REVENUE
PROJECTIONS
Assumptions and Trends
Revenue projections for fiscal years 2006-
2007 and 2007-08 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 six years, the City's revenue
stream, especially in the General Fund, has
shown steady growth. This growth has been
even more pronounced in the last two years.
The City continues to lose approximately
$2.8 million annually as a result of the
property taxes being shifted away from the
City to the Educational Revenue
Augmentation Fund (ERAF) that began in
the early 1990's and is now a permanent
shift.
Fiscal year 2004-05 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 for
this revenue source are now tied to increases
in assessed valuation in the City.
Fiscal year 2006-07 marks the end of the
ERAF III shift that shifted $1.1 million of
property taxes to the county in fiscal years
2004-05 and 2005-06. 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
2006-2008 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
he major General Fund Revenue Sources. t
Sales Taxes: Sales tax revenue is projected
to increase by 6.2% in 2005-06 over 2004-
2005 due in large part to the opening of a
new auto dealership in January 2005. Retail
sales were showed only minor growth in the
2005-06 fiscal year. Sales tax estimates for
2006-07 and 2007-08 are estimated to
increase by 7.0% and 8.3% respectively,
with the addition of two new auto
dealerships and a large commercial center
scheduled to open in 2006-07. Sales tax is
delineated under two categories: 1)
estimates of $11,165,000 in 2006-07 and
12,211,000 in 2007-08 will come from the
usual state allocation and 2) $3,900,000 in
2006-07 and $4,100,000 in 2007-08 will
come from the sales tax compensation fund.
The state allocation is remitted monthly to
the City and the compensation fund
payments are made 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 is
estimated to be $7.4 million in 2006-07 and
$7.8 million in 2007-08. This amount
increases annually based on the increase of
assessed valuation in the City. Property tax
revenues, including the Supplemental
Property Tax in lieu of VLF, now make up
approximately 30% 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.
Although the housing market is starting to
level off, assessed valuations, and
consequently property taxes, should
continue to increase over the next couple of
years at higher than normal rates as homes
transfer ownership and are reassessed at the
higher purchase price. The county-wide
secured property tax roll increased by 10%
again for the 2006-07 fiscal year after a
similar increase in 2005-06. The increase
for the City is not known at this time.
Property taxes for 2006-07 and 2007-08,
including the VLF in lieu amount, are
estimated to be $15.2 million and $15.9
million.
Interest Income from Community
Development Commission (CDC): In July
2005, the City approved a new repayment
schedule for the nearly $19 million
previously advanced to the CDC. The
schedule calls for annual payments of $3.3
million and will amortize the principal over
the next twelve years, thus reducing interest
income over that period. 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
4.7%) plus 2%.
Interest Income: Interest rates began to
climb during the 2004-05 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
revenue estimates are based on the current
interest rate market.
Franchise Taxes: This revenue source
includes franchise fees collected on trash,
cable television, and utilities operating
within the City. Revenues are estimated to
increase only modestly during the next two
years.
Ambulance Service: The City provides
ambulance transport service as part of its
emergency response service. The majority
of the revenues collected for transports are
reimbursement from private insurance and
Medi-care and Medi-Cal. Transports rates
are based on county rates and cost of
supplies and the revenue estimate is based
on projected number of transports and
current transport rates.
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 2% in both budget years.
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 annually is
approximately $1.5 million.
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 3.5% in both budget years.
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:
- Fines and forfeitures from the Traffic Safety Fund in the amount of
$1,180,000 in 2006-07 and $1,300,000 in 2007-08.
- Revenues from the Public Safety Augmentation Fund established by
the State of California to supplement public safety efforts by local
agencies in the amount of $600,000 in both budget years.
- The Police Computer Enterprise Fund will transfer $250,000 in both
budget years to repay the General Fund for PERS Retirement costs.
The following schedules depict historical revenue information for fiscal year 2004-05, projected amounts for fiscal year 2005-2006 and budget estimates for 2006-07 and 2007-08 by fund and source.
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