HomeMy WebLinkAbout25 - Five-Year Financial Forecast0 Agenda Item No. 25 CITY OF NEWPORT BEACH FIVE -YEAR PROJECTION OF GENERAL FUND REVENUES, EXPENDITURES, AND INCREASESADECREASES) TO FUND BALANCE 0 October 25, 1999 October 25„ 1999 Agenda Itera No. _ CITY OF NEWPORT ]BEACH ADMINISTRATIVE SERVICES DEPARTMENT Resource Management Division October 25, 1999 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: Dennis Danner, Administrative Services Director A00- SUBJECT: FIVE -YEAR FINANCIAL FORECAST EXECUTIVE SUMMARY: This report contains a five -year projection of revenues, expenditures, and year -end balances for the General Fund. It concludes that with the stated assumptions, the City's fiscal posture will remain adequate to fund operations at the anticipated level over the five -year period. However, fund balance figures, even with no inflation adjustment, will be declining based on the assumptions (explained further below). This will lead to significant problems in the out years unless corrective action is taken, and doing so relatively soon would be advantageous. The data and conclusions are very sensitive to changes in the assumptions. The report presents a sampling of potential revenue enhancements and recommends that the City Council direct staff to do further work in this area to facilitate future City Council action. III. BACKGROUND: 0 At the Council Meeting of August 23, 1999, Council Member Norma Glover requested staff to prepare a financial plan on the future needs of the City, to include new revenue streams to show how the future needs will be met. This involved preparation of detailed pro-forma Revenue, Expenditure, and Fund Balance Statements for each of the five years, using certain assumptions. It also involved beginning work on identification of long -term revenue enhancement opportunities. OVERVIEW: The projections in this report are intended to serve! as an initial planning tool for the City Council, residents, and management staff. It should be noted that the report does not assume down mast annexation or specific action on any major pending project. The report is divided into five parts: • Assumptions Used to Develop Projections • Five -Year Projection of Revenues, Expenditures, and Fund Balance • Potential Revenue Enhancement Measures, by Category (preliminary list) • Revenue and Expenditure Detail (background information) • Pro Forma Worksheets Used to Develop Projections (background material) October 25, 1999 Page 2 0 LIMITATIONS: Financial projections, such as presented here, have their limitations. These projections should be used to provide financial trend information and point out any excess or shortfall of revenues versus expenses. These .projections can also be used to stimulate discussions on economic trends, service needs /levels, and revenue and expenditure alternatives. It cannot be over- emphasized that these projections should not be interpreted as identifying the specific timing or amount of any excess or shortfall in revenues versus expenditures — especially with the volatile nature of the City's airport and capital project expenditures. ASSUMPTIONS: Detailed revenue and expenditure assumptions are shown on page 4 of this report. Basically, revenues are shown stronger in the initial years of the forecast and are lowered in the later years to account for the inevitable downturn in the economy. Expenditure growth, on the other hand, is modest in the initial years of the projection, and increases in the later years to account for the inevitable upward pressure on the Consumer Price Index and corresponding inflationary pressures. This is consistent with government agencies' slow reaction to changing economic fortunes — both good and bad. It also presents a conservative approach to predicting revenues and expenditures. LONG TERM TREND. Under the assumptions used, the City will be able to maintain funding of services at the current level during the five -year period, but that situation will begin to deteriorate. The balance of the General Fund will not increase over the five -year period, and year to year levels will be somewhat more uneven than usual (page 6). Considering inflation, the real five -year trend in available fund balance will be declining. Under the scenario established by the assumptions, intervention in the form of increased revenues or reduced expenditures will be required. If revenues are constrained to the levels currently projected, expenditures will have to be reduced in such magnitude that it is unlikely that all services can be maintained in the period beyond five years. SENSITIVITY TO CHANGES IN ASSUMPTIONS: Deviations of actual experience from assumptions will change the results of this forecast very significantly. Although we regard the projected scenario as more likely than other single sets of circumstances, it is unlikely that the real situation will unfold as projected. There are just too . many variables, many of which are unpredictable. For example, if the City had done this same projection ten years ago, we would have assumed growth in property tax revenues, based on the experience of the previous decade, which would have ended up being unrealistic for the 90's. We can learn from that, and our projections are more conservative than they would have been. On the other hand, a projection ten years ago could not have foreseen the County bankruptcy or the State's property tax shift. We cannot predict specific events, but it seems prudent to expect that something of that nature is probably on the horizon again. Our recommended action therefore anticipates the need to prepare for such a development. EA October 25, 1999 Page 3 POTENTIAL REVENUE ENHANCEMENT MEASURES: Staff work to prepare a list of potential revenue enhancement initiatives has been started. A preliminary (and incomplete) list is included. The list is divided into four categories, and a very rough projection of the range of additional revenue available from each category is included. We are prepared to act further on this, but we do not want to do so without City Council direction. RECOMMENDED ACTION: 1. Consider the forecast and the specific assumptions listed. Direct modifications, if any, to the projections. 2. In conjunction with the forecast, establish a target level of additional revenues, and /or other actions, needed to maintain a secure fiscal posture for the City over at least the next five years. 3. Direct staff to return with a more thorough analysis of potential revenue enhancements to achieve the target level established above. This analysis should contain advantages and disadvantages of each, as well as recommended prioritization for City Council consideration. STAFF: 0 Principal participants in this staff work who are available to answer questions are Dennis 0 Danner, Dick Kurth, and Glen Everroad. 0 fN d V 7 r a v N W � m C d � fN CL 0 0 C Q � W d/ ¢ O m c m c IL E d R W W y y U' � O OC 0 v— m 0 m a d Y W m� Q N 6 Q gs ee.eeeee H o O O O O O 00 coo eO O e cc eO O m Ol fi fi O oI N N 0 0 0 0 0 0 0 0 0 0 0 0 0 e tl! 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FINES FORFEITURES & PENALTIES Administrative Citations Estimated Potential: $200k to $250k Summary By increasing the use of administrative citations, instead of criminal citations, the City's share of the fines ultimately paid would increase. Background The City receives 15% of the fine paid by a Municipal Code violator when cited criminally, versus 100% when cited administratively. The City annually receives approximately $50k from fines criminally enforced. Chapter 1.05, not quite two years old, provides that violations of Newport Beach Municipal and applicable State Codes may be administratively (versus civilly or criminally) enforced. Since the adoption of Chapter 1.05, approximately 450 administrative citations worth about $85,000 have been issued. Although any City staff authorized by Chapter 1.12 may. issue administrative citations, to date their use has been primarily limited to two code enforcement officers. Harbor justice Center (formerly Harbor Court) annually processes thousands of Newport Beach citations, arrests, and criminal and civil complaints, as well as those of Costa Mesa, Irvine and surrounding unincorporated areas. Relative to the nature of issues judges and commissioners adjudicate, many of the Newport Beach criminal citations they see are considered inconsequential and unique to Newport Beach. As a result, many criminal citations do not receive the level of consideration at adjudication that issuing officers believe is appropriate. Conversely, administrative citations are processed and adjudicated exclusively by the City (Revenue Division). Failure to pay criminal citations leads to additional criminal sanctions and increased costs. Unpaid administrative citations are treated the same as other unpaid receivables (credit reporting, collection agency). The City experienced a similar process in the substitution of criminal for civil enforcement processes in 1993 with the passage of AB 408. This legislation decriminalized parking citations, and the 75,000 parking citations we issue annually are no longer processed or adjudicated by the courts. The greatest opportunity from the use of administrative citations exists in substituting their use with those departments currently using criminal citations (Police) in the enforcement of minor Municipal Code offenses. Examples of offenses for which Administrative Citations might be more appropriate are excessive noise, trash violations, and Use Permit violations. Advantages/Disadvantages • Additional clerical and hearing officer staffing would be required to process any increased volume of administrative citations. • Violators pay less in administrative citation penalties than criminal citation penalties. 7 • Adjudication of administrative citations occurs before a hearing officer, designated by the City, whose focus is Newport Beach violations. Issuing officers receive greater attention to even minor violations b . adjudicators. • Greater return in recovering enforcement costs. • Less onerous than criminal processing for both violators and enforcers. • More efficient and effective than lesser enforcement efforts. Required Action Increased use of administrative citations is an administrative decision, provided the staff person issuing the citation is authorized by Section 1.12. Uniform Bail Schedule Estimated Potential: $30k to $50k Summary This revenue would be received as a result of increasing the base bail amounts and adding new amounts for violations not currently reflected in the bail schedule. Background The City receives 15% of the "base bail" amount paid by violators cited for violations of Newport Beach Municipal Code and misdemeanor violations of a variety of California Code sections we enforce (Vehicle Code, Harbors & Navigation Code, etc.). The fines violators pay are comprised of base bail and penalty assessment amounts. Pursuant to Penal Code Section 1269, the Judicial Council of California determines, the amount of base bail for state violations, and the City has no authority over such bails. However, Section 1269 authorizes a majority of Harbor Justice Center judges to establish the base bails on Newport Beach Municipal Code violations. They do so after a request by the City Council to modify or add base bails. In addition to the base bail, violators statutorily pay penalty assessments of $17.50 for each $10.00 increment (or portion thereof) of the base bail. The City has not requested an increase in the base bail amounts since 1994. Additionally, the City has not requested establishment of new base bail amounts for any newly adopted Municipal Code violations since 1994. Advantages/Disadvantages • Violators pay more in fines, and may be more inclined to fight tickets. • The court is responsible for all administration and adjudication. Required Action This revenue opportunity could be implemented by submitting a Resolution, adopted by the City Council, requesting the presiding judge to increase base bail amounts and adding new amounts for violations not yet established in the bail schedule. Repeal of Court Charges on Parking Citations Estimated Potential: $200 to $300k' Summary Government Code Section 76000 requires the City to pay for services no longer provided by the court system. New legislation could change the required funds flow to more accurately reflect changes in practice, which would result in a gain to the City of approximately $300,000. Background Prior to the decriminalization of parking citations by AB 408 in 1993, courts processed parking citations. During the time courts were responsible for parking citation processing and adjudication, the State legislature authorized additional penalties to be imposed on parking fines. These surcharges (adding $5 for each citation) to the fine amounts of the issuing agencies were, in theory, imposed to support County and State costs in processing and adjudicating parking citations. Although parking citations were decriminalized with processing and adjudication responsibilities no longer a responsibility of the County or State, issuing agencies are still statutorily required to pay the surcharges to the County and State. The City pays approximately $300,000 annually in these surcharges on parking citations we process and adjudicate. The Trial Court Funding Act set the stage for the transfer of court responsibilities from the County to State last year, so the courts are no longer a function of the County. Clearly, the County has no costs in processing or adjudicating parking citations. Moreover, AB 408 has provided for no unrecovered costs to the State justifying parking citation surcharges in processing or adjudicating parking citations. Three years ago Assemblywoman Marilyn Brewer asked for suggestions of legislation the City would desire her to author. This item was one of several identified by staff, but whether it was included in the City's final response to Assemblywoman Brewer at the time is uncertain. Advantages/Disadvantages • The County and State would realize a loss of revenue. • Should have broad support among issuing agencies (cities, counties, college districts, etc.). • The State can now afford elimination of the surcharge. Required Action Direct staff to find an author to carry an amendment to Government Code Section 76000. Red Light Enforcement Potential: $40k to $60k Summary: Recognizing the disproportionately severe ramifications of red light violations compared to most other traffic citations, legislation has increased fines substantially for these offenses. Some municipalities have installed automated equipment that senses and identifies red light violators. In addition to enhancing compliance, such equipment, if the City decides to use it, would result in increased revenue. Required Action If Council directs staff to proceed, procure the necessary equipment; develop and implement policy and procedures for enhanced enforcement. CHARGES FOR CURRENT SERVICES Fees for Service Estimated Potential: $50k to $150k Summary Imposition of fees for some services currently provided without charge, as well as update and expansion of the fee study done four years ago would generate this additional revenue. Background Approximately 12% of general fund revenues are derived from fees imposed on services provided. Growth in this category during the past five years has been the result of the imposition of new fees for services provided (i.e., residential building records, paramedic service & subscription) and increased cost recovery (fee increases) resulting from the 1996 KPMG fee study. KPMG studied 156 fees for service, significantly fewer than the approximately 780 fees identified in the current fee resolution. Moreover, KPMG only studied services for which a fee was being imposed. KPMG was not tasked with identifying services provided for which no fee was being imposed, nor are we aware of any comprehensive effort by the City to identify services for which no fee is being imposed. Other Orange County cities are imposing user fees for services similarly provided by Newport Beach without charge. The potential exists for recovery of costs for services currently provided without charge, such as private property impound recordation fees and fees for discretionary traffic collision reports. Additionally, a more comprehensive cost of services study, reviewing the costs for those services not studied by KPMG, would ensure greater cost recovery. Advantages/Disadvantages • Staff enthusiasm for fee studies is less than exemplary. • Fees justified by services provided. • Establishing fees for services currently without charges reduces subsidy from tax revenues. Required Action Direct staff to update cost of services information and propose revisions to the Fee Resolutions for City Council consideration. 10 USE OF MONEY AND PROPERTY OPenalties & Interest on Unpaid Debt Estimated Potential: $30k to 60k Summary The City's practices regarding penalties and interest for delinquent payments are not standardized as much as they could be, and they are generally quite lenient. Tightening up policy in this area would generate additional revenue in the estimated amount above. Background Prior to the adoption of the 1997 fee resolution (97 -15) virtually none of the City's approximately 800 different receivables had interest imposed on unpaid balances, and just a few had late payment penalties. Debtors had little motivation to pay their bills to the City. Council's adoption of the consolidated fee resolutions with penalty and interest provisions, and a vigorous collections program, has reduced the situation. The three Pentamation -based receivables management software programs used by the City for the past eight years are unintegrated and cumbersome. "Work- arounds," developed by Information Systems staff or advanced Pentamation users, is too often the standard in accomplishing what should be basic functionality. While each of the three receivables management systems has been programmed to impose late payment penalties, imposition of interest is not a current functionality common to each system. Moreover, imposition of both interest and penalties in one of the three modules requires operator review of the age and payment status on a customer by customer basis — not an efficient process. Automation of penalty and interest requirements on outstanding receivables has not been an Information Systems priority. Advantages/Disadvantages • Authority already exists. • Requires I.S. assistance. Required Action Write program(s) to automate application of penalty and interest to accounts. Dumpster Drop Fees Estimated Potential: $40k to $60k Summary This revenue would be generated by charging "use of right of way fees for dumpsters located on City property. Background Since 1985, the City has regulated the installation of large refuse containers (dumpsters) on public right of way. In 1995, the City established non - exclusive franchises for solid waste haulers, which provide for their payment to the City of a percentage of their gross receipts, derived from services provided in the City. About a third of the franchised solid waste haulers also offer dumpsters to their customers. Most often associated with construction activities, dumpsters typically occupy public streets for months at a time, preventing the public's use of the public property. The Revenue Division administers the dumpster regulations for the City, issuing permits on a case -by -case basis for about 15% of the estimated 4,000 dumpsters annually installed on public property, responding to complaints from the public (typically 11 neighbors) and enforcing violations. Neither the businesses utilizing the dumpsters, nor the companies providing the dumpsters compensate the City for their private commercial use of public property. Prior to the franchising of solid waste haulers the City had no authority to is inspect the haulers' business records, and confirming the amount of business dumpster companies provided in the City would be a challenge. Solid waste franchisees now report their business in the City monthly, and Municipal Code Chapter 12.63 as well the franchise agreements with the haulers, authorizes our review of haulers' records for confirmation of business. Advantages/Disadvantages: • Process already in place for monthly payment of fees. • Few companies affected (five or six). • Philosophically follows franchise fees imposed on others using the public right of way. Required Action Implementation of fees for use of public right of way could be accomplished by amendment of Municipal Code Chapter 12.63. Associate Sponsorships Estimated Potential: $100k to $500k Summary The City's limited program in this area could be organized at a higher level and pursued further. The concept of government partnering with corporations for marketing and point of sale is not new. Over the last ten years the concept has been introduced to this city, but not pursued. Piecemeal partnering efforts (Coke machines in public facilities, Land Rover lending of vehicles, etc.) have been in place for several years, but a comprehensive associate sponsorship program or strategy has not been developed. This concept has evolved to reality for a number of California cities, some just next door. Pepsi and Coke's bidding for rights to the City of Huntington Beach's designation as the City's official soft drink concluded a few months ago. Three hundred thousand dollars a year in cash and an equal amount of in -kind services for Huntington Beach over the next ten years demonstrates the reality of this opportunity. Soft drink, automobile, clothing, sun glass, sunscreen, credit card, film and clothing manufacturers are just a few of the many business categories potentially interested in partnering with Newport Beach. Advantages/Disadvantages • The City's image may be subject to both positive and negative judgment. • Are we able to limit the use of the City's endorsement, logo, etc.? • Significant revenue opportunities with little out -of- pocket cost. Required Action Review and possible amendment of current Council Policy and Municipal Code restrictions should follow a comprehensive study and strategic planning for the development of a comprehensive associate sponsorship program. 12 Income Property and Related Revenue Estimated Potential: $100k to $500k aSummary The City's schedule of rents and other charges should be reviewed and updated as necessary. This involves adjusting charges to market conditions unless the City Council decides to set them otherwise, in specific cases, as a policy matter. Required Action Direct staff to submit a report to the City Council with specific recommendations for bringing all appropriate rents and related charges up to market standards; and /or other action impacting return on assets for City- owned, income producing property, including updating of appraisals where necessary. Opening Some City Training Classes and Other Estimated Potential: $20k to $50k Internal Services to Others Summary The City provides various training courses, especially in the area of automation. It has proven very cost effective for us to provide this service in house. There are often available seats in classes that could be opened to others, for a fee. Similarly, we are called upon by other government entities to provide assistance on a frequent basis. Cost recovery would not be appropriate in all of these cases, but it would in others. Required Action Direct staff to establish a trial program opening appropriate City training classes to the public for a market competitive charge. Also direct staff to establish and implement (after City Council approval) policy guidelines regarding reimbursement for occasional services to other government agencies. Modify Franchise Charges as Appropriate Estimated Potential: $10k to $200k Summary There are a variety of franchises in effect, and each is unique and distinct. Reviewing them and taking eventual action, will probably be a significant undertaking in many cases. However, the potential return could be even greater than the figure. shown above. Required Action Direct staff to analyze the various franchise agreements and recommend a plan of action to the City Council. 13 INTERGOVERNMENTAL Mandated Costs Recovery Estimated Potential: $100k to $200k - Summary The City has a strong cost recovery program, but there is room for improvement if more energy is dedicated to this purpose. Background The California Constitution provides that the State shall reimburse increased costs to local government resulting from statute or executive order imposed since January 1, 1975, with certain limitations. This Constitutional provision (added by SB 90) requires the local agency to succeed in the filing of a test claim before the Comnussion on State Mandates (CSM) before costs will be reimbursed. The entire test claim process typically averages three to four years from test claim filing to receipt of payment. During the five years the City has served as a charter member (and currently serves as the chair) of the League of Cities Advisory Committee on State Mandates, we have filed test claims with the CSM resulting in additional cost recovery opportunities for the City. SB 90 reimbursements have increased from $46,207 in 1993 -94 to $427,725 last year (925% increase). The City is currently the claimant on two public safety (Police & Fire) related claims pending before the CSM, and a significant number have yet to be filed for activities mandated since 1975. Advantages/Disadvantages • Lengthy process • No direct costs to Newport Beach residents or its visitors Pursuing recovery of costs leads to greater consideration from the legislature in passing new mandates Required Action Direct staff to continue aggressive pursuit of cost recovery where appropriate. Desk Audits Potential: $75k to $100k Background Last year the City paid over $200,000 to Municipal Resource Consultants (MRC), the City's contingent fee auditors since 1989,'for their efforts in identifying more than $800,000 in taxes and fees owed to the City. Some of the audits they conducted required specific technical skills and industry specific experience, while many of their findings were derived from just paying attention. Prior to the cutbacks during the middle part of this decade, the Revenue Division began development of an aggressive in -house desk audit program. A new job classification, "Revenue Technician," was created within the Revenue Division. This position's responsibilities began in identifying misallocated sales and use tax, effectively competing with the City's contract audit firm (MRC). Within the first three years, the Revenue Technician (an in- house trained former license inspector with no audit experience) had identified over $2 million in misallocated sales and use taxes for the City, retaining over $500k in contingent fees that would have been paid to MRC had they found them. This person left the City to accept an advanced position with the City of San Jose, just as we began to expand the desk audit effort to Transient Occupancy Tax. The Revenue Technician position was later eliminated with the 14 0 0 O 0 transfer of a Principal Planner position from Planning to the Revenue Division as a Management Analyst. As a result, in -house desk audits have not been conducted since 1996. Advantages/Disadvantages • City revenues are retained by the City • Greater opportunity to provide review of revenue streams not commonly reviewed by contract auditors • Potentially additional staff costs • Returns should easily exceed costs Required Action Council action would be required to add a Revenue Technician or similar employee to the Revenue Division. Restructuring the Revenue Division may facilitate the process of recreating the position. Sales and Use Tax Estimated Total Potential: $140k to There are three distinct areas of opportunity in this category. Generally, the City receives 1% of the sales tax, and a percentage of the use tax. Typically use tax (with some notable exceptions such as auto leasing) flows to the countywide pool, and the City receives a proportional share based on the percentage of sales tax received by the City relative to the whole county. Last quarter, the City received 4.4% of the 1% local share of the tax distributed through the countywide pool. Recent regulatory and legislative changes have significantly improved the opportunity to divert more of the taxes distributed through the countywide pool to direct allocation to the City, resulting in considerably greater return (100% of the local tax versus 4.4 %) to the City. The three distinct areas include: 1. Business Outreach Program Estimated Potential: $50k to $150k Background The City has historically contracted with Municipal Resource Consultants (MRC) to assist the City in its efforts to increase the local allocation of sales and use taxes. MRC no longer assists the City with our Business Outreach Program, and staff is pursuing a new contractor, Municipal Revenue Advisors (MRA) to provide this assistance. With the assistance of MRA, we Will focus on changing the reporting practices of targeted businesses so that all of their sales tax is allocated to the City, instead of to the Orange County pool. Advantages/Disadvantages • Increased communication with City businesses, particularly the larger generators of sales and use tax. Should these businesses consider changing their point of sale or moving operations to another jurisdiction we would know sooner rather than later. • Some businesses may take this opportunity to press for certain concessions from the City. 15 2. Use Tax Accrual on One -Time Capital Estimated Potential: $50k to $75k Expenditures Background This is a related component of the Business Outreach Program, and focuses on the larger purchases of manufacturers and non - retail type businesses. These categories of businesses are not typically identified as sales tax producers because they are not retailers, and the City is typically unaware of the purchases creating the opportunity because the City has not had. access to information (countywide pool allocations) identifying such opportunities. Advantages/Disadvantages Same as the Business Outreach Program. 3. Orange County Pool Misallocation Corrections Estimated Potential: $10k to $40k Background Effective January of this year, legislation has created the opportunity to access countywide pool. information, previously unavailable to the City. Identification and action to correct potential misallocation in countywide pool allocations is a new and different area of review. Revenue Division staff is currently reviewing a proposal by Municipal Revenue Advisors to focus or. correcting sales and use tax allocations that are currently going to the Orange County pool. The primary tool for this effort will be SBE county pool data. Advantages/Disadvantages City staff will gain expertise and be able to do this themselves in the future. 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