SR-200-006
e .-
~ City of
Santa Monica"
City Council Report
City Council Meeting: April 11 , 2006
Agenda Item: ~
To:
Mayor and City Council
From:
P. Lamont Ewell, City Manager
Subject:
Update on the City's Financial Status
Recommended Action
Council actions recommend in this report include:
1. Consider accepting the six Principles of Budgeting and Finance to guide the
development of the FY2006/07 Budget and direct staff to prepare a formal
resolution adopting these Principles during the adoption of the FY2006/07
Budget.
2. Defer appropriation of the $2.5 million in additional fund balance identified at mid-
year until the adoption of the FY2006/07 budget when all needs can be
considered equally.
3. Authorize a payment in the amount of $24,807 from the Council Contingency
account to Meals on Wheels West for relocation expenses.
4. Direct City staff to continue to work with the 18th Street Arts Center organization
to assist them in generating viable options in their efforts to develop their
property; however, we seek your concurrence on affirming that becoming an
"equity partner" with the organization is not something that the City will be
pursuing.
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Executive Summary
At the City Council meeting of February 14th Council adopted updated broad Community
Priorities to guide the budget preparation for FY 2006/07 and requested that the City
Manager report back with findings from a review of the overall financial status of the City
and respond to some issues raised during the Pubic Hearing. This report summarizes
the findings to date. Although non-general funded activities are briefly touched upon,
the primary focus of this report is on the General Fund.
Discussion
Backqround
With three months in the position of City Manager, a preliminary review of the financial
status of the City has been conducted. Santa Monica is a financially complex City that
provides a diverse variety of services. A more complete understanding on my part will
only be possible as we go through the budget process for FY2006/07.
To date, I have reviewed the information presented in the Mid-Term staff report
(2/14106), the working draft of the City's financial forecast of major funds, capital request
from departments for FY2006/07, the Unfunded 1 Under-Funded Capital Improvements
Projects list, and departmental preliminary budget increase requests for FY2006/07. I
have also had the opportunity to meet with our outside financial advisors regarding our
bond rating. And, we have received a great deal of feedback from the community
regarding their priorities for directing City funds.
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While I have concerns regarding the health of several enterprise and special revenue
funds, for the purposes of this report, J would like to concentrate my comments on the
General Fund since Council discussions largely focused on the use of these monies.
Future reports will highlight recommendations for the enterprise and special revenue
funds.
Five Year Forecast
As identified in the Mid-Term staff report, General Fund revenues are above adopted
budget levels by $5.5 million and new appropriations increased by $3.0 million. The
uncommitted $2.5 million are considered one-time funds. The projections for the
General Fund over the next five years at current service levels show annual shortfalls
beginning in FY08/09 as shown in the chart below. As we look at short-term funding
potential, we need to always take a long-term view of the City's financial condition.
General Fund
280.0
270.0 I
260.0
en 250.0 I
~
~
.5 240.0
I!!
.!!
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230.0
220.0
210.0
200.0
FY05/06 FY06/07 FY07/08 FY08/09 FY09/10
~. ..~. Expenditu~es I
...... Revenues
-_.-"----
FY10/11
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Overall, the growth in expenditures over time outpaces the growth in revenues.
Because the City forecast takes a conservative approach to both revenues and
expenditures, the potential future gap could be less than projected in the table above.
Operational Assessment
As part of my orientation to the City, I have been reviewing with the departments their
operational constraints regarding services and programs. Consistent with many other
municipalities during tight budget times reductions are made in a manner that has the
least impact to the public. None the less, budget reductions were made during the past
few years and programs continue to reflect the negative impact of those reductions
decisions.
For example, new facilities that came on-line during the economic downturn, were
budgeted at reduced funding levels for such activities as additional Police personnel at
Virginia Avenue Park, expanded operational hours at the Skate Park, additional jail staff
for the new Public Safety Facility, additional custodial support and security support for
several facilities, additional funds for the enhanced maintenance on the promenade and
continued implementation of the Plan Check Counter and increased Library staff have
not been added. This has necessitated a review of funding levels for these facilities
during the up coming budget period.
Another outstanding Issue is the need for additional space at City Hall. Many
departments do not have adequate working space while other departments have
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location issues that make efficiencies less than optimal. These and all other budget
requests for increases to operating line items will be seriously considered for funding
during the development of the Proposed Budget for FY2006/07 and an analysis of our
facilities space needs and a comprehensive plan will be formulated over the coming
months.
Some issues, such as the removal of graffiti throughout our community cannot wait until
budget to address. I have authorized staff to step up removal activities to offset the
increase in graffiti incidences. While stop-gap funding is being made available this year,
a more permanent solution will be required for next year.
I have concerns that while the City shows available funds at year-end FY2004/05 and
projected for FY2005/06, we have not considered all our basic service needs.
Therefore, it is essential that a true base level of services be established so that the
actual availability of General Fund monies is identified.
Deferred Maintenance I Infrastructure Replacement
The City has a mixed record on infrastructure replacement. Funding for computer
replacement, vehicle replacement have been on-going for some time. However, during
the lean years, replacement schedules were extended and a review of these schedules
needs to be conducted to ensure that additional operating cost are not occurring due to
slower replacement cycles.
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As with the computer and vehicle replacement programs, street resurfacing is another
capital program that is funded annually, but was also reduced during the economic
downturn. A substantial infusion of one-time funding is needed to "catch-up" on our
street resurfacing and reconstruction needs.
Facility maintenance and routine building systems replacement appears to have been
under funded for many years. Currently, repairs are done on an as-needed basis which
is reactive, not proactive. A plan needs to be developed to identify immediate needs,
but also provide ongoing maintenance and replacement schedule to ensure the long-
term viability of our facilities. The goal of the plan would be to allocate adequate
resources to properly maintain existing assets and plan for the replacement of assets at
the end of their useful life in order to avoid the unplanned and often excessive operating
expenses that occur when maintenance and replacement is deferred.
Capital Improvement Proqram Requests
CIP requests for funding FY2006/07 through FY2008/09 projects have been received
and the requests exceed the levels of expenditures projected in the financial forecast.
FY2006/07 General Fund requests total $30.5 million in Capital funding while planned
funding levels are $15.0 - $18.0 million. FY2007/08 requests total $30.2 with
programming levels at $14.0 - $17.0. As with the operating budget increase requests,
these CIP requests will need to be weighed with all other requests.
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Unfunded / Under-Funded CIP List
Two years ago, Council was presented with a list of unfunded CIP projects. While some
of these projects have received complete funding such as Airport Park, Virginia Avenue
Park, Fisher Lumber site acquisition and the Civic Center Parking Structure, many
others remain unfunded. The Breakwater, many Civic Center Specific Plan projects,
Senior Recreation Center Renovation project, Crescent Bay Park Rehabilitation and a
host of lower priority projects remain unfunded.
In addition, we have two Fire Stations (Fire Station 1 and Fire Station 3) that the Fire
Department is requesting structural evaluations of and depending on the findings, may
be candidates for replacement - also unfunded. A complete list of the capital needs will
be provided to you during the budget process.
Needs of Other Funds
The City maintains several enterprise funds that are subsidized annually: Cemetery,
Pier and Civic Auditorium. Other funds such as the Beach Fund are Special Revenue
Funds which will be impacted by decisions made regarding 415 PCH which could
increase the need for General Fund support to the Beach fund. Regulatory
requirements regarding water quality will most likely increase the demand for programs
currently provided by the Stormwater Fund and unless non-General Fund monies can
be identified, this fund also may require a subsidy. I am concerned that these funds are
not truly self-supporting. Subsequently, dollars that could be used to enhance other
critical services are used to subsidize these operating funds.
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Many of our "true" enterprise funds are requiring further analysis including the Solid
Waste Fund, presented in the study session on March 14th; the Water Fund, undergoing
a rate study; the Wastewater Funds with a declining fund balance; and the Big Blue Bus
fund which is experiencing declining subsidy revenues from the Los Angeles County
Metropolitan Transportation Authority.
We will continue to address these fund issues during our presentations to Council with
the FY2006/07 budget. However, it is important that you be aware of their declining
fiscal health now.
Community Priorities
The interests of the Santa Monica community are diverse, from biodiesel to
symphonies. The programs and projects expressed during the Community Priorities
Public Hearings were many and funding needs varied from relatively small to quite large
expenditures.
I believe that the updated broad Community Priorities adopted by Council on February
14 for FY2005/06 continue to cover the overall needs of Santa Monica. These
Community Priorities include:
. Address the impacts of homelessness on the community
. Enhance the quality of life, safety and community involvement of the residents of
the Pico neighborhood
. Ensure that the public receives timely and responsive service from all
departments and that the City's regulatory processes are fairly, efficiently and
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courteously administered with a high degree of predictability for customers
moving through a process
. Incorporate ways to achieve the goals of the sustainable City Plan into daily
activities and special projects
. Capitalize on Santa Monica's climate and community amenities to promote
"Active Living"
Two outstanding issues that Council asked staff to further explore following the close of
the public comments at the February 14th Council Meeting were emergency funding for
the Meals on Wheels Program and further study of the 18th Street Arts Complex
proposal:
Meals on Wheels West (MOWW)
In April 2005, MOWW was served a notice to vacate the church at 609 Arizona from
which they operated their meal delivery program. They have secured a new location
with a 10 year lease, with two five year options at 1823 Michigan (1st AME Church), but
the space required significant tenant improvements. The total cost of these
improvements was $50,592.73, of this $25,785.53 was paid for by a Rotary Club
International grant and in kind donations. MOWW seeking $24,807 re-pay their
operating reserves, which was used for this project.
The MOWW program provides a significant level of service to the residents of Santa
Monica. As of December 31, 2005, MOWW had served 272 Santa Monica residents,
eighty-five percent of the total program participation. In FY 2005-2006 City of Santa
Monica Community Development Program Grants will provide MOWW $116,482,
twenty-two percent of their annual budget.
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Alternatives:
1) Council could consider this request with the FY2006-07 Budget, while
considering request from other organizations.
2) Council could grant funds from its contingency account 01201.577850.
Current available account balance is $73,400. This is staff's recommended
approach.
18th Street Arts Center
18th Street Art Center is home to approximately 30% of the non-profit arts organizations
in Santa Monica. The Center owns the 1.25 acre parcel at 18th and Olympic that was
recently appraised for over $8 M. 18th Street currently faces two major problems, it has
a note due to the Center's founder and original owner of the property in the amount of
approximately $2M and its campus has substantial deferred maintenance needs. Over
the past two years, the City of Santa Monica has provided funding totaling $20,000 to
the Center to develop an organizational and site strategy. To date, $10,000 has been
expended.
On February 14th, in response to the Center's request, the City Council directed staff to
work with the Center to explore ways to re-finance the debt and/or redevelop the
property. A technical working group of city staff has been convened to review the
Center's facilities planning work completed to date. As requested by the Council, the
group developed a preliminary list of options.
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In terms of process and policy and given the amount of funding that the Center originally
requested, options must be considered in the context of (1) City goals and objectives;
(2) capital project priorities; (3) operating budget considerations; and (4) the
development of a cultural master plan, currently underway.
The options, identified by the technical working group, vary in scope and scale. They
include:
(a) Increase the current operating support provided to the Center to cover
increased interest on a refinanced loan.
(b) Assign City staff to provide technical assistance to the Center in pursuing the
appropriate development partner for the site
(c) Provide a grant to pay the cost of retaining a private project manager to help
them plan the redevelopment of the site.
(d) Support the Center in the issuance of tax exempt bonds, as a non-profit
entity, to assist the Center in developing the site.
(e) Buy a portion of the property and consider it for a future development.
(f) Partner with the Center to develop affordable housing on the site.
(g) Provide 'bridge financing' to payoff the existing note and provide technical
assistance to the organization in pursuing an appropriate development
partner for the site. The short-term loan would be repaid once a development
partner was in place.
(h) In return for an investment of 2M, become an equity partner with 18th Street in
the redevelopment of the entire site, jointly establish the nature of the mixed
use development at the site, and retain ownership of a portion of the project.
Although this is an option, I do not recommend that the City pursue it further
since the funding requirement is large and 18th Street Arts Center has specific
desires for the development of the site.
This is a complex issue that will require additional discussion and consideration by both
the City and the 18th Street Arts Center.
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Principals of BudQetinQ and Finance
Based on meetings with our Financial Advisors, during the upcoming Budget process, I
will be introducing and seeking your adoption of a formal Resolution the following
Budgeting and Finance principles that will assist in guiding the City in maintaining its
financial health. They are:
1. Ongoing expenditures should be supported by ongoing revenues. Consequently,
one-time revenues should not be used for ongoing expenditures on a continuous
basis. .
2. General Fund reserves should be maintained at a minimum of 10%
3. When capital projects are considered, all associated costs should be identified in
order to properly consider future financial impacts.
4. Each enterprise fund should reflect the true cost of operation, including direct and
indirect costs of services provided by the General Fund.
5. As a goal, activities that are supported by the user fees should be fully cost
recoverable.
6. Discretionary General Fund revenues should not be earmarked, thereby allowing
maximum flexibility in funding decisions on an annual basis.
While the City has included many of these Principles in its Adopted Budget document,
the review and formal resolution adoption will present a stronger commitment to
maintaining the City's financial health
With many large unfunded capital projects, debt financing may be a way to fund with
future dollars, today's projects. To determine the level of debt that the City can afford,
our Financial Advisors are also recommending that we update our Debt Capacity Study
as a tool for identification of financing options and presentation to bond rating agencies.
We will be seriously considering funding this study in next year's budget.
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Summary
The City's current fiscal status is quite stable; however, on the horizon there are many
issues that future budgets will need to address including:
. Ongoing revenue increases not keeping pace with ongoing expenditure
increases
. Operational funding needs
. Under funded capital replacement needs
. Unfunded new capital projects
. Increasing subsidies to "enterprise" funds and special revenue funds from the
General Fund.
. Financial policies and debt strategies
With the above in mind, I believe it to be more prudent for all funding requests
(community, Council and departmental) to be weighed against one another, since
requests always exceed resources available. The best time to do this is during the
budget process when reviewing the proposed budget for adoption. For this reason I
would recommend against appropriating any of the $2.5 million projected excess
revenue. It is more appropriate to consider its use as part of the upcoming budget
process. This prescribed time also gives all groups seeking consideration for additional
revenue the opportunity to be heard.
Forwarded to Council:
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