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1. Purpose and Findings of the Study
Special Reorganization Process.
Goals of the Study .
Data Sources
Findings of the Initial Fiscal Analysis
Tables
PRIMARY DATA SOURCES USED IN ANALYSIS
ESTIMATED CURRENT EXPENDITURES AND REVENUES ACCRUED BY VALLEY CITY
VALLEY CITY PROJECTED BUDGET FISCAL YEAR 2002-03 THROUGH 2005-06
(Unadjusted for Inflation
2. Valley Area Proposal for Special Reorganization.
3. Transfer of Service, Costs, Revenues, and Assets
4. Fiscal Impact on City of Los Angeles
5. Financial Viability of New City
The San Fernando Valley Proposal for Special Reorganization Initial Fiscal Analysis has been prepared on behalf of the Los Angeles County Local Agency Formation Commission (LAFCO) to assess the fiscal impact of an incorporation of a new "Valley City" in the San Fernando Valley region of the City of Los Angeles. The initial fiscal analysis attempts to address the requirements of a comprehensive fiscal analysis (CFA) as defined in the Government Code and provides analysis of factors that, as prescribed by the Code, must be considered by LAFCO in the process of approving a proposal for special reorganization.
The initial fiscal analysis has been prepared in response to a preliminary proposal for special reorganization submitted by the applicant, Valley Study Foundation, Inc. Because the applicant's preliminary proposal does not address, in detail, how the City's various municipal services would be divided and transferred to a proposed Valley City, assumptions have been developed in an attempt to identify a viable process for the transition of services to a newly created city. However, although a specific process is identified in this analysis, many other alternatives may exist regarding the assumed transfer of City services, personnel, assets, and liabilities.
As part of the special reorganization process, the applicant is expected to submit a final proposal, which may provide additional information as to the specific services to be provided by the Valley City. The City of Los Angeles is also expected to comment on this initial fiscal analysis (as well as the applicant's final proposal), which may provide further information on the potential impact of the applicant's proposal on the level of service provided, or the impediments in dividing and transferring certain services.
The initial fiscal analysis is not meant to be a prescription for the break-up of the City of Los Angeles, nor is it meant to be a detailed plan for the creation of Valley City. This analysis provides an assessment of the preliminary proposal for special reorganization, using the criteria set forth in the Government Code and a set of reasonable assumptions regarding the transfer of service to a Valley City. Other viable alternatives may be available, and any assumptions used in this analysis are not meant to preclude LAFCO from developing other alternatives, terms, or conditions for a proposed special reorganization in the San Fernando Valley. To index
The Cortese-Knox Local Government Reorganization Act of 1985 (former Government Code Section 56000 et seq.) [1] sets forth procedures for changes of organization or reorganization of local governments, including a "special reorganization" of an existing city. The Act defines a special reorganization as "a reorganization that includes the detachment of territory from a city or city and county and the incorporation of that entire detached territory as a city." [2] Because the definition of a special reorganization refers to an incorporation, it is assumed for the purposes of this fiscal analysis that all references to an incorporation in the Act are applicable to a special reorganization.
To initiate a special reorganization, the Act requires that a proponent obtain signatures from 25 percent of the voters or landowners in the area to be incorporated. The petition is submitted as part of an "application for proposal" that also includes a map of the boundaries and the names of three chief petitioners. As part of the review of the application, the commission's executive officer prepares a comprehensive fiscal analysis report including a recommendation on the proposal. The commission then holds hearings to review the proposal. If the commission approves the proposal, a public hearing is held to hear protests and objections. If not more than 50 percent of the voters protest, the commission may then call for an election in both the territory to be detached from the city, and the entire territory of the city. In the event of an election, the majority of the voters in both the proposed new city and the city as a whole must favor the new city formation for it to take effect. To index
Seven-Step Process
To facilitate the review of proposals for special reorganization, LAFCO has adopted the following Seven-Step process for conducting the required study for a proposed reorganization.
1. Applicant Identifies Needs for Data Collection – Applicant submits to LAFCO what it believes should be requested, analyzed and reviewed in terms of data from the City of Los Angeles.
2. LAFCO Prepares a Request for Information – LAFCO determines what it needs from City of Los Angeles in terms of data and how it is to be presented and prepares a request for information.
3. Data Collection – City of Los Angeles responds to LAFCO's request for information and provides comprehensive data.
4. Review, Analysis of Data – LAFCO reviews, analyzes, and packages information submitted by the City of Los Angeles. Guidelines are established for Applicant; City to prepare a response and a proposal.
5. Applicant Reorganization Proposal – Applicant submits proposal for Special Reorganization.
6. Response to Applicant Proposal – City of Los Angeles responds to Applicant's proposal.
7. Final Plan – Comprehensive Fiscal Analysis – LAFCO prepares final plan based on all information gathered including proposals from Applicant and the City of Los Angeles. Feasibility determined.
The initial fiscal analysis is part of step 4 of the Seven-Step process. Revisions are expected to this document based on comments from the applicant and the City prior to the completion of the Comprehensive Fiscal Analysis.
In an attempt to refine the "request for information" from the City, LAFCO has further required that the applicant for special reorganization develop a "vision statement" for its proposed city that, among other things, describes the governance and management structure for the proposed new city, the organization of all city departments of the proposed new city, and what existing City of Los Angeles services the applicant intends to provide.
History of Valley Secession Movement
The current process to create a separate San Fernando Valley city began in May 1998 when the organization Valley Voters Organized Towards Empowerment (Valley VOTE) initiated a petition drive for an eventual vote for special reorganization. In December 1998, Valley VOTE submitted petition signatures to LAFCO. A sufficient amount of the petitions were certified by LAFCO in March 1999. An application to initiate the special reorganization proceeding was then submitted by the Valley Study Foundation, Inc., in April 1999. In June 1999, Valley Study provided to LAFCO its "Identification of Needs for Data Collection" as part of step 1 of the Seven-Step process. To index
The Cortese-Knox Act sets forth detailed requirements of the special reorganization process. As part of the review of any proposal for incorporation, the LAFCO executive officer must prepare a report including a comprehensive fiscal analysis and a recommendation of the proposal. [3] Although not specified as part of the comprehensive fiscal analysis, prior to the approval of any proposal for reorganization the commission must find that the "proposed city is expected to receive revenues sufficient to provide public services and facilities and a reasonable reserve during the three fiscal years following incorporation." [4] In addition, the commission cannot approve an incorporation unless: (1) it finds that the current revenues received by the City that would accrue to the proposed city are "substantially equal" to the current expenditures made by the City for services that would be assumed by the proposed city, [5] or (2) any negative fiscal impact has been adequately mitigated by terms and conditions imposed by the commission. [6] The concept of substantially equal revenues and expenditures has been described as a test of "revenue neutrality."
The commission must also consider certain factors in the review of a proposal for incorporation. Among others, the commission must consider "the present cost and adequacy of government services and controls in the area," as well as the "probable effect [of the special reorganization] on the costs and adequacy of services and controls in the area and adjacent areas." [7]
Based on the requirements set forth in the Cortese-Knox Act, the initial fiscal analysis includes an assessment of the financial viability of the new city and attempts to determine whether the proposed special reorganization would be "revenue neutral" for the City of Los Angeles. A review of certain factors associated with the costs of service in the proposed area of special reorganization is also provided for the benefit of LAFCO.
This initial fiscal analysis is also intended to provide the information needed by the applicant to prepare its final proposal pursuant to step 5 of the Seven-Step process. To index
Most of the data used in this analysis have been provided by the City of Los Angeles, as part of the data collection process described in the LAFCO seven-step process. The City has provided LAFCO information regarding, among other things, its various municipal services, budgeted expenditures, staffing, organization of personnel, service territories, asset inventories, and revenues.
The primary sources of data and the application of the data in this analysis are summarized in the table below.
Some of the data sources used to estimate the geographic source of revenue were preliminary at the time this report was prepared. Any material changes to this supporting information will be incorporated into the final comprehensive fiscal analysis. Instances where preliminary data were used have been indicated in this report. To index
To assess the "revenue neutrality" of a proposed special reorganization, a comprehensive review and analysis of services provided by the City has been undertaken, and an attempt has been made to identify those specific services that would transfer to the proposed Valley City. This analysis of transferred services allows for the estimation of the current expenditures for services that would be assumed by the new city as a result of a Valley special reorganization. The current revenue that would transfer to the new city has been estimated through a comprehensive analysis of the geographical source of revenue currently received by the City. A detailed analysis of both current expenditures and current revenue that would accrue to the proposed Valley City are provided in section "Transfer of Service, Costs, Revenues, and Assets – Transfer of Revenue" of this report.
Future expenditure and revenue cash flows for a Valley City that would occur during the first three full fiscal years of incorporation have also been estimated. The projected cash flows for the Valley City are used to assess whether the Valley City would receive sufficient revenues to provide services and maintain a reasonable reserve during the three full fiscal years following incorporation. Included in the projected expenditures for the Valley City, in addition to the expenditures for services that would transfer from the City of Los Angeles, are estimated "start-up" costs that would likely be incurred by a new city. The Valley City may also receive revenue in addition to the proportional share that would transfer from the City of Los Angeles. The estimated additional revenues and costs that would accrue to the proposed Valley City are discussed in sections "Valley City Start-Up Costs," and "Financial Viability of New City – Additional Valley City Revenue" herein.
Revenue Neutrality
Based on the applicant's vision statement, and the assumptions used in this analysis that set forth the process of apportioning municipal services and assets, it is estimated that, upon a special reorganization, the current City of Los Angeles expenditures that would accrue to a Valley City would not likely be "substantially equal" to the current City revenue that would accrue to the Valley City. As shown on the table below, this determination is made upon a comparison of the municipal revenues, budgeted by the City in fiscal year 2000-01, that would accrue to the Valley City, to the City's budgeted municipal expenditures in fiscal year 2000-01 for services that would be assumed by a Valley City or paid for by the Valley City through contracted service from the City of Los Angeles. To index
| ESTIMATED CURRENT EXPENDITURES AND REVENUES ACCRUED BY VALLEY CITY | |
|
FY 2000-01 Estimate |
|
| Current Revenue | 1,044,885,646 |
| Current Expenditures | 976,532,936 |
| Difference | 68,352,711 |
Detailed computations of the estimated amount of current expenditures and current revenues are provided in Appendix II of this report.
The estimated amount of municipal revenue that would accrue to a Valley City is based in part on an analysis of the geographic source of revenue undertaken by the City of Los Angeles in February 2001. The City's analysis provides estimates of the proportion of many of the City's differing General Fund and special purpose revenues that can be attributed to the San Fernando Valley. The City did not review all revenues, as estimates were not provided for 26.5% of the City's various revenue sources. Therefore, as part of this initial fiscal analysis, for those revenues not analyzed by the City an estimate of the proportion of City revenue generated from the Valley has been developed. Both the City's estimates and the percentage estimates developed in this report were applied to each of the City's budgeted receipts for fiscal year 2000-01. A detailed discussion of the percentage estimates is given in section "Transfer of Service, Costs, Revenues, and Assets – Transfer of Revenue."
An important distinction must be made between the amount of municipal revenue currently contributed to the City of Los Angeles by San Fernando Valley residents and businesses and the amount of municipal revenue that would actually accrue to the Valley City as a result of a special reorganization. Not all City revenues generated in the Valley would necessarily accrue to the Valley City. Two significant City General Fund revenue sources are the annual transfers from the City's power revenue fund and water revenue fund. For fiscal year 2000-01, the City budgeted $138.2 million of revenue from these funds. Because it has been assumed in this analysis (see "Transfer of Service, Costs, Revenues, and Assets – Other Departments – Water and Power") that the Valley City would not likely be able to obtain an equity share of the Department of Water and Power immediately upon incorporation, the Valley City may not benefit from the allowable revenue fund transfers for General Fund purposes. If the water and power user rates set for residents and businesses in the Valley do not change upon a special reorganization (i. e., the Valley rate schedule is the same as the rest of the City), the City's Department of Water and Power could continue to generate a surplus that could be paid into the City's General Fund. Accounting only for revenue that would actually accrue to the Valley City, it is estimated that 30.35% of the City's budgeted General Fund revenue in fiscal year 2000-01 and 25.83% of all budgeted revenue would accrue to the Valley City upon incorporation.
In comparison to the current revenue of $1,044.9 million budgeted by the City (excluding cash balances) that would accrue to the Valley City, it is estimated that current expenditures by the City of Los Angeles for services that would be assumed by the Valley City (or reimbursed to the City for contractual services performed) equals $976.5 million. This level of expenditures is based on the service to be provided by the proposed Valley City as described in its preliminary proposal, subject to any legal or fiscal constraints that have been identified in this analysis. To the extent the applicant's final proposal is revised, or the City provides additional information regarding the specific service, assets, and liability, the estimated amount of current expenditures that would accrue to the Valley City may change.
Given the estimated revenue that would transfer from the City is $68.4 million greater than the estimated expenditures, the applicant's proposal would not result in a "substantially equal" accrual of revenue and expenditures to the proposed Valley City. Therefore, some form of mitigation to the City of Los Angeles, as outlined in the Cortese-Knox Act, would be required. This report does not address the specific form of mitigation to the City, or recommend a process to calculate the amount or ensure compliance. The specific terms of any mitigation to the City of Los Angeles will be proposed in the final Comprehensive Fiscal Analysis report to the LAFCO Executive Officer after analysis of the applicant's final proposal and the City's comments.
Financial Viability of the Valley City
Financial projections for the new Valley City have been developed by identifying the services to be provided by the new city, the additional costs that may be incurred by the Valley City in transitioning service from the City of Los Angeles, the amount of municipal revenues to be received from residents and businesses in the Valley City, and any state and federal funding that would accrue to the Valley City upon incorporation. Based on these projections, it is estimated that a Valley City could achieve positive fund balances for the first three years after incorporation and maintain a reasonable level of reserves.
The level of expenditures by the Valley City for municipal services and assets would likely increase in comparison to the current level spent by the City of Los Angeles in the Valley. This projected increase in expenditures would be caused by "start-up costs" related to additional staffing, equipment, and office space needed to implement services in the Valley that cannot be transferred from or provided by the City.
At a minimum, the Valley City may face additional costs of $4.6 million annually related just to the utilization of the City's IT environment. A new Valley City may also experience costs for additional staffing, including elected officials, which cannot be transferred form the City. Other unavoidable start-up costs could result from planning activities that could require interim, dedicated staff or consultant resources, and from the need to lease office space in the San Fernando Valley. The estimated minimum level of start-up costs is based on several assumptions used in this report, and to the extent any assumptions prove unfeasible, or the Valley applicant proposes other alternatives, additional costs for the proposed Valley City may be greater. However, the Valley City would also receive an estimated $10.8 million in additional revenue from state motor vehicles license fees upon the effective date of its incorporation that would not be shared with the City, and could be used for any general fund purpose. This boost in vehicle license fee revenue would work to buffer the impact of any additional costs resulting from the transition of service from the City.
To estimate the amount of expenditures that would be incurred by the Valley City, the initial fiscal analysis has attempted to identify the City services currently provided in the Valley, which would be assumed by a new Valley City or paid for by the new city through a contractual relationship with the City of Los Angeles, then estimate the current and future cost of those services. Similar to the revenues that would transfer to a new Valley City, a distinction must be made between City services provided for the benefit of the Valley, and those services that could actually come under Valley City control upon a special reorganization. For many services performed by the City, it may not be possible to divide existing City infrastructure or equipment between the Valley and the City, within the study period of this report. These City services, such as utility service, radio systems, and certain computer networks utilize large-scale systems that have been designed for specific usage, and cannot be divided without undertaking a time-intensive process to redesign and construct two separate systems. In fact, it may not be cost-effective to utilize the City's existing assets or system design, and may be more beneficial for the Valley City to independently design and construct new technology systems based on the needs of the new city.
An additional difficulty in creating independent Valley City information technology systems is the dearth of available personnel qualified to administer the systems. The Valley City would likely need to source with the City or private operator until it could develop its own strategic plan for the development and implementation of separate information technology systems.
In addition to the City's IT environment, it is assumed in this report that the proposed Valley City would contract from the City for the City Employee Retirement System, the Police and Fire Retirement System, and utility services for water, power, and sewer. Payment to reimburse the City for the utility service is assumed to be recovered through user charges paid by Valley residents and businesses.
Additional detail on the computation of contractual service from the City of Los Angeles is provided on Table E-8 in Appendix II. For comparison purposes, the following table shows the projected Valley City budget, unadjusted for inflation, for fiscal year 2002-03 through 2005-06.
In developing the projected budget, it has been assumed that the effective date of the Valley City incorporation would be November 5, 2002; however, the Valley City would not assume responsibility for municipal services until July 1, 2003. The 8-month period after the effective date but prior to the transfer of service is assumed necessary to prepare for a transition of service from the City. The Valley City is assumed eligible to receive state motor vehicle license fee and gas tax revenue, but would receive only that amount of revenue in excess of the amount currently provided to the City of Los Angeles. The Valley City is also assumed to incur costs related to the modification of certain City-owned IT systems and for additional personnel during the 8-month transition period.
Impact on Adequacy of Service
As part of the proposed Valley City incorporation, the commission must consider the effect on the costs and adequacy of service in both the Valley and remaining City of Los Angeles. A special reorganization in the San Fernando Valley, according to the terms of the applicant's proposal, would result in the transfer of 8,564 City positions to the new Valley City. This level of change in personnel would have a significant impact on the organizational structure of many City departments and affect the way work is performed by the City. Although certain City departments are currently segregated into Valley and non-Valley workforces, most affected City departments would need to restructure the organization of personnel and redefine work assignments for many positions. It is reasonable to expect that the City would lose some productivity as part of such a large-scale reorganization. However, the magnitude of any loss of productivity is difficult to project or quantify.
In addition, it has been assumed in this report that all current City department managers would remain with the City, and the Valley City would obtain its own department heads from the pool of staff transferred. This assumption may result in a lack of highly specialized department managers at the new city, which may negatively impact the level of productivity or quality of service provided. Again, the magnitude of any negative impact is difficult to quantity.
The City has also asserted, as part of the data collection process for this study, that the level of effort for many of its service requirements or legal mandates is fixed and would not be reduced in the event of a special reorganization. Therefore, any loss of staff would negatively impact the City's ability to meet its fixed service requirements. To the extent possible, this fiscal analysis has attempted to identify any fixed service requirements of the City, and has assumed that these services would continue to be provided exclusively by the City without a transfer of staff to the proposed Valley City.
However, it is expected that the City will provide additional information regarding its fixed service requirements in response to the applicant's final proposal, and the potential negative impact on the City's ability to meet any legal mandates can be addressed as part of the final comprehensive fiscal analysis.
In addition to the loss of productivity for certain positions that may need to be reassigned to new duties, both the City and new Valley City may experience diseconomies of scale for certain services, whereby the service would have been provided in a more cost-effective manner if provided solely by the City. In fact, as discussed above, it is assumed the applicant would contract with the City for many services that would be difficult to provide independently by the Valley City.
Reallocation of County and State Funds
A more easily quantifiable impact on City services that would result from a special reorganization is the reallocation of county and state revenue. Certain "special purpose" revenues received by the City are allocated to cities within the county or state based on population. The expenditure of these funds, however, is not currently distributed evenly throughout the City. For example, the City is currently allocated Proposition A "local return" county sales tax revenue based on population in the City. The Proposition A sales tax pays for "DASH" service throughout the City, with a concentration of service in Civic Center. Upon incorporation, the Valley City would be allocated approximately 35.51% of the Proposition A tax that would have otherwise been paid to the City (an amount proportional to the population in the Valley special reorganization area), whereas currently only 2 of 27 routes, or 7% of the City's DASH service is provided in the Valley. A special reorganization would likely result in a relative loss of transit revenue to the City, and the City's remaining DASH transit services would need to be reduced (unless funding from another source was diverted), irrespective of the need to calculate revenue neutrality.
A reallocation of funds would also occur for state Gas Tax revenue, which was budgeted at $98.3 million in fiscal year 2000-01. Although 44% of the City's street miles are in the Valley, street services are provided based on a number of factors, including the age of the street. To the extent services are not provided in proportion to population, a reduction in service could be experienced by the City or proposed Valley City.
Potential for Additional Costs
It is important to restate that the estimated transition costs identified in this report are what is believed to be a minimum amount. The actual amount of transition costs relating only to the provision of the City's IT environment may be as high as $15 million or more annually. Other additive costs may also arise resulting from the need to provide office space in the Valley, unforeseen logistical difficulties in dividing vital functions, and legal and administrative costs associated with the transfer of City employees, among others. These costs could exceed the estimated $10.8 million in additional revenue that would accrue to the Valley, and would require a Valley City to attempt to enhance its revenue generation or reduce other expenditures to meet future budgets. Any forced reduction in expenditures resulting from excessive transition costs may negatively impact the level of service provided by the Valley City. To index
Footnotes
1 The Cortese-Knox Act was recently amended and is now known as the Cortese-Knox-Hertzberg Local Government Reorganization Act of 2000 (the "Hertzberg Act"). The Hertzberg Act, which became effective January 1, 2001, is not applicable to the special reorganization process for the San Fernando Valley proposal because the application was filed prior to the effective date.
2 California Government Code, Section 56075.5. 4
3 Section 56833.1. The text of this section has been recodified as Government Code Section 56800.
4 Section 56375.1. Text recodified as Section 56720.
5 Section 56845( b). Text recodified as Section 56815( b).
6 Section 56345( b)( 2). Text recodified as Section 56815( c).