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
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Prepared by Public Financial Management, Inc. 1
6. Fiscal Impact on City of Los Angeles This section discusses the
fiscal impact on the City of Los Angeles in two
particular areas: the current revenues and expenditures that would transfer to
the new city (revenue neutrality), and the additional costs that would be
incurred by the City solely as a result of the special reorganization.
Assessment of Revenue Neutrality As discussed in section "
Purpose and Findings of the Study," LAFCO cannot
approve the proposed San Fernando Valley special reorganization unless it finds
that the current City revenues that would accrue to the proposed city are
"substantially equal" to the current expenditures that would be
assumed by the proposed city, or 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 LAFCO.
Based on the assumption that the City of Los Angeles would continue to
provide services to the new city, this analysis has found that:
§ The City of Los Angeles would not be revenue neutral as a result of a
special reorganization in the San Fernando Valley.
§ The current revenues that would accrue to the Valley City would
exceed the current expenditures that would accrue to the Valley City by $60.8
million.
§ For the purposes of developing budget projections for the new city, it is
assumed that a mitigation payment of $60.8 million would be made to the City.
A detailed analysis of the amount of revenue that would be generated by the
residents and businesses in the San Fernando Valley and accrue to a Valley
City (transferred from the City) is discussed in section "Financial
Viability of New City -Valley City Revenue." Based on this analysis, it is
estimated that
30.5% of the City's General Fund revenue and 26.0% of all budgeted revenue would
transfer to the Valley City upon incorporation.
In comparison to the 26.0% of budgeted City revenue that would transfer to
the Valley City, it is estimated that the Valley City would fund 23.0% of the
City's
budgeted expenditures for services, through the payment for purchased service
from the City. 17 In dollars, it is projected that, based on the fiscal year
2000-01
budget, the Valley City would accrue $1,053.0 million in revenue that would
otherwise be paid to the City of Los Angeles, and would reimburse the City
$992.2 million for purchased services.
Additional City of Los Angeles Costs In the event the Valley is
incorporated, the City of Los Angeles is expected to
incur costs that it would have not otherwise incurred. Even if the City is to
17 The fiscal year 2000-01 City budget provides for $199.4 million in funding
from available
cash balances. The cash balances are not included in the estimation of the
current revenue
that would accrue to the Valley City, and therefore the percentage of revenue
accrued to the
Valley City is higher than the percentage of current expenditures for services
that would be
assumed.
San Fernando Valley Proposal for Special Reorganization ~ Draft Comprehensive
Fiscal Analysis 56
provide virtually all municipal services on behalf of the Valley during the
new city's first three years of incorporation, the City would incur costs from:
§ accounting and collecting Valley revenue,
§ computing the cost of services to the Valley,
§ accounting for and administering a purchase of service agreement with
the Valley, and
§ redistricting City of Los Angeles council districts
§ City of Los Angeles Council elections
It is assumed in the draft CFA that the new city would compensate the City for
all of these costs. The estimated cost for each of these items is discussed in
sections below.
Service Agreement Administration Costs The draft CFA assumes that the new
Valley City would receive nearly all
services from the City of Los Angeles. These services would be provided on the
basis of service agreements negotiated between the City and the Valley.
In providing these services to the Valley, the City would incur both direct and
indirect costs for which, under California law, they are entitled to
reimbursement. One component of the City's indirect costs would arise from the
City's need to administer the numerous service agreements. This section
describes the elements of these service agreement administration costs, the
framework used to estimate them, and the actual estimate of these costs. It
then briefly discusses a possible model for how the City and Valley might
structure the service agreements between them.
The City of Los Angeles will likely incur most service agreement
administration costs from three kinds of activities. The first category of
activities would
consist of the ongoing oversight of the services being provided. These ongoing
oversight functions could include responding to inquiries or complaints about
services being provided, ensuring that the level of service being provided is
consistent with the terms of the relevant service agreement, and various other
functions. All of these ongoing functions would require staff resources and
therefore generate costs.
The second major category of the City's service agreement administration
costs would be the actual billing for the services provided. Billing costs to
the
City could include those associated with notifying the Valley that payments are
due, the actual receipt and processing of payments, and any necessary
tracking of payment status. Assuming that most billing for services will be done
on a monthly basis, billing will also be ongoing function generating costs
to the City.
The third category of the City's service agreement administration costs would be
determining the City's cost of providing the direct services to the Valley.
This is a particularly important administrative function with respect to service
agreements, as a proper accounting of the cost of services will ensure that the
City is reimbursed appropriately for the services it provides the Valley, and
that the Valley is being charged correctly for the services it is
receiving.
San Fernando Valley Proposal for Special Reorganization ~ Draft Comprehensive
Fiscal Analysis 57
It should be noted that the City's negotiation of service agreements with
the Valley is not considered an additive cost of the special reorganization. It
is
assumed that the negotiation of service agreements can be handled by existing
City staff as part of their normal business operations.
Given the three categories of administrative costs discussed above, the
overall costs the City of Los Angeles will incur in administering service
agreements
with the Valley may vary by agreement, with the key variables determining these
costs being the volume and complexity of the particular service being
provided. For those City departments providing the Valley with a large quantity
of services or services that are highly complex, the costs of
administering the agreements related to these services may be relatively high.
For City departments that provide the Valley a low volume of services or
services of relatively low complexity, the cost of administering service
agreements may be relatively low.
To estimate the City's potential service agreement administration costs,
interviews with the City were requested, and information was obtained from the
County of Los Angeles on its cost of administering contract agreements for the
cities it provides contract services. 18 Although interviews with the City have
yet
to be conducted, based on the available County data, contract administration
costs do appear to vary significantly by department. For the County
department of Public Works, for example, contract administration costs are
relatively high: as of fiscal year 2000-01, the department devotes roughly 5
full-time
equivalent staff members to administer approximately $60 million in contract
services to 57 cities. Under the assumption that the "fully burdened"
cost per staff employee (i. e., salary, benefits, and overhead) is $100,000, the
department's contract administration costs amount to roughly 0.8% of direct
service costs. The County Fire Department, at roughly 0.13% of direct service
costs, incurs significantly lower contract administration costs. 19
For the purposes of the draft CFA, it is assumed that the City of Los Angeles
would incur contract administration costs comparable to that experienced by
the County's lower cost providers, and an estimate of 0.2% of direct service
costs is used for the City's service agreement administration costs.
Structure of the Service Agreements The draft CFA assumes that the City and
the Valley would negotiate the terms
of the service agreements under which the City would provide services to the
Valley. While these service agreements could be structured in any form
agreed to by the City and Valley, a possible model is provided by the agreements
that exist between the County of Los Angeles and the numerous
cities to which the County provides various types of services.
18 Information was obtained through informal telephone interviews with County
of Los Angeles
staff in the Departments of Public Works, Agricultural Commissioner/ Weights and
Measures,
Animal Care and Control, District Attorney, and Fire. 19
The County Fire Department data is based on the contract administration costs
for the 10
"fee for service" cities to which the department provides services,
which does not include the
47 cities to which the department provides services but receives compensation
directly from
property tax revenue.
San Fernando Valley Proposal for Special Reorganization ~ Draft Comprehensive
Fiscal Analysis 58
The County has two separate agreements with each city it provides with
services. It has, first of all, a standard "General Services
Agreement" that is
identical for every city. The General Services Agreement deals with broad
issues, such as liability, that must be addressed no matter what the particular
service the County is agreeing to provide. A single County department
(specifically, the Chief Administrative Office) administers this agreement on
behalf of the County. The other agreement the County has with each city
addresses the specific services to be provided and the fee for those services.
This agreement is negotiated directly between the County department that would
provide the particular service and the city requesting the service. In
general, certain minor adjustments are made to these detailed service agreements
annually.
Redistricting Costs to the City of Los Angeles The City of Los Angeles
has stated that under its charter, a special
reorganization would result in its having to change the boundaries of its City
Council districts (i. e., "redistrict"). According to the City,
"the City Charter
requires 15 districts of roughly equal proportion." Since the Valley
special reorganization would eliminate 4 Council districts entirely and portions
of 3
others, the City would need to redistrict to create 15 newly realigned
districts. The City also states that it would have only 2 months to complete
this
redistricting process, and that the cost of such a process could be $1 million.
While estimating that the cost of its redistricting could be "up to"
$1 million, the City did not provide any information on how it calculated this
estimate. As a
way to assess the accuracy of the City's estimate, officials from the County of
Los Angeles Chief Administrative Office were contacted to discuss the costs of
the County's recently completed redistricting process. The information provided
indicated that the County spent roughly $650,000 on its redistricting
process, although this figure excludes the cost of a significant amount of
County staff time devoted to the project.
Using the county's redistricting costs as a benchmark, and considering that
ure excludes significant amounts of staff costs, the
City's estimate of $1 million for its redistricting appears reasonable. The
draft CFA therefore assumes that the City's redistricting costs would be $1
million.
Election Costs to the City of Los Angeles A special reorganization
would result in the City of Los Angeles having to elect
two additional City Councilmembers as part of its regularly scheduled election
in April 2003. As stated by the City in its response to the IFA,
Council members were elected to districts 3 and 7 in the 2001 municipal
elections and their terms do not expire until 2005. If the Valley special
reorganization is successful, these districts will cease to exist and will be
reconstituted within the remaining City of Los Angeles. New elections will
need to be held in these new districts along with regularly scheduled Spring
2003 elections. Two additional districts, 2 and 12, will also cease to exist,
but
these districts are already scheduled to hold elections in the Spring of 2003.
According to the City, these special elections will increase the cost of the
April
2003 municipal election by approximately $200,000.
The City views the costs associated with these special elections as an additive
costs of the special reorganization for which the Valley would be
responsible.
San Fernando Valley Proposal for Special Reorganization ~ Draft Comprehensive
Fiscal Analysis 59
The draft CFA assumes that the Valley will indeed be responsible for the
City's election costs.
The City estimates that the election costs related to the Valley special
reorganization, which consist of the incremental costs of adding elections for
two City Council seats to the regularly scheduled April 2000 election, would be
roughly $200,000. Upon independent analysis, the City's $200,000 appears
reasonable, and therefore the draft CFA assumes that the incremental election
costs to the City would be $200,000. 63
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