TO:
Honorable Mayor and Members of the City Council
THROUGH:
Mark Danaj, City Manager
FROM:
Bruce Moe, Finance Director
Raul Saenz, Interim Public Works Director
SUBJECT:Title
Review of Potential Revenue Enhancement Options; Status Report on Fire Station #2, Municipal Pool and Parking Structure/City Hall Feasibility Studies; Report on Water and Wastewater Utility Rate Studies (Finance Director Moe/Public Works Director Saenz).
DISCUSS AND PROVIDE DIRECTION
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Recommended Action
RECOMMENDATION:
Staff recommends that the City Council: a) discuss various options available to enhance revenues in order to fund Storm Water, Street Lighting and various capital improvements; b) receive a status report regarding Fire Station #2, municipal pool and parking structure/new City Hall feasibility studies; c) receive a report on water and wastewater utility rate studies, and d) provide direction on whether or not to continue with the capital project feasibility studies, and with polling and public outreach related to ballot revenue measures.
Body
EXECUTIVE SUMMARY:
This report draws together fiscal discussions over the past several years ranging from Storm Water and Street Lighting/Landscape District subsidies and funding, to capital projects and utility rates. The purpose is to provide the City Council with a refresher on past discussions, and to seek direction on the approaches to be undertaken in addressing those unfunded needs. Funding sources for those needs range from fees and assessments to increasing existing taxes, or implementing entirely new tax measures. Each option includes a public approval process described in the report. Past staff reports and relevant materials are provided as a basis for review and discussion.
FISCAL IMPLICATIONS:
The City has unmet funding needs which ultimately may require additional revenues to provide sufficient resources to satisfy those needs. For example, the City currently subsidizes Storm Water and Street Lighting and Landscaping District activities. Over the next five years, those subsidies, if no new revenues are generated, are expected to total approximately $6.5 million, which reduces funds available for General Fund purposes including police, fire and paramedics, as well as general non-enterprise capital improvement projects.
Additionally, there is currently not a regular funding stream for non-enterprise capital projects such as the replacement of Fire Station #2, a municipal pool and additional downtown parking/City Hall replacement. Without such funding sources, projects must rely primarily on year-end General Fund surpluses, which are subject to fluctuation based fiscal performance, leaving capital projects as an afterthought to operations.
Revenue enhancement options that may be used to address these unfunded needs are discussed within this report.
BACKGROUND:
At the February 2, 2016 City Council meeting, City Council authorized funds for a feasibility study and revenue polling for three high priority projects: Fire Station #2, a municipal pool and additional downtown parking/replacement of City Hall. Separately, City Council also requested a report on various revenue enhancement options that might be considered in an effort to address unfunded needs including Storm Water, Street Lighting and Capital Improvements (such as Fire Station #2 replacement).
DISCUSSION:
Over the past few years, City Council has discussed a number of revenue enhancements in order to address various needs. These include storm water fees, street lighting and landscaping district assessments, transient occupancy taxes, and a sales transaction tax. Adjustments/implementation of these revenues requires various levels of voter approval in order to enact.
Storm Water and Street Lighting
The initial revenue discussions centered on repairing the underfunding of Storm Water and Street Lighting/Landscape District activities which have resulted in General Fund subsidies estimated to be $5 million for both activities over the coming five years. In 2015, staff presented preliminary studies, options and survey results for increased Storm Water and Street Lighting fees and assessments (Attachments #1 - #5). Increases in both of these existing revenue sources are needed since costs for these activities exceed existing revenues, which have remained fixed since 1996. The study performed by Harris and Associates determined that the annual Storm Water fee would need to be increased from a typical charge of $19 to $192, and the Street Lighting assessments would need to be increased from $17 to $39 (standard lighting) in order to fully fund these activities without continued General Fund subsidies.
In public opinion polling on these topics, neither Storm Water or Street Lighting and Landscaping garnered the majority required for passage of the full fees and assessments. Property owner support for the Street Lighting and Landscaping measure, in particular, was quite low. Even when the proposed assessment was reduced to 60% of the requirement, support never eclipsed 38% once the weighted votes were factored in.
Support was stronger for the Storm Water fee (reaching 44% at 60% of the required fee, but it’s clear that for a measure to have a reasonable chance of success a more modest fee (e.g., $35 to $49 per year for the typical property) would be required, along with a number of other conditions spelled out in the report (clear support from the City Council, effective public education, a well-organized independent campaign, etc.).
It is clear that without new sufficient revenues to support the Storm Water and Street Lighting activities, the General Fund will continue to be the primary source of funding. This syphons moneys from mission critical operations in the General Fund including Police, Fire, Paramedics, Building and Planning, Parks and Recreation, Code Enforcement and general governmental activities. Further, as the City Council looks for funding sources to address capital projects, this subsidy may obstruct those goals.
Given the survey results on Storm Water and Street Lighting, City Council discussed other possible revenue enhancements including an increase in the Transient Occupancy Tax, implementation of a Utility User Tax, and creation of a Sales Transaction Tax. Those are discussed below:
Other Potential Revenues
Transient Occupancy Tax (TOT)
The City currently collects a 10% TOT on all hotel and motel room rentals. The City allocates fifteen percent of the hotel and motel TOT to the City’s Capital Improvement Project (CIP) fund for debt service on the Police/Fire facility and to fund general non-enterprise or Special Revenue fund improvements. The balance is deposited in the General Fund. The TOT for FY 2016-2017 is projected to generate $5.2 million. As a result, each 1% increase in the TOT rate would be expected to generate $520,000.
Attachment #6 includes a survey of TOT and UUT rates of surrounding cities. Other agencies’ TOT rates range from 10% in Hermosa Beach to 14% in Santa Monica, Beverly Hills, Inglewood and Los Angeles (these rates exclude any tourism or hotel improvement district fees).
Changes to the TOT require a vote by the electorate. If the funds will be used for general purposes then a simple majority is required for passage. If the funds are to be dedicated to a particular purpose, then a super majority (2/3rds) approval is required.
Utility User Tax (UUT)
While the City of Manhattan Beach does not currently have this tax, it is common for cities to impose (with voter approval) a tax on the use of utilities. These typically include cable television, telephone service, natural gas, electricity, water, sewer, etc.
Attachment #6 includes the UUT rates for other communities, which range from 0% to 10% depending upon the utility being taxed. The City of Beverly Hills does not impose or collect the tax. The other cities listed range from 2% to 10%.
A preliminary analysis of a UUT in Manhattan Beach indicates potential annual revenue of approximately $825,000 from each 1% if charged on the aforementioned services (with the exception of telephone services for which we have no current data on revenues generated by the carriers). Imposing a UUT requires a vote of the electorate. If the funds will be used for general purposes then a simple majority is required for passage. If the funds are to be dedicated to a particular purpose, then a super majority (2/3rds) approval is required.
Sales Transaction Tax (STT)
An increasingly popular method for cities to generate revenue is through an increase in the local sales tax (a transaction tax). Cities have used this tool to fund general needs as well as specific purposes including police/fire services, flood control, streets and road, etc. This is also a way to have some of the burden be carried by Manhattan Beach’s non-resident/visitor population.
Like the TOT and UUT, imposing a STT requires a vote by the electorate. If the funds will be used for general purposes then a simple majority is required for passage. If the funds are to be dedicated to a particular purpose, then super majority (2/3rds) approval is required. Statistics on statewide ballot measures in June 2016 indicate that 75% of city general purpose sales transaction tax ballot measures were successful (6 out of 8 measures). Specific purpose city sales transaction tax measures have been less successful; only one out of six such measures passed (largely due to the higher approval threshold).
By way of mechanics, the sales transaction tax would be added to the existing sales tax rate in Manhattan Beach (9%), and collected on all retail transactions. Staff estimates each one-quarter percent (.25%) of sales transaction tax would generate approximately $2.2 million annually. The maximum transaction tax allowable by law is 2%.
Timing
With the options listed above, some form of voter approval is required. For any of the taxes (UUT, TOT, STT), voter approval in the form of a ballot measure concomitant with a City Council election is required if the tax is a general tax requiring a simple majority for passage, unless the City can make emergency findings. If, however, the use of the proceeds is for a specific purpose, two-thirds voter approval is required, but the election may be held at a time other than a City Council election. Consideration should be given to availability of any subject matter experts (community surveys, public outreach and information) vis-à-vis the election date to ensure adequate time for preparation and planning.
Status of Council Priority Projects
At the July 19 meeting, City Council requested status of the feasibility studies on the top three priority capital projects. The following is a brief synopsis of each.
Fire Station #2
The assessment firm retained for these projects conducted interviews to identify future staffing needs and space requirements. This program was reviewed and approved to proceed to floor plan and site plan development. The firm was then instructed to develop three plans based on several site configurations the City Council was contemplating as options, which range from retrofitting the current Fire Station 2 on the existing lot, to expanding and rebuilding fire station 2 on an expanded lot by acquiring adjacent properties.
Municipal Pool
The firm reviewed current operations and, based on the requested aquatic program, provided a detailed future space assessment. These space requirements were then translated into two site plan options: one at Polliwog Park and one at the Adventure Plex location. Related floor plan options were developed as well. The firm is in the process of preparing a cost estimate for this project. This task is 90% completed.
Parking/City Hall
The firm collected information relative to current and future staffing / space projections in a parallel effort with space planner Environ Architecture, hired for short term space planning solutions. They have developed a space assessment based on all information received. Once all of the information is collected, they will update the assessment and issue a report for staff review. Once approved, site and floor plan options will be developed, which will be the basis for the cost estimate. Parking will be included and reviewed as part of City Hall site planning. The firm will base the quantity of stalls off of existing conditions plus a growth factor. This task is 70% completed.
General Fund Reserves
Any discussion about potential revenues should be considered in the context of the City’s General Fund reserves. The City’s current policy (which is included in the Appendix of the budget) is as follows:
The General Fund Unassigned Fund Balance will be maintained in an amount equal to at least 20 percent of the annual General Fund expenditure budget. These funds are designed to be used in the event of significant financial emergency. Council may, at its discretion, set aside additional funds above the 20% minimum. Such additional amounts may be allocated for specific purposes, such as capital projects or for known significant future cost items. Any residual balance shall be available for general operational working capital uses.
The optimal level of reserves is subject to interpretation. While the Government Finance Officers Association (GFOA) recommends a minimum of no less than two months of regular General Fund operating revenues or expenditures (approximately 17%) the amount can and does vary among public agencies. In order to further analyze what is appropriate for Manhattan Beach, staff utilized GFOA’s tool which helps analyze risks and then suggests appropriate levels based on the resulting profile. Based on the assessment performed in March 2016 (Attachment #7) reserve levels of between 26% to 35% are suggested ($17.5 million to $23.6 million). The FY 2016-2017 budget provides for 22.8% ($15.3 million) between Policy reserves and the EUR.
In an effort to validate the GFOA results, staff consulted with the City’s Financial Advisor, Mark Young of KNN Public Finance (see Attachment #8). Mr. Young’s memorandum concluded that “for a variety of reasons, including increased pension costs and significant capital expenditures, we [KNN] would recommend that the City set a target at the high side of that range -- 35% -- as its minimum reserve.” A reserve at that level for FY 2016-2017 would be equal to $23.6 million, up from the existing (adopted) reserve of $15.3 million (Policy and Economic Uncertainty combined).
Given the broad reserve policy spectrum, from the minimum GFOA recommendation of 17%, to the suggested 35% utilizing the GFOA analytic tool, these amounts may be considered “bookends,” which assist in setting the appropriate reserve amount falling somewhere between those parameters.
While not included in General Fund reserves, as a reminder, the City’s Financial Policies state that Enterprise Funds will maintain reserves equal to four months of operating expenses. For Fiscal Year 2016-2017 that reserve for Storm Water should be approximately $297,000. However, because there is no fund balance in Storm Water, there are no funds available for that policy reserve. Unfortunately, the General Fund is now the de facto backstop for the Storm Water Fund.
Finally, it is important to note that the Storm Water and Street Lighting funds are not only directly subsidized through cash transfers; the support provided to those enterprises by General Fund resources, which should be reimbursed, is not being collected due to the lack of funds. The total loss to the General Fund from non-reimbursement is approximately $162,000 per year.
Water and Wastewater Rates
While not directly related to the revenue discussion above due to the restricted nature of utility funds, future consideration should be given to studying rates for both water and wastewater utilities. Rates were last adjusted in January 2014 as part of a Utility Master Plan and five year rate plan adopted by the City Council in 2009, with annual increases commencing in January 2010 and each subsequent January until 2014.
According to industry sources, best practice would be to perform utility rate studies in conjunction with creation of or updates to a Utility Master Plan. The Master Plan sets the course for maintenance and improvements, while the subsequent rate study develops utility rates that support the plan, as well as on-going operational needs.
Several benefits of a thorough rate analysis include establishing specific financial policies for the utilities to ensure fiscal stability, adequate reserves and sufficient capital funding strategies for system investments such as rehabilitation and replacement. Another component is a Cost of Service analysis to support the development of equitable rate structures.
The last rate study in 2009 was performed in conjunction with a Utility Master Plan. The plan identified system capital needs, which laid the ground work for the appropriate rate setting. Staff recommends that once the new Public Works Director is hired, the Utility Master Plan should be reviewed, and if warranted, updated. If updated, a new rate study should be performed based on the updated Mater Plan.
CONCLUSION:
The City currently subsidizes Storm Water and Street Lighting and Landscaping District activities. Over the next five years, those subsidies, if no new revenues are generated, are expected to total approximately $6.5 million, which reduces funds available for General Fund purposes including police, fire and paramedics, as well as general non-enterprise capital improvement projects.
The studies performed by Harris and Associates indicate that sizeable increases are needed in both Storm Water fees and Street Lighting and Landscaping District assessments in order to fully fund these enterprises. However, the survey conducted on these topics concluded that there is not sufficient support for full cost recovery fees and assessments, but that the Storm Water fee may have a reasonable chance of success if a more modest fee were pursued. It also listed other conditions that need to be present for success, including clear support from the City Council, effective public education, a well-organized independent campaign, etc.
As an alternative, staff has presented several potential General Fund revenue sources. While these are presented as possible funding for the Storm Water, and Street Lighting and Landscaping Districts, it is important to note that TOT, UUT and STT are General Fund revenues that can be used for many other purposes, including capital improvements, additional services, pension stabilization, etc.
City Council had authorized feasibility studies of the top three priority projects: Fire Station #2, a pool and added parking/City Hall replacement. The studies are in various stages of completion. Staff is seeking direction on continuation or termination of those studies. Additionally, direction on public polling and public outreach on revenue measures is requested.
PUBLIC OUTREACH/INTEREST:
None.
ENVIRONMENTAL REVIEW:
Not Applicable.
LEGAL REVIEW:
The City Attorney has reviewed this report as to Proposition 218 requirements.
Attachments:
1. City Council Staff report from 2013 on Funding Options for Storm Water and Street Lighting
2. City Council Staff report from 2015 on Storm Water and Street Lighting Preliminary Study Results
3. Storm Water Utility Fee Preliminary Study
4. Street Lighting and Landscaping District Assessment Preliminary Study
5. Revenue Measure Survey results
6. Utility User Tax and Transient Occupancy Tax Comparison Chart
7. Government Finance Officers Association Reserve Risk Assessment
8. KNN Public Finance Analysis/Opinion Memorandum