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11a FY 2012-13 Budget Shortfall StrategiesMEMORANDUM TO: CITY COUNCIL FROM: STEVEN ADAMS, CITY MANAGER b+ SUBJECT: CONSIDERATION OF FY 2012-13 BUDGET SHORTFALL STRATEGIES - "OPERATION FINANCIAL INDEPENDENCE" DATE: JANUARY 24,2012 RECOMMENDATION: It is recommended the City Council: 1) approve the proposed framework of strategies to address the projected FY 2012-13 General Fund budget shortfall; 2) direct staff to develop a detailed analysis and final recommendations for budget adjustments; 3) direct staff to prepare a measure for the November 2012 ballot to establish a City Charter; 4) appropriate $5,000 from the Affordable Housing In-Lieu Fee Fund for the San Luis Obispo County Affordable Housing Trust Fund and $13,000 from the General Fund unappropriated fund balance for merr~berships in the San Luis Obispo County Economic Vitality Corporation (EVC), San Luis Obispo County Visitors' and Conference Bureau (VCB), and Arroyo Grande Valley Chamber of Commerce; 5) direct staff to submit cost estimates for joint dispatch and joint police operations to the City of Grover Beach; 6) approve modifying the Car Corral parking lot upgrade to a resurfacing project and authorize the remainder of funds to be dedicated to costs associated with the lease and future acquisition of the Le Point Street parking lot property; and 7) adopt a Resolution eliminating the Green Business Incentive Program. IMPACT ON FINANCIAL AND PERSONNEL RESOURCES: When the FY 201 1-1 2lFY 201 2-1 3 Biennial Budget was approved, FY 201 1-1 2 was balanced with the use of reserves. The FY 2012-13 budget was not adopted because a projected shortfall of approximately $700,000 remained. The intent was to address this shortfall through efforts to be developed this year. The severity of the shortfall has now increased due to the loss of the Redevelopment Agency. Staff has identified a number of adjustments to both revenues and expenditures for FY 2012-13 that will either be recommended at the mid-year budget report or were already approved by the City Council in the first quarter report. These have all been incorporated into the projections and an overview of the General Fund for FY 2012- Agenda Item 11.a.Page 1 CITY COUNCIL CONSIDERATION OF FY 2012-13 BUDGET SHORTFALL STRATEGIES - "OPERATION FINANCIAL INDEPENDENCE" JANUARY 24,201 2 PAGE 2 13 is shown below. The net projected impact to the General Fund from the elimination of the Redevelopment Agency is $250,000, which is shown separately. This brings the total projected shortfall to roughly $900,000. To complicate matters, the elimination of the Redevelopment Agency takes effect this year, which will reduce the General Fund balance and the amount of reserves available for next year. It is recommended that this year's financial impact be addressed with available reserves. FY 2012-13 GENERAL FUND BUDGET SUMMARY Item Amount Revenues Property Tax Sales Tax Transient Occupancy Tax Vehicle License Fees Other Taxes Licenses and Permits Fines Interest, Leases and Property Grants and Reimbursements Charges for Service Other Revenue Transfers Total Expenditures Salaries and Benefits Contractual Services Operating Accounts Debt Service Equipment Replacement Total Difference $656,055 Projected Redevelopment Decrease $250.000 Net Projected Budget Shortfall $906,055 Agenda Item 11.a.Page 2 CITY COUNCIL CONSIDERATION OF FY 209 2-1 3 BUDGET SHORTFALL STRATEGIES - "OPERATION FINANCIAL INDEPENDENCE" JANUARY 24,201 2 PAGE 3 BACKGROUND: How did we get here? "The Great Recession" The City is still adjusting to the worst economic conditions since the Great Depression that have been experienced over the past several years. Below shows the impact on ongoing City General Fund revenues durivg this period: Revenue Meanwhile, costs continued to escalate, which were also largely the result of the poor economic conditions. For example, pension costs rose dramatically due to the catastrophic impact on investments by the CalPERS system. Changes in the City's CalPERS rates are shown below: Agenda Item 11.a.Page 3 CITY COUNCIL CONSIDERATION OF FY 2012-13 BUDGET SHORTFALL STRATEGIES - "OPERATION FINANCIAL INDEPENDENCE" JANUARY 24,201 2 PAGE 4 PERS Rates 60.000% P E 50.000% 40.000% s 30.000% 20.000% eMisc. a +Police t 10.000% e 0.000% s rnurficnrlrn ????r;'r;' NbrL)aOON OOOOdd >>>>>z LLLLLLLLLL Fiscal Year Like most organizations, medical costs have represented a crisis in terms of escalating costs, which can be seen below in the rates paid by the City for employee coverage. Medical Rates $1,600.00 - $1,400.00 - $1,200.00 - $1,000.00 - $800.00 - $600.00 - $400.00 - $200.00 - ,$o.oo -Rate lIlIIII1II Nmbm~~OOmOrl 00000000~rl 0000000000 NNNNNNNNNN LLLLLLLLLL mmmmmmmmmm Q)Q)Q)Q)Q)Q)Q)Q)Q)Q) >>>>>>>>>> Agenda Item 11.a.Page 4 CITY COUNCIL CONSIDERATION OF FY 2012-13 BUDGET SHORTFALL STRATEGIES - "OPERATION FINANCIAL INDEPENDENCE" JANUARY 24,2012 PAGE 5 2010 Census When the 2000 census figures were completed, the general Five Cities population area was 47,499. bringing us within 2,501 of the-50,000 required to become classified as an "urbanized area" under Federal criteria that would have triggered a significant increase in funds for transit and road construction. Given modest projections of an annual 1 % growth rate for Arroyo Grande alone, staff was confident and counting on the new designation following the 2010 census. However, this did not occur. While the determination will not be made until Fall 2012, it does not appear that the population needed will be reached. The census results reached a figure of 47,884. As a result, projections for items like the pavement management program had incorporated some of these funds, which now must be reduced. Dissolution of Redevelopment Aqencv Two bills were approved last year by the State Legislature, ABXI 26 and ABXI 27, designed to divert redevelopment tax increment funds from redevelopment agencies to the State. The first bill eliminated redevelopment agencies as of October 1, 201 1. The second bill exempted any redevelopment agency from elimination if its host city adopted an ordinance agreeing to make specified payments to benefit schools. Subsequently, the League of California Cities and California Redevelopment Association filed a lawsuit arguing that the legislation violated Proposition 22, which included protections against taking of redevelopment funds by the State. The California Supreme Court issued its opinion in CRA v. Matosantos and upheld the validity of ABIx26, the bill that dissolves all the redevelopment agencies in the State, and invalidated ABIx27, the bill that would have allowed redevelopment agencies to remain in operation by making a payment to assist the State budget. As a result of the Court's ruling, the dissolution of redevelopment agencies will be effective as of February 1, 2012. This will eliminate over $1 million annually in net tax increment funds received by the Redevelopment Agency for economic development efforts. It will result in an immediate loss of $1 million to $2 million of funds available for affordable housing projects and close to an additional $2 million worth of property that has been acquired. Funds budgeted for membership in the EVC, VCB, Chamber of Commerce and Housing Trust Fund and for the lease-purchase of the Le Point Street parking lot will no longer be available. Since the Redevelopment Agency Fund pays its share of the City's administrative overhead costs, these funds will no longer be available except for direct costs associated with phase out of Redevelopment Agency activities. A portion of the tax increment lost will come back to the City as its share of the property tax funds. Based on staffs preliminary analysis, it is anticipated to result in a net impact to the City's General Fund of about $250,000 annually. This does not factor in the amount that will need to be saved over the next few years to acquire the Le Point Street Parking Lot property. Agenda Item 11.a.Page 5 CITY COUNCIL CONSIDERATION OF FY 201 2-1 3 BUDGET SHORTFALL STRATEGIES - "OPERATION FINANCIAL INDEPENDENCE" JANUARY 24,2012 PAGE 6 What have we done thus far? The Council is well aware of, but it is important for the public to also know, how much has been done thus far to address the City's financial challenges. The City's commitment has been, and continues to be, to place the highest priority on maintaining key service levels that the community depends upon. Therefore, the City's approach has consistently emphasized creative ways in which to reduce costs and increase efficiency rather than on increasing taxes and fees or cutting services. A number of efficiency changes have been instituted. The most extensive efforts implemented are outlined below: Reorganization The City has completed a comprehensive restructuring of the entire organization. This included consolidation and cross training of development, maintenance, administrative, and public counter functions. Eighteen positions were eliminated over a two-year period, some through layoffs or an early retirement program. In addition, the Fire Department was consolidated with Grover Beach and the Oceano Community Services District. A number of vacancies have also been modified to part-time positions. The following shows the history of full-time City staffing with Fire operations excluded: Arroyo Grande Full-Time Positions 100 95 Full-Time 90 Staff 85 80 75 0~o*,cs.o")&Goeos4'\~ % u ?j CQ: &' 0pf 01' 0% 09' \0' 0 0 0. ++++++++k4ki Fiscal Year Agenda Item 11.a.Page 6 CITYCOUNCIL CONSIDERATION OF FY 2012-13 BUDGET SHORTFALL STRATEGIES - "OPERATION FINANCIAL INDEPENDENCE" JANUARY 24,201 2 PAGE 7 Retiree Medical Employee union agreements were negotiated over a two-year period to reform the City's retiree medical benefits. The City just completed its first actuarial on costs associated with retiree medical benefits since the changes were implemented, which showed that the changes decreased the City's unfunded liability by over $2 million. It will also reduce annual costs to the City's budget by over $100,000. Pension Costs Comprehensive reforms to the City's pension system have also been negotiated with the City's unions. Employees now pay a larger share of pension costs. A two tiered system to reduce benefit levels for new Police sworn employees has been established. A two tiered system to do the same for management and miscellaneous employees has been approved and is in the process of implementation. Critical Needs Action Plan In order to continue to be effective despite drastic decreases in financial and staff resources, the City established a plan to prioritize major items in order to target limited resources most effectively. The plan includes the following priority areas: Efficiency Measures Economic Development Efforts Street and Sidewalk Improvements Brisco lnterchange Project Police Building Project Water Supply Measures The success rate has been impressive. Significant efficiency measures have been instituted as summarized above. A number of economic development projects have or are nearing completion despite the poor economic conditions. Resurfacing of all the streets in the City identified in the worst condition have been completed or are under construction. A plan has been approved for maintenance of all streets on a seven year cycle. Over 1,000 sidewalk repairs have been completed over the past two years. Approval of a plan and funding for the Brisco Road lnterchange Project is expected in Spring 2012. A recommended plan for a new Police Building has been developed and will be presented to Council at the February 14th meeting. If approved, construction could begin in Fall 2012. A new water well has been constructed, water conservation measures expanded, and a State water measure drafted. As a result, water use has dropped from over 99% to less than 80%. Agenda Item 11.a.Page 7 CITY COUNCIL CONSIDERATION OF FY 2012-13 BUDGET SHORTFALL S'rRA'rEGIES - "OPERATION FINANCIAL INDEPENDENCE" JANUARY 24,201 2 PAGE 8 ANALYSIS OF ISSLIES: What are we proposing to do now? The one bright side of the RDA dissolution is that it may finally minimize the instability of not knowing what the impacts of the State will be on the City's budget process. Therefore, if the current shortfall can be addressed in a reliable manner, the effectiveness of future financial planning and stability can be improved. As a result, staff has identified the effort as "Operation Financial Independence." In responding to the City's financial challenges, staff has worked very hard to find ways to maintain key services, move forward to meet needs important to the community, and to maintain a special work environment that attracts and supports quality employees. Despite the new set of challenges, it is important to continue these efforts. Therefore, the objectives of the proposed plan are the following: To develop a comprehensive plan; To develop a plan that maintains service levels and enables the City to move forward in meeting needs identified critical to the community; To develop a balanced plan to minimize impacts from changes that are necessary; and To develop a plan that increases financial independence from the State and future financial stability without increasing the current financial burden on the City's taxpayers. Process A number of steps have been enacted in order to react quickly and develop a plan to effectively address the budget shortfall projected for FY 2012-13. The process initiated includes the following actions: The City Manager has met with staff from each operation to review the status of the budget and obtain input. The Executive Team has met to review ideas and agree on the budget strategies. A Budget Advisory Committee has been established to advise the City Manager on budget considerations, which includes representatives from management, employee unions, finance and human resources. The Committee met to review the strategies and will continue to meet to assist in determining the final recommendations. A Budget Steering Committee has been established to assist the City Manager in developing the technical aspects of the recommendations, which consists of the City Manager, Director of Administrative Services, and Human Resources Manager. Agenda Item 11.a.Page 8 CITY COUNCIL CONSIDERATION OF FY 2012-13 BUDGET SHORTFALL STRATEGIES - "OPERATION FINANCIAL INDEPENDENCE" JANUARY 24,2012 PAGE 9 Individual meetings will be scheduled with representatives of each union to begin the meet and confer process. A public hearing will be scheduled for review of the final recommendations by the City Council, which is anticipated by April. Proposed Strategies A general framework of strategies is proposed at this time with financial targets. If approved, staff will develop the specific recommendations for each category for Council to consider in Spring 2012. Strategies include the following: Use of Local Sales Tax Funds: Staff recommends a small portion of Local Sales Tax funds be used for operational costs and the amount be identified on the Annual Local Sales Tax Expenditure and Appropriation Report as "Increase in Operational Costs Due to State Dissolution of RDA". Staff has reviewed the Local Sales Tax expenditures and has determined the amount proposed could be accommodated without impacting funding for high priority and critical projects. While it diverts funds from the original intent, when the measure was proposed, it was communicated that the reason it was not proposed as a "special tax" was the need to maintain flexibility in order to accommodate future changes in City priorities and needs. Staff believes the existing challenges justify this change in priorities for a small portion of this funding. It is also recommended that $100,000 recently appropriated for the Car Corral Upgrade project instead be reserved for the Le Point Street Parking Lot lease- purchase agreement, which would include both lease payments and to start setting aside funds for future purchase. The project is proposed to be changed to a simple resurfacing project, which can be funded solely from downtown parking district fees. City Charter Ballot Measure: In order to help neutralize the loss of funds for capital projects, it is recommended to pursue ways in which to increase the effectiveness or "buying power" of the remaining funds. As a result, it is recommended the City Council direct staff to prepare a City Charter to be placed on the November 2012 ballot. There are two types of cities - General Law and Charter. A charter provides increased local control over matters considered "municipal affairs". Close to 25% of cities in California are charter cities. One of the primary objectives would be to exempt the City from State prevailing wage requirements on public contracts. It is estimated that this could save the City over $200,000 annually. It would also help increase "home rule" control in other possible areas, which further serves the goal of increasing independence from the State. Unfortunately, the status of foregoing prevailing wage requirements by charter Agenda Item 11.a.Page 9 CITY COUNCIL CONSIDERATION OF FY 2012-13 BUDGET SHORTFALL STRATEGIES - "OPERATION FINANCIAL INDEPENDENCE" JANUARY 24,201 2 PAGE 10 cities is currently being considered by the California Supreme Court. Results should be known prior to deadlines for placing a measure on the November ballot. Therefore, staffs recommendation may be modified based on the results of that case. Police Building General Obligation Bond Measure: It is recommended to place another Police Station bond measure on the June 2012 ballot. It will require a 213 vote and would generate additional annual revenue of approximately $180,000. As with the first measure, this can be accomplished without raising the annual tax rate by proposing 30-year bonds that will also retire ,the 2003 Fire Station bonds and be partially paid with Local Sales Tax funds. While it is not recommended to decrease the original ongoing Local Sales Tax funding programmed for the Police Building project, it is necessary to reduce some of the increase recently recommended and additional increases necessary to fund the total project costs. It was also originally proposed to fund a portion of the Police building project costs from Redevelopment Agency funds, which is no longer possible. Discontinue City Funding for Increases in Medical Costs: The City has historically paid the majority of costs for increases to employee medical insurance. Staff does not believe this is feasible to continue until the City's financial resources improve. The existirrg budget includes $50,000 in the FY 201 2-1 3 for this increase. Reduction in Fire Costs: It is proposed to request the Five Cities Fire .IPA to negotiate with their union to implement changes similar to the City where employees pay a portion of pension costs in order to address some of the cost increases the City has been forced to assume from increased Fire CalPERS costs. Targeted savings has been identified as $50,000. If the strategies are approved by Council, the City Manager will coordinate with managers from Grover Beach and Oceano on a joint effort. Efficiency Measures: A variety of efficiency alternative measures have been identified for study, which include the following: Consolidation of Public Safety Dispatch or Police Operations: In response to extensive previous efforts, the City of Grover Beach City Council has directed their staff to present costs and analysis for consolidation of both dispatch and full police operations. It is recommended the City Council direct staff to submit to Grover Beach a Agenda Item 11.a.Page 10 CITY COUNCIL CONSIDERATION OF FY 2012-13 BUDGET SHORTFALL S'rRA'rEGIES - "OPERATION FINANCIAL INDEPENDENCE" JANUARY 24,201 2 PAGE 11 cost proposal for both options. It is estimated that joint dispatch could save the City up to $70,000 annually and full consolidation up to $400,000. Organizational Studies: It is recommended that a number of organizational studies be prepared to review cost effectiveness, as well as identify other issues and improvements. A consultant has been contracted to lead the Maintenance Services Division in preparing an Organizational and Operational Review. The Recreation Division will be reviewed again to determine subsidy levels, confirm results from cost efficiency measures implemented over the past two years, and provide a cost comparison with outsourcing alternatives. Lastly, the success and status of the City Hall restructuring will be reviewed and assessed. Employee Concessions: It is recommended that the City work with represented and non- represented employees to address the remainder of the budget shortfall through reductions in err~ployee compensation or other efficiencies in a fair manner through the meet and confer process. Use of Reserves: It is projected that a sufficient General Fund fund balance will be available to utilize some amount of reserves to address a portion of the shortfall. In order to accomplish the goal of future financial stability, it is recommended that the amount used be limited to what can be normally expected through annual savings so it does not exacerbate future deficits. As a result, it is recommended that $200,000 be targeted from this source. Other Issues: Support for Outside Agencies: The City's cost is $5,000 for membership in the EVC, $7,000 for the VCB, $5,000 for the Housing Trust Fund, and $1,000 for the Chamber of Commerce. They have all been funded by the Redevelopment Agency. It is recommended that funding be appropriated from the General Fund fund balance for FY 201 1-12 for the EVC, VCB and Chamber of Commerce. The Housing Trust Fund is recommended to be paid from the City's Affordable Housing In-Lieu Fee Fund. In FY 2012-13, it is proposed to seek approval to join the County Tourism Business Improvement District (BID) once the Hampton Inn has been in operation for a full year.and qualifies to participate in the vote. If supported by the City's hoteliers, the BID would provide funding that could be used for the VCB membership costs. Agenda Item 11.a.Page 11 CITY COUNCIL CONSIDERATION OF FY 2012-13 BUDGET SHORTFALL STRATEGIES - "OPERATION FINANCIAL INDEPENDENCE" JANUARY 24,2012 PAGE 12 Green Business Incentive Program: Elimination of this program was recently proposed, but consideration was postponed due to recent interest from potential businesses. A Resolution is now attached for Council consideration to repeal the program, which is necessary because a significant portion of the program incentives are no longer available with the absence of the Redevelopment Agency. Staff plans to continue to promote the area to "green" businesses. The City will need to honor the incentives to the one business that is already a participant. Target Savings: The following is a summary of the savings targeted for each recommended category: Local Sales Tax $250,000 Medical Benefit Costs $50,000 Reduction in Fire Costs $50,000 Efficiencies - Police Dispatch - Police Consolidation - Organizational Studies - Employee Concessions Total $900,000 ALTERNATIVES: The following alternatives are presented for consideration: - Approve staffs recommendations; - Modify the recommendations to rely more heavily on one category or another; - Eliminate specified recommended alternatives for consideration; - Identify additional alternatives for study and consideration; or - Provide staff other direction. Agenda Item 11.a.Page 12 CITY COUNCIL CONSIDERATION OF FY 2012-13 BUDGET SHORTFALL STRATEGIES - "OPERATION FINANCIAL INDEPENDENCE" JANUARY 24,201 2 PAGE 13 ADVANTAGES: The recommendations will establish ongoing financial stability with little impact on service levels, will maintain funding for major projects, and will not raise annual tax rates or fees paid by residents. DISADVANTAGES: There will be some short-term elirrrination of planned capital improvements and may negatively impact employees through necessary concessions. ENVIRONMENTAL REVIEW: No environmental review is required for this item. PUBLIC NOTIFICATION AND COMMENTS: The qgenda was posted in front of City Hall on Thursday, January 19, 2012 and on the City's website on Friday, January 20, 2012. Agenda Item 11.a.Page 13 RESOLUTION NO. A RESOLUTION OF THE ClTY COLlNClL OF THE ClTY OF ARROYO GRANDE REPEALING THE GREEN BUSINESS ECONOMIC INCENTIVE PROGRAM WHEREAS, on August 11, 2009, the City Council adopted a Resolution creating a Green Business Economic lncentive Program for the purpose of encouraging the creation and location of "green" businesses in the City; and WHEREAS, the Green Business Economic lncentive Program provided economic incentives to attract green businesses to the City and provided a mechanism for designating areas of the City in which such businesses were encouraged to locate in order to promote the use of the economic incentives and rebates in areas where they would achieve the maximum positive results; and WHEREAS, Federal, State and local financial resources anticipated to support the program have been reduced, eliminated or never received; and WHEREAS, economic conditions have changed, which have impacted the success of the program and the desirability of continuing to offer the program at this time; and WHEREAS, it was determined that eliminating the program will be in the best interests of the City in order to dedicate both City financial and personnel resources in the most cost effective manner. NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Arroyo Grande that the City of Arroyo Grande Green Business Economic lncentive Program is hereby repealed and eliminated. On motion of Council Member , seconded by Council Member and on the following roll call vote, to wit: AYES: NOES: ABSENT: the foregoing Resolution was passed and adopted this day of Agenda Item 11.a.Page 14 RESOLUTION NO. PAGE 2 TONY FERRARA, MAYOR ATTEST: KELLY WETMORE, CITY CLERK APPROVED AS TO CONTENT: STEVEN ADAMS, CITY MANAGER APPROVED AS TO FORM: TIMOTHY J. CARMEL, CITY ATTORNEY Agenda Item 11.a.Page 15 THIS PAGE INTENTIO NALLY LEFT BLANK Agenda Item 11.a.Page 16