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sr-052212-8bCity of City Council Report Santa Monica° City Council Meeting: May 22, 2012 Agenda Item: 2 L3 To: Mayor and City Council From: Rod Gould, City Manager Subject: Master Facilities Use Agreement and Related Supplemental Agreements with the Santa Monica - Malibu Unified School District Recommended Action Staff recommends that the City Council: 1. Review and approve the recommendations of the Adjustment Conference Committee; 2. Authorize the City Manager to negotiate and execute a Master Facilities Use Agreement and related supplemental agreements with the Santa Monica - Malibu Unified School District for an initial term of ten years (ending June 30, 2022). Executive Summary The current five year Master Facilities Use Agreement calls for an annual adjustment conference in January 2012 to assess the state of the community use of District facilities, the fiscal status of the City and the School District, and whether to recommend that the Agreement and related supplemental agreements be extended for an additional two year period through June 2014. Officials and staff of the City and School District met over the last five months to review each entity's fiscal conditions and budgetary challenges, including the challenges facing each as a result of the economic downturn, State budget reductions, and the dissolution of redevelopment agencies in California. In an effort to provide more financial certainty to the School District over a longer timeframe and to provide the City and community with access to playfields, recreational facilities, and buildings including the expansion of hours at Lincoln Middle School field to include evenings upon the addition of field lights and synthetic turf and programming of the Lincoln Middle School swimming pool for community use. The Committee recommends: • Entering into a new Master Facilities Use Agreement and related supplemental agreements for an initial term of 10 years through June 30, 2022, an option to extend for an additional five years, an annual FY 20012 -13 payment of $8,120,245 and adjusting that amount by CPI with a minimum adjustment of 2% and a maximum adjustment of 4 %, per the terms of the Agreement. 1 • Providing three years' advance notice of nonrenewal prior to expiration of the term in which the City or School District determines that it cannot responsibly and prudently renew the Agreement. • Convening an adjustment conference each January during the term of the Agreement to discuss any additional adjustments in payment upward or downward by a maximum of $1,000,000 or holding the annual payment constant. Adjustments would be based on the value to the City of use of the District's facilities and the City's ability to provide the School District with additional compensation for the use of District properties. • That the City and School District continue to utilize a methodology in reviewing the growth of the City's "Big 8" revenues that looks backwards over the past two fiscal years but also looks forward to the City's projected revenues and expenditures to allow for the consideration of the City's fiscal status, including projected revenues and expenditures. • That the School District includes and clearly acknowledges annual payments made by the City in its annual budget as a separate income line item. • That the School District continues to maintain the Special Education District Advisory Committee ( SEDAC) or similar public committee. SEDAC or its equivalent shall review the District's special education policies and programs, make recommendations, and report to the Board of Education. The Board of Education shall hold a minimum of two semi - annual Board meetings on special education policies and programs. Changes to policies and programs shall be considered for approval by the Board at a Board meeting. The current annual payment to the School District is $7,953,227. Approval of staff's recommendations would adjust the annual amount by CPI (2.1 %) for a total payment of $8,120,245 in FY 2012 -13. Future adjustment conferences would be convened to discuss any additional adjustments in payment based on the City's ability to provide the District with additional compensation for use of District facilities. The new amount is reflected in the FY 2012 -13 Proposed Budget changes. Council would formally appropriate funds with the FY 2012 -13 budget adoption on June 12, 2012. Background The City and the School District share mutual goals in assisting youth to become productive members of society and support each other's efforts in that regard. Many of the City's projects and programs for children, youth and their families, and certain E activities provided by Santa Monica youth - serving non - profit organizations, take place at public parks, playgrounds, play fields, and other City -owned recreational facilities. However, the City's playgrounds, play fields, and recreational facilities are limited in size and are not sufficient to accommodate all of the current recreational needs of the community's children and youth and their families. Opportunities to create new parks and recreational facilities are limited because the City's total land area is small and the City is fully built -out. Additionally, land values are very high within the City and are rising. The School District owns and operates school sites within the City which include playgrounds, play fields, recreational facilities, and buildings which are under - utilized during non - school hours. The purpose of the Master Facilities Use Agreement is to allow the City and the community to utilize those District recreational facilities to meet the growing demand for space that existing City facilities cannot support. Council approved a five -year Master Facilities Use Agreement and related supplemental agreements on April 12, 2005. The Agreement provides unrestricted revenue to the School District in return for use of District facilities. The School District has utilized City funds to support the District's goal to promote educational excellence and extraordinary achievement for all students while simultaneously closing the achievement gap. The Agreement has two renewal options that extend the agreement to June 30, 2014. On April 7, 2009, Council approved exercising the first renewal option by amending and extending the Agreement by three years through June 2012. Under the amended Agreement, both parties are required to prepare annual reports on the status of the Agreement. Additionally, the School District must maintain the Special Education District Advisory Committee (SEDAC) or similar public committee to review the School District's special education policies and program, make recommendations, and report to the Board of Education. The Board of Education 'must hold a minimum of two semi- annual Board meetings on special education policies and programs. 3 The City pays the School District an annual base payment of $6.0 million, which has been adjusted each year per the terms of the Agreement and totaled $7,953,227 in FY 2011 -12. This payment is in addition to the funds contributed by the City for programs and services it provides at District school sites, which totaled approximately $2.8 million in FY 2011 -12 and for which the City anticipates receiving $854,742 in fee revenue. In FY 2011 -12, the City provided approximately $37 million in school -based and community -based youth programs, and provided the School District with $5.7 million in revenue generated from the half cent transaction and use tax approved by Santa Monica voters in November 2010. The Master Facilities Use Agreement calls for an adjustment conference to be held each January to discuss additional payment adjustments based on the value that the use of the District's facilities has to the City, and the City's ability to provide the School District with additional compensation. The Adjustment Conference Committee convened its meeting on February 7, 2012. Adjustment conference participants included Mayor Richard Bloom, Mayor Pro Tempore Gleam Davis, School Board President Ben Allen, School Board Vice President Laurie Lieberman, City Manager Rod Gould, School District Superintendent Sandra Lyon, Assistant City Manager Elaine Polachek, City Finance Director Gigi Decavalles- Hughes, and School District Finance Director Janece Maez. Discussion Fiscal Conditions As part of its charge, the Committee discussed the budgetary and fiscal conditions of each organization, including the challenges facing each as a result of the economic downturn, State budget reductions, and the dissolution of redevelopment agencies. As of June 21, 2011, taking into consideration the budget as adopted and assumptions 0 that reflected a struggling national economy, slight or no growth from several of the City's major tax sources, the State budget crisis, deep losses in pension fund investment holdings resulting in increased rates, increasing health insurance rates, and a continuation of the current compensation structure, the City's five year forecast indicated that the General Fund would experience a structural deficit in FY 2012 -13. To prevent a future deficit, during the summer and fall, staff implemented a number of cost saving measures that would save approximately $10 million over the five year term. Additionally, several key areas of the local economy grew faster than anticipated, resulting in an improved financial outlook for the City. Among the indicators is the transaction and use tax, or Measure Y, which was approved by voters in November 2010 and was anticipated to bring $11.4 million in new revenue to the City, half of which would be provided to the School District per Measure YY, a non - binding measure solidly approved by voters. The changes pushed the deficit to FY 2015 -16 and shrank it to $100,000. However, various factors are threatening to bring the General Fund deficit ever closer. Staff continues to exercise maximum levels of caution during this time of extreme upheaval for redevelopment in Santa Monica and in California. Redevelopment agencies (RDAs) were dissolved on February 1, 2012, following the California Supreme Court's December 29, 2011 decision in the case of California Redevelopment Association et al v. Matosantos et al. The Successor Agency of the Santa Monica Redevelopment Agency is now tasked with making payments on enforceable obligations approved by an Oversight Board and the State Department of Finance. At this time, it is unknown whether all of the Successor Agency's obligations will be approved by these bodies. Additionally, the State Controller's Office has yet to validate certain asset transfers that were made to the City from the RDA. Unfavorable decisions related to these assets and obligations could have a very significant effect on the City's revenues and assets. Staff will not have a full understanding of the situation until at least the end of the calendar year. In FY 2011 -12, staff anticipates that the 5 General Fund will be required to cover over $1.0 million for staff costs and services previously funded with redevelopment funds. In FY 2012 -13, the General Fund will no longer receive $4.6 million in reimbursements from the Successor Agency for thirty staff and accompanying redevelopment administrative costs. In March 2012, the CALPERS Board voted to decrease the discount rate of the CALPERS investment portfolio to better reflect its low rate of return. This will result in a significant increase in employer contribution rates beginning in FY 2013 -14, which will ultimately increase costs for General Fund employees by as much as $2.8 million by FY 2014 -15. It is anticipated that PIERS contributions may be subject to additional increases in FY 2015 -16 as they are further adjusted to reflect that rate of return. In addition to State - driven changes, changes at the federal level will also negatively impact the General Fund. In FY 2012 -13, the City will receive $1.23 million less in CDBG, HOME and Section 8 grant funds, and will be required to absorb administrative and housing- assistance costs that were previously funded with these grants. Given current projections, and at current levels of spending, the City estimates a potential budget shortfall of over $3.6 million in FY 2014 -15 and $4.6 million in FY 2015- 16. The School District is also facing significant reductions in revenue as a result of State budget cuts. The School District receives 71% of its revenue from the State and about 5% of its revenue from the federal government. The School District is projecting operating deficits of $9.7 million to $10.6 million per year over each of the next four years in the absence of additional revenue and /or expenditure reductions. The Governor's 2012 -13 budget eliminated approximately $2.2 million in COLA increases and $800,000 in transportation funding from the School District's revenue limit funding - a loss of approximately $3 million. The School District has identified a number of proposals to close their deficit, including expenditure reductions of $3 million in the next 0 fiscal year and additional reductions in each of the next three fiscal years. The Board of Education preliminarily discussed reducing expenditure cuts for FY 2012 -13 based largely on anticipated increases over budgeted Measure YY revenues and approved increasing enrollment from permit students. A significant portion of these deficits are likely to be reduced if the Governor's tax measure, or another equivalent measure passes in November; however, the School District cannot budget based on the assumption that this will happen. Committee Recommendations The Adjustment Committee recognized that the community's desire for and commitment to excellent public schools is balanced with its expectations for a wide range of municipal services and programs as well as a safe and well- maintained City infrastructure. Accomplishing both goals will be especially challenging given the pace of the economic recovery, the loss of redevelopment funds, the State's budget crisis, and the need for both organizations to have revenue certainty. Term: Under the current Agreement, the School District and the City have the option to extend the Master Facilities Agreement to 2014, after which it expires. However, a two year extension does not correspond with the School District's budget reporting mandates, which require the submittal of three year revenue and expenditure projections. The School District desires a longer term agreement that would provide more revenue certainty for forecasting while providing the City and community with longer -term access to District playfields, recreational facilities, and buildings. In consideration of a longer term, the School District would allow for expanded use of Lincoln Middle School's playfield after school hours to include evenings at such time as synthetic turf and field lights are installed. These improvements are being considered as add - alternates by the School District as part of the Measure BB project. Additionally, increased access to the Lincoln swimming pool for City -run lap swimming, swim lessons, or other aquatic activities would be made available during non - school hours. The availability of the swimming pool for community use is particularly desirable as the ri City's Swim Center pools are often at capacity for lap swimming and there are typically waiting lists for swim lessons. Contingent upon approval of the proposed Agreement, the City and District would enter into a Lincoln Middle School Supplemental Facilities Use Agreement ( "Supplemental Use Agreement ") which would set forth details related to time periods for use of the facilities at Lincoln Middle School. The Supplemental Use Agreement would govern, among other things, program scheduling, maintenance, staffing, monitoring, permitting, priorities for use, the setting and charging of applicable permit fees (with fees set at an amount not to exceed the costs of administering the permits), and all other administrative and operational aspects of the City's use of the pool and field. Revenues and expenditures associated with Lincoln Middle School pool and field community use would be included in future City operating budgets. The School District proposed the same term as the Santa Monica High School Program Agreement approved by Council on May 26, 2011 (Staff Report and Supplemental Report). This agreement provided the School District with 50 percent of the revenue generated by the half percent transaction and use tax approved by Measure Y and YY in exchange for City and community use of Santa Monica High School recreation facilities. This agreement had an initial term of 10 years with additional 10 year term extensions by mutual agreement. The City's typical agreement term is five years with several one -year options. Staff was able to recommend a longer term for the High School Program Agreement as it only committed future revenues and not expenditures to the School District. For the Master Facilities Use Agreement, the proposed term length of 10 years with an option to extend for an additional five years, while longer than most City contracts, strikes a balance between providing budget certainty for the School District, committing future Councils to expenditure obligations, and allowing expanded public access to school recreational facilities and buildings. 0 While it is difficult to look forward 10 years, the City regularly plans five years in advance through financial status updates. The five year projections enable staff to adjust spending and revenue generation in time to maintain necessary services at their most effective levels. The Master Facilities Use Agreement payment is included in the City's projection as a necessary expenditure to promote educational excellence and extraordinary achievement for all students and provide needed playgrounds, play fields, and recreational facilities and buildings to meet the growing demand for space that existing City facilities cannot support. Conservative projections determine whether a structural deficit might occur, and staff adjusts accordingly. Such an adjustment was performed successfully this fiscal year, with changes in MOU agreements that now require all employees to contribute to PIERS and medical insurance, the use of reserves to spend down unfunded PIERS liability, and other adjustments that decreased General Fund spending by $10 million over five years. Staff will make the necessary adjustments to eliminate the deficits projected in FY 2014 -16 when developing the FY 2013 -15 biennial budget. With this in mind, the Adjustment Committee recommends entering into a new Master Facilities Use Agreement and related supplemental agreements for an initial term of 10 years through June 30, 2022, with an option to extend for an additional five years. If the City or District determines that it cannot responsibly and prudently renew this Agreement, three years' advance written notice of nonrenewal shall be provided prior to the expiration of the term. Revenue Performance and Payment Adiustments: The current Agreement calls for an adjustment conference to be convened in January to discuss any additional adjustments in payment based on the value to the City of its use of the District's facilities, and the City's ability to provide the District with additional funding. In addition to the annual CPI February adjustment of a minimum of 2% and a maximum of 4 %, eight of the City's General Fund revenue sources are evaluated as a basis for recommending adjustments 9 to the City's base payment to the School District. The "Big Eight" revenue sources are property tax, sales tax, utility user tax, transient occupancy tax, business license tax, real property transfer tax, parking facilities tax, and fines /forfeitures. The Agreement specifies two conditions whereby the adjustment conference will discuss adjusting the annual payment. The first condition is whether the growth of these revenues for the two previous fiscal years exceeds 4 %, and the second test is whether the growth of these revenues exceeds CPI by 1.25% in each of the two fiscal years. If these conditions are met, the Adjustment Conference Committee will discuss adjusting the annual payment by an additional % of one percent of the average of the actual "Big Eight" revenues for the two previous fiscal year period to a maximum of $1 million. In addition to looking backwards over the past two fiscal years, the Agreement looks forward to the City's projected revenues and expenditures to allow for consideration of the City's fiscal status, including projected revenues and expenditures. This exercise will be supported by the City's six -month updates of financial projections. The Adjustment Committee recommends retaining the same revenue performance and payment adjustment provisions in the proposed Master Facilities Use Agreement. Accountability: Both the City and the School District agree that it is in the best interest of the community if the benefits of the Agreement as well as the financial status of the two organizations continue to be well understood. And while both organizations acknowledge and agree that the decisions on use of the City's payments are best left to the discretion of the Board of Education, a Master Facilities Use Agreement will continue to call for School District accountability to the community. To that end, the Adjustment Committee recommends that the School District continue to include and clearly acknowledge annual payments made by the City in its annual budget as a separate line item. Further, the School District would continue to maintain the Special Education District Advisory Committee (SEDAC) or similar public 10 committee. SEDAC or its equivalent shall review the District's special education policies and programs, make recommendations, and report to the Board of Education. The Board of Education shall hold a minimum of two semi - annual Board meetings on special education policies and programs. Changes to policies and programs shall be considered for approval by the Board at a Board meeting. Financial Impacts & Budget Actions The current annual payment to the School District is $7,953,227. Approval of staff's recommendations would adjust the annual amount by CPI (2.1 %) for a total payment of $8,120,245 in FY 2012 -13. Future adjustment conferences will be convened to discuss any additional adjustments in payment based on the City's ability to provide the District with additional compensation for use of District facilities. The new amount is reflected in the FY 2012 -13 Proposed Budget changes shown in Item 8A of tonight's Council Agenda. Council would formally appropriate funds with the FY 2012 -13 budget adoption on June 12, 2012. Prepared by: Elaine Polachek, Assistant City Manager Gigi Decavalles- Hughes, Director of Finance Approved By: Forwarded to City Council: Rod Gould Rod Gould City Manager City Manager 11 Reference Contract No. 9588 (CCS).