This report was posted on LAFCO's Website in on nearly unusable PDF files see
http://lalafco.co.la.ca.us/Draft%20CFA%20SFV.pdf
We have started to convert them to usable internet files (HTML) So the public
can read the files in preparation to the public hearings
Prepared by Public Financial Management, Inc.
1. Purpose and Findings of the Study.
Findings of the Draft Comprehensive Fiscal Analysis
Key Assumptions Used in Report.
Financial Viability of the Valley City
Revenue Neutrality
Impact on Adequacy of Service
1. Purpose and Findings of the Study
The purpose of the Draft Comprehensive Fiscal Analysis (CFA) is 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 (i. e. a "special reorganization" within the City). A final CFA will be prepared after pubic hearings are held to receive input on this document. This document addresses the requirements of a comprehensive fiscal analysis as defined in the Government Code and provides analysis of factors that must be considered by LAFCO in making its determination whether to approve the San Fernando Valley proposal for submission to the electors.
The Government Code requires that as part of the review of any proposal which includes a proposal for incorporation, the LAFCO executive officer must prepare a report including a comprehensive fiscal analysis and a recommendation of the proposal. [1] Although not specified as part of the CFA, 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." [2]
In addition, the commission cannot approve the 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, [3] or
(2) any negative fiscal impact "has been adequately mitigated by tax sharing agreements, lump-sum payments, payments over a fixed-period of time, or any other terms and conditions" imposed by the commission. [4]
The calculation to determine whether there would be a transfer of substantially equal revenues and expenditures from the City has been described as a test of "revenue neutrality."
In addition to revenue neutrality, LAFCO must also consider other factors in the review of a proposal for incorporation. LAFCO 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." [5]
1 Section 56833.1. The text of this section has been recodified as Government
Code Section
56800.
2 Section 56375.1. Text recodified as Section 56720.
3 Section 56845( b). Text recodified as Section 56815( b).
4 Section 56845( c)( 2). Text recodified as Section 56815( c).
5 Section 56841. Text recodified as Section 56668( b) To index
Based on the assumptions used in this report regarding the method of providing service to the Valley City and the amount of revenue that would accrue to the new city, the draft CFA has found that:
§ A new Valley City could be financially viable during its first three years of incorporation.
§ A special reorganization of the San Fernando Valley and of the City of Los Angeles would not be "revenue neutral."
§ The City would lose $60.8 million more in revenue than expenditures, and this imbalance must be mitigated through some means such as a payment from the Valley City to the City of Los Angeles. To index
The findings in the draft CFA are based
on the following key assumptions
regarding the provision of services and payment by the new Valley City.
(1) The City of Los Angeles will furnish virtually all municipal services in the San Fernando Valley on behalf of the new city.
(2) The new city will reimburse the City of Los Angeles for all direct and indirect costs of providing service.
(3) The City of Los Angeles will continue to collect a substantial amount of revenue on behalf of the new city, and will retain the revenue as payment for service and a mitigation payment.
(4) The new city will employ staff sufficient to perform only a minimal level of functions.
Further discussion regarding the assumed method of providing service to the Valley is included in section "Service Alternatives for the Valley." The methodology used to estimate the costs of service is included in "Appendix I: Cost of Purchased Services." The staffing plan for the new city is provided in section "Financial Viability of New City -Valley City Costs -Personnel Costs." To index
To determine whether a Valley City
could be financially viable, the revenues
and expenditures for the new city have been projected for its first three years
of incorporation. The financial projections for the new Valley City are based on
the cost of services to be provided by the City of Los Angeles, staffing and
other costs for the new city, and the amount of municipal revenues to be
received from residents and businesses in the Valley City. 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. To index
Valley City Expenditures and Revenue
The combined budget for the Valley City
is estimated at $1,059. 5 million
(based on the City's fiscal year 2000-01 budget), and is comprised of a payment
to the City of Los Angeles for services provided in the San Fernando Valley, a
"mitigation payment," reimbursement to the City for one-time costs,
and costs for a minimal level of personnel and overhead for the new city.
Revenues for the new city are estimated at $1,066.4 million.
The assumed mitigation payment is based on a comparison of current City expenditures and revenues, which has found that the Valley contributes $60.8 million more to the City of Los Angeles than the value of services it receives. This amount excludes payments made by Valley water and power ratepayers, which currently contribute an estimated $51.6 million to the City's General Fund.
Even though the Valley City would be required to pay the City of Los Angeles
essentially all of its revenues for purchased services and the mitigation
payment, the new city would receive an estimated $10.8 million in additional
state motor vehicles license fee revenue that would not be shared with the City.
This boost in vehicle license fee revenue would allow the new city to fund a
minimal level of staffing and pay additional costs for elections, redistricting,
and City contract administration.
Additional Costs for Valley City
Because the Valley City would require additional staffing, equipment, and office space that cannot be provided by the City, its expenditures would increase in comparison to the current amount spent by the City of Los Angeles in the Valley. In addition, the City of Los Angeles may incur costs for redistricting and City Council elections that would result solely because of the Valley special reorganization. It is assumed that the Valley City would reimburse the City for these additional costs.
Valley City Projected Budget
The projected Valley City budget for fiscal year 2003-04 through 2005-06 is shown on the table below, unadjusted for inflation. The projection shows that revenues would exceed expenditures by at least $6.8 million annually, and result in the accumulation of a $23.1 million balance by the end of fiscal year 2005-06.
VALLEY CITY PROJECTED BUDGET FISCAL YEAR 2003-04 THROUGH 2005-06
(Unadjusted for Inflation)
2003-04 2004-05 2005-06
Revenue:
General Fund 904,058,524 904,058,524 904,058,524
Special Purpose Fund 162,302,644 162,302,644 162,302,644
____________ ____________ ____________
Total Revenue: 1,066,361,168 1,066,361,168 1,066,361,168
Expenditures:
Personnel 2,510,040 2,510,040 2,510,040
Non-Departmental 829,257 728,367 728,367
City of Los Angeles Purchased Services 992,172,959 992,172,959 992,172,959
City of Los Angeles Administrative Costs 1,984,346 1,984,346 1,984,346
City of Los Angeles Redistricting Costs 1,000,000 --
City of Los Angeles Election Costs 200,000 --
Mitigation Payment 60,835,208 60,835,208 60,835,208
____________ ____________ ____________
Total Expenditures 1,059,531,811 1,058,230,921 1,058,230,921
Available Balance 6,829,357 14,959,604 23,089,851
In developing the projected budget, it has been assumed that the effective
date of the Valley City incorporation would be July 1, 2003 because that would
provide the longest transition period (one year) pursuant to the provisions of
the Cortese-Knox Act. To index
Based on the assumptions used in this analysis, it
is estimated that the
current City of Los Angeles expenditures that would accrue to a Valley City
would not 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 paid
for by the Valley City through contracted service from the City of Los Angeles.
ESTIMATED CURRENT EXPENDITURES AND REVENUES ACCRUED BY VALLEY CITY
FY 2000-01
Estimate
Current Revenue $ 1,053,008,168
Current Expenditures (992,172,959)
___________
Difference $ 60,835,208
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. In its
analysis, 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 draft CFA, for those revenues not analyzed by the City an estimate of the
proportion of City revenue generated by 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
"Financial
Viability of New City -Valley City Revenue."
Revenues Retained by City of Los Angeles
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 that the Valley City would not 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.
Mitigation Payment
Given the estimated revenue that would transfer from the City is $60.8 million greater than the estimated expenditures, the Valley special reorganization 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 would be required. This report assumes that the mitigation would take the form of annual fixed payments. 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. To index
As part of the proposed Valley special
reorganization, the commission must
consider the effect on the costs and adequacy of service in both the Valley and
remaining City of Los Angeles. Even if it is assumed that the City would
continue to provide service on behalf of the new city, many services could be
impacted in the event the Valley becomes a new city. Two potential service
impacts are: (1) the Valley could experience a reduction in the responsiveness
to its residents, and (2) over the long-term, service may be reduced in one of
the territories due to a reallocation of county and state funding.
Reduction in Responsiveness to Valley
If virtually all municipal services are provided on behalf of the Valley, the City would provide a predetermined level of service as dictated by the service agreement. In the event the new city requires changes to the way services are deployed or prioritized, the new city may have limited ability to unilaterally change the service levels and priorities set forth in the service agreement.
Decreased County and State Funding in Remaining City
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 the 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 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 the Valley agreed to subsidize this service, or funding from another source was diverted.
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. 10
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