REVENUE
PROJECTIONS
Assumptions and Trends
Revenue projections for fiscal year 2005-2006 are based upon economic forecasts for the area, information supplied by other agencies, City Council policies and direction, and service levels projected by the various departments within the City.
The City utilizes information from various outside agencies, such as the Federal Department of the Treasury, State Department of Finance, State Board of Equalization, and the Los Angeles County Assessor's Office, to predict revenues for entitlements, grants, state subventions, sales tax, and property tax. City staff project fee and charge revenues, including many related to development.
Once this general information has been collected, the finance department develops specific revenue estimates for each revenue source by taking into account past performance and expected future events. These assumptions and projections are documented so that they can be evaluated during the year as part of the ongoing fiscal monitoring process. They are then modified as needed for the following year's revenue estimates.
Over the last five years, the City's revenue stream, especially in the General Fund, has shown steady growth. The City has sought to make up for the $4 million annual revenue loss as a result of the BKK landfill closure in the mid-1990's with the addition of auto dealerships, expansion of the two regional shopping centers, increases in existing fees and taxes, and other new revenue sources. The City continues to lose approximately $2.6 million annually as a result of the property taxes being shifted away from the City to the Educational Revenue Augmentation Fund (ERAF).
Fiscal year 2004-2005 was a year in which the City's revenue structure changed dramatically due to actions taken at the state level. The first change is the so-called "triple flip" which was adopted as part of the state fiscal recovery bonds approved by California voters in March 2004. Under the triple flip, one quarter of the City's sales tax revenue will be swapped for a like amount of property tax. Increases in this revenue source will be tied to increases in sales tax revenues. This swap will remain in place as long as the fiscal recovery bonds are outstanding.
The second major change in the revenue structure is the result of an agreement between the governor and local governments. It involves the elimination of the backfill portion of the vehicle license fee (VLF) revenues. As with the sales tax swap, the loss of VLF revenues will be replaced with a like amount of property tax revenues. This is a permanent shift and increases in future years for this revenue source will be tied to increases in assessed valuation in the City. Although these first two changes were intended to be revenue neutral, they do change the timing of when revenues are received by the City.
The final major change to City revenues was the shift of City property tax to the ERAF fund. This shift, known as "ERAF III", is in addition to the previously mentioned ongoing annual ERAF shift. The amount of the shift is $1.1 million per year and would occur for only two years instead of being permanent. Fiscal Year 2005-2006 is the second and final year for this shift. Additionally, Proposition 1A, a constitutional amendment adopted by 84% of the voters in November 2004, provides future safeguards for local government revenues.
The revenue estimates for the fiscal year 2005-2006 reflect the need to be realistic about the fiscal future while avoiding unduly conservative projections. These would result in unnecessary reductions in services to the community. Below is a summary of the major General Fund Revenue Sources.
Sales Taxes: Sales tax revenue is projected to increase by 1.8% in 2004-2005 over 2003-2004 despite the loss of an auto dealership and flattening auto sales in general. Retail sales were strong and made up for the losses sustained in the auto sales sector. Sales tax estimates for 2005-2006 are estimated to increase by 6% despite the expectation of a continued flat market for auto sales. The projected increase is due to the addition of a new auto dealership, the opening of several new restaurants and the City receiving a larger share of sales tax increment previously being returned to the West Covina Plaza Community Facilities District. Sales tax is delineated under two categories: 1) $10,375,000 will come from the usual state allocation and 2) $ 3,430,000 will come from the sales tax compensation fund. These compensation fund payments will be made with property tax in semi-annual installments.
Property Taxes: Property tax revenues have taken on a much larger role in the General Fund revenue structure as a result of changes made at the state level. The majority of vehicle license fee (VLF) revenues were swapped for an equal amount of property tax revenues. That amount in 2005-2006 is estimated to be $6.2 million. Property tax revenues now make up approximately 27% of General Fund revenues.
Property tax revenues have shown strong growth in recent years in the City due to the strong residential real estate markets. Home values continue to appreciate annually in the double-digit range. As homes are sold, the new assessments are based on the sales price, which in most cases leads to a much higher assessed valuation. The county-wide secured property tax roll increased by 10% for the 2005-2006 fiscal year. The increase for the City is not known at this time. Property taxes for 2005-2006, including the VLF in lieu amount, are estimated to be $12.4 million, an 8% increase of the 2004-2005 budget estimate.
Vehicle In-lieu Tax: Up until fiscal year 2004-2005, this has been a significant revenue source for the City. The state swapped approximately 90% of the VLF revenues for a like amount of property taxes. That amount is included in the City's property tax revenue projections. In 2003-04 the state also withheld $1.9 million of VLF revenues due to the City. That amount, originally scheduled to be repaid in 2006-2007, has been approved for repayment in the 2005-2006 as part of the approved state budget. The remaining VLF revenues are estimated to be $725,000, a 3.6% increase over the estimated amount in 2004-2005. This growth is consistent with growth of this revenue source in prior years. The $1.9 million is a one-time revenue and the City will receive the remaining VLF revenues (estimated at $725,000 in 2005-2006) in future years.
Interest Income from Community Development Commission (CDC): The repayment from the CDC to the City increased to $4.4 million in 2004-2005. The amount is scheduled at $3.3 million in 2005-2006. In addition, the CDC will continue to make interest payments on the draw down of the $5.6 million line of credit provided by the City at the agreed rate of LAIF (currently about 3.0%) plus 2%.
Use of Money and Property: Interest rates began to climb during the 2004-2005 fiscal year and the City changed its investment strategy to include federal agency notes that pay higher rates than the state investment pool. The state pool rate has also increased. The higher interest rates should result in an estimated increase of $200,000 in interest earnings in 2005-2006.
Sales Tax Reimbursement Agreement: Pursuant to an agreement in 1990, the City has pledged sales tax revenues as security for the Community Facilities District (CFD) bonds used to expand the West Covina Plaza shopping mall. The City annually shifts approximately $1 million in sales tax revenues to pay debt service on the bonds. The City Council and the CDC have entered into an agreement in which the CDC will reimburse the City for sales tax amounts used to pay debt service on the CFD bonds. This agreement includes all past payments from sales tax revenues as well as future payments from sales tax revenues. The amount of the reimbursement in 2005-2006 is scheduled to be $1,484,480.
Business License Taxes: Unless waived by the City Council, the Business License tax automatically increases by the consumer price index in January of each year. Business license taxes are estimated to increase by 4% in 2005-2006.
Construction Tax: The Construction Tax increases in July each year by the amount of the consumer price index (CPI). There is no provision for the City Council to waive this increase. The projection for this revenue is based on past experience, changes in the CPI and anticipated building activity. West Covina has limited vacant land available for development.
Transient Occupancy Taxes: The City's hotel tax is at 10%. Occupancy in the local hotels is projected to remain approximately the same as in 2004-2005 with a modest increase in rates. Hotel taxes are estimated to increase by 3% in 2005-2006.
Franchise Taxes: The revenue received from franchise taxes are projected to decrease by about 2% in 2005-2006. This is due to a one-time revenue received in 2004-2005 as a result of an audit of the City's cable franchise operator. The 2005-2006 estimate is 4.6% higher than the 2004-2005 budget estimate.
The following table summarizes the major revenue sources in the General Fund Types by revenue source (exclusive of fund transfers):
The General Fund is the recipient of several inter-fund transfers and internal service charges:
- Internal service charge for equipment replacement ($67,750).
- Fines and forfeitures from the Traffic Safety Fund ($1,200,000).
- Revenues from the Public Safety Augmentation Fund established by the State of California to supplement public safety efforts by local agencies ($600,000).
- The Police Computer Enterprise Fund will transfer ($250,000) to repay the General Fund for PERS Retirement costs.
The following charts depict historical information for fiscal year 2003-2004 and projected amounts for fiscal years 2004-2005 and 2005-06 by source and by fund.
|