, but there are a few upsides to look forward to. Consumer sentiment remains at or near historic highs, tight labor markets have yielded increases in wages, and the Tax Cuts and Jobs Act should provide a moderate boost to business investment. Although the estimated impact of the tax cut varies, the consensus is an increase in consumption by both businesses and consumers. SAN LUIS OBISPO COUNTY TAXABLE SALES Q1-05 to Q4-20 Source: Analysis by Beacon Economics, LLC 1,250 500 750 1,000 1,500 250Taxable Sales ($ Millions, SA & Smoothed)Taxable Sales ForecastQ1-05Q1-08Q1-11Q1-14Q1-17Q1-200 Local businesses stand to gain from the new provisions of the legislation. One area of opportunity is expensing. The tax law enables businesses to fully expense the cost of business property, inventory included. There is also 100% bonus depreciation, which is scheduled to remain effective until 2023. This will allow a business owner to deduct a large amount of an asset’s cost in a single year rather than depreciating it over several years. Before the law, the bonus depreciation amount was 50%. In other words, half of the cost of an asset could be deducted in the first year, with the residual deducted over several years. The law increases the bonus depreciation amount to 100%. Additionally, for the first time, bonus depreciation may be used for purchases of used as well as new property.3 Because of the tax overhaul, we expect taxable sales to increase 3% to 4% in the short term as businesses take advantage of the provisions. The County’s real estate market has advanced over the past year but could be doing better considering the region’s economic growth. At this point in the business cycle, housing is unlikely to experience a major structural shift. Mortgage rates are not expected to rise substantially over the near term, but the impact of incrementally rising rates coupled with tight lending standards leads us to believe that home sales are not likely to deviate from the narrow range of recent years. As a result, it is hard to see how the housing market will gain much momentum in terms of sales. The Federal Reserve has shown no sign of scaling back its pursuits of a neutral policy rate, with one additional rate hike anticipated this year and three in 2019. The result will be to increase borrowing costs for would-be homeowners as the less accommodative monetary policy boosts mortgage rates. Although the Fed has far more influence over short-term yields, long-term rates have recently ticked up. From October 19, 2017, to October 11, 2018, mortgage rates rose a full percentage point – 3.9% to 4.9%. The increase in mortgage rates will result in less purchasing power for would-be homeowners and will likely cause a bit of cooling in prices at the upper end of the market. HOME PRICE PERCENT CHANGE FROM PREVIOUS PEAK Select California Counties, as of Q2-18 Source: DataQuick, Bureau of Labor Statistics; Analysis by Beacon Economics, LLC Percent (%), SA -20 0 20 40 60 Percent (%), SA 80 Real Home Prices*Nominal Home Prices 39.3 30.8 30.1 7.7 2.6 -11.9 -13.4 -13.6 -17.3 65.9 70.9 -37.1 -33.3 -31.6 -30.7 -39.4 -28.7 -28.5 -23.9 -21.4 -20.6 -20.0 -19.1 60.1 26.5 33.8 5.1 6.2 8.7 8.9 10.2 4.8 2.7 -2.3 -9.7 -9.6 -8.1 -3.1 -17.2 -11.5 -11.0 -22.4 3Fishman, S. How the Tax Cuts and Jobs Act Affects Businesses. www.nolo.com. Accessed October 23, 2018. Retrieved from https://www.nolo.com/legal-encyclopedia/how-the-new-republican-tax-bill-affects-businesses. html. 2018 CCEF FORECAST - SAN LUIS OBISPO FORECAST 2018 CCEF FORECAST - SAN LUIS OBISPO FORECAST Packet Pg. 242 Item 15 22 23 Inventories for homes have been low from a historical standpoint, and home prices have outpaced local income growth. Permitting activity for residential units has been tepid; through the first half of 2018 there were 316 residential construction permits issued in first half of 2018, down 52% from the first half of 2017. In other words, new construction will have little impact on local real estate market inventories in the near term. Limited inventories of homes for sale have driven price appreciation and kept sales activity in check. The cooling of home resales will also create moderation in price appreciation for both new and existing homes on the market. Through the first half of 2018, sales of existing single-family homes increased 1.4% from the first half of 2017. Sales for existing single-family homes rose 5.6% year to year, although the increase was due to an above-average surge in sales in the second quarter of 2018. New home sales advanced nicely through the first half of the year, with a 6.3% increase from the first half of 2017, but new home sales are a very small segment of the overall market and growth tends to fluctuate because of the small number of transactions. Lastly, condo sales were down 7.9% year to year in the first half of 2018 and, similar to new homes, account only for a small share of overall market transactions. Despite a mixed outlook for the local real estate market, local fundamentals remain intact. The chart above shows the ratio of inflation-adjusted home prices to inflation-adjusted per capita personal income, which includes income that is received from all sources. This ratio is a good way to visualize how far removed housing costs can be from Limited construction activity in the current year will have little effect on the upward trend in the median price of a home. Absent any significant policy changes, we expect sales activity to remain between 3,200 and 3,600 in the near term and price appreciation to advance at a slower rate of 5% to 6%. Both major gubernatorial candidates, Gavin Newsom and John Cox, have campaigned on making housing in California more affordable by increasing construction, but such changes are unlikely to occur in the near term. Beacon will monitor the situation and adjust its outlook accordingly as new policy changes are implemented. REAL HOME PRICE TO INCOME RATIO County of San Luis Obispo, Q1-80 to Q2-18 Source: DataQuick, California Department of Finance, U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics; Analysis by Beacon Economics, LLC 12 3 6 9 15 Real Home Price / Real Per Capita Personal IncomeQ1-80 Q1-86 Q1-92 Q1-98 Q1-04 Q1-10 Q1-16 local incomes. An index close to 9 is roughly normal for San Luis Obispo County. By comparison, the United States index has hovered below 7 for the last decade. During the early part of the housing bubble in the 2000s, price appreciation accelerated by double digits. At that time, the price-to-income ratio ballooned nearly 70% to just below 16 at the height of the expansion and before a much-needed correction brought the market back to a reality driven by fundamentals and not speculation. Today, although prices have surpassed their nominal prerecession peak, when adjusted for inflation and local incomes, housing doesn’t appear to be out of touch with reality the way it was in 2006. As of the second quarter of 2018, the median nominal price of an existing single-family house in San Luis Obispo County was 2.7% above its prerecession peak; but adjusted for inflation, home prices in the County are still 20.6% below their prerecession peak. SAN LUIS OBISPO COUNTY REAL ESTATE Q1-05 to Q4-20 Source: Forecast by Beacon Economics 500 900 600 700 800 1,000 Sales (SA & Smoothed)ForecastExisting Home Sales Median Prices ($, SA)600,000 700,000 500,000 400,000 300,000 ForecastMedian Prices Q1-05 Q1-08 Q1-11 Q1-14 Q1-17 Q1-20 2018 CCEF FORECAST - SAN LUIS OBISPO FORECAST 2018 CCEF FORECAST - SAN LUIS OBISPO FORECAST Packet Pg. 243 Item 15 Diablo Canyon 24 25 Located near Avila Beach in San Luis Obispo County, California’s last nuclear power plant, Diablo Canyon, will not be extending its operating license in 2025. A long-standing fixture of the economy and a growing concern for the California Public Utilities Commission, Diablo Canyon was facing an inevitable exit as cost-efficient renewable energy renders nuclear power economically infeasible 1. Diablo Canyon has roughly a $1 billion impact on the local economy, employing around 1,500 people directly2 Following the success of California Senate Bill 100 – a bill that effectively targets 50% renewable energy by 2026, 60% renewable energy by 2030, and 100% carbon-free energy by 20453 – nuclear power has systematically been phased out. An initial local concern about the Diablo Canyon closure has been that a lot of high-salary earners will be out of a job; in 2014, the mean salary at the PG&E owned plant was $157,0004. Questions have arisen as to how these employees, as well as the surrounding community, will be affected by the closure of Diablo Canyon. However, in September 2018, Governor Brown signed another bill into law, SB 1090, which requires the California Public Utilities Commission to approve an $85 million settlement for community impact mitigation and $395 million towards PG&E’s employee retention program. The bill also contains language voicing caution regarding the 2013 closure of the San Onofre nuclear plant. Acting preemptively, language in Section 3 of the bill asserts that the electricity that is to replace the electricity generated by Diablo Canyon shall not cause an increase in the emissions of greenhouse gasses5. Also, a bill signed into law by President Donald Trump in September, HR 5895, targets situations such as the closure of Diablo Canyon and helps procure funds for community impact mitigation6. 1Climatenexus. (2017, December 22). Retrieved October 23, 2018, from https://www.sanluisobispo.com/news/local/article218563600.html 2The Tribune. (2018, September 19). Retrieved October 25, 2018, from https://www.sanluisobispo.com/news/local/article218698490.html 3Senate Bill No. 100 (2018) 4The Tribune. (2016, July 1). Retrieved October 23, 2018, from https://www.sanluisobispo.com/news/local/article87330307.html 5Senate Bill No. 1090 (2018) 6The Tribune (2018, September 17). Retrieved October 23, 2018, from https://www.sanluisobispo.com/news/local/article218563600.html 2018 CCEF FORECAST - DIABLO CANYON 2018 CCEF FORECAST - DIABLO CANYON Packet Pg. 244 Item 15 26 27 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15 Jan-20 LOCAL LABOR MARKET PERFORMANCE San Luis Obispo County, Jan-90 to Sep-18 Source: California Employment Development Department; Analysis by Beacon Economics, LLC 70 110 80 90 100 120 Nonfarm Employment (000s, SA)Median PriceSales Unemployemt (%,SA)8 10 6 4 2 2018 CCEF FORECAST - EMPLOYMENT 2018 CCEF FORECAST - EMPLOYMENT Employment Overview Growth in San Luis Obispo County’s labor market slowed from 2017 levels. The County’s nonfarm payrolls grew 1.3% (1,500 jobs) from September 2017 to September 2018, down from 2.1% over the same period a year earlier. Private-sector payrolls expanded 1.6% over the period, trailing the statewide pace of 2.1% and down from 2.5% one year ago. This puts the County behind private-sector job growth in Monterey County (3.2%) but well ahead of Santa Barbara County (0.3%) and Ventura County (0.8%). Sustained gains in payroll jobs have helped drive the unemployment rate down to 2.8% — well below the 4.1% mark in the State overall and the lowest rate for the County on record. The low unemployment rate in the region reflects the tight labor market: The labor force remained unchanged from the last year, and as a result, private payrolls grew in part by attracting workers from nearby counties. With the lack of labor force expansion, it will be difficult for the County to maintain economic growth unless it continues to draw workers from beyond its boundaries. Although the labor market in San Luis Obispo County will continue to grow, the region faces challenges going forward. Low affordability of housing, from rental units for workers to homes that cater to middle- and upper-middle-income households, remains an ever- present issue. Builders often face challenging hurdles to development. Local companies are also finding it difficult to offer wages comparable to those in the Bay Area and Southern California. As a result, San Luis Obispo County struggles to attract highly skilled talent and new graduates of Cal Poly San Luis Obispo who are recruited by companies elsewhere. These factors are making it difficult for firms to get both high- and low-skilled workers they need to expand. by Brian Vanderplas, Beacon Economics LLC Packet Pg. 245 Item 15 28 29 Industry Level Growth Despite the region’s tightening labor market, growth trends span a variety of sectors in San Luis Obispo County. • Leisure and Hospitality was responsible for the largest absolute number of new jobs. From September 2017 to September 2018, the sector increased payrolls 3.4% (600 jobs), just behind the 3.5% growth in the State over the period. These continued gains should not come as a surprise given the region’s growing status as a premier tourist destination. In addition, the City of Paso Robles is exploring constructing a large-scale conference center at the Paso Robles Event Center. 3 • The County’s Education and Health Care sector is also continuing to expand at a robust pace. From September 2017 to September 2018, the sector increased payrolls 3.6% (600 jobs). A significant portion of the growth in this industry can be attributed to San Luis Obispo County’s population, which has a higher average age than the State’s and relatively more health care needs: 19.4% of the County’s population is over 65, compared with 13.9% of the State population. This number increased 3.1 percentage points from 16.3% in 2011, part of a broader national trend. 1 Finucane, S., Leslie, K., & Sneed, D. (June 22, 2016). What Diablo Canyon’s closure will mean for SLO County’s economy. Retrieved from https://www.sanluisobispo.com/news/local/article85204657.html 2 Leslie, K. (Aug. 21, 2018). Bill to guarantee $85 million Diablo Canyon closure settlement heads to governor. Retrieved from https://www.sanluisobispo.com/news/local/article217058095.html 3 Pratt, T. (June 21, 2018). San Luis Obispo County may get a $26 million convention center. Retrieved from http://www.kcbx.org/post/san-luis-obispo-county-may-get-26-million-convention-center#stream/0 In the coming years, the region will face another significant challenge: the closing of the Diablo Canyon nuclear power plant. Although the facility will not officially close until 2025, the shutdown will bring sweeping changes to San Luis Obispo County’s economy. The plant employs nearly 1,500 workers with an average annual salary above $150,000, according to 2014 figures.1 It is important to note, however, that all these jobs will not be lost immediately; the plant will employ a significant contingent of engineers and other workers during the plant’s decommissioning phase. But it will ultimately take a strong collaboration between the private and public sectors to create development strategies to foster growth in other sectors of San Luis Obispo County’s economy. A bill guaranteeing $85 million to help mitigate the impact of the Diablo Canyon nuclear plant closure was recently passed by the state Assembly, which should help shore up local coffers in the coming years.2 • The Natural Resource and Construction sector also had a strong year, building on its gains from 2016 and 2017. From September 2017 to September 2018, the sector expanded 3.6% (300 jobs), a slowdown from the 5.4% growth over the same period a year earlier. Sustained construction activity is fueling these gains. From the first half of 2017 to the first half of 2018, sales tax revenue from Building and Construction increased 5.1% in the County, outpacing the 3.5% increase in the State overall. • Manufacturing also continues to be a strong source of new jobs in San Luis Obispo County; payrolls expanded 3.8% (300 jobs) over the year, a slowdown from the 5.7% growth over the same period a year earlier. In contrast, Manufacturing payroll levels remained level in the State overall from September 2017 to September 2018. The types of new jobs reflect how closely the Manufacturing sector is linked to the region’s farms and vineyards. According to the Quarterly Census of Employment and Wages from the Bureau of Labor Statistics, beverage manufacturing (which includes wineries) is the largest Manufacturing subsector in San Luis Obispo County, accounting for nearly 1 in 4 positions. Employment levels at beverage firms were also up significantly, increasing 14.2% (289 jobs) from the first quarter of 2017 to the first quarter of 2018. • Although payrolls in most San Luis Obispo County industries expanded over the year, jobs declined in some sectors, with Retail Trade shedding 300 and Professional and Business Services losing 200 positions. 2018 CCEF FORECAST - EMPLOYMENT 2018 CCEF FORECAST - EMPLOYMENT Packet Pg. 246 Item 15 30 31 City-Level Growth At the city level, San Luis Obispo County has had widespread growth. From the third quarter of 2016 to the third quarter of 2017, the City of San Luis Obispo gained the highest number of jobs, increasing payrolls 2.6% (1,350 jobs). In percentage terms, Paso Robles led the way, increasing payrolls 4.9% (861 jobs). Other coastal communities were a mixed bag last year, with payrolls increasing 4.0% in Arroyo Grande (357 jobs) and 0.2% in Grover Beach (eight jobs), while payrolls fell 0.5% in Pismo Beach Bay (22 jobs) and 0.5% in Morro Bay (20 jobs). The more inland regions of the County also posted gains, with payrolls increasing 3.1% in the County’s Unincorporated Areas (551 jobs) and 1.2% in Atascadero (110 jobs).4 City Employment YoY Change (#)YoY Change (%) San Luis Obispo 54,132 1,350 2.6 Paso Robles 18,449 861 4.9 Unincorporated 18,556 551 3.1 Arroyo Grande 9,319 357 4.0 Atascadero 9,337 110 1.2 Grover Beach 3,475 8 0.2 Morro Bay 3,693 -20 -0.5 Pismo Beach 4,066 -22 -0.5 SAN LUIS OBISPO COUNTY EMPLOYMENT BY CITY Source: California Employment Development Department; Analysis by Beacon Economics, LLC From 2012 to 2016, the unemployment rate in San Luis Obispo County averaged 5.5%, according to the American Community Survey from the U.S. Census Bureau, though this rate varied across the County.5 Atascadero (4.2%), Grover Beach (4.2%), Pismo Beach (4.5%), Arroyo Grande (4.7%) and San Luis Obispo (4.9%) had unemployment rates well below the County’s, but Morro Bay (6.2%) and Paso Robles (5.9%) sustained higher unemployment. Still, the unemployment rates across San Luis Obispo’s cities were lower than the statewide rate of 8.7% over the five- year period. Business Formation Consistent with gains in region’s labor market, business formation in San Luis Obispo County continued in 2017. According to the Quarterly Census of Employment and Wages, the number of establishments grew overall and across a broad range of sectors. More than 162 businesses were begun in 2017, representing a 1.9% increase from 2016 and a slowdown from the 2.2% growth from 2015 to 2016. The 1.9% increase trails the State’s, where establishments increased 3.0% over the period. • At the industry level, the Health Care sector posted the largest gains in 2017, adding 52 firms. 2018 CCEF FORECAST - EMPLOYMENT 2018 CCEF FORECAST - EMPLOYMENT Industry Sep-18 YoY Change (#) YoY Change (%) Total Nonfarm 118.9 1.5 1.3 Farm 5.2 -0.2 -3.3 Government 24.2 0.0 0.2 Leisure and Hospitality 19.7 0.6 3.4 Education/Health 16.2 0.6 3.6 Retail Trade 14.0 -0.3 -2.4 Professional/Business 10.5 -0.2 -2.2 NR/Construction 7.9 0.3 3.6 Manufacturing 7.6 0.3 3.8 Other Services 6.2 0.0 -0.3 Transport,Warehouse,Util. 3.9 0.0 0.1 Wholesale Trade 3.0 0.2 7.0 Finance and Insurance 2.3 0.0 -0.2 Real Estate 2.0 0.1 5.1 Information 1.4 0.0 -0.4 SAN LUIS OBISPO COUNTY EMPLOYMENT BY INDUSTRY Source: California Employment Development Department; Analysis by Beacon Economics, LLC 4City-level employment data are based upon the latest available period, the third quarter of 2017. 5City-level unemployment rate data are based upon the latest available period, from 2012 to 2016.Packet Pg. 247 Item 15 32 33 • Other sectors posting sizable gains for the year included Accommodation & Food (21 firms), Finance & Insurance (17), Professional, Scientific, and Technical Services (16) and Logistics (13). These figures should not come as a surprise given the continued growth in Construction and Leisure and Hospitality over the year. • In percentage terms, Logistics (13.6%), Management (9.6%) and Finance & Insurance (4.4%) led the way. • In addition, Unclassified Firms6 accounted for 52 of the new companies in the region in 2017. These firms will be classified in the coming quarters, providing a clearer picture of business formation. Wages Although private employment growth in San Luis Obispo County is outpacing the State’s, overall wages have increased more slowly. From 2016 to 2017, wages in San Luis Obispo County grew an average of 3.3%, to $45,796, trailing the 4.6% growth in the State overall. County wage growth trailed Monterey County (3.7%) and Santa Barbara County (3.6%) but was well ahead of Ventura County (1.5%). • Average annual wages increased across most industries in San Luis Obispo County in 2017. More importantly, with a historically low unemployment rate and a shortage of workers, there should be upward pressure on wages over the coming year. • The Information sector posted the largest year-over-year gain, with average annual wages increasing just over 10.9% from 2016 to 2017. • Professional and Business Services also had a strong year. From 2016 to 2017, wages grew 9.5% in Administrative Support, 8.4% in Professional, Scientific and Technical Services and 7.6% in Management. These sectors incorporate many skill sets and indicate wage gains are being felt across a wide range of income brackets. • Other sectors posting meaningful gains in 2017 were some of San Luis Obispo County’s fastest-growing in 2017 and 2018: Construction (4.5%), Health Care (3.5%) and Accommodations & Food (3.1%). More importantly, these sectors also represent a significant share of the County’s overall workforce and so these wage gains are being felt across the bulk of households in the region. 2018 CCEF FORECAST - EMPLOYMENT 2018 CCEF FORECAST - EMPLOYMENT AVERAGE ANNUAL WAGES Selected Metropolitan Areas and California, 1990 to 2017 Source: U.S. Bureau of Labor Statistics; Analysis by Beacon Economics, LLC 60 30 40 50 70 Dollars (000s)1990 1993 1996 1999 2002 2005 Monterey County Santa Barbara County San Luis Obispo County California 20 Ventura County 2008 2011 2014 2017 6 Firms awaiting a NAICS industry classification from the U.S. Bureau of Labor Statistics Packet Pg. 248 Item 15 34 35 Top-level indictors of business activity in San Luis Obispo County suggest that 2017 and 2018 were a mixed bag. Local spending slowed in 2018, increasing just 0.4% from the first half of 2017 to the first half of 2018. The driving force behind this slowdown was a decline in Business and Industry spending. This was partially offset, however, by increased spending on Building and Construction, which grew significantly over the period. Despite this year’s slow start, 2017 was a strong year for the region, with economic output in San Luis Obispo County increasing 1.7% in real terms from 2016. Although this growth trailed the State’s (3.0%), San Luis Obispo led the Central Coast in 2017. Several sectors had strong years, with Administrative Support growing 10.8% and Professional, Scientific and Technical Services expanding 10.5%, with each contributing significantly to the County’s overall growth. Tourism also had a strong year in 2017, with a record number of travelers at San Luis Obispo County Regional Airport. Moreover, 2018 is shaping up to be an even stronger year for the airport; traffic through August was up 21.2% over the same period in 2017. Although we expect that business activity will continue to grow, the region faces several challenges. Most pressing is a lack of affordable housing, which will limit growth. Although construction activity has picked up recently, the housing stock has still not grown enough to meet the long-run needs of the County’s growing population and employment base. Another challenge is the pending closure of the Diablo Canyon nuclear power plant. Indeed, because the plant generates over $1 billion in estimated economic activity each year, the County will need to focus on developing and expanding other industries1. 1http://www.sanluisobispo.com/news/local/article85204657.html 2018 CCEF FORECAST - BUSINESS ACTIVITY 2018 CCEF FORECAST - BUSINESS ACTIVITY Business Activity Overview by Brian Vanderplas, Beacon Economics LLC Packet Pg. 249 Item 15 36 37 Sales tax revenue in San Luis Obispo County increased a modest 0.4% from the first half of 2017 to the first half of 2018. Sales tax growth in San Luis Obispo County trails the other Central Coast counties (Monterey, Santa Barbara and Ventura) and is well behind the 3.6% statewide pace. But consumer and business spending has been volatile in recent years. This year’s slower pace of growth compared with the State’s comes on the heels of a more robust 3.7% increase from 2016 to 2017, outpacing the State’s 3.5% increase over the period. Consumer and Business Spending SALES TAX Selected Counties, Q2-11 to Q2-18 Source: HdL; Analysis by Beacon Economics, LLC 130 100 110 120 140 County (Index, Q2-11 = 100)Q2-11 Q2-12 Q2-13 Q2-14 Q2-15 Q2-16 Q2-17 Q2-18 Monterey County Santa Cruz San Luis Obispo California • The main force behind the slowdown in consumer and business spending was a decrease in business-to- business spending. Sales tax from Business and Industry fell 22.2% from the first half of 2017 to the first half of 2018. • Despite the decrease in Business and Industry spending, businesses are continuing to invest in the County, notably on construction projects. From the first half of 2017 to the first half of 2018, sales tax from Building and Construction grew 10.1%, adding to the 10.5% increase from 2016 to 2017. This mirrors the continued gains in Construction sector payrolls the County has enjoyed over the last year. • Consumer-driven sectors were mixed. With gasoline prices beginning to stabilize, sales tax revenue at Fuel and Services Stations rose 8.5% from the first half of 2017 to the first half of 2018, building on the 7.4% increase from 2016 to 2017. • Sales tax revenue from Restaurants and Hotels (1.0%) and Food and Drug Stores (0.3%) also rose steadily in the first half of 2018. But sales taxes collected from Autos and Transportation (-2.5%) and General Consumer Goods (-0.3%) declined during the first half of 2018. Category 2018 YTD YoY Change (%) Building and Construction 2,685 10.10 Fuel and Service Stations 2,649 8.50 Restaurants and Hotels 3,729 1.00 Food and Drugs 1,477 0.30 General Consumer Goods 4,681 -0.30 Autos and Transportation 3,742 -2.50 Business and Industry 3,240 -22.20 San Luis Obispo County 25,706 0.40 Santa Barbara County 34,352 2.00 Ventura County 68,538 1.80 Monterey County 32,859 1.20 California Total 3,357,209 3.60 SAN LUIS OBISPO COUNTY SALES TAX BY INDUSTRY Source: HdL Companies; Analysis by Beacon Economics, LLC • Taxable sales grew across most of the County in 2017. Arroyo Grande led the way, with taxable sales increasing 7.5% from 2016 to 2017. Taxable sales in the County’s largest city, San Luis Obispo, grew a more modest 4.6% from 2016 to 2017. Other cities with sizable growth over the period were Morro Bay (6.1%), Paso Robles (5.7%) and Atascadero (5.7%). The only cities whose tax base failed to grow was Grover Beach (-1.6%) and Pismo Beach (-0.3%), but taxable sales grew in both these cities from 2015 to 2017. • Although we expect taxable sales to continue to grow, consumer spending will increase more modestly in the County compared with the State as population growth lags other parts of California. As such, the County must rely on continued growth in business activity and tourism. 2018 CCEF FORECAST - BUSINESS ACTIVITY 2018 CCEF FORECAST - BUSINESS ACTIVITY Packet Pg. 250 Item 15 38 39 Economic activity in San Luis Obispo County grew 1.7% from 2016 to 2017, outpacing growth in Monterey (1.1%), Santa Barbara (1.6%) and Ventura (-0.4%) counties. The Central Coast trailed the State overall, where economic activity grew 3.0% over the period. Since 2007, economic activity in San Luis Obispo County has expanded 13.6% in real terms, compared with the 19.4% increase in California. Production REAL GDP GROWTH Selected Regions and California, 2007 to 2017 Source: U.S. Bureau of Economic Analysis; Analysis by Beacon Economics, LLC 115 100 105 110 120 Index (2007 = 100)2007 2009 2011 2013 2015 2017 Monterey County Santa Barbara County San Luis Obispo County California 95 Ventura County • At the industry level growth continues to be volatile, with a handful of sectors boosting production levels sizably while others sustained declines. The Administrative Support sector posted the largest gains in percentage terms in recent years, with output levels growing 10.8% from 2016 to 2017. This marks a rebound for the 12.8% decline in output from 2015 to 2016. • San Luis Obispo County’s high-skilled industries also contributed to the region’s production growth in 2017. From 2016 to 2017, the County’s Professional, Scientific and Technical Services sector expanded 10.5%, Management 8.0% and Information 5.5%. Industry 2017 ($ Millions)1-Year Change (%)3-Year Change (%) Real Estate 2,315 -0.1 3.2 Prof., Sci., and Tech. Services 729 10.5 8.8 Government 1927 1.2 2.8 Construction 851 1.1 6.1 Retail trade 1204 3.4 3.8 Information 400 5.5 10.5 Accommodation & Food Services 671 3.2 3.5 NR/Mining 368 -5.4 6.8 Health Care 951 5.0 1.6 Transportation & Utilities 1279 -1.1 1.1 Other services 330 0.0 1.9 Wholesale trade 401 -0.3 0.8 Management 54 8.0 0.6 Arts, Entertainment, & Recreation 79 -6.0 0.0 Educational services 36 -2.7 0.0 Administrative Support 309 10.8 0.0 Finance and Insurance 281 5.6 -1.7 Manufacturing 907 -1.2 -2.6 SAN LUIS OBISPO COUNTY REAL GDP BY INDUSTRY Source: U.S. Bureau of Economic Analysis; Analysis by Beacon Economics, LLC • Looking at a longer time frame, Information (10.5%) and Professional, Scientific and Technical Services (8.8%) were the two fastest-growing sectors in the County over the last three years. These high-skilled sectors will be pivotal to the County’s growth pattern, and continued expansion will be necessary to attract talent from the Bay Area and Southern California. But, as mentioned, local companies are finding it difficult to offer wages comparable to those in the Bay Area. Other sectors posting sizable 2017 gains in output were Finance and Insurance (5.6%), Health Care (5.0%) and Retail Trade (3.4%). • A handful of sectors had pullbacks in production in 2017. Declines were most pronounced in the Education Services sector, which fell 2.7%. Utilities (-1.8%) and Manufacturing (-1.2%) also declined. Although the region faces a number of headwinds, we expect it will continue to grow at a stable pace over the next year. 2018 CCEF FORECAST - BUSINESS ACTIVITY 2018 CCEF FORECAST - BUSINESS ACTIVITY Packet Pg. 251 Item 15 40 41 As the region draws more visitors each year, hospitality and tourism are becoming a bigger part of the County economy. This is evident in the record year for San Luis Obispo County Regional Airport in 2017. A record-breaking 407,646 passengers traveled through the airport in 2017, a 23.4% increaser over 2016 levels, making the airport the fifth-fastest-growing airport in the nation. 2Moreover, 2018 is shaping up to be another record year. Through the first eight months of 2018, passenger traffic was up 21.2% over 2017’s record-setting levels. 3 The County is an easy-to-reach destination from the dense population centers in the Bay Area and in Southern California just a few hours away. Moreover, the County’s variety of amenities and activities ensures that many tourists will visit the region more than once. • Through August 2018, average daily room rates in San Luis Obispo County were 2.0% higher than during the same period in 2017. Room rates rose most steeply in San Luis Obispo (4.1%) and along the Northern Coast (1.9%), while rates in Paso Robles (0.8%) and Pismo Beach (0.55%) grew more modestly. Hospitality & Tourism • Occupancy rates were also a mixed bag in 2018, falling 0.3 percentage point, to 73.1%. Occupancy along the Northern Coast grew 0.8 percentage point, to 63.0%, and occupancy rates in Pismo Beach grew 0.3 percentage point, to 73.7%. In contrast, occupancy rates in San Luis Obispo fell 1.4 percentage point to 77.7%, and occupancy rates in Paso Robles fell 0.5 percentage point, to 73.9%. • With average daily rates growing and occupancy rates falling, revenue per available room grew only 1.6% in 2018. Despite this modest growth, increases were spread across the county. The Northern Coast led the way, with revenue per available growing 3.3%, followed by San Luis Obispo (2.2%), Pismo Beach (1.0%) and Paso Robles (0.1%). • Perhaps more important, when more leisure travelers are drawn to the region, they spend at local attractions, restaurants and stores. This is evident in the 3.4% increase in Leisure and Hospitality employment from September 2017 to September 2018 and the continued increases in spending at Restaurants and Hotels. The region is also looking to be a bigger draw for business travelers, with the City of Paso Robles exploring constructing a large-scale conference center at the Paso Robles Event Center.4 2San Luis Obispo Airport ranked seventh-fastest growing airport in North America. (Sept. 24, 2018). Retrieved from https://pasoroblesdailynews.com/san-luis-obispo-airport-ranked-seventh-fastest-growing-airport-in- north-america/87022/ 3San Luis Obispo County Regional Airport – Airport Statistics 4Pratt, T. (June 21, 2018). San Luis Obispo County may get a $26 million convention center. Retrieved from http://www.kcbx.org/post/san-luis-obispo-county-may-get-26-million-convention-center#stream/0 40 41 2018 CCEF FORECAST - BUSINESS ACTIVITY 2018 CCEF FORECAST - BUSINESS ACTIVITY Packet Pg. 252 Item 15 The performance of the Agriculture sector in San Luis Obispo County has been mixed. The official end of the drought in April 2017 did not boost crop yield or value that year relative to 2016. Real output from the agricultural sector and crop exports were also disappointing in 2017. Even so, farm employment increased decently as the drought ended. Moreover, there had been a shift toward higher-value crops, such as wine grapes and strawberries, that pay higher wages. So far, 2018 has had drier weather than the post-drought period of 2017. Conservation efforts are going to be permanent in San Luis Obispo County and in California as a whole. Although California’s drought ended in April 2017, 1wetter weather in the remainder of that year did not translate to higher crop yield compared with 2016, when the drought was in full effect. Gross crop output was flat in 2017. The gross value of San Luis Obispo County’s agricultural industry totaled $924.7 million in 2017, down 0.5% from 2016.2 The Animal sector (5.6%) was the only category whose gross value increased in 2017. Gross values in other categories tapered off modestly: Field Crops (-0.6%), Nursery (-4.8%), Fruit and Nut (-0.3%) and Vegetable (-0.9%). In fact, after the drought, San Luis Obispo County had wet weather in late 2017,3 which complicated the timing for planting vegetable crops, resulting in a 17.6% decline in vegetable crop yield (in harvested acreage) over 2016. San Luis Obispo County’s inflation-adjusted output (gross metropolitan product) from its agricultural sector declined modestly in 2017. But the percentage decline was less severe than it was statewide. Farm employment held steady in 2017, but there was a shift in farm labor toward more profitable fruit and nut crops and a labor shortage in general. Despite the challenges of the drought recovery, wide fluctuations in weather and labor shortages, the County’s agricultural producers remained key contributors to the regional and State economies in 2017.One Year Percent Chnage in Crop Yield100% 80% 60% 40% 20% 0% -20% -40% -60% -60%-20%-40%0%20%40%60%80%100% One Year Percent Change in Crop Value CHANGE IN CROP VALUE AND CROP YIELD San Luis Obispo County, 2016 vs. 2017 Source: San Luis Obispo County Department of Agriculture; Analysis by Beacon Economics, LLC Nursery Products Cattle & Calves Field Crops Fruit & Nut Crops Vegetable Crops Overview Agriculture 2018 CCEF FORECAST - AGRICULTURE 2018 CCEF FORECAST - AGRICULTURE 1Office of Gov. Edmund G. Brown Jr. (2017, April 7). Governor Brown Lifts Drought Emergency, Retains Prohibition on Wasteful Practices. Retrieved Oct. 8, 2018, from https://www.gov.ca.gov/2017/04/07/ news19748/ 2Note that 2016’s gross value was revised upward from $914.7 million to $929.9 million in the 2017 crop report. 3Holden, L. (2018, July 10). Wine grapes are still SLO County’s most valuable crop — with a record $267 million year. The Tribune. Retrieved Oct. 8, 2018, from https://www.sanluisobispo.com/news/local/arti- cle214629835.html42 43 by Hoyu Chong, Beacon Economics LLC Packet Pg. 253 Item 15 Industry Performance Both inflation-adjusted real output (gross metropolitan product) in the agricultural sector and crop exports decreased in 2017 from 2016. • Output in the agricultural sector4 was $408 million in 2017, down 5.9% from 2016, as measured in inflation- adjusted dollars. • The decrease was less severe than the statewide agricultural sector’s year-over-year decline of 9.0%. • From 2008 to 2017, San Luis Obispo County’s real agricultural output more than doubled, outpacing that in Monterey County (92.7%), Santa Barbara County (86.8%) and the State (46.4%). • Crop exports totaled $65.9 million in 2017, down 34% nominally compared to 2016. Crop exports fell to levels not seen since 2009. AGRICULTURAL SECTOR GROSS VALUE AND OUTPUT San Luis Obispo County, 2008 to 2017 Source: San Luis Obispo County Department of Agriculture and Bureau of Economic Analysis, Analysis by Beacon Economics, LLC $300 $400 $500 $600 $1,000 Gross Crop Value(Nominal, Millions of USD)$700 $800 $900 $1,100 2008 Agricultural Sector Real Output(Inflation Adjusted, Millions of USD)$0 $100 $200 $150 $200 $250 $300 $500 $350 $400 $450 $550 $0 $50 $100 2009 2010 2011 2012 2013 2014 2015 2016 2017 Animal Nursery Vegetable Field Fruit and Nut Real Output (in 2017 Dollars) AGRICULTURAL SECTOR REAL OUTPUT (INDEXED TO 2008 LEVELS) Source: Bureau of Economic Analysis, Analysis by Beacon Economics, LLC 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 100.0 120.0 140.0 220.0 160.0 180.0 200.0 240.0 Agricultural Sector Real Output(Base Year =2008)Monterey County Santa Barbara County San Luis Obispo County California SAN LUIS OBISPO COUNTY CROP EXPORTS Source: International Trade Administration; Analysis by Beacon Economics, LLC 2009 2010 2011 2012 2013 2014 2015 2016 2017 -30% -20% -10% 30% 0% 10% 20% 40%Percentage ChangeCrop Export ($ Millions)Percentage Change Export Value (Millions of USD)$0 $20 $100 $40 $60 $80 $120 -40% The Fruit and Nut category had the highest gross value ($566.6 million) again in 2017. • Wine grapes and strawberries accounted for almost 90% of fruit and nut gross value. • Significant growth in gross value came from wine grapes (10.2%), English walnuts (11.1%), and miscellaneous fruit and nut crops (18.1%). • But the increase in English walnuts’ value was due to a 30% increase in price per harvested ton; yield actually decreased 14.7% year over year. • After a tremendous year in 2016, avocados sustained a 38.8% drop in gross value and a 51.8% drop in yield (harvested tons) in 2017. 2018 CCEF FORECAST - AGRICULTURE 2018 CCEF FORECAST - AGRICULTURE 4Inflation-adjusted gross metropolitan product from the agriculture, forestry, fishing and hunting industries. 44 45 Packet Pg. 254 Item 15 Cattle and calves herds totaled 43,100 heads 2017, a modest 2.6% increase over 2016. • But by weight, this was a 12.2% decrease year over year. • Also, the number of heads sold was less than half of 10 years ago (98,000). • Even though the drought ended, cattle will take time to bounce back in numbers. The Vegetable Crop category had the largest drop in yield (-17.6%) of all agricultural products in 2017. • The vegetable crops’ aggregated value decreased less than 1% from 2016, mostly through a significant increase in crop value per unit. * For example, although yields for cauliflower (-15.9%) and celery (-19.0%) were significantly lower in 2017, the respective crop gross values actually increased 21.2% and 36.7% because of a 44.1% and 68.8% price surge per ton, respectively. • Winter rain was the main contributor to the reduced vegetable crop yields. • Another factor was the continuing labor shortage. Labor-intensive crops — vegetable crops such as broccoli (-30.9%), head lettuce (-28.7%), edible pod peas (-48.4%) and citrus fruits such as lemons (-10.8%) — had the largest drops in yields in 2017 relative to 2016. SAN LUIS OBISPO COUNTY FARM EMPLOYMENT 2007 to 2017 Source: California Employment Development Department; Analysis by Beacon Economics, LLC 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0 1,000 5,000 2,000 3,000 4,000 6,000 2007 Farm employment in 2017 was 9.3% higher than in 2016 but is expected to come in lower in 2018. Although there is a general worker shortage in agriculture, the shortage in vegetable crops may be due to a shift to wine grapes and strawberries, which pay higher wages5 and also are the two crops with the highest gross values in San Luis Obispo County. • Given that farm work is low-paying and mostly done by immigrants, San Luis Obispo County and California as a whole are expected to face continuous labor shortages in the agricultural sector amid high housing costs and the federal administration’s unwelcoming stance toward immigrants. • Particularly in San Luis Obispo County, the chronic undersupply of workers is made worse by insufficient housing.6 Industry Outlook After the Drought Although the drought officially ended in April 2017, California has once again had dry weather in 2018. • As of Oct. 2, 2018, much of Southern, Central Coast and Central California was experiencing moderate to severe drought, with Imperial County in extreme drought. Southwest San Luis Obispo County is in severe drought, and the rest of the County is having either abnormally dry weather or moderate drought.7 • Abnormal dryness or drought is affecting 93% of the state’s population, 34.6 million people.8 • Conservation efforts are going to be a permanent condition in California. The next drought is not a question of if, but when. CALIFORNIA DROUGHT AS OF OCTOBER 2, 2018 Source: U.S. Drought Monitor, National Drought Mitigation Center and National Oceanic and Atmospheric Administration; Analysis by Beacon Economics, LLC 30% 40% 50% 90% 60% 70% 80% 100% 20% 10% 0%Percent of State Land Area10/15/132/15/146/15/1410/15/142/15/156/15/152/15/166/15/1610/15/162/15/176/15/1710/15/172/15/186/15/1810/15/152018 CCEF FORECAST - AGRICULTURE 2018 CCEF FORECAST - AGRICULTURE 5Johnson, P. (2018, July 12). Wine grape values hit record high, labor shortage hurts vegetables in 2017 SLO crop report. New Times San Luis Obispo. Retrieved Oct. 8, 2018, from https://www.newtimesslo.com/ sanluisobispo/wine-grape-values-hit-record-high-labor-shortage-hurts-vegetables-in-2017-slo-crop-report/Content?oid=5637096 6Vaughan, M. (2018, Aug. 23). Thousands of farmworkers live in SLO County. But there isn’t enough housing for them. The Tribune. Retrieved Oct. 8, 2018, from https://www.sanluisobispo.com/news/local/arti- cle217116560.html 7Miskus, D. (2018, Oct. 2). Summary of Drought for California as of October 2, 2018. National Integrated Drought Information System, U.S. Drought Portal. Retrieved Oct. 8, 2018, from https://www.drought.gov/ drought/states/california#regional_summary_full 8Ibid. No Drought Abnormally Dry Extreme DroughtSevere Drought Exceptional DroughtModerate Drought Week of 46 47 Packet Pg. 255 Item 15 1Total sales less sales from foreclosure. 2Home sales historically peak in the first two quarters of the year. 3Based on data from California Association of Realtors (retrieved from https://www.car.org/en/aboutus/mediacenter/newsreleases/2017releases/2qtr2017affordability and https://www.car.org/marketdata/data/haitra- ditional). For comparison, the median home price increased 6.6% in the period. 48 49 Single-Family Housing Market After being flat for four consecutive quarters, traditional home sales1 (existing single-family homes, new single-family homes and condominiums combined) grew 4.2% year over year in the second quarter of 2018. • Yet this fell short of the 6.3% year-over-year increase in the second quarter of 2017. • Overall, San Luis Obispo County finished the first half of 20182 with similar numbers of homes sold compared with the first half of 2017, which is the result of slightly lower condominium sales countered by slightly higher single-family home sales. • Sales of existing single-family homes in the second quarter of 2018 were 5.6% higher than a year earlier.3 • In the second quarter of 2018, the monthly mortgage payment of a home sold for the median price, including taxes and insurance, was $3,280, a 15.9% increase from the same period a year earlier. • Declining affordability, reflected in this substantial increase in monthly mortgage payments, is expected to dampen home sales in the near future. EXISTING SINGLE-FAMILY HOME PRICE AND SALES San Luis Obispo County, Q1-2013 to Q2-2018 Source:DataQuick/CoreLogic; Analysis by Beacon Economics, LLC 300 400 500 900 600 700 800 1000 Sales of SFR (Seasonally Adjusted)Median PriceSales Median SFR Price$630,000 $700,000 200 100 $560,000 $490,000 $420,000 $350,000 $280,000 $210,000 $140,000 $70,000 $00 Residential Real Estate 2018 CCEF FORECAST - RESIDENTIAL REAL ESTATE 2018 CCEF FORECAST - RESIDENTIAL REAL ESTATE The housing market in San Luis Obispo County has shown signs of slowing in 2018. Price appreciation continues, but with smaller percentage gains compared with recent years’. Sales are little changed from a year ago, and although inventory is comparable to that of a year ago, the median number of days on market has increased significantly. Similarly, apartment rent increases have subsided significantly from their 2015 and 2016 highs despite extremely low vacancy rates. Finally, the number of residential construction permits has lagged 2017’s significantly. This is a disappointing trend in an extremely tight local home buying and rental market. Market Overview by Hoyu Chong, Beacon Economics LLC Packet Pg. 256 Item 15 50 51 2018 CCEF FORECAST - RESIDENTIAL REAL ESTATE 2018 CCEF FORECAST - RESIDENTIAL REAL ESTATE Q1-08Monterey County Santa Barbara County San Luis Obispo County Ventura County MEDIAN EXISTING SINGLE-FAMILY HOME PRICE Central Coast Counties, Q1-2008 to Q2-2018 Source: DataQuick/CoreLogic; Analysis by Beacon Economics, LLC $600,000 $700,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Q2-08Q3-08Q4-08Q1-09Q2-09Q3-09Q4-09Q1-10Q2-10Q3-10Q4-10Q1-11Q2-11Q3-11Q4-11Q1-12Q2-12Q3-12Q4-12Q1-13Q2-13Q3-13Q4-13Q1-14Q2-14Q3-14Q4-14Q1-15Q2-15Q3-15Q4-15Q1-16Q2-16Q3-16Q4-16Q1-17Q2-17Q3-17Q4-17Q1-18Q2-18EXISTING SINGLE-FAMILY HOME PRICES (SEASONALLY ADJUSTED) By County, Q2-2018 Source: DataQuick/CoreLogic; Analysis by Beacon Economics, LLC Year-over-year price appreciation (+7.8%) has cooled somewhat from the previous few years but is ahead of nearby counties’: Monterey (+6.7%), Ventura (+5.2%) and Santa Barbara (-6.5%). • Santa Barbara County’s decreased home prices are likely a result of wildfires and mudslides, which hurt demand.4 • Because of San Luis Obispo County’s vast open spaces and coastal mountain range, as many as one-third of homes are highly vulnerable to wildfire damage.5 • San Luis Obispo County price appreciation will likely slow further, exacerbated by wildfire threats. SAN LUIS OBISPO COUNTY EXISTING SINGLE-FAMILY HOME REAL ESTATE, BY CITY (SEASONALLY ADJUSTED) Source: DataQuick/CoreLogic; Analysis by Beacon Economics, LLC *Median prices have been rounded to the nearest thousand ** Year to Date as of end of second quarter Existing Single-Family Home Median Prices* City Q2-2017 Q2-2018 Percent Change Arroyo Grande $743,000 $713,000 -4% Atascadero $475,000 $542,000 +14.2% Grover Beach $515,000 $582,000 +13% Paso Robles $477,000 $466,000 -2.2% San Luis Obispo $742,000 $792,000 +6.7% San Luis Obispo County $554,000 $597,000 +7.8% Existing Single-Family Home Year-to-Date** Sales City 2017 Year-to-Date 2018 Year-to-Date Percent Change Arroyo Grande 171 181 +5.6% Atascadero 230 218 -5.4% Grover Beach 87 53 -39.4% Paso Robles 410 393 -4.1% San Luis Obispo 198 179 -9.5% Unincorporated/Other San Luis Obispo County 651 735 +12.9% San Luis Obispo County 1747 1759 +0.7% Cities with lower median existing single-family home prices than the County’s recorded greater home price appreciation year-over-year than the County. • Atascadero (+14.2%) and Grover Beach (+13.0%), where the median existing single-family home prices are lower than the County median, recorded the highest year-over-year home appreciation in the second quarter of 2018. • Among the major cities, only Arroyo Grande had higher home sales in the first half of 2018 than the first half of 2017. San Luis Obispo County’s housing inventory remains tight. In August 2018, unsold housing inventory stood at 3.8 months countywide, similar to that in Santa Barbara County (4.0 months) and Monterey County (4.1 months). • The County’s unsold housing inventory is also comparable to that from August 2017 (3.9 months).6 • On the other hand, the median time on market has increased significantly, from 23.0 days in July 2017 to 31.0 days in July 2018, a larger jump than in other counties in the Central Coast.7 4Lambert, L. (2018, May 29). Home Prices Aren’t Soaring Everywhere: These Are the 10 Metros Where They’re Falling the Most. Realtor.com. Accessed Sept. 27, 2018, from https://www.realtor.com/news/trends/10- metros-home-prices-falling-fastest/ 5Vaughan, M. and Finch II, M. (2018, Aug. 6). A third of SLO County homes are at high risk of wildfire damage. And it’s not getter better. San Luis Obispo Tribune. Accessed Oct. 1, 2018, from https://www.sanluiso- bispo.com/latest-news/article216181505.html. 6 California Association of Realtors (2018, Sept. 17). August home sales and price report. Retrieved from https://www.car.org/en/aboutus/mediacenter/newsreleases/2018releases/augusthomesales 7 Ibid Central Coast California San Luis Obispo $597,000 +7.8% Santa Barbara $505,000 -6.5% Monterey $582,000 +6.7% Southern California Los Angeles $624,000 +8.6% Orange $775,000 +5.3% San Diego $607,000 +5.8% Inland Empire $345,000 +6.3% Ventura $636,000 +5.2% Northern California San Francisco $1,381,000 +10.2% East Bay $734,000 +12.3% San Jose $1,209,000 +20.2% Sacramento $353,000 +10.8% Other Northern California $493,000 +6.2% State of California $481,000 +8.6% County Median PriceQ2-2018 ($)1-Year Percent Change Packet Pg. 257 Item 15 APARTMENT VACANCY RATE Central Coast Counties, Q1-2014 to Q2-2018 Source: Axiometrics; Analysis by Beacon Economics, LLC 4.0% 2.5% 3.0% 3.5% 4.5% 2.0%Monthly Effective Rent ($)Seasonally AdjustedQ1-14Q2-14Q3-14Q4-14Q1-15Q2-15Q3-15Q4-15Q1-16Q2-16Q3-16Q4-16Q1-17Q2-17Q3-17Q4-17Q1-18Q2-180.5% 1.0% 1.5% 0.0% Monterey County Santa Barbara County San Luis Obispo County Ventura County 52 53 2018 CCEF FORECAST - RESIDENTIAL REAL ESTATE 2018 CCEF FORECAST - RESIDENTIAL REAL ESTATE Compared with the single-family home market, the condominium market in San Luis Obispo County has cooled so far in 2018. • Sales of condominiums dipped 9% in the first half of 2018 compared with the first half of 2017. This trend is also reflected in Monterey (-13%), Santa Barbara (-11%) and Ventura (-6%) counties. • Unlike the single-family home market, where price appreciation continues at a steady pace, the median price of condominiums shows greater fluctuations. • In the second quarter of 2018, the year-over-year median condominium price decreased 1.2% from the second quarter of 2017. • San Luis Obispo County has a lower median condominium price than in Monterey, Santa Barbara and Ventura counties. Apartment rents are lower in San Luis Obispo County than in Monterey, Santa Barbara and Ventura counties. • Effective monthly rent8 in San Luis Obispo County averaged $1,467 in the second quarter of 2018, up 3.4% from the same period a year earlier. • -Rent increases have subsided significantly from their 2015 and 2016 highs, where year-over-year increases were around 10%. • The Central Coast region has had persistently low vacancy rates, reflecting the particularly strong demand for and severe lack of supply of rental housing. • San Luis Obispo County’s apartment vacancy rate is lower than in Monterey (2.4%), Santa Barbara (3.3%) and Ventura (3.5%) counties. The County vacancy rate has averaged less than 1% in the last two years, reflecting an extreme need to bring more apartment units online. APARTMENT MONTHLY EFFECTIVE RENT Central Coast Counties, Q1-2014 to Q2-2018 Source: Axiometrics; Analysis by Beacon Economics, LLC $1,800 $1,200 $1,400 $1,600 $2,000 $1,000Monthly Effective Rent ($)Seasonally AdjustedQ1-14Q2-14Q3-14Q4-14Q1-15Q2-15Q3-15Q4-15Q1-16Q2-16Q3-16Q4-16Q1-17Q2-17Q3-17Q4-17Q1-18Q2-18Monterey County Santa Barbara County San Luis Obispo County Ventura County 8 Asking (market) rent less concessions and discounts. Effective rent is also known as net rent. Packet Pg. 258 Item 15 54 55 2018 CCEF FORECAST - RESIDENTIAL REAL ESTATE 2018 CCEF FORECAST - RESIDENTIAL REAL ESTATE Permitting has been disappointing so far in 2018. Just 316 residential construction permits were issued in the first half of 2018, down 52% from the first half of 2017. • 234 single-family permits were issued in the first half of 2018, down 35% from a year earlier. • Only 82 multifamily permits were issued in the first half of 2018, down 73%. This is troubling news given the extremely low apartment vacancy rate. • Almost half (47%) of the single-family construction permits were issued in the unincorporated areas of the County. Yet this is a 48% decrease from the same period in 2017. o San Luis Obispo, the County’s largest city, had the largest number of single-family construction permits issued (43). • New Cal Poly San Luis Obispo dormitories opened in September, providing housing for about 1,475 first-year students,9 or almost one-third of the 2018 freshman class.10 o This new student housing may help ease the low apartment vacancy rate in the City of San Luis Obispo but does little to alleviate the very tight rental market that pervades the County as a whole. San Luis Obispo’s permitting activity is low not just compared with one year ago but also compared with the State and elsewhere in the Central Coast. • Statewide, 12% more residential construction permits were issued in the first six months of 2018 than the same period in 2017. Residential permits were up 43% in Monterey County and down 29% in Santa Barbara County during the same period. • The drop in residential permits in San Luis Obispo County was similar to that in Ventura County (-48%). • At the city level, only San Luis Obispo had more permits issued for both single- and multifamily in the first half of 2018 than in the first half of 2017. • Pismo Beach was the only other city in San Luis Obispo County with any multifamily construction permits issued in the first half of 2018. Construction Activity *Note Single and Multifamily construction permits are non-seasonally adjusted. The total depicted is moving average of total residential new construction permits. San Luis Obispo County New Construction Permits Issued by City Single-Family New Permits City 2017 Year-to-Date 2018 Year-to-Date Percent Change Arroyo Grande 41 12 -70.7% Atascadero 30 10 -66.7% Grover Beach 7 8 14.3% Morro Bay 9 33 266.7% Paso Robles 10 13 30.0% Pismo Beach 24 4 -83.3% San Luis Obispo 24 43 79.2% Unincorporated/Other San Luis Obispo County 215 111 -48.4% San Luis Obispo County 360 234 -35.0% Multi-Family New Permits City 2017 Year-to-Date 2018 Year-to-Date Percent Change Pismo Beach 128 2 -98.4% San Luis Obispo 51 65 27.5% Unincorporated/Other San Luis Obispo County 125 15 -88.0% San Luis Obispo County 304 82 -73.0% RESIDENTIAL CONSTRUCTION PERMITS ISSUED San Luis Obispo County, Q1-2008 to Q2-2018 Source: Construction Industry Research Board; Analysis by Beacon Economics, LLC 400 100 200 300 500 0Number of Units Permitted (Quarterly)MF + SF Total (Moving Average)Multi-Family Single-FamilyQ1-08Q3-08Q1-09Q3-09Q1-10Q3-10Q1-11Q3-11Q1-12Q3-12Q1-13Q3-13Q1-14Q3-14Q1-15Q3-15Q1-16Q3-16Q1-17Q3-17Q1-18SAN LUIS OBISPO COUNTY CONSTRUCTION PERMITS ISSUED BY CITY Source: Construction Industry Research Board; Analysis by Beacon Economics, LLC *Note: Year-to-date as of end of second quarter. Figures represent actual permits issued not seasonally adjusted. 9 Source: University Housing, Cal Poly San Luis Obispo. Accessed Sept. 28, 2018, from http://www.housing.calpoly.edu/student-housing/residence-halls-and-apartments/ytt 10 Based on a total of 4,486 enrolled freshmen in fall 2018. Source: Preliminary New Freshman Profile Fall 2018, Cal Poly San Luis Obispo. Accessed Oct. 3, 2018, from https://admissions.calpoly.edu/prospective/ profile.html Packet Pg. 259 Item 15 56 57 The Residential Market - A Brief Overview As housing costs continue to rise, housing affordability has become one of the major issues facing San Luis Obispo County. As you can imagine, there are many opinions on how to address the problem and those discussions often come with associated and heated politics. A number of differences between the City of San Luis Obispo and North County markets are discussed below. San Luis Obispo The average price for a home in the City of San Luis Obispo is approximately $450 per square foot. This is an increase from $410 last year. In addition, the homes that have been selling are larger—now averaging over two thousand square feet. Construction time for a new single family residence has pushed out from 6 to 9 months. All in all, this translates to approximately $937,000 for the average (median $800,500) new home is San Luis Obispo. There were approximately 258 units sold through the third quarter of 2018. Needless to say, not everyone can afford these prices and many residents commute from more affordable areas such as Santa Maria, South San Luis Obispo County, and North County. North County In the North County the residential market sales volume has decreased to 916 single family units from 978 units last year. Average prices have increased from $534,500 to $575,000 ($521,250 median price) for a 1,900 sq. ft. house—approximately $302 per sq. ft. In short, compared to last year, in the North County, as in San Luis Obispo, home sales are more expensive, larger, and the overall number of sales has decreased slightly. Housing Related Projects in the City of San Luis Obispo There is noticeable construction within the City of San Luis Obispo and in immediate surrounding areas. Noted projects at or near completion include: • The Avivo Townhome project is in its final phase west of Sacramento Street. • Sierra Meadows and Toscano, off Prado Road, are actively moving through their phases for single-family detached homes. • Wingate Homes, Righetti Ranch, the Jones Property, and West Creek – all located in the Orcutt Area Specific Plan – are proceeding through construction. • Chinatown is partially completed. 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE Commercial Real Estate Key Issues: by Steve McCarty and Steve Davis, McCarty Davis Commercial Real Estate Confidence in Commercial Real Estate Increased Construction Costs Rising Interest Rates, Recession Worries? Packet Pg. 260 Item 15 58 59 • Garden Street Terraces are moving toward completion. • 22 Chorro Street, with 27 residential units and approximately 2,000 sq. ft. of commercial space, is under construction. • The Yard, 43 residential units throughout 8 new buildings on the former Waste Management site, is under construction. Upcoming projects still include: • Avila Ranch, on Buckley south of the County Airport, has been approved for 720 units. • San Luis Ranch, the former Dalidio project, has been approved for 580 homes plus hotel and commercial space. • The Junction, 69 residential units and approximately 3,000 sq. ft. of commercial space on Santa Barbara Street by Miners is on the books. • Numerous other projects are also working their way through the planning and design pipeline. Housing unit sales from 2008 through 2018 in San Luis Obispo and North County are illustrated in the summary table below. 3rd Quarter 2018 Annual Data 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 San Luis Obispo ****** # Units Sold 159 163 191 215 273 282 259 283 337 275 258 Median Price $635,000 $569,000 $550,000 $535,000 $535,000 $618,500 $654,500 $667,000 $661,000 $700,000 $800,500 North County # Units Sold 638 702 698 892 991 1045 1032 1138 923 976 919 Median Price $390,000 $340,000 $296,000 $270,000 $305,000 $355,000 $375,500 $404,500 $422,421 $483,000 $521,250 RESIDENTIAL UNIT SALES DATA Source: MLS Data; Compiled by McCarty Davis Commercial Real Estate Commercial Markets Key activities and trends in San Luis Obispo County’s commercial real estate are outlined in the following sections and broken out by regions and individual market segments. City of San Luis Obispo Office Office vacancy has inched slightly downward from 5.4% in 2017 to 4.2% this year. Base inventory is approximately 2,969,200 sq. ft. Approximately 35,900 sq.ft. of inventory was added this last year. Leasing activity has been vibrant. Office space, which has been the slowest market segment to absorb, has been filling up. The reduction in vacancy has reduced the number of office space options for tenants. Second generation spaces are leasing at lower rates than new construction. However, spaces over 5,000 sq. ft. are difficult to find and tenants have been turning to new construction to meet their needs. The Broad Street corridor from Tank Farm Road to the East Airport area has been the focus of new commercial activity with a mix of user types. Harris’ new legal offices have just been added at a prominent Broad Street location. Meathead Movers are moving their offices to a new building across from the airport. At 892 Aerovista, approximately 36,000 sq. ft of office space has just been completed and fully occupied, filled mainly by medical and financial tenants. The Airport Business Center has been absorbing to the point where its ownership has triggered construction of the next phase of development. New market base rents for these assets are approximately $2.25 per sq. ft NNN (with some dollars being given for Tenant Improvements). Given land costs, fees, and increasing construction costs, any new office buildings coming on to the market will be $2.00+ per sq. ft., NNN. In addition to the cost of shell construction, TI costs for office build-outs have moved up to the $100+/sq. ft range. Medical users have been a big part of the new absorption and activity. Two large medical users account for over 60% of the occupancy at 892 Aerovista. Most recently, the older 30,500 sq. ft. medical campus on California Boulevard sold for $5,683,750 ($186.35 per sq. ft.) and will be given new life through updating. Additional square footage will be built there as well. Larger medical providers are continuing with strategic additions and consolidations with their various clinics. Generally, office sale prices in the San Luis Obispo area in the $300 - $400+ /sq. ft. range. A nicely finished, first floor suite (1,379 sq. ft.) at 805 Aerovista sold this spring for $515,000, or $373/sq. ft. On the larger side (18,447 sq. ft.), 3701 South Higuera St. sold for $5,600,000, which translates to $304 per sq. ft. 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE Packet Pg. 261 Item 15 60 61 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE Retail Retail vacancy in the City of San Luis Obispo remains relatively low (5.0%), and has increased a percentage point over last year. Hardly any new stock has been added and the present retail inventory base is approximately 4,189,400 sq. ft. When the retail vacancy data is parsed, it is interesting to note that the larger vacant spaces, formerly housing the likes of Gotthshalks’s and Staples, have created the bulk of the vacancy, while smaller square footages, 5,000 sq. ft. and under, have, for the most part, been faring well. There is turnover in these spaces, but new tenants generally follow within a reasonable time frame. The larger brick and mortar vacancy issues with national and regional tenants are the fall-out of changing consumer trends and continued growth in online retail sales. The former Sears and Forever 21 have been broken up and are currently being renovated into a greater number of new users with smaller footprints. Downtown SLO Downtown San Luis Obispo is an iconic location for both tourists and locals. The demand for ownership of downtown assets remains robust and larger properties, when they become available, create strong interest. This last year the Naman properties went on the market and there were immediately multiple buyers. The mid-downtown, multi- building asset of approximately 19,300 sq. ft., reportedly sold for $13,125,000 or approximately $680 per sq. ft. of usable area. By way of comparison, a 12,930 sq. ft. building in the same block, 736 Higuera, sold for $5,199,600, or approximately $402 per sq. ft. There remains a vitality to downtown San Luis Obispo as other community’s downtowns have experienced increasing vacancies and diminution of their former cache. Industrial It is difficult for users to find industrial space in San Luis Obispo. The vacancy has declined slightly from an already previous low of 1.4%, and for 2018, stands at 1.28%. Very little inventory has been added to the market, approximately 70,700 sq. ft., and there is not much in the pipeline so we anticipate another year of low vacancy. Lockheed has informed their landlord that they will be vacating the 80,000 sq.ft. they currently occupy and demand for the space has been strong. The standing inventory of industrial space has just tipped over the 4,000,000 sq. ft. mark. Space availability over 15,000 sq. ft. is virtually absent from the market. Rents are about the same as last year with quoted industrial rents in the $.80 – $1.25 per sq. ft. NNN range depending on the size of the space. The East Airport area of San Luis Obispo has seen the strongest concentration of industrial growth in the past few years. Parcel sales in that area have demonstrated values over $20 per sq. ft. Upated 3rd Qtr 2018 Industrial / Warehouse Retail Functioning Office Functioning 2002 2.8%1.9%9.9% 2003 3.8%2.4%8.4% 2004 6.4%2.2%5.4% 2005 4.0%1.7%3.2% 2006 4.3%1.8%4.7% 2007 2.3%1.4%3.5% 2008 5.4%3.0%6.1% 2009 6.1%5.6%9.7% 2010 9.1%5.1%12.6% 2011 8.7%3.4%11.6% 2012 4.5%3.7%8.6% 2013 1.9%1.8%6.5% 2014 3.1%2.7%7.5% 2015 2.3%1.3%5.3% 2016 1.6%5.6%3.8% 2017 1.4%4.0%5.4% 2018 1.3%5.0%4.2% COMMERCIAL VACANCY RATES San Luis Obispo City Metropolitan Area Source: McCarty Davis Commercial Real Estate Packet Pg. 262 Item 15 62 63 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE Office This segment of the market has had the largest vacancy swings over the last 10 years and has been the weakest segment for the region. Office vacancy, just short of doubling, has moved upward from 7.8% to 13.5% in 2018. There is now approximately 59,528 sq. ft. of standing inventory on the market; this is on a base of approximately 442,000 sq. ft. and again, minimal office inventory has been added. Small office buildings are selling for between $200 and $300 per sq. ft. Community Health Centers is constructing new medical offices in Templeton of approximately 26,000 sq. ft. As they occupy the new facility they will transition from their current offices, vacating medical space that will need to be filled. Given current conversations, there appear to be a number of medical groups interested in occupying the space. Industrial Paso Robles’ industrial space, although close to holding constant, is showing slight improvement with a 5.1% vacancy rate for 2018, down from 5.8% in 2017. There is approximately 180,200 sq. ft. of space currently available. Base inventory has grown slightly to approximately 3,530,000 sq. ft. for 2018. An interesting aspect of the market is that available space has been absorbed quickly. The former Paris Precision building of approximately 200,000 sq. ft. went vacant, was purchased, broken down into multiple sections, and mostly leased out within the year. The majority of the new inventory-added vacancies that have been absorbed have been related to viticulture as wineries and support industries continue to expand. Land values for small, finished parcels in east Paso Robles are still in the $5.00 to $10.00/sq. ft. range. The City of Paso Robles sold two parcels comprising 1.4 acres, both positioned for redevelopment/better futures. One on Riverside Drive (acre +), and a small ancillary parcel near downtown, sold for $1,525,000 to a local businessman/investor. At just land values alone, this works out to approximately $25 per sq. ft. Paso Robles and North County Updated 3rd Qtr 2018 Industrial / Warehouse Retail Functioning Office Functioning 2003 9.4%1.9%1.2% 2004 10.7%< 1%1.8% 2005 3.5%< 1%1.2% 2006 5.0%< 1%5.2% 2007 2.8%< 1%5.6% 2008 7.5%2.2%7.7% 2009 8.6%2.7%13.9% 2009 13.2%4.1%24.1% 2010 8.0%4.5%17.5% 2011 7.7%3.5%18.4% 2012 6.5%4.8%18.3% 2013 5.7%3.3%6.6% 2014 3.6%2.6%14.3% 2015 1.1%2.8%7.5% 2016 9.3%2.1%9.2% 2017 5.8%1.1%7.8% 2018 5.1%2.6%13.5% COMMERCIAL VACANCY RATES Paso Robles Metropolitan Area Source: McCarty Davis Commercial Real Estate Retail Given the smaller population base of Paso Robles, as compared to South County, retail has been a strong suit over the years. It currently has a base of approximately 4,650,000 sq. ft. Not much retail inventory has been added since last year, similar to prior years. The retail vacancy rate was very low in 2017 (1.1%) and has ticked up to 2.63% in 2018. The approximate 122,092 sq. ft. of vacancy is comprised mostly of small spaces. As noted in the San Luis Obispo segment, retail is continuing to evolve and bigger units are trending to go dark. The 47,000 sq. ft. Orchard Supply Hardware on Theater Drive has posted closing signs. Packet Pg. 263 Item 15 64 65 Hotels in San Luis Obispo and North County The many hospitality projects that were entitled are now moving through the building phase and signs of their construction are apparent. A number of hospitality properties have sold this last year. Among the most notable are: 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE Row Crops This past year approximately 230 acres of row crops sold in South County for $6,500,000. In the break-out of farmable and non-farmable ground, farmable ground was valued at approximately $51,500 per acre. Vineyard Sales North County had a number of key vineyard sales this last year: 3330 Pleasant Road $8,500,000 149 ac Four Palms Vineyards $16,838,500 98.2 ac Shandon Valley Vineyards $20,656,000 204 ac Shell Creek Road $36,700,000 68 ac In breaking down sales, the general guidelines are as follows: East Side Paso Robles runs in the low $40,000s to $50,000/ac. A recent outlier in Shandon reported $74,000/ac. West Side sales have been at $50,000/ac and up. There was recently a West Side sale at $100,000/ac for a small vineyard. Break-outs for actual farmable ground can be very complex as there is often a residential component included as part of the vineyard asset. San Simeon Quality Inn - San Simeon $5,000,000 Paso Robles Courtyard Marriott $15,000,000 456 Embarcadero - Morro Bay $10,000,000 Commercial Investments Already low capitalization rates, commonly called “Caps” or “Cap Rates”, have been similar to last year. Historically, higher valuations have been centered around San Luis Obispo with values softening as they radiate outward, like concentric circles. Now, with the difficulty of finding investment properties, the cap rates have become similar over geographic areas. Determining a cap rate has become more of an art than science. Exchange monies have led to further exchanges. Transactions have occurred across the board: apartments, self- storage, office, retail, hotels, mobile home parks, viticulture—and each with their own metrics for valuation. With greater variability by product type, it is becoming more difficult to assign a cap rate predominately by location. Examples of commercial buildings: 1704 Spring St.4,800 sq. ft. $1,050,000 approximate 5.3 cap 4120 Horizon 8,600 sq. ft. $1,650,000 approximate 6.1 cap 445 Higuera St.7,000 sq. ft. $2,200,000 approximate 6.5 cap 7 Archer St.8,304 sq.ft $3,085,000 approximate 5.8 cap (imputed) 2238 Broad St. 9,938 sq. ft $3,500,000 approximate 4.8 cap 3195 McMillian 14,152 sq. ft. $2,900,000 approximate 6 cap 3701 S Higuera 18,447 sq. ft $5,600,000 approximate 6.9 cap 1135 Santa Rosa 11,780 sq. ft $7,350,000 approximate 4.2 cap Appraisers have been wrestling with a larger variance in cap rates as investors seek out specific investments in smaller areas. This deemphasizes the investment location somewhat and puts more emphasis on the type of investment or franchisee, giving cap rates a wider range. These assets were selling between 7 and 8 caps. Hospitality cap rates are typically higher than non operational assets where there is no associated business or operational component. 65 Packet Pg. 264 Item 15 66 67 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE Apartment Notes In 2018, there were five sales between $1,200,000 and $4,000,000 and numerous sales below the $1,000,000 threshold. In their analysis these cap rates are typically between 3 and 4s. Following are demonstrated capitalization rate ranges over the last fifteen years for the Central Coast market area: 2002 9.0 to 9.5 2003 7.0 to 8.0 2004 6.5 to 7.5 2005 5.5 to 6.5 2006 4.5 to 6.5 2007 5 to 7 2008 4.5 to 8 2009 5.5 to 9 2010 6.5 to 9 2011 5.5 to 9.7 2012 5.5 to 8.5 2013 5.5 to 8.5 2014 4.5 to 8.5 2015 4.5 to 7.0 2016 4.0 to 6.5 2017 4.0 to 6.5 2018 4.0 to 6.5 Cannabis Activity Cannabis activity on the Central Coast continues to be an interesting market segment to follow. Last year saw a bit of the “Wild West” syndrome play out as Grover Beach moved to license both dispensaries and other cannabis related activities. Property values in the industrial area rose from roughly $150/sq. ft. to over $500/sq. ft. for buildings. Prices have now fallen back into a range of about $300/sq. ft. Lease rates for cannabis related businesses are in the $2.00 - $3.00/sq. ft. range. This has caused the migration of many businesses that had occupied the Grover Beach industrial area to other locations. The City of Grover Beach approved four dispensary operators and it appears that only two of those operators/ locations will actually operate. This is not uncommon in the industry as this product has attracted a wide range of people with various backgrounds and financial and business capabilities. The City of San Luis Obispo has been patient in forming their cannabis ordinances and appears to be the only City in the County that will allow a retail, non-medical dispensary to operate (they have discussed allowing two such dispensaries). The County has approved their Land Use Designations which has forced many existing operations to cease as they are no longer are allowed to cultivate at their current locations. There has recently been a surge in demand for smaller non-cultivation related (manufacturing, testing, distribution, etc.) activities in the County. Packet Pg. 265 Item 15 68 69 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE Conclusion Continuing confidence in commercial real estate over the last five years is a precursor to, “when will this change” conversations. There are various changes occurring that could affect commercial real estate over the coming year. Interest rates are rising although it is not clear how significant of an impact that will have on continued growth. But the higher rates for loans will affect cash flows and affordability. Mixed-use projects are becoming more common in both proposed plans as well as in terms of interest from buyers. There is strong interest from developers for housing projects as well. We are, however, seeing some developers putting entitled projects up for sale, causing one to wonder how long they see strong growth in jobs and incomes continuing. Increased housing costs are a key factor in determining where people live and work. High housing costs are causing problems for employers and affecting their ability to attract key employees. Given the large volume of transactions this past year, it appears that people could be repositioning themselves for the next cycle of the economy. Despite the few warning signs flickering in the distance, the Central Coast remains a desirable place to locate your business, operate, and to invest. To illustrate the capitalization influence on valuation, let us assume a commercial building produces a net income to the investor of $100,000 per year. The declining market cap rates would correlate to the approximate purchase prices according to the following years: 2002 $1,053,000 2003 $1,250,000 2004 $1,333,333 2005 $1,538,000 2006 $1,538,000 2007 $1,428,000 2008 $1,250,000 2009 $1,111,111 2010 $1,111,111 2011 $1,031,000 2012 $1,818,000 2013 $1,818,000 2014 $1,818,000 2015 $1,428,000 2016 $1,538,000 2017 $1,538,000 2018 $1,538,000 A major community issue is the upcoming closing of the PG&E nuclear power plant, Diablo Canyon. The closing will affect jobs and trickle-down income for many parts of the community. From a commercial real estate perspective, there is both a large office building (one of, if not the, biggest in the County) and a large warehouse at the plant that will likely become available for lease. When these buildings are available, they will, in one fell swoop, add 3 to 4 years of commercial absorption into the market. However, although breathtaking and sitting on the coast, the location is not central and uses within the Coastal Zone may be problematic. Packet Pg. 266 Item 15 70 71 San Luis Obispo County’s population growth is slowing, with few parts outside of unincorporated areas having added significant numbers from 2017 to 2018. The natural growth rate has been quite slow, with relatively few women in child-rearing years. Additionaly, many residents with bachelor’s degrees moved to find better pay. San Luis Obispo County is following Central Coast and statewide trends and adding Hispanics while decreasing its share of non- Hispanic whites. As other Central Coast counties and the State sustained increased highway congestion, San Luis Obispo County residents have experienced shorter commutes even as single-occupancy-vehicle use has grown. 2018 CCEF FORECAST - DEMOGRAPHICS 2018 CCEF FORECAST - DEMOGRAPHICS Population Estimates San Luis Obispo County is home to 280,101 people in 2018, a 0.32% increase from 2017 and a 2.5% increase from 2013. Compared with the rest of the Central Coast, San Luis Obispo County’s growth in population is lagging; it added the fewest people in absolute terms over the last five years. All four Central Coast counties have had lower population growth than California as a whole over the last five years. The City of San Luis Obispo is currently the largest city by population in the County, at 46,548, but remains smaller than unincorporated areas. Year-to-date changes in San Luis Obispo include: • The population increased 0.32%, outpacing only Ventura County, the slowest-growing Central Coast county, which grew 0.26%. • Population growth statewide (0.8%) far outpaced that of all four Central Coast counties. • Among cities, San Luis Obispo grew the most, at 0.27%. • Unincorporated areas grew faster, 0.62%, more than any city. • Paso Robles, Grover Beach and Morro Bay sustained slight declines, at -0.01%, -0.24% and -0.23% respectively. POPULATION CHANGE IN THE CENTRAL COAST Fastest Growing Counties, 2013-2018 Source: California Department of Finance; Analysis by Beacon Economics, LLC 0 5,000 10,000 15,000 20,000 25,000 Santa Barbara Ventura Monerey San Luis Obispo Demographics Overview by Joshua Baum, Beacon Economics LLC Packet Pg. 267 Item 15 RACE AND ETHNICITY, SAN LUIS OBISPO COUNTY Source: American Community Survey; Analysis by Beacon Economics, LLC 60% 0% 20% 40% 80% 2012 2017 Non-Hispanic White Non-Hispanic Black Non-Hispanic Asian Hispanic or Latino ( of any race) California San Luis Obispo County Monterey County Santa Barbara County Ventura County 2012 2017 39% 43% 40% 41% 42% 44% WOMEN AGED 15-44 Source: American Community Survey; Analysis by Beacon Economics, LLC 37% 35% 36% 38% 72 73 Race and Ethnicity The population of San Luis Obispo County is less diverse than the State as a whole. In 2017, 68.7% were non- Hispanic white, 22.6% were Hispanic or Latino (of any race), 3.6% were non-Hispanic Asian and 1.6% were non- Hispanic black. Similar to statewide trends, though, the number of Hispanics has been increasing since 2012, from 21.5% of the population in 2012 to 22.6% in 2017. In contrast, the non-Hispanic white population declined from 70.1% in 2012 to 68.7% in 2017. California’s non-Hispanic white population fell from 39.2% in 2012 to 27% in 2017. County Total 280,101 891 0.32% Incorporated 159,462 149 0.09% Unincorporated 120,639 742 0.62% San Luis Obispo 46,548 124 0.27% El Paso De Robles 31,559 -3 -0.01% Atascadero 31,147 12 0.04% Arroyo Grande 17,912 38 0.21% Grover Beach 13,560 -33 -0.24% Morro Bay 10,503 -13 -0.12% Pismo Beach 8,233 24 0.29% POPULATION GROWTH IN SAN LUIS OBISPO COUNTY, 2018 Source: California Department of Finance; Analysis by Beacon Economics, LLC Age San Luis Obispo County’s population is aging. As of 2017, the latest year for which data is available, the median age was 39.6, compared with 38.1 for California. Nearly two-fifths of the population were senior citizens (65+) compared with just 13.9% of California’s population. This is not necessarily a Central Coast trend, though. Santa Barbara (33.8) and Monterey counties (34.3), the two youngest in the Central Coast, have median ages significantly below that of California (36.5). Some five-year trends (2012 to 2017): Less than 5 5 to 19 20 to 34 35 to 49 50 to 64 65 and older 2012 2017 0.0% 20.0% 5.0% 10.0% 15.0% 25.0% SAN LUIS OBISPO COUNTY AGE BREAKDOWN Source: American Community Survey; Analysis by Beacon Economics, LLC • San Luis Obispo County’s median age increased from 39.2 to 39.6, while California’s increased from 35.5 to 36.5. • The share of the County’s population under 5 declined from 4.8% to 4.6%, while California’s share dropped from 6.7% to 6.2%. • Despite being the home of Cal Poly San Luis Obispo, the County’s share of 20- to 34-year-olds dropped from 22.6% to 21.6%; by contrast, the state’s share increased slightly, from 22.1% to 22.3%. • Seniors increased from 16.3% to 19.4%, while the statewide share increased by a smaller margin, from 12.1% to 13.9%. • The share of women in child-bearing years (15 to 44) in San Luis Obispo County decreased from 39.8% to 37.9%, with the statewide share falling from 41.6% to 40.7%. 2018 CCEF FORECAST - DEMOGRAPHICS 2018 CCEF FORECAST - DEMOGRAPHICS Location 2018 1-Year Abs. Change 1-Year Pct. Change Packet Pg. 268 Item 15 MEDIAN HOUSEHOLD INCOME Source: American Community Survey; Analysis by Beacon Economics, LLC $80,000 $20,000 $40,000 $60,000 $10,000 2012 2017 $0Household IncomeCalifornia San Luis Obispo County Monterey County Santa Barbara County Ventura County 74 75 Income Median household income in San Luis Obispo County was $71,880 in 2017, nearly matching the State’s median. Although it had increased since 2012, the County’s 29.3% rise in median household income has trailed that of the state, largely because of smaller gains by those with bachelor’s degrees. • Ventura County was the richest in the Central Coast region in 2017, with a median household income of $82,857. This was likely due to its proximity to major job centers in the Los Angeles MSA. • San Luis Obispo County’s 19.3% increase in household income from 2012 to 2017 trailed California’s 23.1% increase. Education The County, as of 2017, had a high level of high school graduates and those with advanced degrees compared with the rest of the Central Coast and California as a whole. But compared with 2012, San Luis Obispo County is losing those with some college education and those with bachelor’s degrees. The County’s relatively low incomes for those with bachelor’s degrees are likely to blame as workers move to take higher-paid positions elsewhere. Trends among residents 25 and older include: • Only 8% of the population lack a high school diploma or its equivalent, the lowest rate in the Central Coast and less than half that of California (16.7%). • San Luis Obispo County’s lowest-skilled workers (those with a high school diploma or less) earned $32,472 in 2017 (an increase of 19.3% over 2012), more than their counterparts in the rest of the Central Coast and California. • Similar to the other Central Coast counties and California as a whole, San Luis Obispo County’s share of the population with at least a high school education increased from 91.2% in 2012 to 92.1% in 2017. • San Luis Obispo County increased its share of the population with at least a bachelor’s degree from 2012 (33.5%) to 2017 (34.6%), but did so more slowly than California (30.9% to 33.7%) and the broader Central Coast region. • The share of County residents with bachelor’s degrees (lacking advanced or professional degrees) fell from 21.7% in 2012 to 19.8% in 2017. • County workers with bachelor’s degrees increased their incomes just 0.2% from 2012 to 2017, a lower rate than in California (14.9%) and the rest of the Central Coast. • The County’s share of population with graduate or professional degrees increased from 2012 (11.8%) to 2017 (14.8%), representing the largest increase in the Central Coast and more than California (11.3% to 12.6%). • San Luis Obispo County residents with graduate or professional degrees made $71,371 in 2017, the least in the Central Coast and much less than California ($85,555). 2018 CCEF FORECAST - DEMOGRAPHICS 2018 CCEF FORECAST - DEMOGRAPHICS Packet Pg. 269 Item 15 EDUCATIONAL ATTAINMENT, SAN LUIS OBISPO COUNTY Source: American Community Survey; Analysis by Beacon Economics, LLC Graduate or professional degree Bachelor’s degree Some College High School Graduate Less than High School Graduate 2017 2012 2017 INCOME BY EDUCATION Source: American Community Survey; Analysis by Beacon Economics, LLC $80,000 $20,000 $40,000 $60,000 $100,00 High School Graduate or less Some College $0 California San Luis Obispo County Bachelor’s degree Graduate or Professional degree Monterey County Santa Barbara County Ventura County 76 77 2018 CCEF FORECAST - DEMOGRAPHICS 2018 CCEF FORECAST - DEMOGRAPHICS 0%5%10%15%20%25%30%35%40%45% SAN LUIS OBISPO COUNTY INCOME BY EDUCATION Source: American Community Survey; Analysis by Beacon Economics, LLC High School Graduate or less Some College Bachelor’s degree Graduate or Professional degree 2012 2017 $0 $20,000 $40,000 $60,000 $80,000 Packet Pg. 270 Item 15 NATURAL GROWTH RATES, SAN LUIS OBISPO COUNTY Source: American Community Survey; Analysis by Beacon Economics, LLC 2012 2013 2014 2015 2016 2017 -30% -20% -10% 30% 0% 10% 20% 40% Natural Growth Rate 0.30% 0.40% 0.80% 0.50% 0.60% 0.70% 0.90% -40% 0.10% 0.20% 0.00% 78 79 Migration San Luis Obispo County’s population increase of 452 in 2017 was primarily driven by migration; the natural increase (births minus deaths) totaled only 42, or 7.7% of the total increase. This stands in contrast to the State, where most of the recent growth has been through natural increase. Not only is the natural rate of growth in the County at a five-year low, it has consistently had the lowest natural rate of growth over the past five years in the Central Coast and lower than California as a whole. • San Luis Obispo County experienced positive net domestic migration in 2016 (874) and 2017 (35). • Population growth in San Luis Obispo County in 2017 mainly came from foreign migrants, who represented 83% of the growth. • San Luis Obispo County’s natural rate of growth has fallen over the last five years from 0.13% to 0.02%, following Central Coast and statewide trends. • Monterey County had the highest natural rate of growth in the Central Coast in 2017 at 0.82%, likely because of its younger population. Commuting Times and Modes Although its main highways and arteries face congestion during peak commuting periods, San Luis Obispo County is not known for traffic jams. From 2012 to 2017, most residents experienced a slight decrease in commuting time. The exception is the residents who depended on public transportation. Notable trends include: • San Luis Obispo County’s median commuting time fell over the past five years (22.1 to 21.5 minutes). • All other Central Coast counties had increases, with the greatest in Ventura County (24.5 to 29.1 minutes). • More San Luis Obispo County residents are using single-occupancy vehicles to get to work than five years ago (73.1% to 76.8%). Carpooling commuters decreased from 11.2% to 9.9%. • Mass transit use also declined from 2.2% to 0.9% as transit commutes increased by over 20 minutes in each direction. • Other counties in the Central Coast had a decrease in use of mass transit, but did not have so dramatic an increase in commuting time. 2018 CCEF FORECAST - DEMOGRAPHICS 2018 CCEF FORECAST - DEMOGRAPHICS California 73.4%11.1%5.2%27.5 Monterey County, California 71.4% 12.6% 2.5%22.8 San Luis Obispo County, California 73.1% 11.2% 2.2%22.1 Santa Barbara County, California 67.3% 13.4% 3.3%18.7 Ventura County, California 76.3% 13.2% 1.3%24.5 2012 COMMUTES Source: American Community Survey; Analysis by Beacon Economics, LLC Geography Drive Alone %Carpool %Transit %Median Commuting Time California 73.9%10.0%5.0%29.8 Monterey County, California 72.0%8.6%1.4%22.5 San Luis Obispo County, California 76.8%7.9%0.9%21.5 Santa Barbara County, California 68.7%12.8%2.0%19.5 Ventura County, California 79.7%9.9%0.9%28.1 2017 COMMUTES Source: American Community Survey; Analysis by Beacon Economics, LLC Geography Drive Alone %Carpool %Transit %Median Commuting Time Packet Pg. 271 Item 15 DESIGN BY AMF MEDIA GROUP Central Coast Economic Forecast 2018 Beacon Economics 5777 W Century Blvd, Ste 895 Los Angeles, CA 90045 (310) 571-3399 Beaconecon.com Packet Pg. 272 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES FINANCIAL PLAN PURPOSE AND ORGANIZATION A. Financial Plan Objectives. Through its Financial Plan, the City will link resources with results by: 1. Identifying community needs for essential services. 2. Organizing the programs required to provide these essential services. 3. Establishing program policies and goals, which define the nature and level of program services required. 4. Identifying activities performed in delivering program services. 5. Proposing objectives for improving the delivery of program services. 6. Identifying and appropriating the resources required to perform program activities and accomplish program objectives. 7. Setting standards to measure and evaluate the: a. Output of program activities. b. Accomplishment of program objectives. c. Expenditure of program appropriations. B. Two-Year Budget. Following the City's favorable experience, the City will continue using a two-year financial plan, emphasizing long-range planning and effective program management. The benefits identified when the City's first two-year plan was prepared for 1983-85 continue to be realized: 1. Reinforcing the importance of long-range planning in managing the City's fiscal affairs. 2. Concentrating on developing and budgeting for the accomplishment of significant objectives. 3. Establishing realistic timeframes for achieving objectives. 4. Creating a pro-active budget that provides for stable operations and assures the City's long-term fiscal health. 5. Promoting more orderly spending patterns. 6. Reducing the amount of time and resources allocated to preparing annual budgets. C. Measurable Objectives. The two-year financial plan will establish measurable program objectives and allow reasonable time to accomplish those objectives. D. Second Year Budget. Before the beginning of the second year of the two-year cycle, the Council will review progress during the first year and approve appropriations for the second fiscal year. E. Operating Carryover. Operating program appropriations not spent during the first fiscal year may be carried over for specific purposes into the second fiscal year with the approval of the City Manager. F. Goal Status Reports. The status of major program objectives will be for mally reported to the Council on an ongoing, periodic basis. G. Mid-Year Budget Reviews. The Council will formally review the City’s fiscal condition, and amend appropriations if necessary, six months after the beginning of each fiscal year. Packet Pg. 273 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES LONG - TERM FINANCIAL PLANNING A. Balanced Budget. The City will maintain a balanced budget over the two-year period of the Financial Plan. This means that: 1. Operating revenues must fully cover operating expenditures, including debt service. 2. Ending fund balance (or working capital in the enterprise funds) must meet minimum policy levels. For the general and enterprise funds, this level has been established at 20% of operating expenditures. Under this policy, it is allowable for total expenditures to exceed revenues in a given year; however, in this situation, beginning fund balance can only be used to fund capital improvement plan projects, or other “one- time,” non-recurring expenditures. B. Long-Term Liabilities and Maintenance of Infrastructure. The City will give priority to applying unassigned fund-balance due to one-time expenditure savings or one-time increase in revenue to pay down long-term unfunded liabilities and invest in infrastructure and equipment. In applying unassigned fund balances to pay down long- term unfunded liabilities a two-part strategy will be used to address the liability to the greatest extent possible. One, annual payments to CalPERS for unfunded liabilities will address interest and principal. Two, analysis of a Section 115 Trust as mechanism to address future pension obligations and uncertainties will continue and a recommendation about formation of the same will be made during the term of the adopted Fiscal Health Response Plan. FINANCIAL REPORTING AND BUDGET ADMINISTRATION A. Annual Reporting. The City will prepare annual financial statements as follows: 1. In accordance with Charter requirements, the City will contract for an annual audit by a qualified independent certified public accountant. The City will strive for an unqualified auditors’ opinion. 2. The City will use generally accepted accounting principles in preparing its annual financial statements, and will strive to meet the requirements of the GFOA’s Award for Excellence in Financial Reporting program. 3. The City will issue audited financial statements within 180 days after year -end. B. Interim Reporting. The City will prepare and issue timely interim reports on the City’s fiscal status to the Council and staff. This includes: on-line access to the City’s financial management system by City staff; monthly reports to program managers; more formal quarterly reports to the Council and Department Heads; mid-year budget reviews; and interim annual reports. C. Budget Administration. As set forth in the City Charter, the Council may amend or supplement the budget at any time after its adoption by majority vote of the Council members. The City Manager has the authority to make administrative adjustments to the budget as long as those changes will not have a significant policy impact nor affect budgeted year-end fund balances. Packet Pg. 274 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES D. Development Services Revenue. The City Manager may allocate or designate 75% of over-realized Development Services revenues exceeding adopted budget for the current fiscal year for temporary Development Services expenditures for the purpose of timely processing of development permit applications in the current fiscal year or throughout life of applicable projects. Any and all City Manager authorized allocations and funds set aside in a designation for future use, shall be reported to the Council on a semi-annual basis. GENERAL REVENUE MANAGEMENT A. Diversified and Stable Base. The City will seek to maintain a diversified and stable revenue base to protect it from short-term fluctuations in any one revenue source. B. Long-Range Focus. To emphasize and facilitate long-range financial planning, the City will maintain current projections of revenues for the succeeding five years. C. Current Revenues for Current Uses. The City will make all current expenditures with current revenues, avoiding procedures that balance current budgets by postponing needed expenditures, accruing future revenues, or rolling over short-term debt. D. Interfund Transfers and Loans. In order to achieve important public policy goals, the City has established various special revenue, capital project, debt service and enterprise funds to account for revenues whose use should be restricted to certain activities. Accordingly, each fund exists as a separate financing entity from other funds, with its own revenue sources, expenditures and fund equity. Any transfers between funds for operating purposes are clearly set forth in the Financial Plan, and can only be made by the Finance Director in accordance with the adopted budget. These operating transfers, under which financial resources are transferred from one fund to another, are distinctly different from interfund borrowings, which are usually made for temporary cash flow reasons, and ar e not intended to result in a transfer of financial resources by the end of the fiscal year. In summary, interfund transfers result in a change in fund equity; interfund borrowings do not, as the intent is to repay the loan in the near term. From time-to-time, interfund borrowings may be appropriate; however, these are subject to the following criteria in ensuring that the fiduciary purpose of the fund is met: 1. The Finance Director is authorized to approve temporary interfund borrowings for cash flow purposes whenever the cash shortfall is expected to be resolved within 45 days. The most common use of interfund borrowing under this circumstance is for grant programs like the Community Development Block Grant, where costs are incurred before drawdowns are initiated and received. However, receipt of funds is typically received shortly after the request for funds has been made. 2. Any other interfund borrowings for cash flow or other purposes require case-by-case approval by the Council. 3. Any transfers between funds where reimbursement is not expected within one fiscal year shall not be recorded as interfund borrowings; they shall be recorded as interfund operating transfers that affect equity by moving financial resources from one fund to another. Packet Pg. 275 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES USER FEE COST RECOVERY GOALS A. Ongoing Review Fees will be reviewed and updated on an ongoing basis to ensure that they keep pace with changes in the cost - of-living as well as changes in methods or levels of service delivery. In implementing this goal, a comprehensive analysis of City costs and fees should be made at least every five years. In the interim, fees will be adjusted by annual changes in the Consumer Price Index. Fees may be adjusted during this interim period based on supplemental analysis whenever there have been significant changes in the method, level or cost of service delivery. B. User Fee Cost Recovery Levels In setting user fees and cost recovery levels, the following factors will be considered: 1. Community-Wide Versus 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 revenues is appropriate for community-wide services, while user fees are appropriate for services that are of special benefit to easily identified individuals or groups. 2. Service Recipient Versus 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, cost recovery from the applicant is appropriate. 3. 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 r ecovery, 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 the delivery of services to lower income groups. This negative feature is especially pronounced, and works against public policy, if the services are specifically targeted to low income groups. 4. Feasibility of Collection and Recovery. Although it may be determined that a high level of cost recovery may be appropriate for specific services, it may 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 user fees, especially if significant program costs are intended to be financed from that source. C. Factors Favoring Low Cost Recovery Levels Very low cost recovery levels are appropriate under the following circumstances: 1. 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 expected that one group will subsidize another. 2. Collecting fees is not cost-effective or will significantly impact the efficient delivery of the service. Packet Pg. 276 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES 3. 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 response services. Historically, access to neighborhood and community parks would also fit into this category. 4. The service is non-recurring, generally delivered on a "peak demand" or emergency basis, cannot reasonably be planned for on an individual basis, and is not readily available from a private sector source. Many public safety services also fall into this category. 5. Collecting fees would discourage compliance with regulatory requirements and adherence is primarily self- identified, and as such, failure to comply would not be readily detected by the City. Many small-scale licenses and permits might fall into this category. D. Factors Favoring High Cost Recovery Levels The use of service charges as a major source of funding service levels is especially appropriate under the following circumstances: 1. The service is similar to services provided through the private sector. 2. Other private or public sector alternatives could or do exist for the delivery of t he service. 3. 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. 4. The use of the service is specifically discouraged. Police responses to dist urbances or false alarms might fall into this category. 5. The service is regulatory in nature and voluntary compliance is not expected to be the primary method of detecting failure to meet regulatory requirements. Building permit, plan checks, and subdivis ion review fees for large projects would fall into this category. E. General Concepts Regarding the Use of Service Charges The following general concepts will be used in developing and implementing service charges: 1. Revenues should not exceed the reasonable cost of providing the service. 2. Cost recovery goals should be based on the total cost of delivering the service, including direct costs, departmental administration costs and organization-wide support costs such as accounting, personnel, information technology, legal services, fleet maintenance and insurance. 3. The method of assessing and collecting fees should be as simple as possible in order to reduce the administrative cost of collection. 4. Rate structures should be sensitive to the "market" for similar services as well as to smaller, infrequent users of the service. 5. A unified approach should be used in determining cost recovery levels for various programs based on the factors discussed above. Packet Pg. 277 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES F. Low Cost-Recovery Services Based on the criteria discussed above, the following types of services should have very low cost recovery goals. In selected circumstances, there may be specific activities within the broad scope of services provided that should have user charges associated with them. However , the primary source of funding for the operation as a whole should be general-purpose revenues, not user fees. 1. Delivering public safety emergency response services such as police patrol services and fire suppression. 2. Maintaining and developing public facilities that are provided on a uniform, community-wide basis such as streets, parks and general-purpose buildings. 3. Providing social service programs and economic development activities. G. Recreation Programs The following cost recovery policies apply to the City's recreation programs: 1. Cost recovery for activities directed to adults should be relatively high. 2. Cost recovery for activities directed to youth and seniors should be relatively low. In those circumstances where services are similar to those provided in the private sector, cost recovery levels should be higher. Although ability to pay may not be a concern for all youth and senior participants, these are desired program activities, and the cost of determining need may be greater than th e cost of providing a uniform service fee structure to all participants. Further, there is a community-wide benefit in encouraging high-levels of participation in youth and senior recreation activities regardless of financial status. 3. Cost recovery goals for recreation activities are set as follows: High-Range Cost Recovery Activities - (60% to 100%) a. Adult athletics b. Banner permit applications c. Child care services d. Facility rentals (indoor and outdoor; excludes use of facilities for internal City uses) Mid-Range Cost Recovery Activities - (30% to 60%) e. Triathlon f. Golf g. Summer and Spring Break Camps h. Classes i. Major commercial film permit applications Low-Range Cost Recovery Activities- (0 to 30%) j. Aquatics Packet Pg. 278 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES k. Community gardens l. Junior Ranger camp m. Minor commercial film permit applications n. Skate park o. Parks and Recreation sponsored events (except for Triathlon) p. Youth sports q. Teen services r. Senior/boomer services 4. For cost recovery activities of less than 100%, there should be a differential in rates between residents and non-residents. However, the Director of Parks and Recreation is authorized to reduce or eliminate non - resident fee differentials when it can be demonstrated that: a. The fee is reducing attendance. b. And there are no appreciable expenditure savings from the reduced attendance. 5. Charges will be assessed for use of rooms, pools, gymnasiums, ball fields, special -use areas, and recreation equipment for activities not sponsored or co-sponsored by the City. Such charges will generally conform to the fee guidelines described above. However, the Director of Parks and Recreation is authorized to charge fees that are closer to full cost recovery for facilities that are heavily used at peak times and include a majority of non-resident users. 6. A vendor charge of at least 10 percent of gross income will be assessed from individuals or organizations using City facilities for moneymaking activities. 7. Director of Parks and Recreation is authorized to offer reduced fees such as introductory rates, family discounts and coupon discounts on a pilot basis (not to exceed 18 months) to promote new recreation programs or resurrect existing ones. 8. The Parks and Recreation Department will consider waiving fees only when the City Manager determines in writing that an undue hardship exists. H. Development Review Programs The following cost recovery policies apply to the development review programs: 1. Services provided under this category include: a. Planning (planned development permits, tentative tract and parcel maps, rezonings, general plan amendments, variances, use permits). b. Building and safety (building permits, structural plan checks, inspections). c. Engineering (public improvement plan checks, inspections, subdivision requirements, encroachments). d. Fire plan check. 2. Cost recovery for these services should generally be very high. In most instances, the City's cost recovery goal should be 100%. Packet Pg. 279 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES 3. However, in charging high cost recovery levels, the City needs to clearly establish and articulate standards for its performance in reviewing developer applications to ensure that there is “value for cost.” I. Comparability with Other Communities In setting user fees, the City will consider fees charged by other agencies in accordance with the following criteria: 1. Surveying the comparability of the City's fees to other communities provides useful background information in setting fees for several reasons: a. They reflect the "market" for these fees and can assist in assessing the reasonableness of San Luis Obispo’s fees. b. If prudently analyzed, they can serve as a benchmark for how cost-effectively San Luis Obispo provides its services. 2. However, fee surveys should never be the sole or primary criteria in setting City fees as there are many factors that affect how and why other communities have set their fees at their levels. For example: a. What level of cost recovery is their fee intended to achieve compared with our cost recovery objectives? b. What costs have been considered in computing the fees? c. When was the last time that their fees were comprehensively evaluated? d. What level of service do they provide compared with our service or performance standards? e. Is their rate structure significantly different than ours and what is it intended to achieve? 3. These can be very difficult questions to address in fairly evaluating fees among different communities. As such, the comparability of our fees to other communities should be one factor among many that is considered in setting City fees. ENTERPRISE FUND FEES AND RATES A. Water, Sewer and Parking. The City will set fees and rates at levels which fully cover the total direct and indirect costs—including operations, capital outlay, and debt service—of the following enterprise programs: water, sewer and parking. B. Transit. Based on targets set under the Transportation Development Act, the City will strive to cover at least twenty percent of transit operating costs with fare revenues. C. Ongoing Rate Review. The City will review and adjust enterprise fees and rate structures as required to ensure that they remain appropriate and equitable. D. Cost of Service Fees. The City will treat the water and sewer fund in the same manner as if they were privately owned and operated. This means assessing reasonable cost of service fees in fully recovering services costs. Packet Pg. 280 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES The purpose of the cost of service fee is reasonable cost recovery for the use of the City’s services such as street right-of-way and public safety. The appropriateness of charging the water and sewer fund a reasonable cost of service fee for the use of the City streets is further supported by the results of studies from Arizona, California, Ohio, and Vermont which concluded that the leading cause of street resurfacing and reconstruction is street cuts and trenching for Utilities. REVENUE DISTRIBUTION The Council recognizes that generally accepted accounting principles for state and local governments discourage the “earmarking” of General Fund revenues, and accordingly, the practice of designating General Fund revenues for specific programs should be minimized in the City's management of its fiscal affairs. Approval of the following revenue distribution policies does not prevent the Council from direct ing General Fund resources to other functions and programs as necessary. A. Property Taxes. With the passage of Proposition 13 on June 6, 1978, California cities no longer can set their own property tax rates. In addition to limiting annual increases in ma rket value, placing a ceiling on voter- approved indebtedness, and redefining assessed valuations, Proposition 13 established a maximum county-wide levy for general revenue purposes of 1% of market value. Under subsequent state legislation, which adopted formulas for the distribution of this countywide levy, the City now receives a percentage of total property tax revenues collected countywide as determined by the State and administered by the County Auditor -Controller. The City receives 14.9% of each dolla r collected in property tax after allocations to school districts. Accordingly, while property revenues are often thought of local revenue sources, in essence they are State revenue sources, since the State controls their use and allocation. With the adoption of a Charter revision in November 1996, which removed provisions that were in conflict with Proposition 13 relating to the setting of property tax revenues between various funds, all property tax revenues are now accounted for in the General Fund. B. Gasoline Tax Subventions. All gasoline tax revenues (which are restricted by the State for street -related purposes) will be used for maintenance activities. Since the City's total expenditures for gas tax eligible programs and projects are much greater than this revenue source, operating transfers will be made from the gas tax fund to the General Fund for this purpose. This approach significantly reduces the accounting efforts required to meet State reporting requirements. C. Transportation Development Act (TDA) Revenues. All TDA revenues will be allocated to alternative transportation programs, including regional and municipal transit systems, bikeway improvements, and other programs or projects designed to reduce automobile usage. Because TDA revenues will not be allocated for street purposes, it is expected that alternative transportation programs (in conjunction with other state or federal grants for this purpose) will be self -supporting from TDA revenues. D. Parking Fines. All parking fine r evenues will be allocated to the parking fund, except for those collected by Police staff (who are funded by the General Fund) in implementing neighborhood wellness programs. INVESTMENTS Packet Pg. 281 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES A. Responsibility. Investments and cash management are the responsib ility of the City Treasurer or designee. It is the City’s policy to appoint the Finance Director as the City’s Treasurer. B. Investment Objective. The City's primary investment objective is to achieve a reasonable rate of return while minimizing the potential for capital losses arising from market changes or issuer default. Accordingly, the following factors will be considered in priority order in determining individual investment placements: 1. Safety 2. Liquidity 3. Yield C. Tax and Revenue Anticipation Notes: Not for Investment Purposes. There is an appropriate role for tax and revenue anticipation notes (TRANS) in meeting legitimate short -term cash needs within the fiscal year. However, many agencies issue TRANS as a routine business practice, not solely for cash flow purposes, but to capitalize on the favorable difference between the interest cost of issuing TRANS as a tax -preferred security and the interest yields on them if re-invested at full market rates. As part of its cash flow management and investment strategy, the City will only issue TRANS or other forms of short-term debt if necessary to meet demonstrated cash flow needs; TRANS or any other form of short -term debt financing will not be issued for investment purposes. As long as the City maintains its current policy of maintaining fund/working capital balances that are 20% of operating expenditures, it is unlikely that the City would need to issue TRANS for cash flow purposes except in very unusual circumstances. D. Selecting Maturity Dates. The City will strive to keep all idle cash balances fully invested through daily projections of cash flow requirements. To avoid forced liquidations and losses of investment earnings, cash flow and future requirements will be the primary cons ideration when selecting maturities. E. Diversification. As the market and the City's investment portfolio change, care will be taken to maintain a healthy balance of investment types and maturities. F. Authorized Investments. The City will invest only in those instruments authorized by the California Government Code Section 53601. The City will not invest in stock, will not speculate and will not deal in futures or options. The investment market is highly volatile and continually offers new and creative opportunities for enhancing interest earnings. Accordingly, the City will thoroughly investigate any new investment vehicles before committing City funds to them. G. Authorized Institutions. Current financial statements will be maintained for each institution in which cash is invested. Investments will be limited to 20 percent of the total net worth of any institution and may be reduced further or refused altogether if an institution's fina ncial situation becomes unhealthy. H. Consolidated Portfolio. In order to maximize yields from its overall portfolio, the City will consolidate cash balances from all funds for investment purposes, and will allocate investment earnings to each fund in accordance with generally accepted accounting principles. I. Safekeeping. Ownership of the City's investment securities will be protected through third-party custodial safekeeping. Packet Pg. 282 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES J. Investment Management Plan. The City Treasurer will develop and maintain an Investment Management Plan that addresses the City's administration of its portfolio, including investment strategies, practices and procedures. K. Investment Oversight Committee. As set forth in the Investment Management Plan, this committee is responsible for reviewing the City’s portfolio on an ongoing basis to determine compliance with the City’s investment policies and for making recommendations to the City Treasurer (Finance Director regarding invest ment management practices. Members include the City Manager, Assistant City Manager, Finance Director/City Treasurer, Accounting Manager, Budget Manager, the City’s independent auditor, one City Council member, and one member of the public. The member of the public shall be appointed by the City Council in accordance with the City’s process for appointing advisory body members. L. Reporting. The City Treasurer will develop and maintain a comprehensive, well-documented investment reporting system, which will comply with Government Code Section 53607. This reporting system will provide the Council and the Investment Oversight Committee with appropriate investment performance information. APPROPRIATIONS LIMITATION A. The Council will annually adopt a resolution establishing the City's appropriations limit calculated in accordance with Article XIII-B of the Constitution of the State of California, Section 7900 of the State of California Government Code, and any other voter approved amendments or state legislation that affect the City's appropriations limit. B. The supporting documentation used in calculating the City's appropriations limit and projected appropriations subject to the limit will be available for public and Council review at least 10 days before Council consideration of a resolution to adopt an appropriations limit. The Council will generally consider this resolution in connection with final approval of the budget. C. The City will strive to develop revenue sources, both new and existing, which are considered non-tax proceeds in calculating its appropriations subject to limitation. D. The City will annually review user fees and charges and report to the Council the amount of program subsidy, if any, that is being provided by the General or Enterprise Funds. E. The City will actively support legislation or initiatives sponsored or approved by League of California Cities which would modify Article XIII-B of the Constitution in a manner which would allow the City to reta in projected tax revenues resulting from growth in the local economy for use as determined by the Council. F. The City will seek voter approval to amend its appropriation limit at such time that tax proceeds are in excess of allowable limits. FUND BALANCE AND RESERVES Packet Pg. 283 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES A. Minimum Fund and Working Capital Balances. The City will maintain a minimum fund balance of at least 20% of operating expenditures in the General Fund and a minimum working capital balance of 20% of operating expenditures in the water, sewer and parking enterprise funds. This is considered the minimum level necessary to maintain the City's credit worthiness and to adequately provide for: 1. Economic uncertainties, local disasters, and other financial hardships or downturns in the local or national economy. 2. Contingencies for unseen operating or capital needs. 3. Cash flow requirements. B. Fleet Replacement. For the General Fund fleet, the City will establish and maintain a Fleet Replacement Fund to provide for the timely replacement of vehicles and related equipment with an individual replacement cost of $15,000 or more. During the 2015-17 Financial Plan period, the City will establish and maintain a minimum fund balance in the Fleet Replacement Fund equal to $500,000 for the emergency replacement of vehicles that are damaged beyond repair, and are either not covered under the City’s property insurance program or the vehicle has a high replacement cost and insurance proceeds will be inadequate to provide for the vehicle’s replacement (fire engine). Above this contingency level, the amount retained in this fund, coupled with the annual contributions received by it from any source, shall be adequate to fully fund the equipment replacements approved in the Financial Plan. Interest earnings and the proceeds from the sales of surplus equipment as well as any related damage and insurance recoveries will be credited to the Fleet Replacement Fund. C. Information Technology (IT) Replacement Fund. The City will establish an IT Replacement Fund for the General Fund to provide for the timely replacement of information technology, both hardware and software, with an individual replacement cost of $25,000 or more. During the 2015-17 Financial Plan period, the City will establish and maintain a minimum fund balance in this fund equal to $400,000 for the emergency replacement of equipment that is damaged beyond repair and not covered under the City’s property insurance program. Interest earnings and the proceeds from the sale of surplus equipment as well as any related damage and insurance recoveries will be credited to the fund. D. Major Facility Replacement Fund. The City will maintain a reserve within this fund for the purpose of funding the cost of improvements having a cost of $25,000 or more to city-owned, general government building and structures. The amount retained in this fund, coupled with annual contributions received by it from any source, to adequately fund maintenance and replacement of City facilities. E. Infrastructure Investment Fund. The City will maintain a reserve within this fund for the purpose of funding infrastructure projects that contribute to improved economic development and enhanced quality of life in the City of San Luis Obispo. The following evaluation criteria shall be applied to project eligibility: 1. The use of City funds shall not offset any cost that would be expected to be paid to meet the fair share obligation of any developer. 2. The use of City funds shall not offset a project specific cost identified through the environmental review process or under existing regulations or policies. Packet Pg. 284 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES 3. The use of funds shall support a project that would not otherwise be feasible due to economic, timing or other issues outside control of the project proponents or the City. 4. The project shall provide public benefit by contributing to economic development and quality of life within the City. E. Insurance Benefit Fund. The City will establish an Insurance Benefit Fund for the purposes of setting funds aside to manage the fluctuations in liability and worker’s compensation insurance programs. A reserve within the Insurance Benefit Fund for the Liability Excess Insurance Program will be maintained at approximately 75% funded confidence level based on the prior five-year average claims experience. F. Water and Sewer Rate Stabilization Reserves. The City will maintain a reserve for the purposes of offsetting unanticipated fluctuations in Water Fund or Sewer Fund revenues to provide financial stability, including the stability of revenues and the rates and charges related to each Enterprise. The funding target for the Rate Stabilization Reserve will be 10% of sales revenue in the Water Fund and 5% of sales revenue in the Sewer Fund. Conditions for utilization and plan for replenishment of the reserve will be brought to Council for its consideration during the preparation and approval of the Financial Plan or as may become necessary during any fiscal year. G. Future Capital Project Designations. The Council may designate specific fund balance levels for future development of capital projects that it has determined to be in the best long-term interests of the City. For example, replacement of critical information technology infrastructure or other projects. H. Other Designations and Reserves. In addition to the designations noted above, fund balance levels will be sufficient to meet funding requirements for projects approved in prior years which are carried forward into the new year; debt service reserve requirements; reserves for encumbrances; and other reserves or designations required by contractual obligations, state law, or generally accepted accounting principles. I. General Fund Revenue Stabilization Fund. The City will maintain a reserve for the purposes of offsetting unanticipated fluctuations in general fund revenues to provide financial stability. The funding target for the Revenue Stabilization Reserve will be $1,000,000 during the term of the adopted Fiscal Health Response Plan. Use and allocations of funds of the Revenue Stabilization Fund will be made upon Council approvals of the Financial Plan or as becomes necessary during any fis cal year. J. Capital Projects Reserve Fund. The City will maintain a reserve for the purposes of offsetting unanticipated cost increases, unforeseen conditions, and urgent unanticipated projects to provide continued investment in infrastructure maintenance and enhancement. Use and allocations of funds from the Capital Projects Reserve Fund will be made to Capital Projects including Fleet, Information Technology, and Major Facility Replacement upon Council approvals of the Financial Plan or as necessary during any fiscal year. CAPITAL IMPROVEMENT MANAGEMENT Packet Pg. 285 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES A. CIP Projects: $25,000 or More. Construction projects and equipment purchases which cost $25,000 or more will be included in the Capital Improvement Plan (CIP); minor capital outlays of less than $25,000 will be included with the operating program budgets. Such projects are accounted for in the Capital Outlay Fund. B. CIP Purpose. The purpose of the CIP is to systematically plan, schedule, and finance capital projects to ensure cost-effectiveness as well as conformance with establis hed policies. The CIP is a five-year plan organized into the same functional groupings used for the operating programs. The CIP will reflect a balance between capital replacement projects that repair, replace or enhance existing facilities, equipment or infrastructure; and capital facility projects that significantly expand or add to the City's existing fixed assets. C. Project Manager. Every CIP project will have a project manager who will prepare the project proposal, ens ure that required phases are completed on schedule, authorize all project expenditures, ensure that all regulations and laws are observed, and periodically report project status. D. CIP Review Committee. Headed by the City Manager or designee, this Committee will review project proposals, determine project phasing, recommend project managers, review and evaluate the draft CIP budget document, and report CIP project progress on an ongoing basis. E. CIP Phases. The CIP will emphasize project planning, with projects progressing through at least two and up to ten of the following phases: 1. Designate. Appropriates funds based on projects designated for funding by the Council through adoption of the Financial Plan. 2. Study. Concept design, site selection, feasibilit y analysis, schematic design, environmental determination, property appraisals, scheduling, grant application, grant approval, specification preparation for equipment purchases. 3. Environmental Review. EIR preparation, other environmental studies. 4. Real Property Acquisitions. Property acquisition for projects, if necessary. 5. Site Preparation. Demolition, hazardous materials abatements, other pre-construction work. 6. Design. Final design, plan and specification preparation and construction cost esti mation. 7. Construction. Construction contracts. 8. Construction Management. Contract project management and inspection, soils and material tests, other support services during construction. 9. Equipment Acquisitions. Vehicles, heavy machinery, computers, office furnishings, other equipment items acquired and installed independently from construction contracts. 10. Debt Service. Installment payments of principal and interest for completed projects funded through debt financings. Expenditures for this project pha se are included in the Debt Service section of the Financial Plan. Generally, it will become more difficult for a project to move from one phase to the next. As such, more projects will be studied than will be designed, and more projects will be designed than will be constructed or purchased during the term of the CIP. Packet Pg. 286 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES F. CIP Appropriation. The City’s annual CIP appropriation for study, design, acquisition and/or construction is based on the projects designated by the Council through adoption of the Financ ial Plan. Adoption of the Financial Plan CIP appropriation does not automatically authorize funding for specific project phases. This authorization generally occurs only after the preceding project phase has been completed and approved by the Council and costs for the succeeding phases have been fully developed. Accordingly, project appropriations are generally made when contracts are awarded. If project costs at the time of bid award are less than the budgeted amount, the balance will be unappropriat ed and returned to fund balance or allocated to another project. If project costs at the time of bid award are greater than budget amounts, five basic options are available: 1. Eliminate the project. 2. Defer the project for consideration to the next Financial Plan period. 3. Rescope or change the phasing of the project to meet the existing budget. 4. Transfer funding from another specified, lower priority project. 5. Appropriate additional resources as necessary from fund balance. G. CIP Budget Carryover. Appropriations for CIP projects lapse three years after budget adoption. Projects which lapse from lack of project account appropriations may be resubmitted for inclusion in a subsequent CIP. Project accounts, which have been appropriated, will not lapse until completion of the project phase. H. Program Objectives. Project phases will be listed as objectives in the program narratives of the programs, which manage the projects. I. Public Art. CIP projects will be evaluated during the budget process and prior to each phase for conformance with the City's public art policy, which generally requires that 1% of eligible project construction costs be set aside for public art. Excluded from this requirement are underground projects, utility infrastru cture projects, funding from outside agencies, and costs other than construction such as study, environmental review, design, site preparation, land acquisition and equipment purchases. It is generally preferred that public art be incorporated directly into the project, but this is not practical or desirable for all projects; in this case, an in-lieu contribution to public art will be made. To ensure that funds are adequately budgeted for this purpose regardless of whether public art will be directly incorporated into the project, funds for public art will be identified separately in the CIP. J. General Plan Consistency Review. The Planning Commission will review the Preliminary CIP for consistency with the General Plan and provide is findings to the Council prior to adoption. CAPITAL FINANCING AND DEBT MANAGEMENT A. Capital Financing 1. The City will consider the use of debt financing only for one-time capital improvement projects and only under the following circumstances: Packet Pg. 287 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES a. When the project’s useful life will exceed the term of the financing. b. When project revenues or specific resources will be sufficient to service the long-term debt. 2. Debt financing will not be considered appropriate for any recurring purpose such as current operating and maintenance expenditures. The issuance of short-term instruments such as revenue, tax or bond anticipation notes is excluded from this limitation. (See Investment Policy) 3. Capital improvements will be financed primarily through user fees, service charges, as sessments, special taxes or developer agreements when benefits can be specifically attributed to users of the facility. Accordingly, development impact fees should be created and implemented at levels sufficient to ensure that new development pays its fair share of the cost of constructing necessary community facilities. 4. Transportation impact fees are a major funding source in financing transportation system improvements. However, revenues from these fees are subject to significant fluctuation based on t he rate of new development. Accordingly, the following guidelines will be followed in designing and building projects funded with transportation impact fees: a. The availability of transportation impact fees in funding a specific project will be analyzed on a case- by-case basis as plans and specification or contract awards are submitted for City Manager or Council approval. b. If adequate funds are not available at that time, the Council will make one of two determinations: • Defer the project until funds are available. • Based on the high-priority of the project, advance funds from the General Fund, which will be reimbursed as soon as funds become available. Repayment of General Fund advances will be the first use of transportation impact fee funds when they become available. 5. The City will use the following criteria to evaluate pay-as-you -go versus long-term financing in funding capital improvements: a. Factors Favoring Pay-As-You-Go Financing 1. Current revenues and adequate fund balances are available or project phasing can be accomplished. 2. Existing debt levels adversely affect the City's credit rating. 3. Market conditions are unstable or present difficulties in marketing. b. Factors Favoring Long Term Financing 1. Revenues available for debt service are deemed sufficient and reliable so that long-term financings can be marketed with investment grade credit ratings. 2. The project securing the financing is of the type, which will support an investment grade credit rating. 3. Market conditions present favorable interest rates and demand for City financings. Packet Pg. 288 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES 4. A project is mandated by state or federal requirements, and resources are insufficient or unavailable. 5. The project is immediately required to meet or relieve capacity needs and current resources are insufficient or unavailable. 6. The life of the project or asset to be financed is 10 years or longer. 7. Vehicle leasing when market conditions and operational circumstances present favorable opportunities. B. Debt Management 1. The City will not obligate the General Fund to secure long-term financings except when marketability can be significantly enhanced. 2. An internal feasibility analysis will be prepared for each long-term financing which analyzes the impact on current and future budgets for debt service and operations. This analysis will also address the reliability of revenues to support debt service. 3. The City will generally conduct financings on a competitive basis. However, negotiated financings may be used due to market volatility or the use of an unusual or complex financing or security structure. 4. The City will seek an investment grade rating (Baa/BBB or greater) on any direct debt and will seek credit enhancements such as letters of credit or insurance when necessary for marketing purposes, availability and cost-effectiveness. 5. The City will monitor all forms of debt annually coincident with the City's Financial Plan preparation and review process and report concerns and remedies, if needed, to the Council. 6. The City will diligently monitor its compliance with bond covenants and ensure its adherence to federal arbitrage regulations. 7. The City will maintain good, ongoing communications with bond rating agencies about its financial condition. The City will follow a policy of full disclosure on every financial report and bond prospectus (Official Statement). C. Debt Capacity 1. General Purpose Debt Capacity. The City will carefully monitor its levels of general-purpose debt. Because our general purpose debt capacity is limited, it is important that we only use general purpose debt financing for high-priority projects where we cannot reasonably use other financing methods for two key reasons: a. Funds borrowed for a project today are not available to fund other projects tomorrow. b. Funds committed for debt repayment today are not available to fund operations in the future. In evaluating debt capacity, general-purpose annual debt service payments should generally not exceed 10% of General Fund revenues; and in no case should they exceed 15%. Further, direct debt will not exceed 2% of assessed valuation; and no more than 60% of capital improvement outlays will be funded from long- term financings. Packet Pg. 289 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES 2. Enterprise Fund Debt Capacity. The City will set enterprise fund rates at levels needed to fully cover debt service requirements as well as operations, maintenance, administration and capital improvement costs. The ability to afford new debt for enterprise operations will be evaluated as an integral part of the City’s rate review and setting process. D. Independent Disclosure Counsel The following criteria will be used on a case-by-case basis in determining whether the City should retain the services of an independent disclosure counsel in conjunction with specific project financings: 1. The City will generally not retain the services of an independent disclosure counsel when all of the following circumstances are present: a. The revenue source for repayment is under the management or control of the City, such as general obligation bonds, revenue bonds, lease-revenue bonds or certificates of participation. b. The bonds will be rated or insured. 2. The City will consider retaining the services of an independent disclosure counsel when one or more of following circumstances are present: a. The financing will be negotiated, and the underwriter has not separately engaged an underwriter’s counsel for disclosure purposes. b. The revenue source for repayment is not under the management or control of the City, such as land- based assessment districts, tax allocation bonds or conduit financings. c. The bonds will not be rated or insured. d. The City’s financial advisor, bond counsel or underwriter recommends that the City retain an independent disclosure counsel based on the circumstances of the financing. E. Land-Based Financings 1. Public Purpose. There will be a clearly articulated public purpose in forming an assessment or special tax district in financing public infrastructure improvements. This should include a finding by the Council as to why this form of financing is preferred over other funding options such as impact fees, reimbursement agreements or direct developer responsibility for the improvements. New development should generally be expected to “pay its own way,” (i.e., provide funding through one mechanism or another that funds its “proportional share” of public improvement and infrastructure costs and ongoing operations and maintenance costs). (1) The City will consider the use of city-based funding sources to fund public facility and infrastructure improvements that provide for the health, safety and welfare of existing and future residents and/or provide measurable economic development and fiscal benefits. In evaluating whether the City will use city-based funding sources, the following evaluation criteria should be considered: (a) Significant public benefit, demonstrated by compliance with and furtherance of Packet Pg. 290 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES General Plan goals, policies, and programs (b) Alignment with the Major City Goals and other important objectives in place at the time of the application (c) Head of Household Job Creation (d) Housing Creation (e) Circulation/Connectivity Improvements (f) Net General Fund fiscal impact (2) The City generally will not fund or offer public financing for infrastructure improvements that confer only private benefit to individual property owners or development projects. (3) The City shall seek continuity (or improvements to) existing levels of municipal service by assuring adequate funding for the City’s operation, maintenance and infrastructure replacement costs.” 2. Eligible Improvements. Except as otherwise determined by the Council when proceedings for district formation are commenced, preference in financing public improvements through a special tax district shall be given for those public improvements that help achieve clearly identified community facility and infrastructure goals in accordance with adopted facility and infrastructure plans as set forth in key policy documents such as the General Plan, Specific Plan, Facility or Infrastructure Master Plans, or Cap ital Improvement Plan. Such improvements include study, design, construction and/or acquisition of: a. Public safety facilities. b. Water supply, distribution and treatment systems. c. Waste collection and treatment systems. d. Major transportation system improvements, such as freeway interchanges; bridges; intersection improvements; construction of new or widened arterial or collector streets (including related landscaping and lighting); sidewalks and other pedestrian paths; transit facilities; and bike pa ths. e. Storm drainage, creek protection and flood protection improvements. f. Parks, trails, community centers and other recreational facilities. g. Open space. h. Cultural and social service facilities. i. Other governmental facilities and improvements such as offices, information technology systems and telecommunication systems. School facilities will not be financed except under appropriate joint community facilities agreements or joint exercise of powers agreements between the City and school districts. Packet Pg. 291 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES 3. Active Role. Even though land-based financings may be a limited obligation of the City, we will play an active role in managing the district. This means that the City will select and retain the financing team, including the financial advisor, bond counsel, trustee, appraiser, disclosure counsel, assessment engineer and underwriter. Any costs incurred by the City in retaining these services will generally be the responsibility of the property owners or developer, and will be advanced via a deposit when an application is filed; or will be paid on a contingency fee basis from the proceeds from the bonds. 4. Credit Quality. When a developer requests a district, the City will carefully evaluate the applicant’s financial plan and ability to carry the project, inc luding the payment of assessments and special taxes during build-out. This may include detailed background, credit and lender checks, and the preparation of independent appraisal reports and market absorption studies. For districts where one property own er accounts for more than 25% of the annual debt service obligation, a letter of credit further securing the financing may be required. 5. Reserve Fund. A reserve fund should be established in the lesser amount of: the maximum annual debt service; 125% of the annual average debt service; or 10% of the bond proceeds. 6. Value-to-Debt Ratios. The minimum value-to-debt ratio should generally be 4:1. This means the value of the property in the district, with the public improvements, should be at least four times the amount of the assessment or special tax debt. In special circumstances, after conferring and receiving th e concurrence of the City’s financial advisor and bond counsel that a lower value-to-debt ratio is financially prudent under the circumstances, the City may consider allowing a value-to-debt ratio of 3:1. The Council should make special findings in this case. 7. Appraisal Methodology. Determination of value of property in the district shall be based upon the full cash value as shown on the ad valorem assessment roll or upon an appraisal by an independent Member Appraisal Institute (MAI). The definitions, standards and assumptions to be used for appraisals shall be determined by the City on a case-by-case basis, with input from City consultants and district applicants, and by reference to relevant materials and information promulgated by the State of Califor nia, including the Appraisal Standards for Land-Secured Financings prepared by the California Debt and Investment Advisory Commission. 8. Capitalized Interest During Construction. Decisions to capitalize interest will be made on case-by-case basis, with the intent that if allowed, it should improve the credit quality of the bonds and reduce borrowing costs, benefiting both current and future property owners. 9. Maximum Burden. Annual assessments (or special taxes in the case of Mello-Roos or similar districts) should generally not exceed 1% of the sales price of the property; and total property taxes, special assessments and special taxes payments collected on the tax roll should generally not exceed 2%. 10. Benefit Apportionment. Assessments and special taxes will be apportioned according to a formula that is clear, understandable, equitable and reasonably related to the benefit received by—or burden attributed to—each parcel with respect to its financed improvement. Any annual escalation factor should generall y not exceed 2%. F. Development Impact Fees Guidelines and Policies Development impact fees are one-time fees levied on new development, typically levied at the time building permits are issued, to fund a range of the City’s public facilities and infrastructure. Packet Pg. 292 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES Such fees are levied both on a citywide basis as well as for specific areas (e.g., the Specific Plan Areas). The levy of development impact fees is regulated by the State’s Mitigation Fee Act (Government Code Section 66000 et seq.). 1. Development impact fees should be set, consistent with the statutory “nexus” analysis and findings, to fund new development’s proportional share of public facility and infrastructure costs. 2. Improvements funded by development impact fees should be referenced generally in the appropriate planning documents (e.g., General Plan, Specific Plans, etc.) and reflected in the City’s Capital Improvement Program. 3. An exception to this policy may be created by a development agreement between the City and a private developer. In this case public investments are offset by measurable public benefits. 4. The City’s development impact fees can be “leveraged” through the use of fee credit and reimbursement agreements with developers and landowners. 5. The City’s aggregate fee levels should not render new development that is otherwise consistent with City plans and regulations economically infeasible. Aggregate fee levels should be evaluated in terms of a reasonable standard, but not a strict limit (e.g., aggregate fee levels should not exceed an average of approximately 10 to 12 percent of the market value of the new development, either on a per -unit or per-square foot basis). 6. The City may consider reductions or waivers of its development impact fees in cases where a development project meets specific City planning or economic development policies such as affordable housing projects. In such cases the amount of funding foregone must be replaced with other funding sources available to the City. 1. Special Tax District Administration. In the case of Mello-Roos or similar special tax districts, the total maximum annual tax should not exceed 110% of annual debt service. The rate and method of apportionment should include a back-up tax in the event of significant changes from the initial development plan, and should include procedures for prepayments. 1. Community Facilities Districts or Assessment Districts offer a way to fund infrastructure, maintenance, or municipal services through special taxes or assessments levied on property owners benefiting from the thus-funded improvements or services. It can be used for both capital improvements and ongoing facility maintenance or services. Packet Pg. 293 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES 2. The City will consider the formation of financing districts using the State’s assessment law or the Mello-Roos Community Facilities Act for its newly developing areas on a case- by-case basis, consistent with technical analysis and City priorities (i.e., capital or ongoing funding). 3. The City will consider the effect of the special tax on the City’s ability t o issue General Obligation bonds or other property-based tax measures. 4. Such districts should fund infrastructure or services serving or otherwise providing benefit to the area subject to the assessment or special tax. 5. Such districts can fund public facilities or infrastructure otherwise funded with the City’s development impact fees or project-specific exactions. In such cases the area’s development impact fee obligations will be adjusted proportionately. 6. Within any such districts, property value-to-lien ratio should, consistent with typical underwriting standards, be at least 4.0:1 after calculating the value of the financed public improvements to be installed and considering any prior or pending special taxes or improvement liens. 7. Consistent with underwriting standards and market considerations, and as a matter of policy, the City will limit the maximum amount of special taxes to be levied on any parcel of property within a Community Facilities District, in any given fiscal year, together with the general property taxes, general obligation bonds, and other special taxes and assessments levied on such parcel, shall not exceed an amount equal to one and eight - tenths percent (1.8 percent) of the projected assessed value of the parcel (and improvements if applicable). How the special tax capacity is allocated between capital and ongoing expenditures will depend upon the City’s priorities. 8. The City shall have discretion to allow a special tax in excess of the established limits for any lands within the CFD which are designated for commercial or industrial uses. 9. As a part of such district formations, the City will retain a special tax consultant to prepare a report which recommends a special tax rate and method for the proposed CFD and evaluates the spec ial tax proposed to determine its ability to adequately fund identified public facilities, City administrative costs, services (if applicable) and other related expenditures . Packet Pg. 294 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES 2. Foreclosure Covenants. In managing administrative costs, the City will establish minimum delinquency amounts per owner, and for the district as a whole, on a case-by-case basis before initiating foreclosure proceedings. 3. Disclosure to Bondholders. In general, each property owner who accounts for more than 10% of the annual debt service or bonded indebtedness must provide ongoing disclosure information annually as described under SEC Rule 15(c)-12. 4. Disclosure to Prospective Purchasers. Full disclosure about outstanding balances and annual payments should be made by the seller to prospective buyers at the time that the buyer bids on the property. It should not be deferred to after the buyer has made the decision to purchase. When appropriate, applicants or property owners may be required to provide the City with a disclosure plan. G. Conduit Financings 1. The City will consider requests for conduit financing on a case-by-case basis using the following criteria: a. The City’s bond counsel will review the terms of the financing, and r ender an opinion that there will be no liability to the City in issuing the bonds on behalf of the applicant. b. There is a clearly articulated public purpose in providing the conduit financing. c. The applicant is capable of achieving this public purpose. 2. This means that the review of requests for conduit financing will generally be a two-step process: a. First asking the Council if they are interested in considering the request, and establishing the ground rules for evaluating it. b. And then returning with the results of this evaluation, and recommending approval of appropriate financing documents if warranted. This two-step approach ensures that the issues are clear for both the City and applicant, and that key policy questions are answered. 3. The workscope necessary to address these issues will vary from request to request, and will have to be determined on a case-by-case basis. Additionally, the City should generally be fully reimbursed for our costs in evaluating the request; however, this should also be determined on a case-by-case basis. B. Refinancings 1. General Guidelines. Periodic reviews of all outstanding debt will be undertaken to determine refinancing opportunities. Refinancings will be considered (within federal tax law constraints) under the following conditions: a. There is a net economic benefit. b. It is needed to modernize covenants that are adversely affecting the City’s financial position or operations. c. The City wants to reduce the principal outstanding in order to achieve future debt service savings, and it has available working capital to do so from other sources. Packet Pg. 295 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES 2. Standards for Economic Savings. In general, refinancings for economic savings will be undertaken whenever net present value savings of at least five percent (5%) of the refunded debt can be achieved. a. Refinancings that produce net present value savings of less than five percent will be considered on a case-by-case basis, provided that the present value savings are at least three percent (3%) of the refunded debt. b. Refinancings with savings of less than three percent (3%), or with negative savings, will not be considered unless there is a compelling public policy objective. C. Enhanced Infrastructure Financing District Guidelines and Policies a. EIFD financing should be considered for public facilities or infrastructure improvements that confer Citywide and/or regional benefits. This may include the “City share” of infrastructure included in the City’s development impact fees. b. Unless there is a Development Agreement in place that provides otherwise, EIFDs should not be used to fund real estate projects’ proportional share of infrastructure costs otherwise included in the City’s development impact fees or charged as project-specific exactions (e.g., subdivision improvements). c. City should consider EIFDs when more than one local government jurisdiction is participating to produce maximum benefit. d. At the time of formation of the EIFD (or if changes to the EIFD are contemplated), the City should require a fiscal impact analysis to determine if an EIFD is fiscally prudent and analyze opportunity cost to the City’s General Fund. HUMAN RESOURCE MANAGEMENT A. Regular Staffing 1. The budget will fully appropriate the resources needed for authorized regular staffing and will limit programs to the regular staffing authorized. 2. Regular employees will be the core work force and the preferred means of staffing ongoing, year -round program activities that should be performed by full-time City employees rather than independent contractors. The City will strive to provide competitive compensation and benefit s chedules for its authorized regular work force. Each regular employee will: a. Fill an authorized regular position. b. Be assigned to an appropriate bargaining unit, unless designated as an unrepresented management or confidential classification. c. Receive salary and benefits consistent with labor agreements or other compensation plans. 3. To manage the growth of the regular work force and overall staffing costs, the City will follow these procedures: a. The Council will authorize all regular positions. Packet Pg. 296 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES b. The Human Resources Department will coordinate and approve the hiring of all regular and supplemental staff. c. All requests for additional regular positions will include evaluations of: • The necessity, term and expected results of the proposed activity. • Staffing and materials costs including salary, benefits, equipment, uniforms, clerical support and facilities. • The ability of private industry to provide the proposed service. • Additional revenues or cost savings, which may be realized. 4. Periodically, and before any request for additional regular positions, programs will be evaluated to determine if they can be accomplished with fewer regular employees. (See Productivity Review Policy) 5. Staffing and contract service cost ceilings will limit total expenditures for regular employees, supplemental staff, and independent contractors hired to provide operating and maintenance services. B. Supplemental Staff 1. The hiring of supplemental staff will not be used as an incremental method for expanding the City's regular work force. 2. Supplemental staff include all employees other than regular employees, elected officials and volunteers. Supplemental staff include temporary employees, interns, and contract employees. Supplemental staff may work on a full-time or part-time basis and will generally augment regular City staffing. Supplemental staff may be used as extra-help during peak workloads, as coverage during extended absences of regular employees, seasonal workforce, as a means to assess ongoing staffing needs , or as the staffing method for program delivery that is most effectively staffed using part -time hours to ensure adequate coverage. 3. The City Manager and Department Heads will encourage the use of supplemental staff rather than regular employees to meet peak workload requirements, fill interim vacancies, and accomplish tasks where less than full-time, year-round staffing is required. Under this guideline, supplemental staff hours will generally not exceed 50% of a regular, full-time position (1,000 hours annually). There may be limited circumstances where the use of supplemental staff on an ongoing basis in excess of this target may be appropriate due to unique programming or staffing requirements. However, any such exceptions must be approved by the City Manager based on the review and recommendation of the Human Resources Director. 4. Contract employees are defined as supplemental staff with written contracts approved by the City Manager who may receive approved benefits Contract employees will generally be used for medium-term (generally between six months and two years) projects, programs or activities requiring specialized or augmented levels of staffing for a specific period. The services of contract employees will be discontinued upon completion o f the assigned project, program or activity. Accordingly, contract employees will not be used for services that are anticipated to be delivered on an ongoing basis and as such, a determination as to the expected need will be made at the end of each contra ct term and prior to extending or renewing a contract. C. Overtime Management Packet Pg. 297 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES 1. Overtime should be used only when necessary and when other alternatives are not feasible or cost effective. 2. All overtime must be pre-authorized by a department head or delegate unless it is assumed pre-approved by its nature. For example, overtime that results when an employee is assigned to standby and/or must respond to an emergency or complete an emergency response. 3. Departmental operating budgets should reflect antic ipated annual overtime costs and departments will regularly monitor overtime use and expenditures. 4. When considering the addition of regular or temporary staffing, the use of overtime as an alternative will be considered. The department will take into account: a. The duration that additional staff resources may be needed. b. The cost of overtime versus the cost of additional staff. c. The skills and abilities of current staff. d. Training costs associated with hiring additional staff. e. The impact of overtime on existing staff. D. Independent Contractors Independent contractors are not City employees. They may be used in two situations: 1. Short-term, peak workload assignments to be accomplished using personnel contracted through an outside temporary employment agency (OEA). In this situation, it is anticipated that City staff will closely monitor the work of OEA employees and minimal training will be required. However, they will always be considered the employees of the OEA and not the City. All placements through an OEA will be coordinated through the Human Resources Department and subject to the approval of th e Human Resources Director. 2. Construction of public works projects and delivery of operating, maintenance or specialized professional services not routinely performed by City employees. Such services will be provided without close supervision by City staff, and the required methods, skills and equipment will generally be determined and provided by the contractor. Contract awards will be guided by the City's purchasing policies and procedures. (See Contracting for Services Policy) PRODUCTIVITY Ensuring the “delivery of service with value for cost” is one of the key concepts embodied in the City's Mission Statement (San Luis Obispo Style— Quality With Vision). To this end, the City will constantly monitor and review our methods of operation to ensure that services continue to be delivered in the most cost-effective manner possible. This review process encompasses a wide range of productivity issues, including: A. Analyzing systems and procedures to identify and remove unnecessary review requirements. B. Evaluating the ability of new technologies and related capital investments to improve productivity. Packet Pg. 298 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES C. Developing the skills and abilities of all City employees. D. Developing and implementing appropriate methods of recognizing and rewarding exceptional employee performance. E. Evaluating the ability of the private sector to perform the same level of service at a lower cost. F. Periodic formal reviews of operations on a systematic, ongoing basis. G. Maintaining a decentralized approach in managing the City's support service functions. Although some level of centralization is necessary for review and control purposes, decentralization supports productivity by: 1. Encouraging accountability by delegating responsibility to the lowest possible level. 2. Stimulating creativity, innovation and individual initiative. 3. Reducing the administrative costs of operation by eliminating unnecessary review procedures. 4. Improving the organization's ability to respond to changing needs, and identify and implement cost -saving programs. 5. Assigning responsibility for effective operations and citizen responsiveness to the department. H. Maintaining City purchasing policies and procedures that are as efficient and effective as possible. CONTRACTING FOR SERVICES A. General Policy Guidelines 1. Contracting with the private sector for the delivery of services provides the City with a significant opportunity for cost containment and productivity enhancements. As such, the City is committed to using private sector resources in delivering municipal services as a key element in our continuing efforts to provide cost-effective programs. 2. Private sector contracting approaches under this policy include construction projects, professional services, outside employment agencies and ongoing operating and maintenance services. 3. In evaluating the costs of private sector contracts compared with in-house performance of the service, indirect, direct, and contract administration costs of the City will be identified and considered. 4. Whenever private sector providers are available and can meet established service levels, they will be seriously considered as viable service delivery alternatives using the evaluation criteria outlined below. 5. For programs and activities currently provided by City employees, conversions to contract services will generally be made through attrition, reassignment or absorption by the contractor. B. Evaluation Criteria Packet Pg. 299 Item 15 BUDGET REFERENCE MATERIALS Attachment X BUDGET AND FISCAL POLICIES Within the general policy guidelines stated above, the cost -effectiveness of contract services in meeting established service levels will be determined on a case-by-case basis using the following criteria: 1. Is a sufficient private sector market available to competitively deliver this service and assure a reasonable range of alternative service providers? 2. Can the contract be effectively and efficiently administered? 3. What are the consequences if the contractor fails to perform, and can the contract reasonably be written to compensate the City for any such damages? 4. Can a private sector contractor better respond to expansions, contractions or special requirements of the service? 5. Can the work scope be sufficiently defined to ensure that competing proposals can be fairly and fully evaluated, as well as the contractor's performance after bid award? 6. Does the use of contract services provide us with an opportunity to redefine service levels? 7. Will the contract limit our ability to deliver emergency or other high priority services? 8. Overall, can the City successfully delegate the performance of the service but still retain a ccountability and responsibility for its delivery? Packet Pg. 300 Item 15 ATTACHMENT J STATUS OF CURRENT CIP PROJECTS As of November 2018 3 Packet Pg. 301 Item 15 Packet Pg. 302 Item 15 STATUS OF 2017-19 CAPITAL IMPROVEMENT PROJECTS Purpose The purpose of this report is to provide the Council with a concise summary of the status of the City’s Capital Improvement Plan (CIP) projects. Of the 97 projects that have been financially active during the 2017-19 Financial Plan period: 1. 20 are complete, 2. 29 will be complete within 6 months, 3. 21 will be complete within 12 months, 4. 27 will be complete in more than 12 months. Within the last 12 months the following projects have been completed: 1. Sinsheimer Playground Renovation: Park playground equipment, which had originally been installed in 1993, was outdated and did not conform to current California playground regulations. In preparation for renovation, the City underwent an extensive public engagement process including receiving children’s input in a “kids only” session. The resulting project includes a completely reconstructed playground site and all new equipment, which has been well received by adults and children alike. The construction cost for this work was $725,000 of which $283,000 was grant funding Complete, 20 Complete in 6 months, 29 Complete in 12 months, 21 Complete in more than 12 months, 27 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Packet Pg. 303 Item 15 2. Madonna Road and Los Osos Valley Road Paving: Los Osos Valley Road and Madonna Road underwent a combination of maintenance, rehabilitation, and reconstruction work for the first time in approximately 10 years. Improvements included repairs and a maintenance seal of Los Osos Valley Road and Madonna Road, as well as full reconstruction of Madonna Road between Los Osos Valley Road and Oceanaire through reclamation of the existing roadway paving. Along with pavement maintenance work, curb ramp upgrades and bike facility improvements were completed. The construction cost for this project was $2,740,000. 3. Mission Plaza Railing Replacements: This project addresses ongoing railing replacement needs within the Mission Plaza and adjacent pathways along San Luis Obispo Creek. The existing railing is deteriorated and failing in places and does not meet current standards for sa fety. Approximately 160 lineal feet of railing is replaced at a cost of $30,000. 4. Calle Joaquin Park and Ride: This project, located on Calle Joaquin behind the Hampton Inn, encourages sustainable transportation and ridesharing with the addition of 31 car spaces and two motorcycle spaces to the region-wide Park and Ride inventory. In addition to the construction o f new parking, the project also included a bus turnout, lighting, and landscaping with Low Impact Development (LID) features to retain and save water. The construction cost for this work was $573,000. Packet Pg. 304 Item 15 5. Reservoir canyon: The Reservoir Canyon Natural Reserve is a popular destination for hikers and outdoor enthusiasts. The City’s Conservation Plan for the reserve identified the need to provide increased trail access and creek crossings to allow safer passage, particularly during winter storm events when Reservoir Canyon creek often floods parts of the trail. This project installed a new 60-foot span fiberglass bridge crossing at a cost of $75,000. 6. Marsh Street Curb Ramps: The City has an established system of streets with curbs, gutter, and sidewalks. This system can be challenging to negotiate for those with physical limitations, especially where curb ramps do not currently exist or where curb ramps do not meet current standards. This project installed new ramps and retro fitted existing ramps at 21 locations along Marsh Street. Construction cost for this work was $165,000 of which $105,000 was Community Development Block Grant funding. Before/After Photo at North Corner of Marsh & Carmel Intersection. 7. Monterey & Osos Traffic Signal Reconstruction: The City’s Traffic Safety Report identified the intersection of Monterey and Osos as a high collision rate intersection with correctable measures available. Red light violations in all directions was the ident ified pattern of collision at the intersection. Corrective measures included the enhanced visibility of signal heads, which were constructed by this project. Additional improvements included new curb ramps at all four corners and tree replacement. The construction cost for this work was $360,000. Packet Pg. 305 Item 15 8. Bus Shelters: The SLO Transit system has approximately 236 bus stops of which 49 have bus shelters. Many of the existing shelters are older models with glass panels that are past their useful life and are su bject to graffiti and vandalism; glass replacement is an ongoing expense. This project replaced 12 old shelters with new models which meet current standards and are more durable. The project cost for this work was $63,000. 9. City Hall Kiosk: This project continued implementation of the City Wayfinding Program with the installation of a new informational kiosk and wayfinding sign located outside of City Hall. Construction Cost: $83,000 10. Sign Replacement Project: The City is responsible for maintenance of approximately 15,000 traffic signs. The Sign Replacement Project is part of an ongoing program to replace old signage with new signage meeting minimum retro-reflectivity levels for enhanced driver awareness and public safety. This year’s project replaced 188 signs of all types, including speed limit, stop, and parking signage. The construction cost for this work was $41,000. Packet Pg. 306 Item 15 11. Concrete Streets: This project reconstructed the intersections of Dana and Nipomo, P alm and Toro, and Palm and Johnson as well as paving of Dana Street. These intersections were previously very cracked and uneven, presenting a challenge to pedestrians crossing the street, particularly those with mobility limitations. Work included new cur b ramps and intersection paving. Dana Street received an asphalt concrete overlay which removed surface irregularities and brought the roadway back to excellent condition. The construction cost for this work was $635,000. Before and After at the Intersection of Palm/Toro Before and After at the Intersection of Palm/Toro Before and after on Dana Street Packet Pg. 307 Item 15 12. Rosa Butron Adobe Painting: Regular painting of City facilities protects buildings against environmental damage and prolongs building life. This project addressed the painting maintenance requirements of the Rosa Butron Adobe (located on Dana Street), which had not been painted in o ver 10 years. The cost of this work was $10,000. 13. LOVR Interchange Landscaping: The Los Osos Valley Road Interchange (LOVR) project began construction in the Fall of 2014 and was completed in 2016. The LOVR Landscaping Project was implemented as an environmental mitigation of the overall Los Osos Valley Road Interchange Project and is a joint effort between Caltrans and the City. Landscaping was installed along both sides of the new bridge and adjacent on and off ramps. New plantings included trees and shrubs, within new mulched areas, are irrigated by recycled water. Construction cost for this work was $376,000. 14. Laurel Lane Street Lights: Street lighting along the south end of Laurel Lane had not been operational due to damaged electrical wiring. This project installed new conduit wire and lighting pull boxes, restoring power and lighting and enhancing nighttime visibility. The cost of this work was $81,000. 15. Southwood and Ellen Storm Drain Replacement: Maintenance of the City’s storm drain system provides for increased flood protection and reduces the likelihood of property loss. This project replaced failing corrugated metal pipe (CMP) drain systems at Southwood Drive and Ellen Way by removing 150 feet of failing CMP and providing enhanced stormwater protection by extending the system with 350 feet of storm drain pipe, including new catch basins. The construction cost for this work was $200,000. Packet Pg. 308 Item 15 16. Roadway Sealing 2018 and Laurel Lane Complete Streets: This project implemented the City’s pavement maintenance plan for ongoing street maintenance in combination traffic safety enhancements to Laurel Lane. Approximately 20% of the City’s neighborhood streets in the southwest area of the City received a slurry seal maintenance treatment. Improvements to Laurel Lane increased pedestrian, bicycle, and vehicle safety b y the construction of high visibility crosswalks and corner ramp bulbouts, buffered bike lanes, and revised roadway striping. Construction cost for this work was $2.4 Million. Before and After at the Laurel Lane and Augusta Intersection 17. Sidewalk Replacement on Monterey: This project replaced a section of sidewalk on Monterey Street near Morro Street was damaged due to a large tree. The damaged sidewalk created a tripping hazard for pedestrians, as well redirected drainage into adjacent business instead of into the street. With approval from the tree committee, the ficus tree was removed and replaced with two olive trees in conjunction with the sidewalk replacement work. The cost of this work was $49,500. Packet Pg. 309 Item 15 18. Silt Removal 2018: Silt carried by storm water settles at points in creeks where storm water velocity decreases, resulting in deposits of silt and settlement that build up over time, reducing capacity of creek systems and increasing the risk of flooding of surrounding areas. This year’s silt removal project removed 1,320 cubic yards of silt build up in the Prefumo Creek just west of the LOVR crossing. The cost of this silt removal work was $59,000. Before and after silt removal from the Prefumo Creek arm, East of LOVR. Capital Improvement Projects that are currently under construction include: 1. Telemetry System Improvements SCADA Project: Supervisory Control and Data Acquisition (SCADA) systems include elements of computer programing, radio communication, databases, and human-machine interface (HMI) stations. With SCADA, an operator can efficiently manage a complex network of pipes, valves, tanks, and pump stations from an HMI station based on real-time data collected from remote locations of the water system. This project that is currently being constructed provides complete SCADA coverage of the City’s water distribution system. The estimated construction cost for this work is $1.1 Million. Packet Pg. 310 Item 15 2. Margarita Lift Station Project: The Margarita Lift Station was put into service in 1971 and has exceeded its operational life expectancy of 20 years. This project replaces the existing lift station with a new wet well and sewer force main. The new station accommodates capacity needs of development anticipated by the Margarita Area Specific Plan. The estimated construction cost for this work is $1.4 Million. 3. Sinsheimer Backstop: Sinsheimer Baseball Stadium, built in the 1970’s, has been the community’s baseball venue for local schools, Babe Ruth leagues, and primarily the home of the SLO Blues semi-professional baseball team. The old backstop, consisting of fabricated steel poles and chain-link fencing, reached the end of its design life and was recommended for replacement to avoid a failure. The new backstop, currently under construction, will consist of small steel cables and nylon netting, and will extending 30 - feet above the field in the same style used by most colleges and major league baseball. The estimated construction cost for this work is $170,000. Old backstop, currently being removed and replaced. 4. Waterline Replacements: This project is replacing approximately 5,000 feet of waterline in Pacific, Boysen, Chorro and Sierra streets. The existing waterlines are substandard and deteriorated and their replacement will remove capacity limitations improve water flow for fire protection. Replacing waterlines reduces maintenance costs and customer impacts associated with emergency repairs. This estimated construction cost for this work is $1.8 million Packet Pg. 311 Item 15 5. Sewerlining Project: This project rehabilitates 4,350 feet of existing sewer pipe using cured in place pipe (CIPP), a trenchless rehabilitation method. This project rehabilitates aging and deteriorating sewer infrastructure that will ultimately reduce maintenance cost and the need for emergency repairs. The estimated construction cost for this work is $695,000. 6. Fire Station 1 Masonry Seal: Regular painting of City facilities protects buildings against environmental damage and prolongs building life. This project addresses the masonry seal needs Fire Station 1. The estimated construction cost for this work is $40,000. Packet Pg. 312 Item 15 7. City Hall Chiller Replacement: This project replaces the existing cooling system at City Hall with a smaller and more energy-efficient unit meeting all current standards. This project was necessitated by the imminent failure of the existing cooling system which was installed in 1996, requires ongoing costly repairs, and is no longer supported by the manufacture. The estimated construction cost for this work is $137,000. Capital Improvement Projects that are anticipated to start construction within the next six months include: 1. Concrete Paver Sidewalk – Replacement of Boardwalks in the Railroad District: Portions of the sidewalk on Santa Barbara Street from Broad to Leff are constructed of wood planks, which was formerly the City’s standard installation for sidewalk in the Railroad District. The existing wood plank boardwalk sidewalk are in poor conditio n and must be addressed to prevent hazards to pedestrians. The estimated construction cost for this work is $350,000. 2. El Capitan Bridge Replacement: The El Capitan Bridge is a pedestrian bridge located at the end of El Capitan Way. In January of 2015, a large eucalyptus tree fell on the Bridge causing substantial damage. This project will remove and replace the bridge. Estimated Construction Cost: $100,000 Packet Pg. 313 Item 15 3. Meadow Park Pedestrian Bridge Replacements: This project will replace the pedestrian bridges within Meadow Park, which have deteriorated and reached the end of their useful life. The estimated construction cost of this project is $180,000. 4. Fire Station 4 Emergency Generator: This project replaces an existing gasoline powered backup generator with a new generator at Fire Station 4. The new generator will provide the backup power necessary to keep this facility functioning in the event of a disaster. The estimated construction cost for this work is $79,000. Packet Pg. 314 Item 15 5. Pedestrian and Bicycle Pathway Maintenance: There are approximately 6.5 miles of asphalt pathways and bike paths within the City which require routine surface maintenance to keep them functional for users. This project will rehabilitate the pedestrian pathways within Meadow Park. 6. Marsh Street Bridge Replacement: The Marsh Street Bridge, located near the intersection of Marsh and Santa Rosa Streets, was approved by the City Council in January 2013 for removal and replacement. This followed a determination by the California Department of Transportation (Caltrans) that the existing bridge, built in 1909, is structurally deficient. An assessment concluded that a complete replacement of the existing bridge was the most prudent and cost- effective alternative given the age of the structure. The estimated construction cost of this project is $7.6 Million. Packet Pg. 315 Item 15 Overall Status of the City’s Current CIP Projects This report summarizes the status of all 97 CIP projects with financial activity during the 2017-19 Financial Plan period presented under Major City Goal, Other Important Objective and Regular priorit ies. No. Project Project Budget Percentage Complete Major City Goal 2017/19 Multimodal Transportation 1 Prado Road Interchange $31,690,000 35% 2 Prado at Higuera Bridge Replacement $11,075,000 10% 3 Safe Routes to School: Foothill Crossing $595,894 40% 4 Anholm Bikeway: Phase 1 $792,106 50% 5 Orcutt Tank Farm Roundabout Design $213,050 100% 6 Santa Fe at Tank Farm Bridge Replacement $2,865,000 5% 7 Higuera Street Widening: 50 Higuera $947,500 5% 8 Bob Jones Trail: Prefumo Creek to Oceanaire Study and Design $216,000 50% 9 Railroad Safety Trail Pepper to Train Station $30,000 10% 10 Broad Street Corridor Access Improvements $70,000 10% 11 California Taft Roundabout Design $290,000 60% 12 Higuera Street Widening: Fontana to Chumash $365,500 15% 13 Meadow Park Pathway Maintenance $120,000 35% 14 Broad Street Pavement Improvements $1,600,000 50% 15 Marsh at Santa Rosa Bridge Replacement $8,342,900 50% 16 Railroad Safety Trail Taft to Pepper $4,653,700 70% 17 Roadway Sealing and Laurel Lane Complete Streets $3,000,000 95% Packet Pg. 316 Item 15 No. Project Project Budget Percentage Complete 18 Concrete Streets and Accessibility Improvements Project $770,000 100% 19 CDBG Marsh Street Curb Ramps $213,000 100% 20 Madonna and LOVR Rehabilitation Project $2,900,000 100% 21 Sign Replacement Project $45,000 100% 22 Bob Jones Trail Octagon Barn Connection Study $50,000 100% Major City Goal 2017/19 Climate Action 23 Green Fleet Vehicle Charging Stations $105,000 45% Major City Goal 2015/17 Multimodal Transportation 24 LOVR Interchange Landscape $535,688 100% Other Important Objective 2017/19 Downtown Vitality 25 Palm-Nipomo Parking Structure $23,850,000 40% 26 Mid-Higuera Bypass $482,000 30% 27 Mission Plaza Concept Plan $120,000 100% 28 Mission Plaza Restroom Replacement $105,000 20% 29 Mission Plaza Railing Upgrade $30,000 40% 30 Downtown Renewal : 858 Higuera $36,000 40% Other Important Objective 2015/17 Neighborhood Wellness 31 CMP Repair Bullock Lane $170,000 5% 32 Buchon and Santa Rosa Storm Drainage Improvements Project $250,000 40% 33 Sinsheimer Stadium Backstop $153,500 80% 34 Silt Removal $135,000 100% Packet Pg. 317 Item 15 No. Project Project Budget Percentage Complete Other Important Objective 2015/17 Laguna Lake Restoration 35 Laguna Lake Dredging $490,000 75% Other Important Objective 2015/17 Fiscal Sustainability & Responsibility 36 City Hall Painting $55,000 50% Other Important Objective 2013/15 Infrastructure Maintenance 37 Margarita Lift Station Replacement $2,318,535 90% 38 W ater Resource Recovery Facility (WRRF) Facility Upgrade $115,000,000 75% 39 Water Distribution Telemetry System $1,036,650 90% Other Important Objective 2011/13 Infrastructure Maintenance 40 Calle Joaquin Siphon and Lift Station $6,400,000 50% Regular Priority 41 Parking Access Revenue Control System $763,000 80% 42 North Broad Street Neighborhood Park $75,000 5% 43 Police Department Space Improvement $124,000 5% 44 Railroad Crossing Upgrade - Foothill $740,000 10% 45 Calle Joaquin at LOVR Drainage $15,000 20% 46 Corporation Yard Tenant Improvement $50,000 20% 47 Parks and Recreation Interior Office $55,000 25% 48 El Capitan Pedestrian Bridge Replacement $150,000 50% 49 Waterline Abandonment & Connections Various Locations $1,622,170 25% 50 Sinsheimer Park Tennis Court Lighting $204,000 25% Packet Pg. 318 Item 15 No. Project Project Budget Percentage Complete 51 Reservoir No. 2 Replacement $5,750,000 30% 52 Chorro/Murray Sewer Replacement $444,000 30% 53 Walnut, Morro, Albert, Mill, Santa Rosa CIPP $660,000 40% 54 Terrace Hill PRV & Wash Water Recoat $757,500 45% 55 Utilities Administration HVAC $50,400 50% 56 Lakeview Drainage $200,000 50% 57 City Hall Landing Repair $25,000 50% 58 Foothill-Chorro PRV Replacement $109,000 50% 59 Foothill Pipe Burst $120,000 50% 60 Pickleball Courts $60,000 50% 61 Sewer Lining Project $695,000 70% 62 Stafford, Taft, Kentucky Sewer Line Replacement $250,000 75% 63 Marsh Street Garage Improvements Design $106,000 100% 64 Waterline Replacement Various Locations $2,288,600 85% 65 Osos/Leff/Santa Barbara Sewer $910,000 85% 66 City Hall Kiosks $79,100 95% 67 Facilities Master Plan $250,000 95% 68 Bus Shelter Installation $56,000 100% 69 Jennifer Street Bridge Deck Repair $8,500 100% 70 Reservoir Canyon Pedestrian Bridge $80,000 100% Packet Pg. 319 Item 15 No. Project Project Budget Percentage Complete 71 Swim Center Co-generation Plant $85,000 5% 72 Police Evidence Storage Bldg Roof $5,000 10% 73 Install Police Admin Building IT-Room Cooling $15,000 10% 74 Fire Station 1 HVAC $21,800 15% 75 Fire Station 2 Communications Tower $200,000 20% 76 Corp Yard Fuel Island Siding $14,750 25% 77 Islay Hill Park Playground $80,000 25% 78 Swim Center Bath House Roof $8,500 30% 79 Swim Center Re-plaster Therapy Pool $18,500 30% 80 Sinsheimer Irrigation & Drainage $140,000 35% 81 Meadow Park Pedestrian Bridges Replacement $175,000 40% 82 South Hills Radio Site Upgrades $523,500 35% 83 Police Department & Fire Station 3 Painting $88,500 40% 84 Fire Station 4 Emergency Backup Generator $79,500 45% 85 Emergency Dispatch Center DataAire Replacement $172,000 50% 86 Ellen Way Storm Drain Improvements $230,000 100% 87 City/County Library HVAC Replacement $53,100 50 88 Parks & Recreation HVAC $50,400 50% 89 Fire Station 1 Masonry Sealing $65,000 90% 90 City Hall Chiller Replacement $227,400 80% Packet Pg. 320 Item 15 No. Project Project Budget Percentage Complete 91 1042 Walnut Parking Lot Maintenance $120,000 65% 92 Sinsheimer Court Entrance Hardscape $60,000 65% 93 Broad and Leff Culvert Repair Design $10,000 75% 94 PG&E Relocation for Meadow Park Pedestrian Bridge $30,000 80% 95 Pavement Inspection $25,000 85% 96 Police Station Replacement Conceptual Design $80,000 90% 97 Laurel Lane Street Light Repair $100,000 100% Packet Pg. 321 Item 15 ATTACHMENT K LONG RANGE CAPITAL IMPROVEMENT PLAN NEEDS 11/26/18 Packet Pg. 322 Item 15 Packet Pg. 323 Item 15 3 OVERVIEW The Long-Range Capital Improvement Plan Needs provides a glimpse into the future improvement needs of the City as envisioned by the General Plan or other Council adopted plans. Many of our current infrastructure assets are not adequate to handle the needs of the future. Many streets must be built or widened, intersections improved, bicycle facilities added, water lines and sewer lines extended into new areas, and new parks must be built. The Long-Range Capital Improvement Needs can serve as a guide for required future investments to support the General Plan as well as other Council approved policies, plans, and goals in place today. At the time of General Plan build out, the projects included in the Long-Range Capital Improvement Plan Needs would ideally be built and available for use by the community. Annual maintenance needs for City infrastructure are shown below are represent the ideal annual investment. Annual Maintenance Needs Asset Ideal Annual Funding Traffic Management $ 250,000 Pavement Management $ 4,400,000 Curb, Gutter, Sidewalks $ 1,000,000 Flood Control $ 5,300,000 Sidewalk Ramps $ 580,000 Parks Play Equipment $ 150,000 Water Systems $ 3,100,000 Sewer Systems $ 2,800,000 Buildings $ 1,570,000 Bike Path Maintenance $ 100,000 Openspace Maintenance $ 150,000 Total $ 19,400,000 Annual maintenance needs of existing assets are an important consideration when considering the one-time implementation cost of long-range infrastructure expansions projects. While the Long-Range Capital Improvement Plan Needs focuses on the new facilities and infrastructure needed to support the City at build -out, the costs to maintain existing assets should also be considered. Ideally, these projects would be built as part of new development taking place in the City, but this may be unrealistic. The City may need to build some of these projects using grant funds, general funds, or some form of debt financing. There also may be opportunit ies in the future in which to leverage grant funding to build larger infrastructure maintenance projects to complement what new development provides. By considering the Long-Range Capital Improvement Plan Needs in the context of the Financial Plan process, these projects provide an important starting place in assessing which ones might be a high priority to consider in the next funding cycle. The list is a way Packet Pg. 324 Item 15 4 for the Council to see the long-term infrastructure improvements that are needed and have an “order of magnitude” idea of how much it may cost to fully implement. With this understanding, the Long-Range Capital Improvement Plan Needs is one of the pieces of information for the Council to consider in setting goals and priorities. This Long- Range Capital Improvement Plan Needs is conceptual, and in most cases, the projects have not undergone detailed analysis, nor undergone the rigor of the public review process. They represent City staff’s best assessment of costs and scope based on what is known today but may undergo changes in scope or importance as new challenges and issues emerge over time. In short, this report focuses on presenting the "inventory" of improvements that may be needed at some time in the future, as a starting point in the goal-setting process. A summary of estimated cost of the Long-Range Capital Improvement Plan Needs by function and anticipated funding source is as follows: LONG-TERM CIP SUMMARY BY FUNCTION AND FUNDING SOURCE COMMUNITY & NEIGHBORHOOD LIVABILITY $ 3,358,000 General Capital Outlay $ 3,358,000 COMMUNITY SAFETY $ 137,583,000 General Capital Outlay $ 131,427,000 Impact Fee $ 6,156,000 CULTURE & RECREATION $ 115,827,000 General Capital Outlay $ 82,827,000 Impact Fee $ 25,808,000 Park In Lieu $ 7,192,000 ENVIRONMENTAL HEALTH & OPEN SPACE $ 23,223,000 General Capital Outlay $ 15,723,000 State or Federal Grant $ 7,500,000 FISCAL HEALTH & GOVERNANCE $ 13,160,000 General Capital Outlay $ 13,160,000 INFRASTRUCTURE & TRANSPORTATION $ 662,810,000 Debt Financing $ 18,656,000 Developer Contribution $ 30,825,000 General Capital Outlay $ 240,274,000 Parking Fund $ 10,010,000 Sewer Fund $ 130,000,000 State or Federal Grant $ 50,851,000 Transportation Impact Fee $ 104,694,000 Water Fund $ 77,500,000 Total $ 955,961,000 Existing city funding is available for a portion of the Annual Maintenance needs in the first chart. Those funds are primarily Local Revenue Measure, State Gas Tax, General Fund, Packet Pg. 325 Item 15 5 and Water and Sewer funds. As shown in the second chart, funding sources for the Long- Range needs as shown in the chart below include Impact Fees, Developer contributions, enterprise fund sources (Water, Sewer, Parking and Transit), grant funds, and General Fund. A project listing of the Long-Range Capital Improvement Plan Needs by function and estimated project cost is as follows: COMMUNITY & NEIGHBORHOOD LIVABILITY $ 3,358,000 Emerson Park Rehabilitation $ 1,276,000 Emerson Park Restroom $ 638,000 Mission Plaza Restroom Replacements and Enhancements $ 1,444,000 COMMUNITY SAFETY $ 137,583,000 Fire Station 1: New Emergency Operations Center and Maintenance Building $ 9,106,000 Fire Station 1: Provide Additional Operational Area $ 3,758,000 Fire Station 2 Replacement $ 11,716,000 Fire Station 3 Replacement $ 18,548,000 Fire Station 4 Replacement $ 13,527,000 Fire Station 5: New Fire Station $ 12,574,000 Police Response Vehicles $ 399,000 Police Station Replacement $ 47,435,000 Stormwater Resource Plan Implementation $ 1,620,000 Waterway Management Plan Implementation $ 18,900,000 CULTURE & RECREATION $ 115,827,000 Implementation of Parks Master Plan $ 49,758,000 Laguna Lake Golf Course Club House $ 4,681,000 Mitchell Park Senior Center Expansion and Renovation $ 1,102,000 New Park Amenities $ 378,000 Orcutt Area Neighborhood Parks $ 7,192,000 Parks and Recreation Administration Expansion and Renovation $ 6,780,000 Replacement of the Ludwick Community Center $ 24,244,000 Sinsheimer Stadium: Concession and Restroom Replacement $ 3,480,000 Swim Center Site and Deck Improvements $ 18,212,000 ENVIRONMENTAL HEALTH & OPEN SPACE $ 23,223,000 Buses to Trails Implementation $ 44,000 Electric Fleet Vehicle Charging Stations $ 309,000 Laguna Lake Dredging $ 13,920,000 Open Space Acquisition $ 8,950,000 FISCAL HEALTH & GOVERNANCE $ 13,160,000 Dog Park(s) $ 624,000 Implement Accessibility Improvements $ 2,016,000 Mission Plaza Revitalization $ 7,656,000 Packet Pg. 326 Item 15 6 San Luis Creek Walkway Expansion $ 2,864,000 INFRASTRUCTURE & TRANSPORTATION $ 662,810,000 Bishop and Roundhouse Street Connection $ 13,200,000 Bob Jones Trail Connections: Marsh Street to Prado and Los Osos Valley Road to Southern City Limits $ 11,000,000 Boysen at Santa Rosa Street: Pedestrian and Class I Bike grade separate crossing $ 3,500,000 Broad at Tank Farm Intersection Improvements $ 1,500,000 Broad Street Bicycle Boulevard / Anholm Bikeway Including Broad St. Ramp Closure & Bike/Ped Overpass $ 5,000,000 Broad Street Bike Path: Class I from Rockview to Damon Garcia Sports Fields $ 800,000 Broad Street Intersection Improvements $ 6,775,000 Broad/South/Santa Barbara streets Intersection Improvements $ 300,000 Bus Fleet Expansion: 4 Buses $ 1,970,000 Cerro Romauldo Bike Path: Class I from Tassajara to Chorro Street $ 750,000 City Hall Annex Renovation $ 47,223,000 City Hall Renovation $ 10,123,000 Citywide Traffic Model Updates and Data Collection $ 954,000 Class II Bike Lane Installations $ 3,299,000 Class III Bike Lane Signage and Markings $ 408,000 Corporation Yard Work Area Rehabilitation $ 583,000 Creek Walk Expansion under Broad Street Bridge $ 6,237,000 Downtown Bikeways & Bike Blvds $ 2,000,000 Downtown Lighting Installations $ 630,000 Downtown Multimodal Street Conversion (Type A) $ 53,157,000 Downtown Multimodal Street Conversion (Type B) $ 7,157,000 Downtown Multimodal Street Conversion (Type C) $ 5,893,000 Downtown Multimodal Street Conversion (woonerfs) $ 15,312,000 Downtown Sidewalk Installations $ 1,159,000 Ella Street Bike Boulevard $ 50,000 Extend Prado Road: Higuera Street to Broad Street $ 26,526,000 Fixilini & Flora Bike Boulevard $ 450,000 Higuera at Tank Farm: Intersection Improvements $ 2,000,000 Higuera Widening: High St to Marsh St $ 2,150,000 Higuera Widening: Madonna Rd to City Limits $ 5,400,000 Horizon Lane Extension South of Tank Farm $ 3,000,000 Implementation of IT Strategic Plan $ 17,000,000 Intersection Control Upgrades $ 20,000,000 Jennifer Street Bridge Morro St. Expansion $ 500,000 Laguna Lake Bikeways $ 6,576,000 Los Osos Valley Road Interchange Class I Bike Underpass $ 1,000,000 Madonna Class I (Hwy 101 to Oceanaire) $ 1,500,000 Marsh & Higuera 2-Way Conversion $ 3,770,000 Packet Pg. 327 Item 15 7 Marsh at Higuera Intersection Improvements $ 5,123,000 Master Plan Implementation $ 50,000,000 Meter Expansion (new) $ 350,000 Multimodal Street Conversion Studies $ 477,000 New Street Lights $ 964,000 Orcutt at Johnson Intersection Improvements $ 2,000,000 Orcutt at Tank Farm Intersection Improvements $ 1,700,000 Orcutt Road Bridge over Railroad Tracks $ 20,000,000 Parking Structure: Palm and Nipomo Street $ 25,016,000 Pedestrian and Bicycle Bridge: Bullock to Industrial over Railroad Tracks $ 2,703,000 Pedestrian and Bicycle Bridge: Over Tank Farm along east side of railroad tracks $ 1,178,000 Pedestrian and Bike Bridge: Penny Lane over railroad tracks $ 53,000 Prado at Higuera Intersection Improvements $ 2,500,000 Prado Road Interchange $ 35,000,000 Prado Road Widening: West of Higuera Street widening $ 12,000,000 Property Acquisitions - Lots E/O Santa Rosa and Downtown $ 3,000,000 Railroad Safety Trail: Class I Bike Path from Cal Poly to Southern City Limits $ 12,000,000 Railroad Safety Trail: Pepper Street to the Train Station $ 176,000 Santa Fe Bike Path: Class I Bike Path from Buckley to Tank Farm $ 2,863,000 Santa Fe Road Connection: Tank Farm to Prado Road $ 1,080,000 Sewer Collections Master Plan Implementation $ 35,000,000 Sewer Treatment and Reclamation Master Plan Implementation $ 95,000,000 South Broad Street Medians $ 2,708,000 Tank Farm Creek Bike Path: Class I Bike Path from Buckley to Tank Farm $ 1,800,000 Tank Farm Road Widening: Horizon to Santa Fe $ 22,000,000 Transit Center $ 6,428,000 Upgrade of Pedestrian and Bike Crossing Controls $ 2,389,000 Upgrade Parking Meters: Coin Meter to Credit Card Capable $ 300,000 Vachell Lane Bike Path: Class II Lanes on Vachell from Buckley to South Higuera Street $ 650,000 Water Reuse Master Plan Implementation $ 2,500,000 Water Treatment Plant Master Plan Implementation $ 25,000,000 West Side of 101 Bike Path: Class I Bike Path from Broad to Marsh Street $ 2,000,000 Total $ 955,961,000 Packet Pg. 328 Item 15 Item 15 ‐ Staff Presentation12/4/20181Budget Foundation WorkshopDecember 4, 20182019-21 Financial PlanRecommendation1.Review and approve the 2019-21 Financial Plan Goal Setting Process. 2.Review the City’s budget policies. 3.Review and discuss the Economic Outlook for the 2019-21 Financial Plan development.4.Review the current and long-term capital improvement plan.5.Review Community Forum Outline2Presentation OverviewLong-term Capital PlanEconomic OutlookFinancial Plan PoliciesGoal-Setting Process & Schedule3Capital Projects Summary4Complete20Complete Within 6M, 29Complete Within 12M, 21Beyond 12M, 2797 Active Projects Item 15 ‐ Staff Presentation12/4/20182Ongoing Needs: 1) Annual Maintenance: 2) Asset Replacement: 3) New Projects General Fund: thru 2040 ~$400MAll Funds: 2040 +~$995MLong-Term CIP and Funding the FutureLong Range CIPFunding the Future2 Year and 5 Year 19‐21 CIP5General Fund Economic Outlook 2018Ok for now, but…6PurposeProvide the basis for the City’s own five-year fiscal forecast which will be presented to Council with the mid-year report on February 5, 2019.7Major DriversEmploymentTourismReal EstateInterest RatesSales Tax RevenueConstruction8 Item 15 ‐ Staff Presentation12/4/20183Major Revenue Sources ShareSales Tax, 36%Property Tax, 14%Trasnsient Occupancy Tax, 10%Utility Users Tax, 8%Development Review Fees, 7%9‹#›10Budget and Financial Policies11Budget PoliciesConsistent and comprehensive fiscal policies provide a solid foundation for the long-term fiscal health of a CityWith each Financial Plan, the Council reviews its fiscal policies to determine if any updating is necessaryNo additions are recommended tonight, but might surface as the process continues. 12 Item 15 ‐ Staff Presentation12/4/20184Recent Policy Changes1.General Fund Revenue Stabilization Fund. The City will maintain a reserve of $1M for the purposes of offsetting unanticipated fluctuations in general fund revenues to provide financial stability for the term of the Fiscal Health Response Plan.2.Capital Projects Reserve Fund. The City will maintain a reserve for the purposes of offsetting unanticipated cost increases, unforeseen conditions, and urgent unanticipated projects to provide continued investment in infrastructure maintenance and enhancement. 13Community Input14Community Forum1.Add an Open House Workshop component prior to public comment2.Opportunity to build upon results of community survey3.Provide opportunity for more focused feedback on Local Revenue Measure uses4.Provide dots at the beginning of the Forum to give people more schedule flexibility15Major Enhancements to Improve Public EngagementCommunity Forum Agenda16Welcomed at the door 6:00-6:05pmOpening Objectives 6:05-6:10pmFiscal Outlook Presentation 6:10-6:25pmReminder on Instructions 6:25-6:30pmOpen House Workshop 6:30-7:30pmPublic Comment 7:30-8:30pmClosing Remarks 8:30pm16Date, Time, and Location:6:00 PM, Wednesday, January 23, 2019San Luis Obispo Vets Hall, 801 Grand Avenue Item 15 ‐ Staff Presentation12/4/20185Local Revenue Measure (LRM)Feedback on the LRM will be a part of the Community Forum2019-21 recommended projects and services will incorporate feedback Identified projects and services will be reviewed by Revenue Enhancement Oversight Commission (REOC) for consistency with priorities in March before final approval by the City Council 1718Council Goal Setting Workshop18Objectives for Council Goal-Setting Workshop: February 4th19Council…Develops Major City Goals and Other Important Objectives for 2019-21Identifies connections between use of Local Revenue Measure revenues and Major City GoalsIdentifies ideas for changes in programs and services to achieve the highest priorities during the Financial Plan19Criteria for Major City GoalsBe legitimate to our genuine beliefs (real, supported).Agreed upon by a Council majority.Limited in number for comprehension, communication & focus.Set forth in one document: the Financial Plan.Be clear & understandable.Established as a high priority & a real commitment.Reflect major goals that cannot be achieved without Council supportCan be translated into the performance goals & objectives of employees at all levels of the organization.Created within a supportive atmosphere where participants are not afraid to state their suggestions for improving goals or objectives.Reflect genuine consensus: while unanimous agreement is not required, they should be accepted to the point where resistance to them is reduced or eliminated.20 Item 15 ‐ Staff Presentation12/4/20186Council Goals “Homework”please provide distinct suggestions in separate itemsDue 1/25/192121Goal-Setting Workshop AgendaWelcome and Instructions 5:00pmPurpose, process & guidelines 5:00-5:15pmReview goals by category, discuss relationshipof goals to current activities, select candidate 5:15-7pmgoals Public Comment if not previously 7:00-7:15pmpresented Council ranks goals 7:15-7:45pmBreak as staff tabulates results 7:45-8:45pmIdentify Major City Goals 8:45-9:15pmDiscuss Next Steps 9:15-9:30pm22Priority ScaleMost important, highest priority for City to achieve over the next two years.Very important goal to achieve.Important goal to achieve.Address if resources are available.Defer to 2021-23 for consideration.Not a priority goal.Suggestion: total points available to allocate = # of candidate goals x 3.Suggestion: Major City Goals (majority of Council give 4’s or 5’s); Other Important Objectives (majority give 3’s or 4’s)23Council Member GuidelinesEncourage community groups/citizens to submit written/online comments about desired goals.Invite citizens to participate in Community Forum to listen and learn from their neighbors.Receive written and verbal comments from community & acknowledge their input.Assure the community that you are willing to listen openly to all perspectives.Focus your submission of suggested goals on a short list of key priorities to target City resources (not to exceed seven suggested goals).24 Item 15 ‐ Staff Presentation12/4/20187Council Member GuidelinesAvoid publicizing your submission of suggested goals.Give yourself flexibility by not publicly staking positions in advance of the February 4, 2019 Goal-Setting Workshop.Use this process as a way to learn from citizens & Council colleagues about what’s important.Explore areas where the Council can come together for positive action.Recognize that while an important step, it’s only the first step in the process of developing the two-year budget.25Next Steps2626Key Budget DatesGoal-Setting ProcessCommunity Forum 1/23Council “Homework” Assignment 1/25Council Goal-Setting Workshop 2/4Service Level & Strategic DirectionMajor City Goal Work Programs/ 4/16Strategic Budget Direction27Recommendation1.Review and approve the 2019-21 Financial Plan Goal Setting Process. 2.Review the City’s budget policies. 3.Review and discuss the Economic Outlook for the 2019-21 Financial Plan development.4.Review the current and long-term capital improvement plan.28 Item 15 ‐ Staff Presentation12/4/20188Community Priorities Survey610 responses as of 12/4Fiscal Sustainability & Responsibility MCG (290)Open Space Preservation (272)Addressing Homelessness (251)Infrastructure Maintenance (234)Housing MCG (216)Climate Action MCG (207)Multi-Modal Transportation MCG (200)Growth Management (194)Downtown Vitality OIO (170)Traffic Reduction (178)Survey closes on 12/1629