City Manager's Office
July 25, 2005
Honorable Mayor and
City Council of the City of West Covina
I am pleased to submit the City Manager's 2005-2006 Budget for the City of West Covina. This adopted budget is an effort to balance the needs of the community for the continued delivery of municipal services with the ever-shrinking resources which local governments have to work with. At their January 2005 goal-setting meeting, the City Council listed balancing the budget as one of their top priorities. The budget presented herein is essentially a balanced budget with only a $56,908 gap between estimated revenues and appropriations.
The operating budget (General and special revenue funds) totals $64,254,465. The balance of the budget is for proprietary type, capital project, debt service and redevelopment funds, which totals $29,640,909. The grand total is $93,895,374. The total General Fund budget is $48,750,514.
A summary of the General Fund budget is presented below:
This budget reflects the progress made in closing the continual budget gap that has existed in the City's General Fund budget for the last six years. This gap between revenues and expenditures in the 2004-2005 and future years is due in large part to increases in the cost of providing public safety services, and increases in the contributions required for the employees retirement system. The increase in retirement costs is a problem faced by most cities across the state that are members of the California Public Employees Retirement System (CalPERS) and is due to three consecutive years of poor investment performance of the CalPERS portfolio. CalPERS has recently adopted an employer rate stabilization policy that smoothes out investment gains and losses over a longer period of time and extends the amortization period for unfunded liabilities. The effect of these changes, which will take effect in 2006-2007, will be an immediate decrease in employer contribution rates and more stable contribution rates in the future.
Fiscal year 2005-2006 is the second of two years in which the state will shift $1.1 million of property taxes away from the City. Proposition 1A, which was approved by 80% of the voters in November 2004, will prohibit this type of state takeaway in future years as well as provide other protection for local government revenues.
While the City's largest revenue sources have shown positive trends over the last several years, total revenues in the General Fund have not increased at the same level as increases in the cost of providing services. The combination of rapidly increasing costs in public safety and retirement contributions, and additional revenue takeaways by the state, have resulted in the budget deficits in recent years. Fiscal year 2005-2006 is the last year in which the City expects to see the large increases in retirement contribution costs that have increased from $3 million in fiscal 2001-2002 to over $8 million in 2005-2006. The previously mentioned policy changes at CalPERS will begin to provide some level of relief in 2006-2007. The City is projected to have a total fund balance at the beginning of the 2005-2006 fiscal year of approximately $46 million and an available fund balance of $22 million. While this large fund balance has allowed the City to use reserves for the last six years to balance the budget, further steps must be taken to address the structural imbalance in the operating budget. Budget reductions totaling $1.5 million and implementation of the City-provided ambulance service in the 2004-2005 budget reduced the ongoing structural deficit by $2.3 million. This 2005-06 Budget contains additional reductions along with a sales tax reimbursement agreement between the City and the Community Development Commission that will further reduce the structural imbalance in the General Fund in the current and future years.
Budget Overview
The 2004-2005 fiscal year budget was adopted with a $5.4 million gap. This gap was reduced during the fiscal year as one-time expenditure reductions and revenue sources were identified totaling over $2 million. The revenue sources included a $1 million repayment of the City loan to the CDC as a result of the sale of CDC-owned property, reimbursement of park maintenance expenditures from county grant funds, a settlement payment for IKEA, and amounts recovered as a result of an audit of the City's franchise cable operator. The City also generated significant budgetary savings due to many positions being vacant. During the fiscal year, the City Council granted the City Manager the authority to reduce department budgets in order to capture the savings generated by those position vacancies. This authority was meant to provide one-time savings to the General Fund reserve. The one-time savings and revenues, combined with certain revenue sources that exceeded their estimates, most notably property taxes, will bring the 2004-2005 deficit down to an estimated $2.3 million.
The gap in the 2005-06 General Fund budget is $56,908. This gap had been projected at $9 million last year and was reduced down to about $7 million as a result of the implementation of the ambulance service and the $1.5 million in cuts that took place during 2004-2005. During preparation of the 2005-2006 budget, additional measures were included in the preliminary budget that further reduced the structural budget deficit. Certain revenues have grown faster than in previous projections, such as property taxes and interest income. The property tax increase is the result of a continuing very hot residential real estate market. The increase in interest income is the result of higher interest rates available on investments.
The City Council also approved a sales tax reimbursement agreement between the City and the CDC in which the CDC will reimburse the City for sales tax used to secure the West Covina Fashion Plaza Community Facilities District bonds. This agreement reverses the financial obligation for the bonds from the City to the CDC and will generate payments to the General Fund annually of $1.5 million in 2005-06, increasing to $2.9 million in 2021-22 and with a final payment of $1.2 million in 2024-25. The CDC, by virtue of strong growth in property tax increment revenues, is now able to afford this obligation.
Departments were directed to prepare their 2005-2006 budgets at a status quo level, allowing only for increases in retirement contributions and other contractually obligated increases. In addition, a number of departments are undergoing organizational studies, which will result in ongoing budgetary savings as a result of reorganizations within the effected departments. Some of those savings are included in the preliminary budget. Certain other positions, including police officer and firefighter positions, which will be filled using overtime staffing, will be kept vacant to generate additional budgetary savings. Expenditure reductions in the 2005-2006 budget total approximately $950,000 and it is believed that these reductions will not significantly impact service levels.
The City also initiated a re-amortization of the unfunded liability of the City's public safety retirement plan. This re-amortization will generate approximately $810,000 in cash flow savings in the 2005-2006 fiscal year and is one of the measures being used to reduce the budget gap.
In June 2004, the City Council approved providing ambulance transport service to generate income to help offset the City's cost of providing emergency medical services. That service went into effect October 18, 2004 and was projected to generate additional net revenues of $860,000 annually. Due to the mid-year start up and the lag time between transporting patients and receiving revenues, net revenue in 2004-2005 was only budgeted at $350,000. The additional $510,000 of net revenues is included in the 2005-2006 budget.
The final action that took place to close the budget gap was the adoption of the state budget, which included the early repayment to cities of the VLF gap loan. The amount due to West Covina is $1.9 million. This amount was withheld by the state in 2003-04 and was originally scheduled to be repaid in 2006-07. This amount is a one-time revenue source.
State and Local Economic Outlook
The City of West Covina is a largely residential city that has a large commercial section along the Interstate 10 corridor. That commercial section includes two regional shopping centers and a number of auto dealerships. The City's two largest revenue sources, sales tax and property tax, make up approximately 60% of the General Fund revenues and both have performed well over the last several years.
Sales tax revenues now include the sales tax compensation fund. This fund was created as part of the so-called "triple flip", which was adopted by voters in March 2004, and swaps one quarter of the City's sales tax revenue for a like amount of property tax. Increases in this revenue source are tied to increases in the City's remaining portion of sales tax. Overall, sales tax are projected to be up 6.4% over 2004-2005 revenues due in large part to the addition of a new auto dealership, the opening of a number of new restaurants, and the City receiving a larger share of the sales tax increment previously being returned to the West Covina Plaza Community Facilities District. Auto sales, which make up about 30% of all sales tax, were down 6% for the four quarters ending December 2004 over the previous year as a result of flat auto sales and the loss of one dealership in January 2004.
Property tax revenue became a much larger part the General Fund in 2004-2005 as a result of the elimination of the backfill portion of the vehicle license fee (VLF) revenues which were then replaced with a like amount of property tax revenues. This is a permanent shift and the amount of the swap in 2004-2005 was $5.9 million. Increases in future years for this revenue source, identified in the budget as Supplemental Property Tax in Lieu of VLF, will be tied to increases in assessed valuation in the City. Property tax revenues on their own have shown strong growth as a result of the strong residential real estate market and estimates for 2005-06 are 8% higher than the budget estimate for 2004-2005.
Property taxes for the Community Development Commission (CDC) have also shown solid growth in recent years and this trend is expected to continue in the near future due to a strong residential real estate market and continued redevelopment activity in the city. This increase in property tax increment has improved the CDC's financial position and will allow them to repay amounts owed to the City.
West Covina remains an attractive location for businesses to locate to. The challenge has been to identify acceptable sites for these businesses. The CDC continues to serve a vital role by working with local businesses and property owners to stimulate local business, generate employment opportunities and enhance the City's economic stability. A number of new restaurants are under construction and will open in fiscal year 2005-2006. The City is still in negotiations to bring in a large commercial center as part of the redevelopment of the former BKK landfill site. The CDC is also continuing progress on expanding and enhancing the City's auto center and a Ford dealership located in the city in the 2004-2005 fiscal year.
Interest rates have begun to turn around after a decline to historic lows over the last four years. This rise in interest rates has allowed the City to change its investment strategy which now includes federal agency issues in the two to three year maturity range which will significantly increase the City's investment returns without compromising safety or liquidity.
While most of the City's revenue sources have shown positive trends in recent years, they have not been able to keep up with the rising costs of providing municipal services. The City has taken a number of actions in the last few years to reduce the budget gap and many of those are carried forward into this budget. The City continues to look for additional funding sources while at the same time reducing expenditures without major impacts on services. This approach is an attempt to balance the needs of the community against the City's limited resources.
Conclusion
City staff has worked with the City Council to find and implement solutions to the City's ongoing budget structural imbalance and to ensure that the economic well being of the City is maintained. Although the City was able to reduce the budget gap from $7.1 million to $56,000 during the preparation of this budget, a good portion of that reduction came in the form of a one-time revenue source, which was the $1.9 million repayment of the VLF gap loan. The gap is projected to grow again to $1.6 million in the 2006-07 fiscal year.
The City will continue to work towards closing future budget gaps and stabilizing the General Fund budget. A critical piece of this stabilization effort will be the commercial development at the former BKK landfill site. That development is estimated to generate $1 - $1.5 million in sales tax revenues annually.
Keeping positions vacant, reorganizing departments, implementing additional revenue sources, increasing current revenue sources, and shifting funding away from the General Fund are all measures that have been used to reduce the gap in this budget. Part of stabilizing the budget will also include ensuring proper staffing levels of the various departments that have been impacted in recent years as well as ensuring that the City's capital and infrastructure needs will be met in the future.
Staff will also continue to pursue a number of additional proposals for City Council consideration that will further stabilize and diversify the City's revenue stream. Those proposals include:
- Apartment Service Fee
- Annexation of surrounding unincorporated land
- Ambulance Service Subscription Program
Development of the K-mart site, the downtown area and other strategic locations within the city will also strengthen the City's economic base in future years. The City is also monitoring the legal status of a 911 emergency service fee as a potential revenue source in the future. Acceptance of the proposals outlined above, along with a continued commitment to the completion of commercial developments, is a key component to bringing together a balanced budget.
Many creative solutions have been put forth by staff in an effort to balance the budget without major service impacts. I would like to acknowledge the collective efforts that were necessary for the preparation of the fiscal year 2005-2006 Budget. The finance department staff, department heads and other employees contributed ideas and a tremendous amount of analyses, work and dedication to the preparation of the document. For all of these efforts, I am extremely grateful and proud.
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