City Manager's Office
June 29, 2006
Honorable Mayor and
City Council of the City of West Covina
I am pleased to submit the City Manager's 2006-07 and 2007-08 Budget for the City of West Covina. This adopted budget represents the City's first two-year budget and presents a budget that is balanced in both fiscal years. After six years of budgets that contained significant deficits, the City adopted a budget in 2005-06 that contained a gap of only $56,908. This was achieved as a result of the City implementing new revenues sources, controlling the growth of expenditures and an improving economy, most notably in the area of property taxes, and property and construction related fees and taxes. This two-year budget continues that trend of solid revenue growth and controlled expenditures. The result is a budget that is balanced for the next two years
and one that continues the delivery of municipal services to the community in a fiscally responsible manner.
The operating budget (General and special revenue funds) totals $67,802,733 in 2006-07 and $65,451,107 in 2007-08. The balance of the budget is for proprietary type, capital project, debt service, and redevelopment funds. The grand total is $98,986,320, in 2006-07 and $95,928,512 in 2007-08. The total General Fund budget is $51,359,699 in fiscal year 2006-07 and $53,505,813 in 2007-08.
A summary of the General Fund budget is presented below:
This budget follows the directive of the City Council to provide balanced budgets and reflects a continual trend of improving revenues and controlled expenditure growth. Prior to 2005-06, the City had adopted budgets that were balanced with the use of reserves. This use of reserves was necessitated by rapidly increasing costs of providing public services that exceeded the growth of revenues.
A major factor in the increasing costs was 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 more stable contribution rates in the future. While the rates will stabilize, absent any further changes by CalPERS, they will remain at higher levels than in the past.
Fiscal year 2005-2006 is the second and final year 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 strong growth of many of the City's revenue sources have contributed to closing the budget gaps that persisted over the last several years, equally important was the City's ability to control its expenditures, especially in the area of personnel costs. As the growth of revenues is anticipated to slow in coming years as the housing market levels off, the ability of the City to
continue to control expenditures will be a key for the City in balancing its budget in future years.
The City is projected to have a total fund balance at the beginning of the 2006-2007 fiscal year of approximately $49 million and an available fund balance of $25 million.
Budget Overview
As mentioned above, the 2006-07 and 2007-08 budget years are expected to continue a trend of sustained revenue growth and controlled expenditures on the part of the City. Although the 2005-06 fiscal year General Fund budget was adopted with a $56,908 gap, the City is estimating that the General Fund will end up with a surplus for that year in excess of $1 million. This is due
in large part to the City receiving a larger than expected amount of supplemental property tax in lieu of vehicle license fees. This property tax is a result of state action that exchanged vehicle license fees for a larger portion of property taxes. This exchange first occurred in 2004-05 and
was based on vehicle license fees. Beginning in 2005-06, the revenue was tied to increases in property taxes and consequently this revenue grew by 10% in the 2005-06 fiscal year. Property taxes, including supplemental taxes which are levied after the assessment roll for the year is set, also exceeded budget estimates and contributed to the projected surplus.
The adopted budget contains a surplus of $52,028 in the 2006-07 fiscal year and a surplus of $149,370 in the 2007-08 fiscal year. Fiscal year 2006-07 total General Fund revenues are only up 1.3% over the estimated 2005-06 revenues due to the one-time VLF gap loan repayment of $1.9 million that occurred in 2005-06. This revenue loss was partially offset by the end of the ERAF shift of property tax, which saw the City lose $1.1 million of property taxes in each of the last two years. The revenue growth also reflects continued growth in property taxes as well as higher interest rates available on the investment of City reserves.
The City Council in 2005-06 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. As part of establishing this agreement, the City Council approved a new repayment schedule for existing advances due from the CDC. As this debt is amortized over the next twelve years, the $19 million principal amount will be paid off. Consequently, interest income to the City will be reduced over that time.
On the expenditure side of the budget, departments were directed to prepare their budgets for both years at a status quo level, allowing only for contractually obligated increases. During the budget review process, departments were further directed to reduce their General Fund budgets
by 1% in an effort to balance the budgets. The 1% savings totaled approximately $530,000 in each of the two budget years. Certain positions in the police and fire department have been budgeted as vacant with the staffing being provided with overtime from existing personnel. This approach has been used in the past to achieve budgetary savings as overtime rates are less than a
fully benefited full time employee. This method will begin to be phased out in the second year of the two-year budget.
The City's workers' compensation and general liability costs have decreased in recent years and as a result chargebacks to the General Fund for these costs have been reduced by a total of approximately $600,000 in each of the budget years.
Certain supplemental requests, which are requests by departments for personnel, programs, services or equipment that are above and beyond the current level of service, are being recommended as part of the adopted budget. Additional personnel being recommended includes a senior planner in the planning department (funded by the CDC), four additional software developers in the West Covina Service Group of the police department, additional part-time parking enforcement officers in the Police Department, a civil engineering assistant in the public works department and a fire protection specialist in the fire department.
Over the last several years as the General Fund struggled with budget deficits, vehicle and equipment replacement and certain maintenance items were deferred. This budget attempts to reverse some of those practices the City Council approved $1 million of the surplus in the 2005-06 fiscal year be set aside in a equipment replacement fund to provide funding for vehicles and equipment whose replacement has been deferred. A number of vehicles were approved for
replacement as part of the 2006-07 Capital Improvement Program.
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, each make up approximately 30% of the General Fund revenues and both have performed well
over the last several years. Approximately 80% of the City's property taxes are generated by residential properties.
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 is projected to be up 7.0% in 2006-07 and 8.3% in 2007-08. These increases are projected in large part to the addition of two new auto dealerships in mid 2006-07 and the scheduled opening of a large commercial development at the former BKK landfill site in the spring of 2007. Auto sales, which make up about 30% of all sales tax, were up almost 11% for the four quarters ending December 2005 over the previous year, due in large part to the opening of a new auto dealership
in January 2005.
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 2005-06 was $6.9 million. Increases for this revenue source, identified in the budget as Supplemental Property Tax in Lieu of VLF, are 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. Homes that transferred ownership in the last two years have on average seen the assessed valuations double as a result of the transfer. Although the market has begun to level off, assessed valuations should continue to increase for the next couple of years as homes with low assessed valuations are sold and reassessed at the purchase price.
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 is still identifying 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 large commercial center is scheduled to open in the 2006-07 fiscal year as part of the redevelopment of the former
BKK landfill site. That redevelopment of the landfill will also contain a Big League Dreams sports park and potential other commercial uses. The CDC is also continuing progress on expanding and enhancing the City's auto center. Nissan and Audi dealerships are scheduled to open in the 2006-2007 fiscal year.
Interest rates continue to climb and this has allowed the City to change its investment strategy which now includes short term federal agency issues which will significantly increase the City's investment returns without compromising safety or liquidity. Additionally, the interest rate on the Local Agency Investment Fund is currently about three times the rate it was paying just two
years ago.
Many of the other City's revenue sources, including franchise fees, business license taxes, transient occupancy taxes, and building permits, have also shown positive trends in recent years.
Conclusion
City staff has worked with the City Council the last few years 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. The result has been a budget that will generate a surplus in the 2005-06 fiscal year and one that is balanced for the next two years. The City has also been able to
maintain a sizable fund balance during this period that allows it to weather financial difficulties and provide funding for capital needs.
The City has seen substantial growth in the last two years in certain revenue categories, namely property taxes, and property and construction related taxes and fees. Interest rates have also risen rapidly in the last two years. This substantial growth in revenues, combined with limiting the growth of expenditures, has allowed the City to balance its budget.
While the City's financial position has improved dramatically in the last two years, the challenge into future years will be to continue to control the growth of expenditures at a reasonable rate as revenue growth begins to level off. The City also has a number of large capital items that have been deferred in recent years but now must be addressed. These capital items include the
replacement of the City's 911 emergency radio system, replacement of the city hall heating and air conditioning system, and the replacement of many vehicles.
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 City's first two-year 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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