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Summary
Recommendations To the City Council
Issues That Should Be Negotiated/Discussed with LAFCO and
Secession Applicants
1. Debt allocation and guarantees of payment
2. Revenue neutrality and how it must be applied and
calculated to ensure that no harm comes to the remaining City
3. Requirements of Fiscal Viability
4. Employee relations issues and the legal restrictions on
the City of Los Angeles
5. Division of liability such as lawsuits, claims, workers'
compensation and pensions
6. Cashflow agreements about how revenues would be split (accrued
revenue versus cash receipts that span fiscal years)
7. City's Expectation of LAFCO's Role in the Mitigation
Negotiation Process
REPORT FROM
Office Of The City Administrative Officer
Date: October 1, 2001 CAO File No. 0220-03482-0000 0220-00086-0000 Council File No.
Council District: Citywide
To: The Mayor
The City Council
From: William T Fujioka, City Administrative Officer
Reference: LAFCO (Local Agency Formation Commission) Secession Time Line dated August 3, 2001
Subject: Secession - "Mitigation Negotiations" between Secession Applicants (Both Valley and Harbor) and the City of Los Angeles
LAFCO recently published a revised time line for the secession process, which includes a step whereby LAFCO would "facilitate mitigation negotiations" between the secession Applicants and the City. LAFCO's schedule shows these negotiations taking place during the month of October 2001. LAFCO has not yet published an agenda or list of topics to be discussed during the proposed negotiations. However, from a brief conversation our staff had with the LAFCO Executive Director, it appears that the negotiations could include any significant topic related to secession, such as revenue neutrality payments, debt allocations, etc.
If the City participates in these negotiations, we need to ensure that all key topics of importance to the City and its residents and businesses are discussed - whether these topics have been included in LAFCO's draft reports or not. We have consulted with representatives from the Mayor's Office, the Council, the City Attorney and the Controller and make the following observations and recommendations. The City of Los Angeles needs to make several decisions about these proposed negotiations, such as:
• Should the City participate in the proposed negotiations?
• Who should represent the City in negotiations?
• Should the negotiations be public or private?
• What should be negotiated or discussed?
• What are the City's expectations of LAFCO's role in the mitigation negotiation process? We make the following recommendations:
Should the City participate in the proposed negotiations? Yes.
The City Attorney indicates that the City is not legally obligated to participate in negotiations as proposed by the LAFCO Executive Director. However, given the seriousness of the potential impact of the secession proposals being reviewed by LAFCO upon the very future of Los Angeles itself, we believe it is in the best interest of the City of Los Angeles to use every opportunity to attempt to minimize potential negative impacts to both residents in the remaining City of Los Angeles and the proposed new Valley and Harbor Cities. The negotiations proposed by LAFCO represent another opportunity to do so. In addition, it is likely (although not required) that LAFCO would honor any proposals the City and Applicant jointly submit. Negotiations also provide an opportunity to concurrently attempt to find common ground with the Applicants on certain aspects of their proposals and to better focus future discussions on items of significance.
It should be made clear to LAFCO that the City is willing to participate in the negotiations only with the understanding that the City reserves all rights it may have to object to or question: (a) whether the proposed secessions should be approved by LAFCO and (b) any aspect of the proposals being studied by LAFCO, including but not limited to, any particular conditions that may potentially be included in a resolution making determinations. Therefore, the City's participation should not be seen as either an acknowledgement that secession will happen or acquiescence in any aspect of what is under study.
• Who should represent the City in negotiations?
The contemplated negotiations with the Applicants could result in the City proposing terms and conditions to LAFCO for incorporation into its decision. Since LAFCO is a governmental agency, the Charter and Administrative Code provisions regarding intergovernmental relations should guide procedures for developing negotiating positions and presenting those positions to LAFCO. Under those provisions, the Council adopts City policy, subject to veto of the Mayor and override by the Council. The Mayor then represents the City in intergovernmental relations in accordance with that City policy.
However, due to the broad range of topics that could be covered in these meetings, we believe that a negotiating team would best represent the City's interests. We recommend that the Mayor authorize a City team comprised of representatives from:
Negotiating Team Support Staff
Mayor's Office City Administrative Officer
Council City Attorney Controller Department heads as needed City consultants as needed
• Should the negotiations be public or private?
Public. Discussions are anticipated to cover major issues related to a proposed dramatic change in the governance of the second largest city in the country. The public has a right to know what is being proposed.
There should be clear and open discussion about the significant financial and operational impacts (to the new cities and the remaining City of Los Angeles) created by the Applicants' proposals. These issues cannot be ignored, "swept under the rug" or deferred with promises of working things out at a later date after the election. The issues must be resolved before LAFCO can: 1) make its findings about the fiscal viability of the proposed new cities, and 2) guarantee that no harm will come to the remaining City of Los Angeles.
The potential impacts of the Applicants' proposals could affect every resident and business owner within the current City of Los Angeles' border for generations. Negotiations done in private carry more risks for all of Los Angeles' current residents and businesses than negotiations done in public. Everyone in this process deserves to have full access to these discussions and the opportunity to comment before LAFCO regarding these issues.
To ensure public access, the City can assist by making City facilities available for the negotiations. In addition, ITA should be authorized to:
• Broadcast the negotiations live on Channel 35, the internet and on Cityphone;
• Run tapes of the negotiations on a variety of days and times, such that the timing and frequency allow as many people as possible to view the negotiations;
• Make tapes available for sale to the public at a nominal fee; and,
• Provide for translation of the negotiations into the three most frequently used languages in the city.
What should be negotiated?
At a recent LAFCO meeting, the LAFCO consultant stated that the draft Comprehensive Fiscal Analysis (CFA) would also be released during the first week of October. Because of the narrow time frame allowed by LAFCO between the release of the draft CFA and the beginning of negotiations, we are obliged to release this report with our recommendations on the negotiation process ahead of the draft CFA. After the draft CFA has been released, we will report back if our review indicates the need for any substantive changes in the negotiation process or instructions.
We believe that topics to be discussed with LAFCO and the Applicants should include, but not be limited to, the following:
1. Debt allocation and guarantees of payment;
2. Revenue neutrality and how it must be applied and calculated to ensure that no harm comes to the remaining City;
3. Fiscal viability calculation and the potential impact on people in the proposed new cities;
4. Employee relations issues;
5. Division of liability such as lawsuits, claims and workers' compensation;
6. Cashflow agreements about how revenues would be split (accrued revenue versus cash receipts that span fiscal years);
7. Other topics which we may identify and on which we will report back as needed.
What are the City's expectations of LAFCO's role in the mitigation negotiation process? We believe that LAFCO should not only set up the meetings, but should also be present at all negotiation sessions. This arrangement would give LAFCO the opportunity to ask clarifying questions as needed for LAFCO's own benefit during the discussions. The negotiations should provide valuable insight into the various issues which LAFCO must address to make its revenue neutrality and fiscal viability findings.
In the Attachment, we provide a specific explanation with our recommendations for the City's position on each of these items. Index
1. Approve the policy positions on the issues described in the Attachment to this report and transmit these policies to the Mayor for approval and to be used in the Mayor's representation of the City in negotiations with LAFCO and the Applicants;
2. Designate the Chief Legislative Analyst as the Council's representative if a team approach is chosen for negotiations with LAFCO; and,
3. Make City facilities available for the conduct of these negotiations and direct the Information Technology Agency (ITA) to:
a. Immediately set up and operate Channel 35 filming/broadcasting equipment, as needed, during these negotiations;
b. Provide for translation of the negotiations into the three most frequently used foreign languages in the City; and,
c. Report back with actual costs incurred and budget appropriations that may be needed if these costs cannot be absorbed into the ITA budget.
That the Mayor establish a negotiating team and request the participation of elected City officials as follows:
Negotiating Team Support Staff
Mayor's Office City Administrative Officer
Council City Attorney Controller Department heads as needed City consultants as needed
(Fiscal Impact Statement attached)
Fiscal Impact Statement
The City negotiating team and City support staff costs should be funded through existing budget appropriations. We cannot determine the ITA cost to set up and broadcast the negotiations because LAFCO has not yet announced the schedule, location, number or length of negotiation meetings. ITA will report back on those costs once they are known. Index
1. Debt allocation and guarantees of payment
In general, debt should be allocated to the new city on the basis of the type of borrowing program under which the debt was incurred and the source of repayment for that particular debt. (For example, debt that is paid from the General Fund should be allocated on the basis of the loss in General Fund revenue to mitigate the impact of the City's reduced capacity to repay the debt.) Each new city should be required to replace their share of the existing City of Los Angeles's debt with debt in the new city.
A. General Obligation (G.O.) Bonds and Special Assessments
Position: For any debt that has already been issued and is secured by a tax or special assessment, the new city must pay off its portion of the outstanding debt as a condition of secession. This will alleviate any concern about the new city adopting its own ordinances to levy taxes and remitting them to the remaining City of Los Angeles in a timely manner or the question about Los Angeles' authority to levy taxes outside of its city limits to collect tax revenue for debt payments.
Position: For any debt that has been authorized by the voters, but has not yet been issued prior to the November 2002 election:
• If secession is approved, the remaining City of Los Angeles will only issue that portion of the authorized debt that funds assets/etc. in the remaining City of Los Angeles. If secession is not approved, the City of Los Angeles will continue to issue the entire authorized debt to acquire all facilities/assets authorized by the voters for the entire City. • We do not believe that LAFCO should allow a new city to issue any debt based on the City of Los Angeles' authority, but rather a new city should secure its own authority should it wish to issue debt.
B. MICLA Certificates of Participation (COP) Lease Obligations for Moveable Assets Position:
For any COP lease obligations that have already been issued and are secured by a moveable physical asset that is transferred to a new city, the City of Los Angeles is legally not allowed to make COP lease payments on physical assets the City does not use. Therefore:
• LAFCO must identify specifically which assets are to be transferred to a new city.
• If COP lease payments are still owed on the assets to be transferred, the new city must pay cash up front to the remaining City of Los Angeles so that the COP lease obligation can immediately be paid before the asset is transferred.
• Alternatively, if the remaining City of Los Angeles is using the asset to provide a service to the new city, the COP lease payment will become part of the service cost to the new city and must be paid in regular installments to meet the existing COP lease payment schedule.
C. Certificates of Participation (COP)
Lease Payment Obligations for Fixed Assets Position: These lease obligations were incurred for major facilities and were based on the current capacity of the City's General Fund. If a portion of the City secedes, the General Fund for the remaining City of Los Angeles will be reduced. The remaining City will not have the same ability to make the COP lease payment and maintain the current level of service. LAFCO must ensure that the remaining City of Los Angeles is not harmed and can meet its lease payments. Therefore, the new cities must continue to fund their share of the COP lease payments for the Convention Center, Central Library, Piper Technical Facility and any other similarly financed facilities. This COP lease repayment must be guaranteed through a legally enforceable mechanism such as annually setting aside a share of the new city's property tax revenue to make COP lease payments. Alternately, COPs could be paid off in full with cash by the new city at the time of secession so that the lease payment obligation for the remaining City can be paid off.
• The Van Nuys Civic Center is a new facility to be built of approximately 134,000 square feet. The City has a long-term lease to occupy the building with an option to purchase. Because of the cost effectiveness of a tax-exempt financing, the City may utilize MICLA COPs. If the Valley area secedes, the new Valley City would need to take over the City's lease payment ($34 million over 20 years).
D. Special Parking Revenue Fund Financed Projects
Position: This debt was issued based on the current revenue stream for the Special Parking Revenue Fund. Special Parking Revenue Fund monies have been pledged to the Hollywood and Highland (TrizecHahn) Project and may be pledged to other projects in the near future. Careful analysis is needed to ensure that the City's compliance with the rate covenant is not affected by the loss of special parking revenue funds to a new city. We believe that the City's Financial Advisors and Bond Counsel need to review these projects before the division of this Fund and debt can be addressed.
E. Sanitation Equipment Charge (SEC) Revenue Bond Issues
Position: The City of Los Angeles' ability to maintain the bond required debt ratio may be an issue if Los Angeles is not allowed to continue collecting all SEC revenue from the entire (current) City. The City of Los Angeles needs a legally enforceable guarantee that the new city will maintain the SEC charges needed to pay off SEC financed debt and/or pay off its share of the debt.
F. Proposition K Debt
Position: Allocation of Proposition K debt already issued and yet to be issued must be resolved. Proposition K is different from other types of programs because a large portion of Proposition K is for "pay as you go" financing, rather than simply debt financed. Many other issues related to the Prop K assessment district and its future administration must be resolved.
G. Judgment Obligation Bonds
Position: This debt should be allocated on the basis of the loss of General Fund revenue. The General Fund is the source of repayment for this type of debt; therefore, the amount of debt allocated to the new city should be proportional to the loss in General Fund revenue to mitigate the impact of the remaining City's reduced capacity to repay the debt. The repayment of the new city's portion of the outstanding judgment obligation bond debt, as with their portion of other types of debts and obligations, must be guaranteed through a legally enforceable mechanism so that the remaining City is not financially harmed. Index
Position: Revenue neutrality must be based on what the remaining City of Los Angeles saves by no longer serving the seceding areas. The methodology used in each draft Initial Fiscal Analysis (IFA) to date is not valid because it simply splits an existing "pie" and does not acknowledge the "fixed" costs that will not change for the remaining City of Los Angeles. In fact, the IFAs done to date do not analyze any impacts on the remaining City of Los Angeles as required by State law.
Example: A family of four pays for a mortgage payment and food each month. If one person moves out, the mortgage payment does NOT decrease at all, whereas the food bill will decrease by 25%. The following table shows the costs compared to the faulty methodology used in the IFAs issued to date:
| 4 Person Household | 3 Person Household | IFA Methodology for 3 Person Household | |
| Mortgage Payment | 1000 | 1000 | 750 |
| Food Bill | 400 | 300 | 300 |
| Monthly Expenses | $1400 | $1300 | $1050 |
Therefore, the three people in the remaining household see a $100 decrease in their bills, not a $350 decrease as calculated using the faulty IFA methodology.
The City of Los Angeles "fixed" costs should be determined by calculating what it would take to continue the current level of service for the people in the remaining City. The LAFCO approach, which cuts the funding for the remaining City of Los Angeles' "fixed" costs and then claims there is no impact on the remaining City, is not correct and does not meet the requirements of the State law that there should be no fiscal harm to the remaining City. The City has many kinds of fixed costs, which it will continue to incur whether or not the Valley or Harbor areas secede. When calculating revenue neutrality, the IFA methodology should have focused on the variable costs associated with no longer serving a particular region.
We do not believe that LAFCO's initial estimate of a $68 million revenue neutrality payment is correct, particularly regarding centralized and support services. For example, the Valley IFA states that 34% of the City Clerk staff should be transferred to a new Valley City. However, a simple review of the City Clerk's workload and functions clearly demonstrates that little to no work or costs will be saved by the City Clerk if the Valley secedes. The Los Angeles City Clerk will have to serve the same number of Councilmembers, staff the same number of committees and Council meetings, hold the same number of elections, etc. - but according to LAFCO's IFA, with only 66% of the staff and budget. Furthermore, under the Valley IFA, a City Clerk in the new Valley City would have nearly the same amount of work (14 instead of 15 Council members) but is only provided for 34% of the budget and staff, leaving the Valley City Clerk even more severely understaffed and underfunded. The Valley IFA allocated City staff based on population of the new and remaining cities and the proportion of employees to be transferred. A better methodology would have been to analyze the actual work done by the various divisions of the City Clerk's Office and whether the secession of the Valley would eliminate or decrease that work. The analysis of what the new Valley City needs would show that they need to nearly duplicate the staff and budget of Los Angeles City Clerk if the new Valley City wants the same level of service and support for their new Council that they currently receive.
This is one of the most significant examples of where the LAFCO methodology does not reflect reality; furthermore, it harms both the new city and the remaining City of Los Angeles. Not every instance will be as clear cut. We acknowledge that there may be some limited areas where centralized and support staff and resources can be allocated to a new city and where the remaining City departmental staff and resources can be reorganized to handle the work of the remaining City. However, that analysis should be based on the principle of maintaining the current level of service to the remaining City of Los Angeles residents and businesses. The analysis should be calculated based on what costs the remaining City actually saves due to secession.
The burden is on LAFCO to do this analysis correctly.
Position: The City of Los Angeles must be assured that it will receive revenue neutrality payments on a timely basis. The revenue neutrality payments from the proposed Valley City would be substantial, even by the Valley IFA measurement. Should the Valley City fail for whatever reason to make the payment on a timely basis, serious fiscal problems would be thrust upon the City of Los Angeles. For this reason the City should demand LAFCO conditions that secure timely payment.
Lessons can be drawn from the experience of Sacramento County in regard to the Citrus Heights incorporation a few years back. There, a revenue neutrality payment had been negotiated and formed part of the incorporation terms and conditions that were ultimately approved. After incorporation, however, the newly formed Citrus Heights city council balked at making the required payments. Sacramento County brought suit against Citrus Heights, with the matter being settled prior to judicial determination. Under the settlement terms Sacramento County settled for only a portion of the previously negotiated revenue neutrality payment.
We naturally have no reason now to ascribe bad faith on the part of the any of those associated with the Valley secession movement. But it would be irresponsible for the City of Los Angeles to ignore what happened in the Citrus Heights matter. Any terms and conditions adopted by LAFCO should not put Los Angeles at risk of receiving the revenue neutrality payment late or having to seek payments by court directive. Hence, a way must be found to ensure timely payment.
Position: The revenue neutrality payment must be guaranteed for a significant number of years. Incorporations around the state typically require a newly incorporated city to make revenue neutrality payments. In those cases, the new cities' budgets usually represent a small percentage of a county's revenue. The incorporations of Laguna Woods, Rancho Santa Margarita and Aliso Viejo were each less than one percent of Orange County's budget. The incorporations of Citrus Heights and Elk Grove each represented less than two percent of Sacramento County's budget. In contrast, the San Fernando Valley produces approximately 31% and the Harbor Area produces approximately 3% of the City of Los Angeles revenue.
In other incorporations the revenue neutrality payments have varied, but generally fall between 10 to 25 years. This time frame gives the county (the remaining agency) sufficient time to adjust to the loss of a few percent of its revenue without negatively impacting the remaining people in the county.
The time frame for the revenue neutrality payment must be sufficient for the remaining City of Los Angeles to adjust to that loss of revenue without harming the people in the remaining city.
Position: The frequency of payments should be quarterly at a minimum and paid in advance to protect Los Angeles' cash flow. Index
The residents and businesses of the proposed new cities are currently the responsibility of the City of Los Angeles and the City should also address issues which will provide for their protection as well. As we described in our prior reports, the results of the revenue neutrality calculation are the basis for determination of fiscal viability. If revenue neutrality is calculated inaccurately, fiscal viability will also be inaccurate.
The fiscal viability determination directly impacts the future well-being of those in the proposed new cities. It may be that there are things that the City of Los Angeles can do to assist in protecting those in the proposed new cities (our current responsibility), however, without an accurate determination of the revenue neutrality and fiscal viability calculations, we can not identify what they are. Once revenue neutrality is accurately defined, the City can focus on identifying specific requirements of fiscal viability.
Position: The calculation of fiscal viability needs to be done accurately so that potential impacts to the residents and businesses in the proposed new cities can be addressed effectively by both the Applicants and the City of Los Angeles. Index
A. Applicability of City of Los Angeles laws and regulations such as the Charter, various ordinances and Civil Service Rules
Position: State law requires that any employees transferred to work for a new city are covered under the Memorandum of Understanding (MOU) in effect at the time of the transfer.
It should be noted that the MOU protections are only for the duration of that MOU. The Applicants have indicated that the new cities would adopt the same ordinances that Los Angeles currently has. However, many employee protections are included in documents besides ordinances, such as the Charter and Civil Service rules. We do not want to meddle in the affairs of the new city - but the City of Los Angeles does want assurances that its current employees would be protected in the future if they go to work for a new city.
B. Employee Selection/Assignment Issues - LAFCO and the Applicants have proposed that selection processes be developed to choose which employees would work for the new cities.
Position: Any reduction in the City of Los Angeles' workforce needs to be done in conformance with the Charter methodology. The City of Los Angeles needs to follow its existing layoff mechanism. This is not negotiable. Index
Position: Formulas for division of various types of liabilities should be negotiated. The remaining City of Los Angeles must have a guaranteed payment for the new cities share of liabilities (minimum semi-annual payments) or the new cities must give Los Angeles a lump sum up front to be held in an escrow account to pay their share of liabilities as they are incurred. The liability formulas must include claims for incidents that occurred prior to the establishment of the new cities, even if the claims are submitted after the new cities are approved. Los Angeles will make the calculations according to the formulas established and will share those calculations with the new city. Index
Position: Cashflow agreements about how revenues would be split must be negotiated before LAFCO can determine fiscal viability or revenue neutrality. The outcome depends on whether the revenue is allocated based on when it is accrued or when it is actually received. Approximately 25% of the revenues for the first year of the new Valley Harbor City's existence may be impacted by cashflow issues. Index
LAFCO published a timeline which included reference to LAFCO facilitating mitigation negotiations. LAFCO is the agency responsible for insuring that what is proposed is revenue neutral (so as to protect the residents of the remaining City of Los Angeles) and that the new cities are fiscally viable (so as to protect the residents of the new cities). Therefore, LAFCO needs to have a clear and thorough understanding of the concerns and issues raised by both parties in this negotiation process.
Position: LAFCO should not only set up the meetings, but should also be present at all negotiations. This arrangement would give LAFCO the opportunity to ask clarifying questions as needed for LAFCO's own benefit during the discussions. Index
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