This summary was posted on LAFCO's Website in on nearly unreadable file without an index. See http://lalafco.co.la.ca.us/Executive%20Summary%20SFV.htm We have converted it to usable internet files (HTML) So the public can read the files in preparation to the public hearings
Prepared by Public Financial Management, Inc.
Purpose and Findings of the Study
Findings of the Draft Comprehensive Fiscal
Analysis
Key Assumptions Used in Report
Financial Viability of the Valley City
Additional Costs for Valley City
Financial
Assessment of New City
Additional Revenues Exceed Costs
Risk Factors
Fiscal Impact on City of Los Angeles
Additional City of Los Angeles Costs
Applicant's Final Proposal
City
of Los Angeles Response
The purpose of the Draft Comprehensive Fiscal Analysis (CFA) is to assess the fiscal impact of an incorporation of a new “Valley City” in the San Fernando Valley region of the City of Los Angeles (i.e. a "special reorganization" within the City). The draft CFA has been prepared in response to a Final Proposal for special reorganization submitted by the applicant, Valley Study Foundation, on May 14, 2001.
The Government Code requires that as part of the review of any proposal for incorporation:
The LAFCO executive officer must prepare a comprehensive fiscal analysis and a recommendation of the proposal.
Prior to the approval of any proposal for reorganization the commission must find that the “proposed city is expected to receive revenues sufficient to provide public services and facilities and a reasonable reserve during the three fiscal years following incorporation.”
LAFCO must consider “the present cost and adequacy of government services and controls in the area,” as well as the “probable effect [of the special reorganization] on the costs and adequacy of services and controls in the area and adjacent areas.” to Index
Based on the assumptions used in this report regarding the method of providing service to the Valley City and the amount of revenue that would accrue to the new city, the draft CFA has found that:
A new Valley City could be financially viable during its first three years of incorporation.
A special reorganization of the San Fernando Valley and of the City of Los Angeles would not be "revenue neutral."
The City would lose $60.8 million more in revenue than expenditures, and this imbalance must be mitigated through some means such as a payment from the Valley City to the City of Los Angeles. to Index
In order to make the findings required for the draft CFA, various assumptions must be made regarding services the new city intends to provide, and how those services are to be provided. The City of Los Angeles currently provides most of the municipal services for the Valley, yet the new city has the option of contracting with the City (or other entity), requesting a transfer of assets and personnel from the City, or providing the services independently without City assets and personnel.
The findings in the draft CFA are based on the following key assumptions regarding the provision of services and payment by the new Valley City.
(1)The City of Los Angeles will furnish virtually all municipal services in the San Fernando Valley on behalf of the new city.
(2)The new city will reimburse the City of Los Angeles for all direct and indirect costs of providing service.
(3)The City of Los Angeles will continue to collect a substantial amount of revenue on behalf of the new city, and will retain the revenue as payment for service and a mitigation payment.
(4)The new city will employ staff sufficient to perform only a minimal level of functions.
Because the applicant has not provided any information that identifies how particular services would be provided, or indicates a timetable for providing those services, LAFCO must make certain assumptions on behalf of the applicant.
Given it is not the responsibility of LAFCO under the Government Code or approved Seven-Step Process to develop a transition and operating plan on behalf of the applicant, it is recommended that LAFCO assume that services are provided by the City, for at least a three-year period.This assumption would not preclude the new city from negotiating a faster transition of service from the City, which it may be able to accomplish with the mutual consent of the City. to Index
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.
The combined budget for the Valley City is estimated at $1,059.5 million (based on the City's fiscal year 2000-01 budget), and is comprised of a payment to the City of Los Angeles for services provided in the San Fernando Valley, a "mitigation payment," reimbursement to the City for one-time costs, and costs for a minimal level of personnel and overhead for the new city. Revenues for the new city are estimated at $1,066.4 million.
The assumed mitigation payment is based on a comparison of current City expenditures and revenues, which has found that the Valley contributes $60.8 million more to the City of Los Angeles than the value of services it receives.This amount excludes payments made by Valley water and power ratepayers, which currently contribute an estimated $51.6 million to the City's General Fund.
Even though the Valley City would be required to pay the City of Los Angeles essentially all of its revenues for purchased services and the mitigation payment, the new city would receive an estimated $10.8 million in additional state motor vehicles license fee revenue that would not be shared with the City.This boost in vehicle license fee revenue would allow the new city to fund a minimal level of staffing and pay additional costs for elections, redistricting, and City contract administration. to Index
Because the Valley City would require additional staffing, equipment, and office space that cannot be provided by the City, its expenditures would increase in comparison to the current amount spent by the City of Los Angeles in the Valley.In addition, the City of Los Angeles may incur costs for redistricting and City Council elections that would result solely because of the Valley special reorganization.It is assumed that the Valley City would reimburse the City for these additional costs.
The projected Valley City budget for fiscal year 2003-04 through 2005-06 is shown on the table below, unadjusted for inflation.The projection shows that revenues would exceed expenditures by at least $6.8 million annually, and result in the accumulation of a $23.1 million balance by the end of fiscal year 2005-06. to Index
|
VALLEY CITY PROJECTED BUDGETFISCAL YEAR 2003-04 THROUGH 2005-06 (Unadjusted for Inflation) |
|||
|
2003-04 |
2004-05 |
2005-06 | |
| Revenue | |||
| General Fund | $ 904,058,524 | $ 904,058,524 | $ 904,058,524 |
| Special Purpose Fund | 162,302,644 | 162,302,644 | 162,302,644 |
| Total Revenue | $ 1,066,361,168 | $ 1,066,361,168 | $ 1,066,361,168 |
| Expenditures | |||
| Personnel | $2,510,040 | $2,510,040 | $2,510,040 |
| Non-Departmental | 829,257 | 728,367 | 728,367 |
| City of Los Angeles Purchased Services | 992,172,959 | 992,172,959 | 992,172,959 |
| City of Los Angeles Administrative Costs | 1,984,346 | 1,984,346 | 1,984,346 |
| City of Los Angeles Redistricting Costs | 1,000,000 | 0 | 0 |
| City of Los Angeles Election Costs | 200,000 | 0 | 0 |
| Mitigation Payment | 60,835,208 | 60,835,208 | |
| Total Expenditures | $ 1,059,531,811 | $1,058,230,921 | $1,058,230,921 |
| Available Balance (surplus) | 6,829,357 | 14,959,604 | 23,089,851 |
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. to Index
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.[1]
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. to Index
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. to Index
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.
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. to Index
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 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. to Index
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.
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.
The applicant has submitted an ambitious proposal that describes, conceptually, how municipal services could be provided in the Valley involving a transfer of existing City of Los Angeles employees and assets.The applicant has not addressed how it would implement any such transfer, and has proposed that LAFCO determine how this would be done.
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. to Index
The City has responded to the IFA and Final Proposal in two primary documents, a report by the City Attorney addressing legal issues, and a report by the Department of Administrative and Research Services (OARS) office addressing implementation issues.
The OARS report raises the following issues regarding the IFA and Final Proposal:
Does not provide adequate fiscal protection for both the new Valley city and the remainder of the City of Los Angeles;
Is not currently Revenue Neutral;
Raises serious questions regarding the apparent preliminary finding of fiscal viability in the IFA;
Contains numerous contradictions which must be worked out by LAFCO;
Contains factual errors;
Focuses on calculating current service levels to the Valley instead of savings accrued by the City of Los Angeles as a result of departure of the Valley; and
Contains numerous assumptions which will propagate negative fiscal, legal and operational impacts on the new Valley city and the remaining City of Los Angeles.
Of the findings made by the City, of particular importance to the preparation of a draft CFA are the assertions that the special reorganization would not be revenue neutral, or would not result in the fiscal viability of the proposed new city, which are contrary to the preliminary conclusions in the IFA.
Upon review of the City's findings and in light of the assumed method of providing service to the Valley, the draft CFA has made the following determinations:
The City found that the Valley incorporation would not be revenue neutral because the City's workload would not decrease in proportion to the number of City employees transferred. However, because a transfer of City employees is not assumed to occur as part of a Valley special reorganization, the City would not lose employees to the new city.
The City questioned the IFA’s finding that the Valley would be fiscally viable given that many potential "start-up" costs were not identified in the IFA. However, many of the costs identified by the City resulted from a specific plan to divide or duplicate the City's existing assets. Because City assets would not need to be divided if the City provides service on behalf of the new city, the potential start-up costs would not be incurred.
[1] 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.
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