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.
2. Applicant's Final Proposal
Summary and Analysis of the Proposal
Transition Period
Payment for Services
Post Transition Period Services
Proprietary Departments and Regional Services
Municipal Revenues
Assets and Liabilities
Personnel
Mitigation Payment
Conclusions and Recommendations
2. Applicant's Final Proposal This section provides a summary of the San Fernando Valley applicant's final proposal for special reorganization, and an analysis (with recommendations) of the important issues or concepts raised in the proposal. The analysis is based on certain key assumptions regarding the provision of service in the Valley by the City of Los Angeles (see section "Purpose and Findings of the Study - Findings of the Draft Comprehensive Fiscal Analysis -Key Assumptions Used in Report").
It should be noted that LAFCO is not restricted to the provisions contained in the applicant's proposal and may impose its own terms and conditions on the proposed special reorganization. This section attempts to provide LAFCO with clearly identified, viable alternatives that may be considered in assessing the transition of service to the proposed new city. To index
On May 14, 2001, the San Fernando
Valley applicant submitted its final
proposal for special reorganization to the Los Angeles County LAFCO. The
proposal is a set of general principles that provides guidelines for, among
other
things, the transition of service to the new city, the allocation of regional
assets, the transfer of City employees, and the computation of a mitigation
payment. The proposal is not a detailed operating plan for the new city and does
not specifically address how services would be provided, or over what
timeframe. To index
The applicant has proposed that during a
"transition period" the City of Los
Angeles, under terms and conditions set forth by LAFCO, will provide services to
the new Valley City. It is further proposed that City employees would be
transferred to the new city according to a "reorganization plan" to be
included in the final CFA. The Final Proposal does not provide any detailed
information regarding the timing or process involved in the transition of service.
Because services could transfer to the new city in a number of differing ways (each of which having a different fiscal impact), a definitive process must be identified so that a viable set of events can be evaluated. Issues that must be considered in transferring service include:
§ the process for selecting employees from the City;
§ the division of equipment and assets;
§ the cost of incorporating the service in the new city's data processing and communications infrastructure;
§ the logistical requirements for providing supplies, new office space, and equipment facilities needs; and
§ the time frame involved in transferring services from the City.
Given that these issues have not been addressed in the Final Proposal, it is assumed in the draft CFA that the City will continue to provide services to the Valley City for a period of at least three years. The basis for this assumption is discussed in section "Service Alternatives for the Valley." Any additional costs necessary in administrating and accounting for the billing and payment of such services have been estimated as part of the draft CFA. The potential terms of a service contract with the City of Los Angeles are described in section "Financial Viability of New City -Valley City Costs -Purchase of Service Agreement." To index
The applicant has proposed that the payments to the City of Los Angeles for purchased services could be based on a fixed percentage of total revenues that would accrue to the new city. Reconciliation of cost and revenue balances can occur at the end of the transition period or periodically during the transition period.
Although there does not appear to be any legal impediments to LAFCO setting forth a payment schedule consistent with this proposal, it may result in a payment lower than the City's cost of providing the service in the event the new city's revenues were to decrease. Conversely, the C existing level of service to the new city would be fixed, as the City would have limited flexibility to demobilize or absorb personnel allocated to a Valley City service contract.
Under the report's assumed transition plan whereby the City continues to provide all services until an alternative arrangement can be negotiated, the City would also continue to collect a large portion of the new city's revenues, such as utility users taxes, business taxes, franchise fees, and other licenses, permits, fees and fines, and could retain this revenue for payment of contractual services and revenue neutrality mitigation. In this manner, the City would be assured that a large portion of the amount owed to it would be collected.
The new city would also receive revenues that are not collected by the City of Los Angeles, such as property tax and sales tax revenue. Typically, a new city would receive property tax revenue directly from the County of Los Angeles, and would receive sales tax from the state. Whether the new city would receive these revenues directly upon incorporation, or whether the City's payment for contractual services and mitigation would take priority may be a matter for negotiation between the two parties. It is assumed in this report that the new city would make monthly payments to the City for any amounts owed for purchased service and a mitigation payment that are not covered by revenues retained by the City. To index
The applicant has not identified in its Final Proposal how municipal services would be provided by the new city after the transition period, and has suggested that such a "service plan" would be part of the CFA. The applicant has also proposed that, notwithstanding a service plan in the CFA, it would retain the flexibility to contract with the City of Los Angeles, or establish new Valley City departments to provide the services.
Because the applicant has not described its service plan for the new city, it is recommended that LAFCO assume that the City of Los Angeles would continue to provide service to the new city for a period of at least three years. During this period the new city could attempt to negotiate a transfer of employees, equipment, and facilities from the City, in order that the new city can gain flexibility in deploying the service, and receive its municipal revenues directly.
In the event the new city cannot successfully negotiate a transfer of employees, equipment, and facilities from the City of Los Angeles, some form of protection is required for both parties to ensure that the Valley can continue to rely on the City for services, and that the City is adequately notified and compensated in the event it must redeploy its forces to other areas. To provide this protection, it may be necessary that the service contract provide for the continuation of all municipal services beyond a three year initial period if an alternative arrangement has not been negotiated. The potential terms of a purchase of service agreement are provided in section "Financial Viability of New City -Valley City Costs -Purchase of Service Agreement."
It is not recommended that LAFCO take responsibility for setting the terms of a transfer of service after the transition plan. This would require that LAFCO address issues including the transfer of City employees. LAFCO has limited discretion in employment matters, and it would need to adhere to Section 56844.2, while attempting to develop a plan for the transfer of employees that may occur after three years. It must be noted that the City and new city are bound by Section 56844.2 and, regardless of the terms and conditions imposed by LAFCO, will have to honor those requirements when engaging in negotiations over actual employee transfers in the future. To index
The applicant has proposed that "joint organizations" would be created for most regionally provided City services, including water, power, airports, harbor, zoo, and wastewater. The specific form of any joint organizations would be specified by LAFCO, and the formation would occur during the transition period.
Section 56844 provides LAFCO with the authority to form "improvement districts," which are districts "formed for the sole purpose of designating an area which is to bear a special tax or assessment for an improvement benefiting that area." [6] Only improvement districts can be formed without complying with the requirements of the principal act. [7] Accordingly, the applicants would have to comply with the principal act to form a regional service district. For example, to form a municipal utility district to provide the services of the Department of Water and Power, the process would have to comply with the provisions of the Municipal Utility District Act. Pursuant to the Municipal Utility District Act, initiation of formation proceedings requires resolutions of the public agencies involved consenting to the formation of the district (Public Utilities Code Section 11561) or a petition signed by ten percent of the registered voters (Public Utilities Code Section 11611), and an election called by the Board of Supervisors (Public Utilities Code § 11641). Each type of district the applicant may want formed may have different formation requirements.
As an alternative to the creation of a district, utility service could be provided to the new city by means of a purchase of service agreement with the City. This type of agreement would ensure that regionally provided utility services are not diminished in the newly incorporated territory and that user fees would be set to equitably recover the cost of service provided by the City.
In the absence of a set of terms regarding the joint operation of a special district that would control the City's proprietary departments and regionally provided service, it is recommended that LAFCO proceed with the review of the draft CFA under the assumption that the City would continue to provide these services through a purchase of service agreement. This type of agreement would likely result in a continuation of the same level of service for both cities, at the same cost, and would not require that LAFCO determine the terms of any jointly operated special districts, or attempt to devise a divestiture and asset allocation of any of the City's regional services. To index
The applicant has proposed that, to the extent possible, all municipal revenues will accrue to the new Valley City. To the extent any revenues cannot be paid directly to the new city, these revenues would be transferred to the new city when received by the City, and with "reasonable diligence." The applicant also proposes that the City provide a proportional share of grant funding to the new city.
Although a large amount of municipal revenues, such as the property tax and state subventions, would be paid directly to the new city upon the effective date of its incorporation, many others (e. g. business taxes, transient occupancy taxes, franchise fees, fees for services) are currently collected and accounted for by the City of Los Angeles. Any separate collection of the revenues would require that the new city and the remaining City of Los Angeles develop a process to separately collect and account for their respective revenues, and reconfigure the City's data processing systems to accommodate such a change. If an immediate transfer of revenue were imposed by LAFCO as part of the special reorganization, a detailed plan would need to be developed that would identify the specific steps necessary to provide this capability, in order that the time and cost of such a proposal could be presented to LAFCO for evaluation.
In addition to the necessity for a detailed collection and accounting process, an immediate transfer of revenue to the new city must consider the extent services are provided on a purchase of service basis from the City of Los Angeles. If the City is providing virtually all municipal services on behalf of the new city, yet would transfer a proportionate share of revenues to the new city upon its effective date, the City may be required to fund the contractual services in advance of reimbursement from the new city. This would result in lost interest earnings and potentially greater interest on cash flow borrowings, which would need to be accounted for in computing the estimated contractual services payment to the City.
As an alternative, LAFCO could require that the City of Los Angeles remain as the custodian of certain municipal revenues, until such time as a plan (both technical and financial) can be developed to allow for the transfer of funds, which can be mutually agreed upon by the new city and City of Los Angeles.
It is therefore assumed that until the new city is able to negotiate an agreement otherwise, the City would continue to act as a trustee for all revenues collected on behalf of the new city, and would retain any amounts necessary to reimburse the City for any contractual services and a mitigation payment. To index
The applicant has proposed that the new city would be allocated an equitable
share of regional assets and given "rights" to those assets. The
specific form of ownership that would result from the asset allocation is not provided in the
Final Proposal, and it is not clear whether the new city would have the right to
restrict the usage or disposition of any regional assets.
Because the applicant has not addressed its ownership rights as a result of the transfer of ownership of City assets, LAFCO would need to consider whether the allocation would restrict the usage of the asset by the City, or whether the new city would be able to force the disposition of any asset. If the new city could restrict the use of such an asset, this may negatively impact the rights of bondholders or the ability of the City to meet existing contractual obligations.
As an alternative to LAFCO determining what assets would be transferred to the new city, and what rights of ownership the new city would have, it is assumed that the new city would receive only those assets that must transfer as an operation of law. Pursuant to Government Code Section 57385( a), these assets only include roads and highways in the territory.
Van Nuys Airport
The applicant has proposed that "the operation and assets (including land) associated with the Van Nuys Airport shall be transferred to the new Valley City."
As discussed in the IFA, transfer of the land and operation of the Van Nuys Airport (VNY) to a new city would be subject to approval by the Federal Aviation Administration (FAA). Since LAFCO does not have authority, independent of the FAA approval, to transfer VNY, it is not recommended that LAFCO attempt to impose such a transfer.
In addition, if such a transfer were to occur, the new Valley City would likely be required to subsidize operations at VNY from its general fund, as current operating revenues at the airport fall short of its operation expenses. If the Valley City were to subsidize the operations at VNY, it could be required to expend as much as $4 million annually from its general fund budget for this purpose. This expenditure would comprise a proportionally large expenditure of the new city's relatively small discretionary general fund budget. It is therefore assumed, for the purposes of the draft CFA, that VNY would remain part of the City's airport system, under the control of the City and the Board of Commissioners, in the event the Valley is incorporated as a new city.
Cash
he applicant has proposed that all "cash assets and receivables associated
with allocated services will be allocated proportionally and equitably to those
transferred services." It is assumed that the meaning of this proposal is
that
the Valley City would receive cash from the City of Los Angeles based on the
proportion of costs transferred to the Valley to total costs of the City.
As part of the initial fiscal analysis, it was assumed that no General Fund
or special revenue fund cash of the City of Los Angeles would be allocated to the
new city. General Fund cash was not assumed transferred given the City of Los
Angeles appeared to lack a reasonable fund balance. Because the City's
cash position has not appreciably changed since the preparation of the IFA, it
is again assumed that LAFCO would not require a transfer of cash from the
City as a condition of the Valley incorporation.
The new city would therefore have little cash reserves immediately upon its
incorporation. This is a similar circumstance faced by most newly
incorporated cities, but is exacerbated by the size of the new city's budget. In
the event revenues do not meet budget projections, the new city, as well as the
City of Los Angeles, would need to make budget adjustments in order that fixed
costs can be paid. The new city may have a significant amount of fixed
costs, as its budget will be mainly comprised of a payment for contracted
services and a mitigation payment. If the terms of the new city's purchase of
service agreement do not provide sufficient flexibility to allow for a reduction
of service or payment in the event budgeted revenues fall short, the new city
would have difficulty meeting its obligations (see section " Financial
Viability of New City -Financial Assessment of New City -Risk Factors").
Debt Financed Assets
The applicant has proposed that "To the extent the Valley is allocated its proportional share of the General Obligation debt of the City of Los Angeles, a credit will be given for the estimated value of the new Valley City's interest in regional assets of the City of Los Angeles." It is assumed that the meaning of this proposal is that, to the extent the current value of any assets financed with City general obligation bonds exceeds the imputed principal amount of general obligation bonds that would payable by Valley residents, the difference would be an obligation of either the City of Los Angeles or new Valley City.
As part of the initial fiscal analysis, it was assumed that the new city would be allocated a proportionate share of lease debt based on the location of the assets financed, but that the allocation of general obligation and special tax debt service would be based on property values or other existing method of allocating the tax.
There appears to be some flexibility in the manner lease obligation debt service is allocated, but limited flexibility in the allocation of general obligation and special tax debt service. However, the specific methodology used to allocate the City's outstanding lease debt may not impact the determination of revenue neutrality, given the new city would be required to mitigate any imbalance in aggregate revenues and expenditures. That is, if a particular methodology to divide the lease debt resulted in a higher amount allocated to the City, the mitigation payment to the City would need to increase in order to balance the City's aggregate revenues and expenditures. The requirement to repay the general obligation debt of the City will likely remain with the property, regardless of whether the property becomes part of the new Valley City.
In the event of a special reorganization, it is assumed that the new city would pay a proportional share of lease obligation debt service based on the location of the debt financed assets, and that Valley residents would continue to be liable for repayment of general obligation and special tax bonds levied on their property tax roll. It is further assumed that the City would continue to determine the general obligation tax levy on property owners and provide for payment of debt service to bondholders. Under this scenario, payment of the general obligation tax would be made to the City (through the Los Angeles County Tax Collector) by all properties currently subject to the tax, and no budget appropriation would be required by a Valley City. To index
The applicant has proposed that, during a transition period, all existing City employees would continue to be employed by the City of Los Angeles. As the new city assumes responsibility for services, City employees could transfer and become the responsibility of the new city. The applicant has stated that the salary and benefits of any transferred employees would not be reduced, and that "seniority, bumping rights, and placement on Certification Lists will be honored." The applicant has further requested that LAFCO would determine which employees would transfer, and that the terms of collective bargaining agreements would be maintained.
In order that a reasonable level of service can be maintained in the San Fernando Valley (for services that are not provided on a contractual basis), a process and set of rules will likely be necessary for the selection of employees transferred. Any such process would need to ensure that essentially the same positions or classes of employees are transferred to the new city so that qualified personnel are available to the new city, and that any transfer can be accomplished in consideration of existing City of Los Angeles rules and rights of City employees. Furthermore, any process for transferring employees would need to set a definitive timetable for the transfer of specific positions to ensure adequate notification is provided, and that the City and its employees can prepare for the mobilization of staff. Without a definitive process and timetable, the fiscal impact or legality of any such transfer is difficult to assess.
The applicant has not provided a plan that addresses many of the complex issues that would result from a transfer of City employees. Further, LAFCO is not responsible for the development of such a plan on behalf of the applicant. Given the absence of a definitive process and timetable, it is recommended that LAFCO proceed with the review of the Valley application assuming that no City employees would transfer to the new city during the first three years of incorporation. This assumption is consistent with the concept that the City continue to provide virtually all existing services through a purchase of service agreement. To index
The applicant has proposed that any mitigation payment made by the Valley City would be fixed and paid over a 10-year term. Any annual installment of the payment would be adjusted in the event actual Valley City revenues are less than the amount projected by LAFCO.
Pursuant to Sections 56844 and 56845 of the Cortese-Knox Act, LAFCO has many alternatives to mitigate the negative fiscal impact of a San Fernando Valley area special reorganization, including payments over a fixed period of time. A mitigation payment would be the most direct method of balancing the revenues and expenditures transferred from the City, and would allow the City to fund its remaining expenditures. It is assumed in the draft CFA that the Valley would make a fixed, annual mitigation payment to the City, and this payment would be unadjusted for inflation during the city's first three years of incorporation.
It may be reasonable for LAFCO to consider limiting the term of a mitigation payment, given an expectation that the City would need to gradually reduce its expenditures (and thus the level of municipal services) in order to meet the revenues generated within its territory. However, consideration must also be made for the City's debt obligations, which will be outstanding longer than ten years.
Negotiations between the City and Valley over the form, amount, and term of the mitigation are planned as part of the LAFCO process of approving the application for special reorganization, and it is expected that more definitive terms will be determined after this process. To index
Conclusions and Recommendations
Based on our review and analysis of the applicant's Final Proposal, we have made the following findings:
§ The Final Proposal is substantially the same as the applicant's preliminary proposal, and does not provide detailed information on what services would be provided by the new city, or how employees, equipment, or facilities would transfer to the new city.
§ In the absence of a detailed plan in the Final Proposal, it is likely that the new city would need to rely on the City of Los Angeles to provide municipal services on its behalf for an extended period.
§ In the event the City continues to provide services for the new city, it would need to collect certain Valley revenues on behalf of the new city and serve as its trustee until the new city can perform this function on its own.
§ The City of Los Angeles may require that it retain any revenue collected on behalf of the Valley to reimburse itself for purchased services and a mitigation payment.
§ No City of Los Angeles assets, other than streets, are required to be transferred to the new city upon its incorporation.
§ No City of Los Angeles employees would transfer to the new city as a LAFCO term or condition of the special reorganization.
In the absence of a specific plan by the applicant and in response to the numerous comments by the City of Los Angeles regarding the negative impacts of a transfer of employees and assets, it is recommended that LAFCO assume the City would continue to provide essentially all services for the new Valley City. This assumption is consistent with the specific direction from the LAFCO Commission that its consultants not provide a plan on behalf of the applicant, and would be a likely alternative in the event the City of Los Angeles and the applicant are unable to agree upon an immediate transfer of employees and assets.
This approach offers several policy advantages:
(1) It can be done in the absence of a specific proposal by the applicants.
(2) It best responds to the concerns raised by the City of Los Angeles. This approach would have minimal impact on the status of current City employees, allow City departments flexibility in providing services to the Valley, and have the least fiscal impact on the City.
(3) It requires the least amount of staffing for the new city.
(4) It provides time for the new city to better determine its service requirements.
(5) It allows the new city and the City of Los Angeles to negotiate ongoing service provisions after the new city is incorporated.
Assuming the City provides the service also reduces the uncertainty in the future level of service for both cities, and the potential for a significant amount of additive costs associated with a transfer of City employees, equipment, and facilities. The City's response to the Final Proposal raised a significant amount of concerns regarding the fiscal impact on the City and financial viability of the new city. These concerns are based on certain assumptions regarding the transfer of service from the City, which may not reflect the most cost efficient process for providing services to the new city. To index
6 Government Code Section 56041.
7 Government Code Section 56125.