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HomeMy WebLinkAbout05/11/2004 - Study SessionCITY OF NEWPORT BEACH City Council Minutes Study Session May 11, 2004 - 4:00 p.m. ROLL CALL Present: Heffernan, Rosansky, Adams (arrived at 4:40 p.m.), Bromberg, Nichols, Mayor Ridgeway Absent: Webb (excused) CURRENT BUSINESS 1. CLARIFICATION OF ITEMS ON THE CONSENT CALENDAR. Council Member Heffernan asked why Item 9 (Relinquishment of Bristol Street North and South) is on the Consent Calendar rather than under Current Business. City Manager Bludau stated that he believed that the staff report adequately explained the item and added that this was a commitment that the City made with Caltrans regarding the ramp off of SR 73. City Manager Bludau announced that the Sister City presentation will not take place tonight. 2. BUDGET SUMMARY AND INTRODUCTION OF DEPARTMENT REVIEWS [ORAL REPORTS]. City Manager Bludau noted that there is almost no change to this year's budget. He reported that Council will be looking at the Capital Improvement Programs (CIP) at the next study session and will be reviewing the departmental budgets at the next two study sessions. Mr. Bludau utilized a PowerPoint presentation and reported that they will be discussing and reviewing the overall budget process and assumptions, anticipated revenues and expenditures, reserves and fund balances, new developments and pending issues, and a conclusion of where the City stands today. He reported that the City Charter states that the fiscal year is from July 1 to June 30, delegates authority to the City Manager to prepare a proposed budget, requires submission of the budget to the City Council at least 35 days prior to the beginning of each fiscal year, and requires a public notice and hearing. Further, Council may modify the budget before adoption, is required to adopt a budget on or before June 30, may amend the budget after adoption, and may also reduce appropriations if necessary. He noted that the Charter also requires an annual independent audit. City Manager Bludau reported that the budget process begins in November where they project the current year financial forecast and forecast for the end of the fiscal year. He noted that, in December, they prepare preliminary revenue estimates, balance revenues, and expenditures to ensure reserves are fully funded; and they meet with all the departments and establish budget ceilings in Volume 56 - Page 878 INDEX (100 -2004) City of Newport Beach Study Session Minutes May 11, 2004 January. He reported that departments submit their budgets for City Manager review in February/March and the preliminary budget is printed and distributed in April. He stated that the Finance Committee holds its meetings and Council begins its review in May, and the public hearings are conducted and the budget is adopted in June. City Manager Bludau displayed a revenue comparison of the General Fund for the current year and reported that the General Fund is $107,239,467. In response to Mayor Pro Tern Adams' questions, Administrative Services Director Danner reported that intergovernmental funds are made up primarily of the $2.9 million of Vehicle License Fees (VLF) that they hadn't planned on receiving. Regarding the license & permits overage, he stated that this is due to increased building activities and the fee adjustments that were implemented in December. Council Member Heffernan asked what happens if the City receives $8 million more than it thought it was going to have. He also asked how anyone can do budgeting if they are almost 7.5% off on the estimate of income. Mr. Danner stated that they were not surprised with the revision because they had some ideas going in that they were conservative in their revenue estimates. Further, they had an idea that the VLF would be more than what they thought. He stated that most of the money has gone into reserves, particularly the PERS reserve that was established for pension costs. However, he noted that there were increased expenditures that were unanticipated. City Manager Bludau referenced the organizational chart. He reported that the budget proposes only one new position that would be in the Utilities Department, explaining that the Health Department is requiring that the City have a full-time maintenance person for the reservoir cover. Regarding the two new Building Department positions that were approved last year, he reported that they are conducting interviews now and are close to making the selections. City Manager Bludau reported that the numbers in the revenue pie chart have changed very little since it deals with such large numbers. He noted that they were looking at an increase from 25% to 26 %; however, that may change due to what is happening in Sacramento. He reported that intergovernmental revenue decreased from 11% to 9% primarily due to the VLF. He explained that there are very few basic revenues, even though there may be 480 revenues in which the City gets money from. He reported that, of the $110 million in the General Fund, 64% ($70 million) of that comes from three sources (secured property tax, sales tax, and the transient occupancy tax [TOT]). Council Member Rosansky asked if the TOT takes into account the changes that were made with the Conference and Visitors Bureau, City Manager Bludau indicated that it does not because the TOT is revenue and the change would show up as an expenditure. He added that this is just revenue, does not show where it goes, and is what would be generated from of the TOT. In response to Council Member Nichols' question, City Manager Bludau explained that the secured property tax is the City's portion of the property tax and not the total, noting that the City has an assessed value of over $25 billion and the City's portion of it is about 15% of the property tax bill. He stated that there has been a substantial increase in property tax over the last five years. Volume 56 - Page 879 City of Newport Beach Study Session Minutes May 11, 2004 INDEX Mr. Danner reported that this information is included in the budget and they have been tracking revenues for about six years. City Manager Bludau added that sales tax revenues have been coming in strong this year. Further, they anticipate another 3% increase in sales tax and TOT. Mayor Pro Tem Adams' asked how the TOT compares to pre -9/11. Mr. Danner reported that the City is still below where it was prior to 9/11 but it is recovering. City Manager Bludau believed that the occupancy is about the same but the room rates have not gone back to pre -9/11 rates. City Manager Bludau stated that there are no real changes in the expenditures pie chart. Council Member Heffernan referenced the public safety portion and asked if it factors in the disproportionate amount of PERS and, even though the City is paying a lot more, if it is still the same percentage. City Manager Bludau stated that public safety has probably only changed 1% or 1.5% percent. He indicated that the PERS rates probably have gone up percentage -wise as much as public safety has. City Manager Bludau reported that the total expenditure budget is $171.1 million which includes debt service at $143.8 million, capital improvement programs (CIP) at $27.3 million, and CIP rebudgets of $7.7 million. He stated that, of the $143.8 million total operating budget, the debt service is $4.2 million. He indicated that the debt service is small and is payment against the library bonds and outstanding payments against water improvements. Mr. Danner added that it also includes boating loans and minor equipment leases. He confirmed that this is principal and interest. City Manager Bludau confirmed for Mayor Pro Tern Adams that the CIP rebudgets are carry -overs from this year. He referenced the expenditure slide and reported that, of the $109 million, general government makes up 10.55 %, public safety makes up 55.5 %, community development which includes Planning and Building makes up 4.75 %, public works makes up $21.46 %, and community services makes up 7.8 %. Council Member Heffernan asked how the $109 million compares to previous years. Mr. Danner indicated that he'll look up the figures, but believed that it is basically the same as last year. City Manager Bludau clarified that the General Fund budget did not increase 7.5 %. He stated that there were rebudgets during the year that will now be added to the budget. Mr. Danner reported that there is a summary of expenditures by fund on page 13 of the Resource Allocation Plan (RAP) that date back to fiscal year 1999 -2000. Council Member Heffernan noted that the increase from $84 million to $109 million was due to the addition of Newport Coast. Mayor Ridgeway added that it also includes East Santa Ana Heights and part of Bay Knolls. City Manager Bludau reported that, in 1992 -1993, there were 763 employees; and this year there will be 782 employees which includes the one position being proposed. He noted that the lowest count was during 1995 -1996 with 659 employees. He reported that the Newport Coast annexation took effect during 2001 -2002 and there was a jump from 728 to 771 employees which was made up mostly of Police and Fire Department personnel. Volume 56 - Page 880 City of Newport Beach Study Session Minutes May 11, 2004 INDEX rvir. Danner reported that the fund balance is going down; however, the reserves are not decreasing. He explained that the fund balance has to do with the rebudgeting of capital projects and the timing of how they are spent. He stated that the reserves are fully funded and the City even established new reserves for the PERS rate increases. He confirmed that the General Fund Balance includes all the reserve accounts. He explained that the decrease happens because the City saves up money to build projects, the money gets spent, and then the total fund balance naturally decreases. He emphasized that this balance should not be confused with the reserves which are fully funded. City Manager Bludau reported that the total property tax loss to the State from 1992 -1993 is about $54 million. He noted that this includes the $1.3 million that the City predicated losing this fiscal year. He confirmed that 1992 -1993 was the first year of ERAF losses, and the City was getting about 18% to 20% of the property tax. Mr. Danner indicated that the City is now at about 15 %, but this varies from area to area. City Manager Bludau noted that the City is getting about 10% in Newport Coast because the City absorbed the special districts. Mr. Danner confirmed for Council Member Rosansky that the $40 million of property tax was net of ERAF and, if the City were able to keep the ERAF, it would be $46 million. City Manager Bludau explained that the only thing the City absorbed when it annexed Newport Coast were the special districts, fire district, and library district. Mayor Pro Tem Adams asked if the money that the State takes has any real significance, if this is money lost, and if there is any expectation of getting the $54 million back. City Manager Bludau stated that the City will not get any of that money back, but the benefit of talking about it is to inform citizens that, when they read in the newspaper that the State is having a problem and will be removing property tax from local government, they will know that a major portion of the property tax they pay is no longer going to the city in which they live. He emphasized that this affects where their money goes and how it is spent. Mayor Ridgeway reported that the majority of cities in the State are much poorer than Newport Beach and keep a running tabulation because they are ever hopeful that they will get a return. City Manager Bludau stated that the money will never come back but it helps the argument in Sacramento that the City has lost a certain amount of money because there has been a couple of economic downturns and the State hasn't been able to take care of their budget in a responsible manner. Mr. Danner reported that Council adopted a policy in 1995 or 1996 in which they established a contingency reserve which also includes outstanding encumbrances that had to be 10% of the total General Fund appropriations. He reported that Council also established a stabilization reserve of 2% of the same total to be used to stabilize City expenditures in the event there was a rough year. He noted that Council could choose to use this reserve rather than lay off employees. He stated that this reserve has never been dipped into. City Manager Bludau added that, at the beginning of budget preparations, they make sure the contingency and stabilization reserves are fully funded when they estimate what the revenues are and when they tell the departments what their budgets are going to be. Mr. Danner stated that the policy states that, for whatever reason those could not be fully funded, the City Manager is required to present Council with a plan to reestablish the reserves over a very short period Volume 56 - Page 881 City of Newport Beach Study Session Minutes May 11, 2004 of time. jv-j *.q Council Member Nichols asked how the contingency funds carry from year to year. Mr. Danner explained that the funds are like owner's equity and it just stays there on the balance sheet from year to year. Further, it naturally gets bigger each year because the appropriations get bigger, and it is required to be a set percentage of the total. City Manager Bludau explained that this money is shown as budgeted because it is money that is not going anywhere since it is required to sit there in case it is needed in an emergency. Further, this money is not part of the $171 million budget, although it will be shown as fund balances in the reserves. Council Member Heffernan asked if the City expects to have any new reserve accounts this year and if the City is reserving for things like a new City Hall. City Manager Bludau indicated that they are not reserving for other things. He reported that, in 1999, Council suggested that money be set aside for capital improvements and started with $200,000. He reported that there is now $2 million in the reserve. He added that, in 2002, they started out with $2 million knowing that the PERS rates were going to climb quite high. He reported that money has continued to be set aside over the last three years and now the PERS rate changes account has $9 million. He noted that this does not have to be used for that. Mr. Danner clarified that the $33 million figure is strictly General Fund reserves. He reported that the City also has other reserves, like the water fund, workers compensation, and general liability. Mr. Danner confirmed for Council Member Heffernan that the City has paid for the PERS increase out of revenue and has not touched the reserves. City Manager Bludau indicated that they do not know how much they will add into the PERS fund until the end of the budget year. Mr. Danner noted that they were able to add money into this account because the City went two years without budgeting the VLF backfill. Council Member Heffernan asked if the City is going to pay the increase and add money into the reserve. Mr. Danner stated that the City is paying the increase but there is no plan to add to the reserve at this point. City Manager Bludau noted that they can put the $9 million in any reserve account and call it anything. He stated that it would be ideal if the City does not dip into the reserve over the next two years and just adds to it. He reported that they have been very conservative in their revenue estimates over the last few years. Council Member Heffernan noted that some time during the fiscal year, it was determined that the revenue was exceeding what was anticipated and there was a huge PERS bill, but money was still added to the reserve. He asked who makes the decision to add to the reserve. City Manager Bludau indicated that staff initially makes the decision to save for a rainy day and then they go to the Finance Committee; however, it is ultimately Council's decision. He reported that Council also makes the decision to pull money out of reserves. Mayor Ridgeway suggested that this issue be taken to the Finance Committee for a study. City Manager Bludau displayed the history of PERS rates and projections. He stated that the City has twice as many miscellaneous employees as it does safety employees. He reported that the PERS rate for miscellaneous employees in Volume 56 - Page 882 City of Newport Beach Study Session Minutes May 11, 2004 "Llf"�►/ 2002 -2003 was 7 %, but that rate will be 11.3% this year. He stated that PERS anticipates it going up in 2006 -2007 to 13.7 %; however, staff feels their rate of return has been so good on their investments that this will probably decrease. Mr. Danner explained that the safety rates are much higher than for miscellaneous employees because they have a different benefit schedule and are allowed to begin retiring at age 50 at 3 %, compared to 55 at 2% for miscellaneous employees. City Manager Bludau reported that they anticipate PERS costs for miscellaneous employees to be 3.7 %. He noted that, in 2002- 2003, the safety rate was 21.5 %; however, this year it will be 35% and peak at about 40% in 2006 -2007. He reported that, in 2002 -2003, the cost of PERS for the safety employees was $5.1 million and, this year, it will be about $9.1 million. City Manager Bludau confirmed for Council Member Rosansky that the City is currently handling the $13 million PERS rates without dipping into the reserves, and if Council wants them to pay the rates in the next years without dipping into the reserves they will try to do that. Mr. Danner reported that there are two components to the PERS rate (current service and unfunded liability). He stated that it is their intent from now on, no matter what the rates are, to fully fund the normal cost of the pension. He reported that the normal cost for both the safety employees and miscellaneous employees is about 25 %, and a normal contribution will be about $10 million to $12 million. He confirmed that, at the peak, the City will be $3 million to $5 million over the normal contribution. Council Member Heffernan asked if this is because this is an employee related cost versus a capital improvement in which there is a bond. City Manager Bludau stated that this is how they see doing it, noting that the State is selling bonds because they cannot afford their PERS rates for State employees. City Manager Bludau indicated that there are a number of things that could affect this budget, such as uncertainties of future State actions. He reported that there has been a lot of negotiations between local government and the Governor's office over the weekend. He reported that the league of California Cities (LCC) Executive Director Chris McKenzie spoke to Orange County City Managers last Thursday and said that the LCC was looking at a deal offered by the Governor. He stated that the LCC initially sponsored a ballot measure that will be on the November ballot that no longer allows the State to take property tax, sales tax, or VLF from local governments unless there was a Statewide vote. He indicated that 1.3 million signatures were collected. He stated that the day the signatures came in, the LCC received a call from Governor Schwarzenegger to congratulate them; however, he then told them that he was going to oppose the ballot measure. He indicated that the Governor does not believe that the State should be taking local revenues, but he has a big budget problem, has a hole in the budget for the next two years, and needs local government's cooperation in order to close the budget hole. He reported that Governor Schwarzenegger stated that he would support a ballot measure that has to be approved by legislature by a two- thirds vote. He stated that it would basically support the LCC's position and even be tighter in protecting revenues. He indicated that Governor Schwarzenegger said, if the LCC and local governments cooperate with his proposal, he would lead the campaign for this ballot measure in November and help raise money for its success. He stated that, based on information they have gotten today and negotiations that took place over the weekend, it is going to be LCC's recommendation that local governments take Volume 56 - Page 883 City of Newport Beach Study Session Minutes May 11, 2004 INDEX the Governor's offer to lose $1.3 billion for each of the next two years. He noted that this equates to Newport Beach losing $2 million. He stated that they predicated the budget on losing $1.3 million because that was the ERAF shift that the Governor was proposing last December. He indicated that it looks like the new formula for the $2 million loss equates to one -third coming from property tax, one -third from sales tax, and one -third from VLF. Mr. Danner reported that the Governor's proposal puts in place the permanent reduction of VLF to .65% with no backfill to local governments, but there will be a dollar for dollar shift of property tax. City Manager Bludau stated that the $1.3 million that would be shifted away from cities this year would be made up one time three years from now. Mr. Danner clarified that, for 2004 -2005 and 2005 -2006, the City would lose about $2 million each year, and in 2006 -2007, there would be a one time repayment of about $1.3 million which is the VLF that the City lost last year. He added that after the first two years, the City would be constitutionally prevented from losing anything more, would put the City back to zero, and the City would be relying on its own property tax growth. City Manager Bludau reported that the LCC looked at a lot of different options over the weekend. He explained that cities are affected differently based on whether the money comes from sales tax, VLF, or property tax. He indicated that the Governor tried to blend the three together, every city in the State would lose a minimum of 2 %, and no city would lose more than 4% of their general fund. Mr. Danner noted that the City's loss is estimated to be 2.7% and the Statewide average is 2.9 %. City Manager Bludau reported that Newport Beach has the highest loss per capita at $24.86 and the next is Costa Mesa at $17. He noted that there are only four cities in the County whose per capita losses are more than $15. Mayor Ridgeway stated that it is his understanding that the current initiative will be abandoned and the LCC will support the Governor's initiative if passed by the legislature. He clarified that there will be two competing initiatives but only one will be supported Statewide. City Manager Bludau added that the one that passes is the one that receives the highest number of votes and there will be no campaigning for the LCC initiative. Council Member Heffernan asked where Sacramento thinks they are going to get the money if they do not have any money today, noting that they are going to take the cities' money and they'll have a constitutional amendment that will cobble them forever. Mayor Ridgeway stated that it is incumbent on them to create a growth economy, plus the Governor continues to look at cutting the budget. He indicated that, if the State continues to do poorly in the economy, he believed there will be some type of tax increase which will probably have a reverse effect in which more businesses will be lost. City Manager Bludau stated that the Governor thinks he will be able to make some reorganizational changes to Sate government and efficiencies in two years that will also make up some of the money. He reported that the sales tax, property tax, and VLF tax figures will need to be adjusted if this is approved on Thursday. He noted that this means that the City has $700,000 less in revenues than anticipated, but believed that the revenue estimates are more realistic this year than they have been in the past few years. He stated that most of the smaller cities are up against the 4% cap. Mr. Danner stated that this is a problem they have to deal with but it is a manageable problem. City Manager Bludau referenced the pending issues slide and reported that all of the employee bargaining units are up for renegotiation this year. He stated Volume 56 - Page 884 City of Newport Beach Study Session Minutes May 11, 2004 INDEX mat the lhty is not contributing as much from the General Fund toward CIP projects this year, reporting that this year the budget is $1.4 million when last year it was $1 million. He noted that in past years, it has been as high as $4.5 million. He stated that there is $27 million in the CIP budget which Council will review at the next study session. Regarding the condition of City facilities, he indicated that they are slowly moving forward with grappling with the City Hall issue. He added that the City also has fire station and lifeguard headquarter problems, as well as other facilities. He stated that they are hopeful that next year, the rising pension costs will max out and start going down; however, it is dependent on the economy. He reported that workers compensation and general liability insurance costs over the last couple of years have seen sizable increases. He stated that they are budgeting for the increases, but it is always a guessing game. City Manager Bludau stated that there are increased costs for Newport Coast based on the pre- annexation agreement. Council Member Heffernan stated that there has to be a revenue side also for Newport Coast. Mr. Danner indicated that it is difficult to compute this number because, when we receive the property tax apportionments, it does not identify which portion is from Newport Coast and which is the balance for the City. He stated that they could probably get that number but it is not readily available. City Manager Bludau reported that there is some funding in the budget to pay for consultants to conduct studies and geological testing for sphere issues. He noted that Council will be talking tonight in closed session about acquiring property for the Santa Ana Heights fire station, reporting that the County has committed $2.5 million to help purchase the property and $1.5 million for its construction. He stated that there really isn't any money budgeted outside of the CIP for Sunset Ridge Park and other park development issues. City Manager Bludau referenced the slide of the potential State revenue loss and reported that, under the Governor's previous ERAF proposal, Newport Beach was going to lose the second highest amount of money in the County. City Manager Bludau stated that this proposed budget is balanced, they still need to juggle numbers based on what is coming out of Sacramento, and they do not intend to use any of the reserves to balance the budget. He noted that the budget includes only one new full-time City employee and since the reservoir cover project will be concluded at the end of 2004, that person will be funded half this year. Further, the budget includes most of the construction costs for the new Mariners Library and services related to the Santa Ana Heights annexation. He reported that the preliminary budget is balanced without the use of reserves, but noted that it's not likely that they will be able to do the same in the 2005 -2006 budget. Council Member Nichols asked if there is a budget set aside for sphere issues. City Manager Bludau indicated that there is $600,000 budgeted and it is located in the City Council portion of the budget (page 5). He noted that this replaces the airport issues budget. Mayor Ridgeway stated that some of the narratives in the RAP are incorrect. Mr. Danner asked that Mayor Ridgeway provide staff with the corrections so they can fix it in the final document. Volume 56 - Page 885 City of Newport Beach Study Session Minutes May 11, 2004 Assistant City Manager Kiff described the layout of the Budget Detail. He reviewed the City Council budget and reported that account 8080 is proposed to be $134,000 and will cover costs such as expenses for the Sacramento lobbyist, special expenses related to the cable franchise agreements, and special projects. Regarding publications and dues (8060), he stated that this account pays the LCC dues and the Southern California Association of Governments (SCAG) dues. He reported that accounts 8250 are for special department expenses which are not otherwise classified (NOC) and the $127,000 amount is for events like the Film Festival or allocations to the Balboa Island Historical Society. He noted that this money is not always spent and, if it is not spent, it goes into the fund balance at the end of the year as part of the money that carries over. He pointed out that the next seven items in the 8250 account are the district discretionary grants in which each Council Member has $7,000 to spend on projects within their district. He noted that, if this money is not spent by June 30, it rolls into the next year. Mr. Kiff reported that City grants (8254) are for human services grants that are awarded by Council policy once a year. He noted that there is a new line item for fireworks (8265). He stated that management of sphere issues is a division within Council's budget (pages 4 and 5). Council Member Bromberg stated that he sits on the Centennial Committee and indicated that they will be bringing a budget to Council at some point. He asked how it will be dealt with when they can't give the City an estimate right now. City Manager Bludau believed that the committee should conduct its meetings and then give a best guess estimate for funding at the last meeting where Council adopts the budget and proposes things they would like to see budgeted. Council Member Bromberg stated that the budget could be quite substantial, but noted that they are trying to get everything underwritten. He added that he doubts they would have something by the end of June. City Manager Bludau indicated that they could do it during the budget year. City Clerk Harkless reported that there are basically no changes to her budget with the exception of salaries and benefits. She noted that her maintenance and operating budget basically stays the same even after money was taken out due to a budget amendment for an unexpected scanner repair this year. She reported that the main change for this year is the $55,000 budget for the November election. She stated that she has not yet received an estimate from the County on what the costs are going to be based on the fact that the Secretary of State has decertified their election equipment. She added that, until they know what system they will be using, they won't be able to provide an estimate. She stated that the $84,000 professional services account (8080) is for the codification of the Municipal Code and the advertising and public relations account (8010) is for all the legal advertising. Ms. Harkless added that her office has estimated another $20,000 in revenue from the passport processing fees. In response to Mayor Pro Tem Adams' question, Mr. Danner stated that he does not believe that the budget is on the website but they can put it on. He indicated that copies were made available at all the libraries, to homeowners associations, and at the Administrative Services counter. He noted that the budget detail is a large document, but they always put the RAP on the website. Mayor Ridgeway asked that they put the draft RAP on the website now. PUBLIC COMMENTS- None. Volume 56 - Page 886 INDEX City of Newport Beach Study Session Minutes May 11, 2004 - at 6:00 p.m. to Closed The agenda for the Study Session was posted on May 5, 2004, at 4:10 p.m. on the City Hall Bulletin Board located outside of the City of Newport Beach Administration Building. MY11 City Clerk �2 Recording Secretary Mayor t�EW�i,+T o� �C /F00.NS Volume 56 - Page 887 INDEX