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
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40.000% s
30.000%
20.000% eMisc.
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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
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LLLLLLLLLL mmmmmmmmmm
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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
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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
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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
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