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HomeMy WebLinkAbout09/07/1993, 5 - STATE REVENUE REDUCTIONS IllllAl�lll�llllll��lp II MEETING DATE: MY II IIIIIIII Of � San LUIS OBISPO ITEM NUMBER: U COUNCIL AGENDA REPORT FROM: John Dunn, City Administrative Officer SUBJECT: STATE REVENUE REDUCTIONS CAO RECOMMENDATION Take no further action on the recently approved City budget at this time considering the fiscal impact on the City of State revenue reductions for 1993-94 and the City's current financial condition. DISCUSSION We learned approximately two months ago that the State's "take-away" of property taxes previously available to the City was going to be somewhat less than we had been anticipating over the last several months; $403,000 actual versus $500,000 earlier estimated. Given what has happened to us in each of the last three years, this was a little bit of good news for the City. Attached is a memorandum from the Director of Finance outlining the specifics of the State's revenue cuts to us, along with an overview of the uncertainties that continue to face us. In the way of background, this has been the most difficult budget years the City has faced, certainly in the post-World War H environment. For 1993-94, we made the unprecedented move of eliminating 30.6 of our 336 authorized regular positions, an almost 10% decrease of our City work force. These personnel cuts were from almost all departments, reducing staff'by up to 25% in two departments. These figures cannot be stated in financial terms alone. What we have been through as an organization has made an indelible imprint on our organization. It has also left an imprint on the services we provide. There is no way to make a personnel cut of this magnitude without affecting many of our services, although the cuts were made in an attempt to minimize negative service impacts on our citizens. However, the organization itself has been subjected to several different forms of pain in the last eight months. First, there was the pain of knowing a change and probable downsizing would be occurring, but not knowing at that time where the cuts would be made. This "fear of the unknown" affected virtually all the employees of the organization. Secondly, there was the pain of dealing with the need for making cutbacks, in every department, and having each department make their recommendations at two different levels as to where cuts would be made. Thirdly, there was the CAO's decision-making process, and on March 13 the City Council's, in having to choose where the cuts would be made. Fourthly, there was the pain of most of these 30 employees moving on to other jobs and other cities, and some of them having to be laid off. S-/ �►����ibi���IIIIIII�h ��b�U city of San LUIS OBISpo COUNCIL AGENDA REPORT After the experience that this organization has gone through this winter-spring-summer, I would like to be able to say that everything looks rosier and that the pain is over. In good conscience, I cannot say that. I can say that with the sacrifices and difficult decisions, the City is now on a course of fiscal solvency, which is an absolute responsibility of its elected and appointed officials. We have exercised great care in projecting our revenues and controlling our expenditures. The situation for the present seems to be under control. However, there is a great unknown for the future, and that is what the State will be doing to the cities, and to our City in. particular, in the years ahead. There is no authoritative source saying that the State's fiscal problems are over; indeed, the prognosis by the most knowledgeable parties is exactly the opposite, that the State has at least one more and possibly more very difficult years ahead. The State must continue to react to a reduction in defense expenditures, closing of military installations, out-migration of companies to other areas, continued population growth, unresolved legal and illegal immigration issues, increasing caseload in social welfare, decline in our educational expenditures relative to other states, increases in crime in our major urban areas, increases in gang activities and urban violence, and other shifts in population and economic patterns. There are those who believe that the fiscal crisis facing the State in the next year may be nearly of the same magnitude as this past year. We have heard more than one observer coming from discussion at the State capitol and reporting that "the word is that it was the counties this year, and that it will be the cities next year". However, in the wake of a slightly lesser property tax take-away, receipt of some one-time transportation monies, and the Governor/Legislature extension of the sales tax for six months, with the proceeds of the latter being devoted to public safety, there is a belief in some quarters that things are better than we earlier anticipated, and that some relief from or change to our earlier decision making can now be made. I and others have given a great deal of thought to this subject, and I have had many conversations with people both inside and outside the organization as to what we should do. I have also received detailed memorandums from the Police Chief and Fire Chief as well as two communications from the City Employees' Association. Additionally, other department heads have related incidents to me regarding the effects of the personnel reductions on their staffs and services. Despite my desire, and I am sure that of the Council, to grant some relief to a beleaguered organization, making major changes - restoring some of the previous cuts - would endanger the organization in the long-term in that we would not be able to respond to the probable circumstances of next year without making further cuts. It was the major premise of our approach this year that we were going to make those decisions, make those cuts in expenditures which would best position this organization for the present and the five-year future. It was our desire that we act once, decisively, in order to avoid the necessity of a long, slow, painful process of having to repeat making a smaller number of cuts each year. �,�H�►�ii�IIIIIIUIi����I�l My Of San L"IS OBISpO COUNCIL AGENDA REPORT Because the recent very difficult budget process is so fresh in our minds, there is a tendency to "look back" when considering the City's fiscal situation to see if there is an opportunity to restore something to "the way it was". Instead, we must be looking forward. While most of the discussion has been about personnel and services, because they are perceived as having the most immediate impact, I would like to restate a premise which all of us know. If a City neglects its resources/infrastructure/public facilities, its short-term financial success is illusory. It is only as we address the long-term capital facility needs of the City on a consistent, sustained basis that we are truly acting in our full capacity as stewards of the City, and our citizens' future. Over the last three years, the City has substantially reduced its investment in capital improvement projects, with the 1993-94 General Fund contribution to capital at 50% of its historic level. In essence, therefore, the City's capital improvement program offers little more than maintenance or replacement of existing facilities. Yet, there are a number of needs outlined in recently, or soon to be, approved plans. These include: • Laguna Lake Master Plan Downtown Physical Concept Plan Open Space Element • Housing Element • Circulation Element • Parks and Recreation Element • Bicycle Transportation Plan • Indoor Recreation Plan • Mission Plaza Expansion In addition, there are major programs that will need to be supported in order to implement the updated land use element. These programs are intended to address neighborhood and other priority community concerns. At the present time, we have no funds set aside to support these programs. There are a number of other areas which have not been supported in recent years because of the budget problems. As two examples, the art-in-public-places program is virtually non- existent, and the neighborhood traffic improvement program has been deferred. In summary, I believe that our paramount duty is to recreate the condition whereby the City is living within its available and projected means. This position demands that we prudently conserve and utilize what has been entrusted to US. s- 111111►I111111101111 city of san L,.4is OBISPO COUNCIL AGENDA REPORT ALTERNATIVES However, we do have to recognize that the State take-away was a bit less than anticipated, that we were given some one-time funding, and that the Governor and State Legislature did extend the sales tax, earmarking the money for public safety purposes. Therefore, I am giving the Council some alternative courses of action for consideration, listed in priority order: 1. Reinstate the Traffic Sergeant position. I have carefully reviewed the job description, the work activities, the calls/citations issued by this position, and have concluded that it is a direct service provider and helps meet the law enforcement needs of the community. 2. Utilize the $69,000 sales tax extension to address the projected $500,000 short-fall in the headquarters fire station site acquisition. The advantage of this approval is that we would be applying one-time money to a one-time project. 3. Authorize management negotiators to meet and confer with the General Employees Association to discuss the matters listed in their memoranda. 4. Restore a Police Officer position. The idea in taking this action would be to add another "on-the-street" law enforcement position. 5. Set aside some money ($25,000 estimated) for professional analysis of the City's law enforcement needs and Police Department capabilities, organization, restructuring, etc. 6. Re-examine capital improvement programs that were deleted and see if these projects are justified in order to meet critical public service needs or to properly implement community plans. I SUMMARY In conclusion, I want to thank the Council for your steadfastness in giving time and effort to the budget process this year, and for your ready and reasoned decision making. I also wish to thank the Management Team members for their help and advice on their departmental needs and on the City's fiscal situation. I would also like to reiterate my gratitude to the many people throughout the organization who were involved in putting this year's budget together and who were part of the difficult decision-making process. ATTACHMENT Memorandum from the Director of Finance outlining the specifics of the State's revenue reductions to the City MEMORANDUM August 30, 1993 TO: John Dunn, City Administrative Officer FROM: William C. Statler, Director of Finance SUBJECT: STATE REVENUE REDUCTIONS RECOMMENDATION Take no further action on the recently approved City budget at this time considering the fiscal impact on the City of state revenue reductions for 1993-94 and the uncertainties that continue to face us. DISCUSSION The purpose of this report is twofold: to discuss the fiscal impact of the State's revenue reductions on the City; and to discuss what actions - if any - the City should take at this time as a result of these reductions. What is the impact of the reductions on the City of San Luis Obispo? As a result of the State's adoption of its budget, $2.6 billion in property taxes will be shifted for educational purposes from the following levels of local government in 1993-94: AMOUNT PERCENT Counties $1,998,000,000 77% Cities 288,000,000 11 Special Districts 244,000,000 9 Redevelopment Agencies 65.000.000 3 TOTAL $2,595,000,000 100% Although the target of taking $2.6 billion from local government was established early in the State's budget process, a key concern - in addition to the more fundamental issue of whether any shift should occur at all - was how this reduction would be spread among various local agencies. A number of methodologies were developed and discussed, with impacts to us ranging from $300,000 to over $1.5 million annually. For example, a simple extrapolation from the $1.3 billion taken from local government in 1992-93 - which resulted in a loss to the City of $436,000 (9% of our property tax revenues) - would have resulted in a loss of about $900,000 in 1993-94 (adjusting for increased property tax revenues at 3.5%). The following is a summary of the three key features of the State's revenue reductions to cities and their impact on us: permanent property tax shift, "TD&P Roundabout", and extension of the 1/2 cent sales tax: J'� ■ Property Tax Shift. For cities, the permanent property tax shift to the "Educational Revenue Augmentation Fund" has been developed based on each city's proportionate share of the 1993-94 value of "state assistance payments" provided to cities under AB8 adopted in 1979. (Provided in Attachment A is brief overview of AB8 and what it was originally intended to do). Transcending the nuts and bolts of how these amounts were determined - and what philosophical basis might exist for the methodology chosen - the City will lose $403,000 this year and each succeeding year thereafter in property tax revenues as a result of the state revenue reductions to cities. Given the "order of magnitude" nature of our budget projections for state take-aways, this is very close to our estimate of $500,000. ■ TD&P Roundabout. We will receive a one-time offset in 1993-94 of approximately $126,000 from what has been labeled the "TP&D Roundabout". Without going into a lot of detail, this is simply an effort on the State's part to mitigate the fust year impact of their cut. Provided in Attachment B is a memorandum from the Public Works Director describing the Transportation Planning and Development Account, and the potential impact of shifting $90 million in these funds - on a one-time basis - to cities. As noted in the memorandum from the Public Works Director, this "roundabout" may simply result in there being $126,000 less available funding for transportation programs that might have been allocated to us. ■ Half Cent Sales Tax Extension. If the 1/2 cent sales tax extension is approved Statewide, it is estimated that our share - which must be allocated for "public safety" purposes (although exactly what this means is not clear since there are no "maintenance of effort" requirements) - will be $139,000 annually. The amount allocated to cities is not based on point of sale, but a methodology that again relies on AB8 apportionment factors. It is our understanding that if the 1/2 cent sales tax extension is not approved, we would still be eligible for six months of the revenue from the extension already approved by the State through December 31, 1993, for a one-time revenue in 1993-94 of about $69,000. In summary, although there will be some relief in 1993-94 from the TP&D roundabout and six month extension of the sales tax, the only "sure" thing about the State cuts to us is that we will lose about $400,000 annually, which is essentially consistent with our 1993-95 budget estimates. What action should we take at this time? Although state budget issues as they affect us for 1993-94 appear to be resolved, there are a number of uncertainties that continue to face us. Based on the following factors, it is recommended that any consideration of changes to the operating or capital budget be made at a later time: ■ End of Year Fund Balances. Our projected financial condition at the end of 1992-93 was a critical factor in our budget balancing strategy. Audited financial statements confirming these estimates will be available at the mid-year budget review. ■ Financing of Headquarters Fire Station Site. Several key issues remain outstanding regarding the purchase and financing of the Southern California Gas Company site for the Headquarters Fire Station. These should be resolved by mid-year. ■ Sales Tax Revenue Trends. The 1993-95 Financial Plan assumed very modest levels of growth in sales tax revenues. Although recent trends are encouraging, no authoritative sources are projecting any significant increases in retail sales activity over the next twelve months. By mid-year, we should have a better picture of what economic recovery looks like for our State and region. ■ Property Tax Revenues. Initial information from the County indicates that our 3.5% growth projection for 1993-94 is on target. However, the County has received a number of requests for reassessment, which could result in a significant downward revision in property tax revenues estimates. ■ Half-Cent Sales Tax Extension. The reliability of revenues from the half-cent sales tax extension won't be known until the November election. It should be noted that preliminary polls indicate that the current outlook for passage is not favorable. ■ Alternative Method of Property Tax Collections. As approved by the Council in July of 1993, implementing the alternative method of property tax allocations could result in a one-time source of funding to the City of about $500,000. The County's final determination on whether to go forward with this option, and how much it will actually mean to us, will be known to us by mid-year. ■ State's Continuing Fiscal Condition. By all accounts, the State's fiscal crisis is not over, and another budget shortfall of significant dimensions will in all probability be facing the State next Spring. The probable impact is that there will be another threatened and actual revenue take-away from cities next year, particularly since cities were viewed as getting off relatively light this year as compared to counties. The latest word we hear from Sacramento sources is that "this year it was the counties, next year it's the cities". In summary, although we now know the impact of State revenue reductions on us for 1993- 94, a number of uncertainties continue to face us as discussed above. Further, we should remember that this represents the third year in a row that the State has taken funding away from us in the $500,000 range, leaving us with almost $1.5 million in reduced revenues in 1993-94 as a result. Although 1993-94 may be slightly brighter than initially projected, we have to consider the further cuts the State may make in 1994-95. Based on these factors, it is recommended that any consideration of changes to the 1993-94 operating and capital budget be made at a later time, when we will have better information upon which to base our decision-making. ATTACHMENTS A. Memorandum on AB Background B. Memorandum on affects of TP&D Roundabout S-! i Attachment MEMORANDUM May 10, 1993 TO: John Dunn, City Administrative Officer FROM: William C. Statler, Director of Financ SUBJECT: AB 8 BACKGROUND In response to your request, the purpose of this memorandum is to provide you with a brief background on AB 8 adopted by the State Legislature in 1979: Reason for AB 8 AB 8 was adopted in the aftermath of Proposition 13 in order to set the groundrules for how revenues generated from resulting 1% general property tax levy would be allocated between taxing agencies. Prior to Proposition 13, this was not a problem, as each agency set its own rate, and the resulting total was simply the sum of each agency's rate. By establishing the 1% limit, Proposition 13 brought about the need to fundamentally alter the way that property tax revenues would be allocated. Issues addressed by AB 8 In the interim period between the passage of Proposition 13 and AB 8, there were a number of issues regarding allocation of the 1% levy that were addressed on an "ad hoc" basis. AB 8 was intended to be a "permanent" solution for these issues, which included: ■ How should revenue allocations between local taxing agencies be determined? ■ How should 'bail-out" funds which were made available in the immediate aftermath of Proposition 13 be reflected in these allocations? ■ How can reliance on local property taxes be reduced for local schools in order to provide for a more equitable, statewide system? ■ How should "growth" in the property tax base be allocated? ■ How will special district revenues be allocated, with a distinction between "dependent" and "independent" districts? What changes are being proposed? Although no specifics regarding the Governor's proposal to further shift $2.6 billion in property tax revenues have been presented, it is reasonable to assume that it simply represents another redistribution of the 1% levy between local agencies. This is what happened last year when the City lost $430,000 in property tax revenues: our share of the S� levy (previously determined in 1979 by AB 8) - as well as the portion going to counties and special districts - was reduced, and shifted to schools. In turn, the State reduced funding to schools by the amount of this shift. Although attempts have been made to provide a philosophical basis for these shifts (eliminating the "bailout" component of AB 8, for example), these efforts are disingenious, and not necessary. The reality is that the State governs the administration of property revenues under the 1% levy limit, including its apportionment among local agencies, and they can change it however and as often as they want - it's their prerogative. Logically, this could ultimately lead to eliminating any property tax allocations to cities, and no apologies would really be necessary. Of course, this extends to any of our other traditional municipal revenue sources (sales tax, for example): as creatures of the State, we can ultimately only have the revenue sources it allows us, and none of them are written in stone. As a concluding note, I find it interesting that even the Speaker refers to AB 8 as legislation "which provided for a permanent method of allocating proceeds from the 1% property tax rate". We now know definitively how long permanently is: about 12 years. If you have any further questions on the specifics of AB 8, or require additional information, , please do not hesitate to contact me. s-9 Attachment MEMORANDUM June 30, 1 -993 TO: John Dunn FROM: Mike McCluskey SUBJECT: Effect of TP&D Bailout SB 1135 will take $130 million out of the state's TP&D account and transfer it to the Department of Motor Vehicles. DMV will then transfer $130 million of motor vehicle in-lieu fees to cities and counties as a one-time bailout. The amount transferred to the City of San Luis Obispo will be $126,000. The raid on the TP&D account will reduce Transit Capital Improvemment (TCI) and State Transit Assistance (STA) grants available from the state in 1993/94, but the exact amount TCI and STA reductions for each local jurisdiction is unknown. The City has programmed $125,000 in TCI grants for two CIP projects: Bus Rehabilitation ($105,000 in 1992/93) and Transit Transfer Center ($20,000 in 1993/94). With existing executed grant agreements, this grant revenue should be secure. SLOCOG uses the local STA allocation to pay for a portion of the Regional Transit Authority operating costs. If this allocation were reduced, SLOCOG would use TDA money instead, which would in turn reduce the City's TDA allocation by as much as $40,000. As mentioned in previous memos, the transit operations will run an annual deficit over the next two years, but the transit fund balance eligible for operations will cover these deficits until the City can figure out how to close the ongoing gap. If the City's TDA allocation were reduced, during 1994/95 transit operations would prematurely exhaust the fund balance, and the City would have to cut back existing service levels. I recommend leaving the City's $126,000 TP&D bailout unappropriated for the time being. Further, I recommend a policy by which the general fund would make good any shortfalls of budgeted TDA revenue through 1994/95, using the $126,000 bailout. G:\WP6 11TPSD San Luis Coastal Uni fwd School District 1 4 9 9 SAN LUIS R I E SAN LUIS OBISPO, CA 93401-3099 { TELEPHONE (805) 543-2010 DATE MEETIN y- AGENDA �- - ITEM # September 7, 1993 HAND DELIVERED IrCOUNCIL ❑ CDD DIR pPfAO FIN DIR City of San Luis Obispo CACAO ❑ FIRE CHIEF The Honorable Mayor Peg Pinard &t TORNEY ❑ PW DIR and Council Members CLERKIORIG ❑ POLICE CHF 990 Palm Street ❑ MGMT TEAM ❑ REG DIR San Luis Obispo, CA 93403-$100 ❑ C READ FILE [3 UTIL DIR Qr A-140 ❑ PERS DIR - Dear Mayor Pinard and Council Members: First I would like to express my appreciation for the open-mindedness of the City of San Luis Obispo in working jointly with the San Luis Coastal USD in considering the development of a joint powers agreement to facilitate crossing guard services to the children of our community. During the difficult budget times we are encountering, I believe that this can be the forerunner of other joint powers agreements in which win-win situations could be derived from problems that we will all encounter. The Administration of the San Luis Coastal Unified School District strongly supports the continuation of the traffic supervisor position to oversee and maintain the authority of crossing guards within the City of San Luis Obispo. We recognize that we will bear some of the fiscal responsibilities associated with the Crossing Guard Program but feel that the program has been well managed and carries with it the power of authority of the law enforcement agency within our city boundaries. This status for crossing guards is an important deterrent to those who might otherwise not be respectful of the authority that the position requires. The safety of the crossing guards and the children are enhanced by this kind of support. We stand ready to work with you in developing a joint powers agreement to facilitate the program and are confident you will give serious consideration to continuation of the traffic supervisor position. Thank you for your cooperation in this matter. Sincerely yours, rczee�e C� Edwin Denton, Ed.D. SEP 7 1993 Superintendent SANCLUIS OBISPo, CA ha District Superintendent,EDWIN DENTON,Ed.D.