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http://lalafco.co.la.ca.us/Draft%20CFA%20SFV.pdf
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Prepared by Public Financial Management, Inc.
5. Financial Viability of New City
Budget Summary
Valley City Costs
Personnel Costs
Non-Departmental Costs
Purchase of Service Agreement
Special Election Costs
Valley City Revenue
Estimated Share of Existing City Revenue
Additional State Revenue Available to Valley City
Financial Assessment of New City
Additional Revenues Exceed Costs
Risk Factors1
5. Financial Viability of New City
To assess the financial viability of a proposed Valley City, projected expenditures for the new city have been estimated given the personnel requirements for the new city, the cost of services provided by the City of Los Angeles, and additional costs that would result from the special reorganization, and compared to the amount of municipal revenues that would accrue to the Valley City. Based on this projection of expenditures and revenues, it is estimated that:
§ A Valley City could achieve positive fund balances for the first three years of incorporation and maintain a reasonable level of reserves.
§ The Valley City would need to accumulate its reserves, as it would not have cash balances immediately upon its incorporation.
§ In the event of an economic downturn, the Valley City would likely experience a decrease in revenues and may not have cash reserves to supplement any shortfalls.
§ The ability of the new city to meet its obligations to the City of Los Angeles will depend on the flexibility of the terms of its purchase of service agreement and mitigation payment.
Budget Summary
The estimated budget for the new city is comprised primarily of a payment to the City of Los Angeles for services provided as part of a purchase of service agreement. The projected cost of the purchased services are based on the mount budgeted by the City of Los Angeles in fiscal year 2000-01, and are unadjusted for inflation. The specific services that would be provided on behalf of the Valley City and the estimated cost of those services are described in the department-by-department analysis in this report (see "Appendix I: Cost of Purchased Services"). Based on this review of City of Los Angeles services provided in the Valley, it is estimated that the new city would reimburse the City $992.2 million in fiscal year 2003-04 for the cost of purchased services.
The budget for the new city is also assumed to include $2.5 million in personnel costs for its own staff, and $0.8 million in "non-departmental" costs for equipment and office space. In addition, the new city is assumed to reimburse the City of Los Angeles $60.8 million annually as a mitigation payment, and a one-time $1.2 million charge for redistricting and election costs resulting from the special reorganization.
Revenues for the new city are estimated at $1,066.4 million for fiscal year 2003-04 (unadjusted for inflation), of which $515.2 million are assumed collected by the City of Los Angeles on behalf of the new city, and $551.1 million would be received directly from the state or County of Los Angeles. The new city is expected to receive an additional $10.8 million in Motor Vehicle License Fee Revenue, which is over and above what is currently paid to the City of Los Angeles, and would provide the new city funding for discretionary purposes.
Revenues are projected to exceed expenditures by $6.8 million in fiscal year 2003-04, and $8.1 million in the following two years, resulting in a cumulative fund balance of $23.1 million at the end of fiscal year 2005-06.
Valley City Costs
The estimated costs for the Valley City during its first three years of incorporation are discussed in this section. Cost estimates for the new city are developed for the new city's own staff and "non-department" costs. The Valley City is also assumed to pay other costs incurred by City, which are described in section "Fiscal Impact on City of Los Angeles -Additional City of Los Angeles Costs."
Personnel Costs
The draft CFA assumes the new Valley City would, upon
incorporation, include
an elected City Council and Mayor, as well as a core administrative staff to
carry out several essential municipal duties. This section presents one
possible plan for the initial staffing of a new Valley City. The plan for
initial staffing of a new Valley City is intended to satisfy two requirements:
(1) A new Valley City's initial staffing must be sufficient to perform certain functions of general law cities that are mandated by state law; and
(2) Valley staffing should be at the minimum level to ensure that all currently foreseeable day-to-day municipal functions are being carried out.
Presented below is a discussion of the data sources and methodology used to develop the initial staffing plan for the Valley. Following this discussion is the staffing plan itself.
Data Sources and Methodology
The primary data sources utilized to develop the
Valley City's initial staffing
plan were budget documents from the most recent fiscal years of numerous
California cities. The budget documents used most extensively were those of
California cities that have incorporated since 1997. These budgets provided
benchmarks for assessing the staffing and various other costs that face newly
incorporated cities. While the proposed Valley special reorganization is
different from previous city incorporations in several important ways (e. g.,
the
large size of the proposed Valley City, its detachment being from another city
instead of from a county government), the budgets of recently incorporated
cities are useful guides in developing an initial Valley City budget for at
least two reasons. First, a newly incorporated Valley City would have several
things
in common with other newly incorporated cities. A new Valley City would (at
least initially) have very limited revenues, be staffed at a minimum level, and
be
reliant on an outside agency( s) for the delivery of essential services. Second,
the actual staffing and expenditures of recently incorporated cities provide
benchmarks of what constitutes truly core staffing needs, as well as of the kind
and level of departmental and non-departmental expenditures that newly
incorporated cities are likely to encounter.
Valley City Staffing Plan
It is envisioned that the following officers and functions would comprise the initial staffing of a new Valley City:
§ City Council
§ Mayor
§ City Manager
§ City Attorney
§ City Clerk
§ City Controller/ Finance Director
§ Planning Director
§ Public Works Director
Each position listed above would include support staff. A detailed breakdown of the staffing and related cost for each function appears in Appendix III. For the Valley City's first three years, it is envisioned that the city's administrative staff would consist of 19 full time employees.
As envisioned in the draft CFA, the City of Los Angeles would continue providing most services to the Valley for at least three years, including animal control, public works, law enforcement and many others, as well as certain general government and planning functions. The new Valley City would have its own city council and mayor, and it would assume a limited range of general government and planning responsibilities.
The proposed initial staffing of the new Valley City is also designed to provide the Valley with a core staff able to both administer essential municipal functions and ensure that services are being provided consistent with all service agreements. Among the administrative staff deemed particularly important for carrying out the Valley City's essential municipal functions would be a City Attorney, who would oversee all legal matters; a City Controller, who would oversee all financial and accounting functions; and a City Clerk, who would perform a variety of mandated administrative functions and ensure that the Valley adheres to various procedural requirements.
The other positions included in the proposed initial staffing plan – City Manager, Public Works Director, Planning Director – would have primary responsibility for ensuring that the Valley receives the municipal services from the City of Los Angeles as specified in the various service provision agreements. Carrying out this responsibility would entail these staff positions acting to both address the concerns of Valley residents and as liaisons between the Valley and City of Los Angeles.
Among all positions in the proposed initial staffing plan for the Valley, the
somewhat unique nature of the planning function requires special
consideration. Because the planning function concerns fundamental issues of land
use and development, the Valley will need to exert a relatively higher level
of policy oversight in this area at the outset than in other functional areas,
even though the Valley would (at least initially) continue using the City's
General
plan, zoning and building codes. This will require both relatively more
administrative resources, and it will require that procedural mechanisms exist
to ensure that Valley administrative staff and/ or policymakers (i. e., the city
council) are able to make key policy decisions related to land use policies and
specific development projects within the boundaries of the Valley City. It will
therefore be critical that such procedural mechanisms be negotiated as part of
any planning-related service provision agreement between the City and Valley.
City Council and Mayor
The new Valley City would have 15
councilmembers – 14 elected by district,as well as a mayor elected at-large who would also serve as a councilmember. It
is assumed that each councilmember and the mayor would earn annual
salaries of $12,000, which is the salary level specified in California law for
councilmembers of general law cities with populations of 250,000 or greater. [9]
It
is important to note, however, that the Valley citizens could at any municipal
election vote to provide higher or lower salaries for Valley councilmembers.
Councilmembers themselves could also adjust their salaries by ordinance,
although state law limits such increases to 5% annually. [10] The estimate of city
council expenses is based on analysis of actual city council budgets for
recently incorporated California cities.
It is also assumed that the city council and mayor would require minimal staffing during the new City's first three years, which would include a single legislative analyst position and a secretary. The salary for the secretary position is assumed to be the midpoint of the range of salary levels for a Secretary (Code # 1116) at the City of Los Angeles as of fiscal year 2000-01; for the legislative analyst, the midpoint of the range of salary levels for a Legislative Analyst II position in the City (see Appendix III for a complete list of position salaries).
City Manager
The City Manager's Office would oversee all City
operations. It is envisioned
that this role would include responsibility for coordinating and administering
the services being provided to the Valley. Given the draft CFA's assumption that
the new Valley City would be receiving all services on a contract basis, the
City Manager's Office is likely to require relatively more initial staffing than
other departments (other than Planning). Thus in addition to a City Manager, the
department would also include two Assistant City Managers and a
secretary. The salaries for the positions are estimated using the salaries of
similar positions in the City of Los Angeles as of fiscal year 2000-01, with the
exception of the Administrative Intern position, whose salary is estimated from
analysis of Intern salary levels at various municipalities. The estimate of City
Council expenses is based on analysis of actual City Manager's Office budgets
for recently incorporated California cities.
City Clerk
The City Clerk's Office would include a City Clerk, and
Executive Secretary,
and a half-time secretary. The City Clerk's salary would initially be equal to
that of the City Clerk of the City of Los Angeles as of fiscal year 2000-01.
Estimated expenses are derived from analysis of actual City Clerk Office
expenses in recently incorporated California cities.
City Attorney
The City Attorney's Office would consist of a City Attorney and a half-time secretary. Estimated salaries are based on the actual salaries for similar positions in the City of Los Angeles, and the estimates of expenses are derived from analysis of actual City Attorney expenses in recently incorporated California cities. The majority of City Attorney expenses are assumed to consist of payments for outside legal counsel, whose assistance will be particularly important in the Valley's negotiation of service agreements with the City of Los Angeles.
City Controller
The City Controller's Office would oversee all accounting and financial management functions in the new Valley City. The Office would include a City Controller, an accountant, and a secretary. The salaries for the City Controller and accountant positions are estimated, respectively, from the fiscal year 2000-01 City of Los Angeles salary of the City Controller, and the midpoint of the salary range for a Senior Accountant II position. Expenses are estimated from analysis of actual Finance Department expenses in recently incorporated cities.
Planning Department
The Planning Department would oversee city policy toward land use and development. It is assumed that a new Valley City would likely seek an active role in shaping land use policy within its boundaries, and that its ability to assume this role would be enhanced by having an independent planning capability within its own city administration. The department would therefore consist of a Planning Director, two city planners, and a part-time secretary. All position salaries are based on those of similar positions in the City of Los Angeles, and department expenses are based on analysis of actual Planning Department expenses in recently incorporated cities.
Public Works
The Public Works Department would oversee city engineering activities and the maintenance of all municipal facilities. It would consist of a Director, a city engineer, and a part-time secretary.
Non-Departmental Costs
The non-departmental budget includes items not
assignable to specific
departments and expenditures related to support services. The budget includes
three components: operations, office space rental, and capital outlay.
Estimated expenses for operations and capital outlay are derived from analysis
of actual city budgets, including those of recently incorporated cities as well
as
other cities having, like the new Valley City would have, relatively small
administrative staffs.
To estimate the cost of office space rental, market rates for office space in the Valley were obtained from research conducted by Cushman and Wakefield. As of January 2001, market rates for office space in the Valley were $2.02 per square foot per month. The estimate of square footage requirements were derived from the facilities planning documents of the City of Los Angeles, in which the City allots 230 square feet per person for office space. Applying these figures to the projected staffing of 18 full time equivalents, and then adding additional space that would serve as a meeting room for the City Council and other city commissions, resulted in the estimate of total office space costs. These costs are assumed to remain constant for the three years estimated.
Purchase of Service Agreement
As further discussed in section "Service Alternatives for the Valley," it is assumed in this analysis that the Valley City would rely on the City of Los Angeles for the provision of all municipal services currently provided by the City in the San Fernando Valley. It is assumed that the City would provide these services under the terms of a "purchase of service agreement." The methodology used to estimate the costs of providing service to the Valley is described in "Appendix I: Costs of Purchased Services." The estimated cost to administer the Valley purchase of service contract is discussed in section " Fiscal Impact on City of Los Angeles -Additional City of Los Angeles Costs." This section provides a discussion of the potential contractual terms of such an agreement.
Potential Contractual Terms of the Agreement
In order that the fiscal impact
of such a large purchase of service agreement
can be evaluated, the potential contractual terms of the agreement must be
identified. The fiscal impact on both the City of Los Angeles and new Valley
City would depend on the flexibility and security features provided by the terms
of the agreement.
The applicant has requested in its Final Proposal that the following contractual terms be included in a purchase of service agreement with the City:
§ LAFCO will set the terms of any purchase of service agreement.
§ The Valley City would receive the same level of service the Valley
region is currently receiving.
§ The costs of City services would be determined in the final CFA.
§ The rates and quality of service would be comparable to the remaining
City of Los Angeles.
§ Payment for City service would be made as a percentage of the new cities revenues.
In the City Response to the Final Proposal, the City has raised the following concerns regarding the terms of a purchase of service agreement:
§ The costs for negotiating the service contracts and amendments, coordinating with unions, and billing and tracking should be included in the amount billed to the Valley.
§ Liability for potential claims, lawsuits, and judgments must be addressed.
§ In the event the City is unable to meet the service levels identified in the agreement, it would not be required to divert resources from other areas.
§ The time period of the contract must be specified.
§ The services to be provided must be clearly specified.
To assess which of the requested terms are reasonable, and which appear out of the norm, the contractual terms used by other service providers has been reviewed. Based on the review of contract terms used by the County and others, and the requirements relating to contractually provided service set forth in the Government Code, it is assumed in the draft CFA that the following contractual terms would be part of the purchase of service agreement:
§ The service levels and resulting direct and indirect costs of the purchased services are based on the methodology used in the draft CFA.
§ The City would be reimbursed for all indirect costs of providing service including coordinating with unions, and billing and tracking.
§ The City would provide service under the agreement beginning on July 1, 2004.
§ Notice for renewal or amendment of the contract would be required one year in advance of the contract termination date.
§ The City would collect Valley revenues on behalf of the new city and would retain all amounts for payment of purchased services and the mitigation payment.
§ The Valley City would pay the City of Los Angeles monthly all amounts not recovered by the revenues collected on behalf of the new city.
§ The service levels identified in the agreement could be modified with the consent of both cities for just cause, such as a significant decrease in revenues, or an inability to provide staffing necessary to meet the required service levels.
Under these terms, the agreement would provide for the uninterrupted continuation of service in both territories, would address the service level concerns of the applicant, and would ensure the City is fully reimbursement for the cost of providing the service.
City of Los Angeles Administrative Costs
The estimated City of Los Angeles indirect costs necessary for the proper administration of the assumed purchase of service agreements are discussed in section "Fiscal Impact on City of Los Angeles -Additional City of Los Angeles Costs -Service Agreement Administration Costs."
Election Costs
The draft CFA assumes that if a special reorganization
advances to the stage
of being placed before the voters of Los Angeles, the vote on this issue would
take place in November 2002. The draft CFA also assumes that the election
for the initial Valley City councilmembers and mayor would be held concurrently
with the vote on special reorganization. The new Valley City
would be electing 14 councilmembers by district, as well as a mayor in an
at-large election. This would create 15 councilmembers, as the mayor would also
serve on the city council.
The special reorganization election, as well as the election of the Valley
City's first city council and mayor, will generate costs that, under California
law, will
be borne by the new Valley City. It is estimated that the magnitude of these
costs will be relatively low because the envisioned election date coincides
with the regularly scheduled general election November 2002. This means that the
required election "infrastructure" (e. g., polling places, ballots,
precinct workers,
etc.) will already be in place and the associated costs assumed by the County of
Los Angeles, leaving the new Valley City with responsibility solely for the
incremental expenses caused by elections on the special reorganization and for
the Valley's City council and mayor. As a result, it is assumed in the draft
CFA that the Valley's election expenses will be negligible.
Valley City Revenue
This section discusses the methodology used to estimate the amount of revenue that would be received by new Valley City, and provides a summary of the results of the analysis.
Estimated Share of Existing City Revenue
To estimate the amount of
revenue that would accrue to the Valley City
(transfer from the City), all revenue items currently received by the City that
would transfer to the Valley City have been analyzed. This analysis is based
on a report of the geographic source of revenue undertaken by the City of Los
Angeles in February 2001. [11] The City's report estimated that, of the revenue
items analyzed, 33.0% of General Fund revenue and 31.0% of all budgeted revenue
were generated in the Valley.
For the purposes of this report, the City's analysis has been reviewed, and
additional research has been performed to assess the geographic source of
certain revenues that were not analyzed by the City. Adjustments have also been
made to the City's analysis where more recent, or more refined data are
available. Incorporating these updates and adjustments to the City's analysis,
it is estimated that 30.5%, or $893.3 million of the City's budgeted General
Fund revenue in fiscal year 2000-01, and 26.0%, or $1,053.0 million of all
budgeted revenue would accrue to the Valley City.
| ESTIMATED CURRENT REVENUE ACCRUED TO VALLEY CITY | ||
| % Accrued By Valley City | $ Accrued By Valley City | |
| General Fund revenue | 30.46% | $ 893,258,524 |
| Special purpose fund revenue | 14.36% | 159,749,644 |
| Total revenue | 26.03% | $1,053,008,168 |
Additional detail regarding the estimated amount of current revenue that would accrue to the Valley City is provided in Appendix II.
An important distinction must be made between the amount of revenue generated by
Valley residents and businesses and the amount of revenue that
would actually transfer 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. Revenue related to the City's utilities,
such as the
transfer of operating income from the City's Department of Water and Power
(DWP), reimbursements from the DWP for service provided by the City, and
sewer franchise fees, would not accrue to the Valley City without an equity
share in the City's DWP or wastewater system. It has been assumed that
neither equity nor revenue generated from the City's utilities would accrue to
the Valley City.
Methodology Used to Estimate Revenue
In its revenue study, the City used a variety of methods to estimate the geographic source of its revenues. Because many City revenue sources, including property taxes, business taxes, and transient occupancy taxes, are assessed to City businesses and residents based on their address, the City was able to estimate the geographic source of revenue by grouping the address of the payers to either the Valley or City. Other revenues, such as state motor vehicle license fees are paid to the City based on population, and the City could estimate the Valley share of these population-based revenues according to the estimated population in the Valley.
However, in some instances, even where the address of the payer is known, an estimate of the geographic source of revenue in not easily obtained. For example, the amount of state sales taxes that are returned to cities is based on the location of the taxable transaction. Although the state keeps records of the location of transactions in the City, no records are readily available for businesses that have retail locations in both the Valley and other parts of the City. Other revenue, such as utility user taxes, are assessed by private firms and submitted in total to the City. The payer addresses are held by the private firms and not readily available to the City.
As part of this report, the methodology used by the City in preparing its revenue analysis has been reviewed and assessed for accuracy. In general, the City's analysis is accurate and provides a reasonable estimate of the geographic source of revenue. However, the City did not attempt to determine approximately 27% of revenue items paid into its General Fund, and 32% of its "special purpose funds." For the revenue items excluded from the City's analysis, the estimated geographic source is provided in this section. In addition, for certain revenues that were analyzed by the City, it has been determined that more updated or detailed information is available, which may provide a more accurate estimate of the geographic source of revenue.
General Fund Revenue
The City's General Fund accounts for revenue where the
use of funds is not
restricted to a specific purpose, and provides funding for most of the municipal
services of the City. [12] Upon incorporation, the Valley City is assumed to have
its own general fund to pay the costs of municipal services, which cannot be
funded by the various special revenue funds. The table below shows the major
revenue items currently paid into the City's General Fund, and the estimated
percentage that would accrue to the Valley City.
|
ESTIMATED PERCENT OF GENERAL FUND REVENUE ALLOCATED TO VALLEY CITY |
||
| Revenue ItemEstimated in February 2001 Report | City Estimate |
Draft CFA Allocation |
| Property Tax | 35.00% | 36.56% |
| Utility Users Tax | 35.68% | 36.12% |
| Business Tax | 31.00% | 31.00% |
| Sales Tax | 42.00% | 45.70% |
| State Motor Vehicle License Fees | 35.00% | 35.88% |
| Transient Occupancy Tax | 16.00% | 15.68% |
| Municipal Court Fines | 13.00% | 13.00% |
| Parking Users Tax | 8.00% | 8.43% |
| Interest | 33.00% | 30.46% |
| Franchise Income | 38.22% | 24.56% |
| Civic Center Parking Income | 0.00% | 0.00% |
| Transfer from Telecomm. Dev. Account | 43.01% | 43.01% |
| Transit Shelter Income | 33.00% | 33.00% |
| Residential Development Fee | 26.33% | 26.33% |
| Los Angeles Mall Rental Income | 0.00% | 0.00% |
| Not Estimated in February 2001 Report | ||
| Licenses, Permits, Fees & Fines. | na. | 21.64% |
| Power Revenue Transfer. | na. | 0.00% |
| Documentary Transfer Tax. | na. | 35.31% |
| Utility Users Tax – Unallocated . | na. | 37.73% |
| Transfer from Reserve Fund | n. a. | 0.00% |
| Water Revenue Transfer | n. a. | 0.00% |
| Franchise Income – Unallocated | n. a. | 33.69% |
| Grant Receipts | n. a. | 26.77% |
| Tobacco Settlement | n.a. | 0.00% |
| Transfer of Reserve Fund Loan | n. a. | 0.00% |
| Municipal Court Fines -Unallocated | n. a. | 13.00% |
| Capital Finance Admin. Transfer | n. a. | 30.46% |
| % Total General Fund Revenue | 30.46% | |
A discussion of the methodology used to estimate the percentage of revenue that would accrued to the Valley City, which differs from the percent of revenue generated in the Valley estimated by the City in its February 2001 report, is provided below. Further detail on the computation of the percentages is provided in Appendix II of this report.
Property Tax
At the request of LAFCO, the Los Angeles County Assessor has estimated the geographic source of property tax within the City, identifying the location of assessments made in fiscal year 1999-00. The Assessor's estimate is to be used to determine the amount transferred to a newly incorporated Valley City, in accordance with Cortese-Knox. Based on the Assessor's analysis, the Valley area was assessed 36.56% of the total 1% general tax levy transferred to the City of Los Angeles, net of the allocation of tax increment revenue to the Los Angeles Community Redevelopment Agency (CRA). [13]
The 1% general tax levy for fiscal year 1999-00 in the City of Los Angeles and for parcels within the proposed boundaries of the San Fernando Valley area of special reorganization are provided in the table below.
| 1% GENERAL TAX LEVY CITY OF LOS ANGELES AND SAN FERNANDO VALLEY FISCAL YEAR 1999-00 | ||
| Valley |
City of Los Angeles |
|
| Gross Tax Levy | $ 191,885,242 | $ 548,762,688 |
| Allocation to CRA | (1,998,160) $ | (29,433,957) |
| Net Tax Levy | 189,887,082 | $ 519,328,731 |
| Percent Net Tax Levy | 36.56% | |
Source: County of Los Angeles Auditor-Controller.
The County Assessor's estimate that 36.56% of the net tax levy is attributable to the Valley is used to estimate the allocation of property tax revenue in fiscal year 2000-01.
Utility Users Tax
The Utility Users Tax is comprised of several taxes, including the electric users' tax, gas users' tax, and telephone users' tax. The City's revenue analysis included an allocation of the electric and telephone tax, but did not include an allocation of the gas users' tax. The gas users' tax is levied on all users of gas in the City, and is equal to, in most instances, 10% of the amount charged. The Southern California Gas Company collects the gas tax on behalf of the City.
For the purposes of the draft CFA, the URD and LAFCO obtained gas users' tax revenue from the Gas Company, and geo-coded the data for fiscal year 1999-00. Based on the geo-coding effort, it is estimated that the Valley area of special reorganization accounted for 37.73% of the total amount of gas users' tax collected in that year. It is therefore assumed in this report that the amount attributable to the Valley as part of the City's fiscal year 2000-01 budget is equal to 37.73% of the total.
Sales Tax
The City's February 2001 revenue study utilized a 1998 study
prepared by the
State Board of Equalization (BOE) to estimate the share of 1996 City sales tax
revenue generated in the San Fernando Valley. The BOE study estimated
41.9% of the City's calendar year 1996 sales tax revenue was generated in the
Valley. The City also stated in its revenue study that, based on an internal
City database of sales tax accounts, 45% of sales tax revenue for fiscal year
1998-99 was identified to be generated in the Valley. Because of the
differing estimates of sales tax revenue from the Valley, the County of Los
Angeles
Urban Research Division (URD) was asked, as part of this fiscal analysis, to
prepare an independent estimate of the amount of fiscal year 1998-99 sales tax
revenue generated in the Valley.
The URD obtained a master registration file from the BOE that listed all sales tax accounts and branch locations in the City. The BOE file contains sales tax revenue for 1998-99 for each account, but not by branch for multiple branch accounts. The URD geo-coded the BOE file for single branch accounts and sampled the revenue for multiple branch accounts based on the number of days the branches were open. The URD's preliminary analysis resulted in an estimate of $121 million, or $45.7% of the City's sales tax revenue generated from the San Fernando Valley area of special reorganization.
It must be noted that the URD geo-coding effort did not result in a 100% match of accounts to geographic area, as $9.1 million of the $277.8 million in fiscal year 1998-99 sales tax revenue attributable to BOE accounts was either outside the City or not determinable. In addition, $1.9 million of sales tax revenue was located in an area that is within both the San Fernando Valley and Hollywood area of special reorganization. The following table summarizes the URD preliminary analysis of City sales tax revenue.
| SALES TAX REVENUE CITY OF LOS ANGELES AND SAN FERNANDO VALLEY FISCAL YEAR 1998-99 | ||
| Area |
$ Geographic Source of Sales Tax Revenue |
% Geographic Source of Sales Tax Revenue |
| San Fernando Valley | $ 120,991,295 | 45.0% |
| Hollywood/ San Fernando Valley overlap | 1,854,732 | 0.7% |
| Other areas | 29,565,104 | 11.0% |
| Residual City of Los Angeles | 116,255,332 | 43.3% |
| Total Allocable | $ 268,666,463 | |
| Total | 277,767,218 | |
| Source: County of Los Angeles Urban Research Division. | ||
The URD 45.7% estimate for fiscal year 1998-99 is used to estimate the amount of
sales tax revenue attributable to the San Fernando Valley for fiscal
year 2000-01.
Interest
The amount of interest income that would accrue to the Valley
City would be
related to the relative activity of its own general fund. For the purposes of
this analysis, it is assumed that the Valley City would accrue general fund
interest
earnings in proportion to the amount of total revenue that would transfer from
the City.
Franchise Income
The City assesses a franchise fee on the sale of
natural gas, cable television
service, wastewater service, the operation of official police garages, taxicab
income, and others. The City has provided estimates of the geographical
source of revenue for cable, wastewater, and police garages, but not for the
other franchise fees.
For the purposes of this report, the amount of gas franchise revenue that would accrue to the Valley City is estimated using the same proportion of gas users' tax revenue attributable to the Valley area (see "-Utility Users Tax" above). City wastewater system franchise income is not assumed to accrue to the Valley City, as it has been assumed in this report that the City would retain ownership of the system. Taxicab franchise fees include a fixed franchise fee per cab and a fee charged when a cab franchise changes hands. The estimated proportion of taxicab franchise fee revenue attributable to the Valley is based on the number of vehicles authorized under the City's most recent taxicab franchise allocation. As part of the City's approved franchises for the year 2000, 196 of the total 2303 "vehicle authoriti Fernando Valley service area. [14]
Licenses, Permits, Fees & Fines
The City collects various
licenses, permits, fines, and fees (LPFF) for services,
such as building permits, animal licenses, and fire inspection fees. Also
included in LPFF are reimbursements from the proprietary departments and for
services related to special purpose funds. The fiscal year 2000-01 revenue
budgeted for each budgetary department is provided in table R-4 in Appendix II
of this report.
For the category of LPFF relating to reimbursements to the City's proprietary departments, and wastewater and stormwater system, it has been assumed in this report that no amount would accrue to the Valley City, as the Valley City would not provide services under the scenario described in this report.
Reimbursements from the MTA and those related to gas tax projects are assumed to accrue to the Valley City in proportion to population. LPFF for most other City budgetary departments are also assumed to accrue to the Valley City either according to population or the number of employees transferred. Population or the number of transferred employees is assumed for certain revenues, depending on which measurement appears to represent the level of service to be provided for the specific reimbursement or service.
A more detailed allocation of LPFF revenue associated with the Building and
Safety department has been provided, given the magnitude of fees collected.
The Building and Safety department collects revenue for plan checks, permits,
and inspection fees, among others. The allocation of the department's receipts
for Construction Permits, Other Licenses and Permits, Plan Checking Fees, and
Engineering Fees, Inspection and Other Services, Plan Checks to the
Valley were estimated using the relevant workload measurements shown in the
table below.
San Fernando Valley Proposal for Special Reorganization ~ Draft Comprehensive
Fiscal Analysis 47
BUILDING AND SAFETY DEPARTMENT WORKLOAD MEASUREMENTS
Workload Citywide
San
Fernando
Valley
%
San
Fernando
Valley
Permits Issued 326,266 117,102 35.89%
Plan Checks 75,182 27,761 36.93%
Inspections 1,117,711 448,388 40.12%
Detailed computations of Building and Safety LPFF are provided in Table R-5
in Appendix II.
A detailed allocation of LPFF has also been provided for the Fire Department.
The allocation primarily assumes that most of the components of the Fire
Department LPFF accrue to the Valley according to population, with the exception
of the reimbursement for service from the City of San Fernando,
which is assumed to accrue entirely to the Valley City.
Detailed computations of Fire Department LPFF are provided in Table R-6 in
Appendix II.
Power Revenue Transfer Under the provisions of the Charter, the
Department of Water and Power has
historically transferred a portion of power system earnings to the reserve fund
of the City (which is then transferred to the City's General Fund), at the
discretion of the department's board. The department has covenanted in its
revenue bond resolutions to restrict the transfer to its net income in the prior
fiscal year. Actual transfers have been generally equal to 5% of the
department's gross operating revenues.
Although the department's ratepayers in the Valley contribute to the power
revenue transfer, it does not appear that the Valley could accrue any portion of
the transfer, given that the Valley City would not obtain an equity interest in
the City's power system upon a special reorganization. Therefore, for the
purposes of this initial fiscal analysis, it is assumed the Valley City would
not receive an allocation of the power revenue transfer.
Documentary Transfer Tax The Documentary Transfer Tax is assessed on
all taxable conveyances in
excess of $100 at a rate of $. 55 per $500 or fractional portion of real
property value, excluding any liens or encumbrances already of record. The
amount of
tax revenue is related to the number the real estate tax transactions in the
City. For the purposes of this analysis, the relative population in the City of
Los Angeles and the Valley is used as an estimate of the amount of revenue that
would accrue to the Valley City in the event of a special reorganization.
Grant Receipts Grant funds are paid into the General Fund to be used
at the discretion of the
City. These grants differ from those where the use of funds is restricted to
specific purposes, and the amount of revenue may be related to the level
of
San Fernando Valley Proposal for Special Reorganization ~ Draft Comprehensive
Fiscal Analysis 48
overall activity of the City. Therefore, for the purposes of the draft CFA,
it is assumed that the Valley City would receive grant receipts proportional to
the
total number of City employees that provide service to the area.
Water Revenue Transfer Similar to the power revenue transfer, the
Department of Water and Power has
historically transferred a portion of water system earnings to the reserve fund
of the City (which is then transferred to the City's General Fund), at the
discretion
of the department's board. The department has covenanted in its revenue bond
resolutions to restrict the transfer to its net income in the prior fiscal year.
Actual transfers have been generally equal to 5% of the department's gross
operating revenues.
Although the department's ratepayers in the Valley contribute to the water
revenue transfer, it does not appear that the Valley could accrue any portion of
the transfer, given that the Valley City would not obtain an equity interest in
the City's water system upon a special reorganization. Therefore, for the
purposes
of this draft CFA, it is assumed the Valley City would not receive an allocation
of the water revenue transfer.
Transfer from Reserve Fund The City maintains a reserve fund comprised
of a contingency reserve and an
Emergency Reserve. Funds in the Emergency Reserve are to be used only upon the
finding of an "urgent economic necessity" by the Mayor and Council.
No City assets, including its reserve funds, are assumed transferred to the
Valley City as a result of the special reorganization, and thus this revenue
item
would not accrue to the new city.
Tobacco Settlement As part of multi-state tobacco settlement agreement,
annual payments are
expected to be made from tobacco companies to the state, as well as a consortium
of 58 counties and four cities, including the City of Los Angeles.
The settlement stipulates that states and local entities will continue to
receive annual payments in perpetuity. The allocation of settlement funds to the
City
is set forth in a Memorandum of Understanding involving the state, to which the
Valley City is not a party. It is therefore assumed for the purposes of the
draft
CFA that the Valley City would not accrue any tobacco settlement funds.
Special Purpose Fund Revenue In addition to General Fund revenue, the City
receives revenue for which the
use is restricted to specific purposes. The largest special purpose fund revenue
is the sewer construction and maintenance fund revenue, comprised
primarily of wastewater system user fees and charges, which is restricted for
use on wastewater-related costs. Other large special purpose fund revenues
include the gas tax, which is assessed on the sale of gasoline and restricted to
use on the City's streets, and the Proposition A and Proposition C "local
return" taxes, which are a portion of the .5% sales taxes restricted to use
for transportation purposes.
Upon incorporation, the proposed Valley City would be eligible for, and
likely receive, many of the special purpose funds currently collected by the
City. The
City of Los Angeles in its February 2001 study estimated the geographic source
of many special purpose fund revenues, and many of the City's
San Fernando Valley Proposal for Special Reorganization ~ Draft Comprehensive
Fiscal Analysis 49
estimates (upon review of the City's support data) have been used in this
report. However, as with General Fund revenue, several revenue items
generated by residents and businesses of the Valley may not necessarily accrue
to the Valley City. An example is the revenue paid into the Sewer
Construction and Maintenance Fund. Because it is assumed that the Valley City
would contract with the City for wastewater service, the new city would
pay for its share of the capital costs and operating and maintenance expenses
through its users fees, but wastewater system revenue would not accrue to the
Valley City.
Further discussion of those revenues that may not accrue to the Valley City, as
well as alternate estimates made in lieu of the City's estimates, are
discussed below.
Sewer Construction and Maintenance Fund The Sewer Construction and
Maintenance Fund accounts for funds received for
sewer-related purposes, including basic sewer service charges, Sewage Facilities
Charges, and revenue from contract agencies. Because it is
assumed that the Valley City would contract for sewer service from the City, the
new city would not accrue any system revenue.
Convention Center Revenue Fund The Convention Center Revenue Fund
accounts for monies derived from the
operation of the Convention and Exhibition Center. It is assumed for the
purposes of the draft CFA that the Valley City would not receive an equity
interest or retain control of the operations of the Los Angeles Convention
Center. Therefore, no Convention Center Revenue Fund revenue would accrue
to the proposed city.
Los Angeles Convention and Visitor's Bureau Trust Fund The trust fund
receives as receipts an amount equal to what would be
generated by a transient occupancy tax of one percent, as well as an equal
amount from the City's General Fund. Expenditures from the fund are
restricted to the promotion and advertising of the Los Angeles Convention
Center.
The Valley City is not assumed to receive an equity interest or retain
control of the operations of assets such as the Los Angeles Convention Center.
Therefore, no trust fund would be required by the Valley City to support a
convention center. The Valley City would not lose revenue without a trust fund,
and would expend the one percent transient occupancy tax levy and matching
general fund revenue on other purposes.
Zoo Enterprise Trust Fund The Zoo Enterprise Trust Fund receives all
Los Angeles Zoo revenues, as well
as any required transfer from the City's General Fund. The Valley City is not
assumed to receive an equity interest or retain control of the operations of
assets such as the Los Angeles Zoo. Therefore, no trust fund would be required
by the Valley City to support a zoo. The Valley City would not be
allocated any operating revenue from the zoo; however, it would retain and
required general fund revenue for other purposes.
San Fernando Valley Proposal for Special Reorganization ~ Draft Comprehensive
Fiscal Analysis 50
Arts and Cultural Facilities and Services Trust Fund The Arts and
Cultural Facilities and Services Trust Fund accounts for revenues
from a 1% fee assessed on the cost of all construction, improvement, or
remodeling work for each public works capital improvement project undertaken
by the City. In addition, the fund is also supported by a transfer from the
City's General Fund equal to the amount that would have been generated from the
transient occupancy tax (TOT), imposed at the rate of 1%. Given the fund is
supported primarily by TOT revenue, it is assumed for the purposes of this
analysis that the amount that would accrue to the Valley City is equal to the
proportion of TOT generated in the Valley.
Older Americans Act Fund Older Americans Act (OAA) funding is
allocated to California for designated
uses based on the number of seniors. The California State Department of Aging
allocates funding to local Area Agencies on Aging within the State,
including the City of Los Angeles, which are primarily responsible for the
provision of service to seniors.
In the event of a Valley special reorganization, the County of Los Angeles
may receive the San Fernando Valley's share of OAA funding that would have
otherwise been allocated to the City. It is therefore assumed in this analysis
that the Valley City would not receive OAA funds.
City Ethics Commission Fund The City makes an appropriation annually
from its General Fund to fund the
operations of the City Ethics Commission. The revenue accounted in the City
Ethics Commission Fund is thus a transfer from one City fund to another.
However, to assist in reconciling to the City's budget, it is assumed the Valley
would accrue this revenue in an amount proportional to all General Fund
revenues transferred to the Valley City.
Street Lighting Maintenance Assessment Fund The Street Lighting
Maintenance Assessment Fund accounts for revenue
collected from annual assessments used to maintain or improve street lighting in
the City. The number of Bureau of Street Lighting field offices in the Valley
has been used to estimate the service needs in the Valley, and the proportion of
street lighting assessments that would accrue to the Valley City.
Local Public Safety Fund Funds in the Local Public Safety Fund are
allocated to the City in direct
proportion to the amount of property taxes shifted to schools in the 1993-94
state budget, less the amount of State Motor Vehicle License fees received on
a one-time basis. Funds must be spent on public safety.
It is unclear whether the Valley City would receive Local Public Safety Fund
revenue pursuant to section 30051 of the Government Code. The state
allocation appears to lock in the percentage from the 1995-96 fiscal year, which
is prior to the incorporation of a Valley City. Therefore it is assumed the
Valley City would not accrue any revenue from the Local Public State Fund.
Traffic Safety Fund The Traffic Safety Fund accounts for the City's share
of misdemeanor fines (not
including parking offenses) and forfeitures collected, allocated subject to
Section 42200 of the Vehicle Code. For the purposes of this draft CFA, it is
San Fernando Valley Proposal for Special Reorganization ~ Draft Comprehensive
Fiscal Analysis 51
assumed the share of Traffic Safety Fund attributable to the Valley is
proportional to population.
As a point of reference, the number of traffic citations in the Valley was
computed to provide a proxy measure of revenue generation in the Valley.
Based on fiscal year 1998-99 data, police service areas in the San Fernando
Valley accounted for 34.1% of all traffic citations issued.
CITY OF LOS ANGELES POLICE DEPARTMENT
TRAFFIC CITATIONS ISSUED FISCAL YEAR 1998-99
Area
Traffic
Citations
Van Nuys 50,753
West Valley 39,008
North Hollywood 25,772
Foothill 26,413
Devonshire 39,664
_______
Total Valley 181,610
Total Citywide 532,149
% Valley 34.1%
Special Police Communications/ 911 System Tax Fund The 911 System Tax
Fund receives proceeds from a special parcel tax that
was approved by voters in 1992 to repay bonds issued to finance improvements to
the police communications system. It has been assumed in this analysis
that the City would continue to administer the repayment of debt service on the
bonds, and the residents of the Valley would continue to pay its allocable
share of the parcel tax directly to the City. Therefore no Special Police
Communications/ 911 System Tax Fund would accrue to the Valley City upon a
special reorganization.
Allocations from Other Governmental Agencies and Other Sources This
category includes a variety of miscellaneous revenue for engineering,
design, fire protection, acquiring rights of way, and construction. It is
assumed for the purposes of this analysis that the Valley City would accrue an
amount
of these various payments from governmental agencies and other sources in
proportion to the general level of service provided by the Valley City, as
measured by the number of City employees that provide services on behalf of the
Valley City.
The computation for the allocation of all other special purpose fund revenues
is provided in Table R-7 in Appendix II.
Additional State Revenue Available to Valley City Revenue from the State
Motor Vehicle License Fee and Gas Tax would be
available to the proposed Valley City upon the effective date of the
San Fernando Valley Proposal for Special Reorganization ~ Draft Comprehensive
Fiscal Analysis 52
incorporation, which is assumed to be July 1, 2003, for the purposes of this
analysis. These revenues are allocated to cities in the state according to
population. However, in estimating the population of a newly incorporated city,
the State Controller must use the greater of the population computed by the
Department of Finance, or three times the number of registered voters in new
city. 15 As of March 1999, the Valley had 527,084 registered voters. This
results in a population estimate of 1,581,252 for purposes of allocating the
state vehicle license fee revenue and state gas taxes, which is greater than the
1,329,321 City Planning Department estimate of San Fernando Valley population
for 1998.
As shown in the table below, using these population estimates and the City's
fiscal year 2000-01 budget estimate of the statewide vehicle license fee
allocation to cities, it is estimated that the Valley City would receive $80.41
million in vehicle license fee revenue. When added to the estimated share that
would be allocated to the City after the proposed special reorganization, the
total revenue for the region would increase by $10.8 million. The increase in
vehicle license fee revenue would accrue entirely to the Valley City general
fund and would not be part of the computation of revenue neutrality.
ADJUSTED STATE MOTOR VEHICLE LICENSE FEE ALLOCATION
(Dollars in Millions)
2000-01
City
Budget
2000-01
Adjusted for
Valley
Allocation
Cities' Share * $ 1,418.67 $ 1,418.68
City of Los Angeles population 3,781,545 2,446,281
Valley City estimated population ** -1,581,252
All other cities 23,869,745 23,869,745
Total cities population *** 27,651,290 27,897,278
City of Los Angeles share (%) 13.7% 8.8%
Valley City share (%) 0.0% 5.7%
City of Los Angeles share ($) $ 194.01 $ 124.40
Valley City share ($) $ -$ 80.41
Total Los Angeles/ Valley share ($) $ 194.01 $ 204.81
* Source: "CAO Estimate" from City of Los Angeles, Revenue Outlook,
Supplement to the 2000-01 Proposed Budget, April 2000, p. 31
** For purposes of computing VLF allocation. Based on number of
registered voters as of March 1999.
*** Source: California State Controller, "State of California Shared
Revenue
Estimates, Fiscal Year 2000-2001."
Similar to the allocation of vehicle license fee revenue, state gas taxes
apportioned to cities under Sections 2105, 2106, and 2107 of the Streets and
15 Section 11005.3( b).
San Fernando Valley Proposal for Special Reorganization ~ Draft Comprehensive
Fiscal Analysis 53
Highways Code would be allocated to the Valley based on population as
estimated by the number of registered voters. This allocation method would
result in an estimated additional $2.6 million in gas tax revenue that would
accrue entirely to the Valley City.
Financial Assessment of New City Under the assumptions described in
this report, it is estimated that the Valley
City could generate revenues in excess of its expenditures and provide for a
reasonable reserve during the first full three years of incorporation. Although
a
proposed Valley City may be required to transfer virtually all of its revenues
back to the City for payment of services and to mitigate the negative fiscal
impacts of a special reorganization, a newly incorporated Valley City would
receive revenues in excess of the amount currently received by the City.
Additional Revenues Exceed Costs A newly incorporated Valley City
could receive an estimated $900,000 per
month ($ 10.8 million per year) from state motor vehicle license fees and $2.6
million in gas taxes that would be in addition to the amount currently received
by the City. This additional revenue would be excluded from the computation of
any mitigation payment, and could be used by the Valley City to fund its
own staffing costs and as a set aside for a reserve. 16
It is estimated that the additional revenues to be receive by a new Valley City
could exceed additional Valley City costs associated with personnel,
equipment, office space, and one-time City of Los Angeles costs by at least $6.8
million annually.
Risk Factors Although the Valley budget projections used in this
analysis show an excess
of revenue over expenditures, there are certain risks that could restrict the
new city's ability to generate a reserve during its first three years of
incorporation.
Similar to most newly incorporated cities, a Valley City would not have cash
balances immediately upon its incorporation. In the absence of a transfer of
cash from the City of Los Angeles, any cash balances would need to be
accumulated over time. In the event Valley City revenues were to significantly
vary from projections, the new city may not have cash reserves to supplement any
shortfalls.
In addition to limited cash reserves, the new city could have a substantial
fixed obligation with the City. If the new city's obligation to pay the costs of
its
purchase of service agreement and mitigation payment could not be easily
adjusted, then any shortfall in revenue would result in either the City not
being
paid, or the new city borrowing to meet its operating costs -neither of which is
a desirable outcome. Therefore, it is essential that, given the relative size of
the purchase of service agreement, the new city have the ability to reduce its
obligation to the City (e. g. through a reduction in service levels) within a
reasonable amount of time.
16 The expenditure of state gas tax revenue is restricted to specified street
improvement-related
uses. However, the Valley City may be able to offset general fund-supported
street
improvement expenditures by the estimated $2.6 million in additional gas tax
revenue
9 Government Code Section 36516( a)( 6)
10 Government Code Section 36516( c)
11 City of Los Angeles, City of Los Angeles Geographic Revenue Analysis for
Fiscal Year
1998-1999, February 2001.
12 The City has, through ordinance, required that certain General Fund
revenue, such as a
portion of the transient occupancy tax, be allocated to specific uses.
13 Community Redevelopment Agency project areas receive the 1% general tax levy
that
would otherwise be transferred to the City of Los Angeles, above an identified
base year
level of assessments.
14 City of Los Angeles, "Recommendation to Award Franchises for the
Operation of Taxicab
Transportation Services in All Service Zones of the City of Los Angeles,"
October 19, 2000.
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