City of Santa Monica
California

Staff Report
3341

Ten-Year Financial Forecast

Information

Department:Finance Department, Budget DivisionSponsors:
Category:08. Administrative Item

Recommended Action

Recommended Action

Staff recommends that the City Council:

1.              Review the FY 2019-20 through FY 2028-29 Ten-Year Financial Forecast and direct staff to proceed with developing a fiscally sustainable budget strategy;

2.              Renew grant funding for two years contingent upon available funding and postpone the next grant cycle to begin FY 2021-22 for the Human Services Grant Program; and

3.              Receive public comment on federal Community Development Block Grant (CDBG) and Home Investment Partnership Act (HOME) Program funds.

Staff Report Body

Summary

The City of Santa Monica has a decades-long legacy of prudent financial management that is the foundation for the scope and quality of services to the community and a AAA bond rating from all three national rating agencies.  One of those, Moody’s, in reaffirming that rating last year, cited Santa Monica’s “large and diverse tax base, strong socioeconomic indicators, exceptionally healthy financial position and low lease burden.”  Maintaining this strong fiscal position in times of increasing economic uncertainty is at the heart of the City’s commitment to being a sustainable city of wellbeing.

 

The FY 201920 through FY 2028-29 Ten-Year Financial Forecast informs the Council and community of the City’s current and projected fiscal status as the City enters the FY 2019-21 Biennial Budget preparation process. Every six months, staff updates the forecast to reflect known and potential factors that will have an impact on the City’s financial position. This tool allows Council to understand the level to which revenues can adequately cover ongoing initiatives, or more critically, to make course corrections if necessary to avoid a shortfall.

 

The City’s shift to a reimagined, performance-based budget includes the transition from a five- to a tenyear forecast model that will provide the necessary perspective to allocate limited resources during a time of economic volatility, rising costs and unprecedented changes in the ways municipal revenues are generated. To date, the City’s five-year forecasting process has been crucial in establishing and maintaining not only the City’s AAA credit rating, but avoiding crisis management through long-term planning. A ten-year forecast will provide an enhanced tool to prepare for increasing economic challenges coming from a future recession, flattening revenues, and steep pension cost increases; understand the lifecycle costs of programs and technology; and plan for significant investments in public infrastructure.  Such a plan follows best practices as recommended by the City’s internal auditor and the Government Finance Officers Association (GFOA).

 

The forecast reflects the impact of Consumer Price Index (CPI) and labor cost increases without new programs or staffing. Staff has completed a series of best to worst case forecast scenarios, using for the most part current service and staffing levels, to provide a range of impacts that the General Fund may be required to withstand. The following table shows revenues over expenditures in the four forecast scenarios:

 

 

Scenario

General Fund Annual Revenues – Expenditures ($ in millions)

FY 19-20

FY 20-21

FY 21-22

FY 22-23

FY 23-24

FY 24-25

FY 25-26

FY 26-27

FY 27-28

FY 28-29

Probable Case

$1.1

($4.9)

($11.6)

($16.9)

($20.8)

($24.7)

($29.0)

($32.6)

($36.3)

($31.5)

Best Case

$8.7

$6.2

$1.4

($1.7)

($3.7)

($4.9)

($6.8)

($7.7)

($8.5)

($0.8)

Recession Case

$0.2

($16.4)

($39.2)

($35.8)

($36.9)

($38.4)

($42.8)

($46.3)

($49.6)

($44.4)

Worst Case

($3.3)

($22.9)

($53.7)

($55.3)

($52.1)

($54.4)

($59.0)

($63.5)

($68.7)

($65.3)

 

It is important to note that these are, of course, projections.  In previous years, the City has consistently projected future shortfalls in the latter years of our five year projections. This is not only because those figures have been based on fiscally conservative assumptions, but more significantly because these warnings have guided City Council to make prudent adjustments to expenses and revenues that have ensured continued balanced budgets, and continued investment in maintaining and expanding public infrastructure and augmenting financial reserves.

 

Again looking ahead, now with a 10-year time horizon, the staff and Council have recognized that the greatest risk factor to the City’s fiscal health is the City’s unfunded pension liabilitySanta Monica is actually in better condition than most members of the statewide California Public Retirement System (CalPERS) with a funding ratio of 75% versus 71% system-wide.  However, not only is the projected $467 million unfunded liability the primary factor driving rapidly rising City expenses over the next ten years, the likelihood of a recession in the years ahead could increase that debt load, driving future costs beyond those currently projected. That is why the City has been one of the handful of local agencies that have made substantial pre-payments of the debt, amounting to a total of $77.5 million since FY 2010-2011.

 

Recognizing the continuing challenge of this issue, the City Manager established a Pension Advisory Committee in October, 2018, made up of residents and City employees, to discuss options for further management of the City’s pension obligation and provide recommendations to the City Manager. After intensive study and discussion of the sources, magnitude and alternative approaches to the pension challenge, the committee framed a set of principles that were unanimously adopted by all 11 members:

Among the Committee’s principles was a recommended accelerated plan to pay down the City’s current pension unfunded liability over 13 years, to conclude in 2032-33 (It should be noted that the Committee members also recognized the potential that fiscal emergencies might preclude making those payments in some years and they provided a provision for such circumstances). The following table shows the impacts of these additional payments on the General Fund’s financial projections scenarios during the forecast period:

 

 

Scenario

General Fund Annual Revenues – Expenditures ($ in millions)

with 13 Years of Additional Discretionary Payments Towards Unfunded Liability

FY 19-20

FY 20-21

FY 21-22

FY 22-23

FY 23-24

FY 24-25

FY 25-26

FY 26-27

FY 27-28

FY 28-29

Probable Case

($6.2)

($10.6)

($15.7)

($19.9)

($24.0)

($27.9)

($32.3)

($36.0)

($39.8)

($39.8)

Best Case

$1.5

$0.5

($2.6)

($4.6)

($6.8)

($8.2)

($10.2)

($11.1)

($12.1)

($9.1)

Recession Case

($7.1)

($22.0)

($43.2)

($38.7)

($40.1)

($41.6)

($46.1)

($49.8)

($53.1)

($52.7)

Worst Case

($10.5)

($28.6)

($57.8)

($58.2)

($55.2)

($57.6)

($62.4)

($66.9)

($72.2)

($73.6)

 

As can be seen in the first table above, even without additional payments towards unfunded pension liability, annual expenditures will exceed revenues starting in FY 2020-21, the second year of the upcoming Biennial Budget.  To eliminate out-year projected shortfalls and also maintain a fiscally prudent level of General Fund reserves, staff recommends a short term budget strategy that identifies services that can be done in a more efficient way, or that may be eliminated, as well as a reallocation of resources to Framework outcome areas that may require greater investment through tradeoffs, as well as long term consideration of potential staff attrition, additional staff cost sharing of retirement benefits and new sources of revenue, including those that will potentially be identified as part of the City’s Economic Sustainability planning process.

 

A discussion of other funds and any potential changes in their financial status, including the impact of additional payments towards unfunded pension liability, is also included in this report. Generally, these funds are projected to have positive fund balances over the course of the next biennial budget period.

 

Discussion

Economic Update

The current economic expansion continues as one of the longest in the post-World War II era, and economic growth both on a national and State level is expected to continue in the near term. However, there are signs that the growth rates have peaked, and the economy is likely to experience a slowdown, and possibly a full recession, sometime within the next few years.

 

The State budget has also expanded in recent years to attempt to correct long term issues and build up reserves.  Governor Newsom’s proposed State Budget for FY 2019-20 allocates $13.6 billion to building budget resiliency, including increasing the constitutionally required “Rainy Day Fund” by $1.8 billion to a balance of $15.3 billion by the end of FY 2019-20.  Also included are funds to pay down unfunded pension liabilities, eliminate debts, and increase reserves to address emergencies and unforeseeable events.  However, the State budget situation is volatile given the disproportionate dependence of State revenues on the wealthiest individuals and can change quickly.  Extensive new funding commitments and/or a moderate recession present significant challenges to a balanced State budget.

 

Santa Monica’s economy remains relatively strong. However, there are signs of moderation in the local economy’s growth rate. General Fund revenue growth is slowing down after several years of strong increases. Average annual growth over the last three years has been about 4% following growth rates of over 8% in the three years of recovery following the recession.

 

Within this context, the City’s General Fund forecast continues to show modest revenue growth averaging 2.3% annually over the next ten years as the City absorbs the impacts of a changing economic landscape, present in the on-going shift to on-line sales from brick and mortar and alternative transportation models. Also, as with the State and national economies, the threat of a recession could significantly alter revenue projections. More information on some of the City’s key revenue sources is provided below:

·         Property values in the City remain the third highest in Los Angeles County for a City with the 19th largest population. For the fourth consecutive year the FY 2018-19 assessed value increase was within the range of 6%. Moderate increases of 3.5-4.5% are projected over the next ten years.

 

·         Sales tax (both sales and use and transaction and use tax) growth is expected to be modest, reflecting the continuing global shift of retail activity from brick and mortar businesses to on-line businesses, a softening in auto sales, and an overall slowing of the economy.  City taxable sales are expected to grow by slightly less than 2% annually over the next five years before recovering slightly to an annual growth rate of just under 3% for the final five years of the forecast.

 

·         Tourism, which provides a major stimulus to the local economy by creating jobs and producing revenues, continues to show strength. Transient Occupancy Taxes have increased at an average annual rate of over 9% over the last seven years. While the overall growth rate is expected to moderate to approximately 2.5% annually over the next few years as room rates stabilize, the recent addition of two hotels with 260 new rooms to the lodging supply as well as another hotel with 271 rooms expected to open around the beginning of FY 2019-20 will continue to bolster City revenues. One area of uncertainty over the forecast period is the impact that recent registration requirements for home share hosting platforms will have on current revenue projections. Additionally, competition from other areas such as Downtown Los Angeles and Marina Del Rey may affect revenue growth.

 

·         Business License Taxes are expected to show baseline growth of approximately 1.5% annually over the forecast period based on recent trends. Utility Users Tax revenues are expected to remain relatively flat over the forecast period as revenues from telecommunication services continue to drop. Parking Facility Taxes are expected to grow by approximately 1.7% annually over the remainder of the forecast period. Interest rates have risen sharply in the last year after the historically low levels of the prior seven years, resulting in greater investment income. While a gradual increase is expected over the forecast period, interest rates are still expected to remain at relatively low levels, and a declining economy could likely slow the growth in rates.

 

·         Staff will continue to monitor parking revenues, a consistently strong revenue source for the City. The number of parking transactions in Downtown parking structures and lots have decreased over the last two years, reflecting a significant shift in how people travel into and around the City. This is primarily a result of EXPO light rail and ridesharing services providing alternative modes of transportation for visitors and community members. While Council-approved rate revisions have essentially restored parking revenues to previous levels, this area will require continued close monitoring of emerging trends and their impacts.

 

·         The forecast also reflects annual cost of living adjustments for user fees and charges as well as new fee revenues from implementation of the City’s seismic retrofit program and from the mobility scooter and e-bike programs during the pilot program period. Building and Safety permit revenue projections are expected to peak in FY 2018-19 reflecting the number of mixed use housing projects that have been approved in the past few years and the adoption of the Downtown Community Plan, which has made it easier for uses such as restaurants and fitness facilities to open in the Downtown area.

 

General Fund Ten-Year Financial Forecast

The transition from five- to a ten-year forecast will provide the tool to prepare for increasing economic challenges coming from a future recession, flattening revenues, and steep pension cost increase; to understand the lifecycle costs of programs and technology; and to plan for significant investments in public infrastructure.  Such a plan follows best practices as recommended by the City’s internal auditor and the Government Finance Officers Association (GFOA).

 

Projected Fund Balance

Staff has completed four forecast scenarios that contemplate Best, Probable, Recession, and Worst Case impacts on the General Fund. The chart below shows the four forecast scenarios.

 

 

 


The following are the assumptions used for the various scenarios.  The same expenditure assumptions are used for all scenarios.

Scenario

Revenue Assumptions

Expenditure Assumptions
(same across all scenarios)

Probable Case (status quo)

·         2.3% average annual growth

·         Continued strong property tax growth

·         Slowing growth rate of other key tax sources such as Transient Occupancy Tax (TOT), Sales Taxes, and Business License Taxes

 

·         2.4% Consumer Price Index average annual growth

·         Overall growth rate of 3.2%

·         Staff size, services status quo

·         Additional retirement cost sharing by Police and Fire bargaining groups through FY 2019-20.

·         Non-safety employee retirement contributions projected as status quo.

·         Average annual pension contribution increases of 9.5% during the first 4 years, and 2.6% during the remaining years of the forecast, reflecting assumptions noted in Retirement Costs section below)

·         Average annual healthcare increases of 8.4%, including average increase of 6.4% during 3year contract with new provider, and 8.8% average increases following

·         Average annual Workers’ Compensation increases of 8%

·         Projected $64 million bond issuance for City Yards Modernization in FY 2019-20.

Best Case (higher increases in revenues)

·         Approximately 4% growth in revenues over Probable Case during the forecast period

·         Primarily reflects higher growth rates in all local taxes and increasing parking rates

Recession Case (possible light to moderate recession)

·         Approximately 3.1% decrease in revenues from Probable Case during the forecast period

·         Decrease of 6.4% from Probable Case during worst year of recession (FY2021-22)

·         Largest decreases in TOT, Sales Taxes, Business License Taxes, Property Taxes, Parking, and Investment Income.

Worst Case (recession similar to the Great Recession of 2009)

·         Approximately 6.3% decrease in revenues from Probable Case during the forecast period

·         Decrease of nearly 10% from Probable Case during worst year of recession (FY2021-22)

·         Largest decreases in TOT, Sales Taxes, Business License Taxes, Parking, and Investment Income.

 

Almost three-quarters of the General Fund operating budget is composed of labor costs, and a number of these costs, including retirement, health insurance and workers’ compensation, increase at a rate that is higher than the CPI and represent significant budgetary challenges in the years to come.

As in past years where the forecast shows an upcoming shortfall, staff will work as part of the Biennial Budget process to realign spending in order to ensure that the City’s FY 201921 budget provides a fiscally sustainable plan. 

 

The following are additional details related to elements that were considered in the development of the forecast.

 

Retirement Costs

The City’s pension obligations are and will continue to be one of the City’s largest financial concerns for decades to come. With its current participants and benefit levels, the City’s accrued pension liability is approximately $1.8 billion dollars and has been growing at an average annual rate of 13% per year for the last ten years. Meanwhile, General Fund revenue has grown an average of 4.7% annually for the same ten-year period (2007-2017).

 

The City’s current unfunded accrued pension liability (UAL) is significant at $467 million. As a result of the City’s annual pay downs of unfunded liability above the required amount, and especially the $45 million that was paid down in June 2017, the City’s funded status has improved to 75%, despite recent reductions to the discount rate.  This level exceeds that of the overall CalPERS plan, which is 71% funded, and is on the higher end of the range for California cities. By continuing to proactively manage the repayment of the unfunded pension liability, the City is better positioned to weather the pension challenges known today.

 

At this time, Miscellaneous (non-safety) employees contribute up to 29.5% of the total cost of their retirement benefits, while Police Officers Association and Firefighters Local 1109 IAFF employees contribute up to 29%. Since FY 2010-11, the City has used savings to pay down $77.5 million of its unfunded liability, and follows a policy to pay down approximately $1.3 million of its unfunded liability each year. These payments have been estimated to lower the City’s annual contribution costs by over $8 million a year. In addition, the City takes advantage of a program offered by CalPERS that allows cities prepaying a portion of their total contribution at the beginning of the fiscal year to receive a discount on the amount owed. The net savings to the City of these discounts has been approximately $11.5 million through the current year.

 

Despite these measures, recent changes made by CalPERS, including lowering the discount rate used to project the assets required to make promised pension annuity payments, have increased the City’s unfunded pension liability and therefore the contributions needed to ameliorate this issue. As shown in the chart below, with the currently projected $467 million in unfunded pension liability, the amount the City owes CalPERS every year will increase from $52 million in FY 2018-19 to $103 million in FY 2029-30. The information is provided in graphical form below.

 

The City has worked with an independent actuary to project the most realistic estimates of future contribution increases that will occur from a likely lower rate of return (6.5%) than what is projected by CalPERS (7%); the higher volatility that will come from CalPERS’ shift to a best-practice 20-year, rather than a 30-year, amortization period for gains and losses (this will mitigate the negative amortization – when payments on an obligation are not large enough to cover the interest costs – that is currently occurring); and CalPERS’ implementation of a risk mitigation policy that will take advantage of years where returns exceed the targeted level to shift the portfolio to lower risk investments, culminating in a more stable, but potentially lower return portfolio with an estimated 6% annual growth rate.

 

Recessions and market volatility are unavoidable and the plan will most likely experience turbulence in the future. As noted earlier, the 10-year forecast scenarios consider the threat of revenue decline and the potential of CalPERS reducing discount rates further.  Despite these considerations, there is no guarantee that changes in the funded status of the plan will not further exacerbate the unfunded liability and result in additional cost increases over the short or long term.

 

Pension Advisory Committee

In view of these continuing pension challenges, and following resident interest in the City’s plan to manage pensions, the City Manager established an advisory committee made up of residents and City employees to discuss the City’s pension obligation.  The Committee’s purpose was to study the issue, look at alternatives, and develop sensible recommendations for the City Manager to consider in the development of a proposed sustainable budget for community and City Council consideration.  The Committee met six times in November and December and considered scenarios from the independent actuary; information from City staff on the budget process, past actions, and City’s financial status and resources; other cities’ practices and experiences; and research from group members.  

 

At its final meeting on January 7, the Committee unanimously voted to recommend principles for an approach to pension obligation management that endorse a proactive approach to pension obligation management that minimizes total funds spent over time by decreasing the interest accrued. Moreover, the Pension Advisory Committee recommends an accelerated plan to pay down the City’s current pension unfunded liability over 13 years, to conclude in 2032-33. The following are the adopted Principles:

 

1.     The GFOA and the California Actuarial Advisory Panel (CAAP) believe it is financially advantageous to repay or amortize unfunded pension liabilities. The Pension Advisory Committee believes the unfunded liability represents a looming threat to Santa Monica’s safety and quality of life through erosion of vital services; undermining workforce compensation and job security; and damaging the City’s long-term fiscal health. 

2.     The Pension Advisory Committee believes the City should maintain prudent funded status levels and an aggressive repayment plan to ensure that funds are available in the long run to meet City obligations and preserve financial flexibility to meet or maintain City obligations consistent with values of the City.

3.     The Pension Advisory Committee believes the City should formally commit to a repayment period of not-to-exceed 13 years for the current unfunded pension liability, concluding in 2032-33.  By following this recommendation, the City is projected to save approximately $100 million.

4.     In the event of a fiscal emergency, the Council would have the option to reduce the annual payment for that fiscal year to the amount required for a 15-year repayment schedule (as calculated in 2019), concluding in 2034-35, only after holding a public hearing and making appropriate findings.

 

The recommendations would allocate a maximum of approximately $9.3 million a year for 9 years for additional discretionary payments toward the unfunded liability above the CalPERS Annual Required Contribution amount City-wide, and then maintain this funding level for an additional 4 years with annual increases of $1.6 to $1.7 millionThe charts below reflect the impacts of these additional payments on the City’s General Fund and all other funds’ financial projections scenarios during the forecast period.  Staff considers the accelerated pay down of the unfunded liability as the primary tool in achieving financial sustainability and maintaining stability (a key element of the Governance outcome from the City’s Framework for a Sustainable City of Wellbeing) for the City at this time.

 

These charts show the accelerated 13 year repayment that would save more than $100 million in interest costs.

 

 

 

Scenario

General Fund Annual Revenues – Expenditures ($ in millions)

with 13 Years of Additional Discretionary Payments Towards Unfunded Liability

FY 19-20

FY 20-21

FY 21-22

FY 22-23

FY 23-24

FY 24-25

FY 25-26

FY 26-27

FY 27-28

FY 28-29

Probable Case

($6.2)

($10.6)

($15.7)

($19.9)

($24.0)

($27.9)

($32.3)

($36.0)

($39.8)

($39.8)

Best Case

$1.5

$0.5

($2.6)

($4.6)

($6.8)

($8.2)

($10.2)

($11.1)

($12.1)

($9.1)

Recession Case

($7.1)

($22.0)

($43.2)

($38.7)

($40.1)

($41.6)

($46.1)

($49.8)

($53.1)

($52.7)

Worst Case

($10.5)

($28.6)

($57.8)

($58.2)

($55.2)

($57.6)

($62.4)

($66.9)

($72.2)

($73.6)

 

Staff is evaluating approaches to make these additional payments, including a combination of phased in use of reserves (in the General Fund) and reallocations of existing budget, which would require modifications to operating budgets for this purpose in addition to the shortfalls that are anticipated each year.  The amounts to be paid by the Risk Management Fund would be allocated to internal service fund workers’ compensation and liability contributions.  Additionally, any changes to the contribution payments for Rent Control would be contingent on Rent Control Board approval.

 

Staff anticipates that recommended actions to allocate funding to additional payments would be considered as part of the FY 2019-21 Biennial Budget, with an initial proposal presented during the Council meeting in April.  If Council chose to adopt the principles developed by the Pension Advisory Committee, they would be added to the City’s financial policies with the June 2019 budget adoption.

 

Bond Issuance

The debt service for the financing of the City Yards Modernization project is projected to be $1.7 million in FY 2019-20, and increases to $3.4-$4.5 million annually through the remainder of the forecast.

 

Capital Expenditures

The forecast assumes no growth to the annual allocation of $21 million to the General Fund capital improvement program.  This is an added challenge given significant escalation costs in the construction industry that threaten the City’s ability to make investments in infrastructure.  Furthermore, the annual allocation of $21 million for General Fund capital projects will be reduced by approximately $3 million in FY 2019-20 to pay debt service on the City Services Building. The contribution for the debt service coming from the annual capital program allocation will be lower after the building is operational, beginning in FY 2020-21, due to savings that the General Fund will realize once leases for City office space are terminated.  The contributions from the capital program allocation will continue to decrease through the last contribution in FY 2032/33, after which point annual General Fund operating savings will offset the annual cost of debt service.

 

Addressing Future Shortfalls

To address the significant future shortfalls shown in all scenarios, staff is following an incremental approach to plan for short-term and long-term resource shifts in all funds.  Since September, staff has identified and developed cost estimates for over 650 individual activities performed throughout the City to provide over 250 services.  Over the next three biennial budget processes (six years), staff will work incrementally to examine the activities representing up to 20% of their departments’ budgets to determine whether the activities could be candidates for being done in a different way that would drive cost savings (efficiency) or for elimination, thereby freeing up funds for services addressing higher priority needs, including eliminating the shortfall.  To do this incrementally, staff has been tasked with looking at 10% of their budget during the upcoming biennial budget process, an additional 5% in the next biennial process, and another 5% in the third biennial process, for a total of 20% over 6 years. 

 

This does not mean that 10% of the budget will be eliminated in the next biennial, or 20% within 6 years.  It is not anticipated that all activities identified will be changed, or changed during the biennial period in which they are identified.  In some cases, staff may identify a change that may take more than one or two years to fully effectuate due to considerations such as attrition, interdepartmental coordination or negotiations with bargaining units. The trade-offs that will be developed from this exercise will be presented to Council before they are incorporated into the Proposed Budget.  This year, this presentation will be done at the April 23, 2019 Council meeting.

 

It is also important to note that staff is concurrently evaluating what services and activities will service achieving the highest priorities established by the City Council at the upcoming Council retreat. Resources identified in the process outlined above may be reallocated to these higher priority purposes. The overall goal is to ensure that the highest priority services and activities are provided in the least costly way.

 

Other Funds

Other major funds included in the Ten-Year Financial Forecast fall into two categories: 1) funds that operate with sufficient revenues to sustain necessary operating and capital needs; and 2) funds that have a structural deficit where ongoing revenues are not sufficient to cover ongoing expenditures.

 

Self-Sustaining Enterprise Funds

Enterprise funds that historically rely on sufficient revenues to support necessary operations include the Water, Wastewater, Resource Recovery and Recycling (RRR) and Big Blue Bus (BBB) funds.

 

Water and Wastewater Funds

With the implementation of the 9% water rate increase approved by Council on January 8, 2019, the Water Fund will maintain a positive fund balance while also meeting reserve requirements until FY 2021-22, at which point capital improvement project expenditures will lower the fund’s reserve level to below recommended levels.

 

The Wastewater Fund will maintain a positive fund balance while also meeting reserve requirements until FY 2019-20, at which time final estimated construction costs for the Sustainable Water Infrastructure Project (SWIP) could have a substantial impact on the fund and lower the fund’s reserve level to below recommended levels. To address the fund’s ability to meet these needs, a water and wastewater rate study is currently underway. The results from the rate study will set water and sewer bill rates for calendar years 2020 to 2024. The rate study will also evaluate the minimum fund reserve requirements.

 

Resource Recovery and Recycling Fund

The Resource Recovery and Recycling (RRR) Fund will maintain a positive fund balance until FY 2021-22 as the global market for recyclable materials is expected to worsen due to the China Waste Ban and RRR’s fund position is adversely impacted by the global domino effect. To address the projected fund shortfall, staff are working with a consultant to conduct an operational study and solid waste rate study to explore ways to find expenditure efficiencies and uncover potential revenues. Staff will likely recommend an increase to solid waste rates to respond to higher recycling costs, potentially new zero waste programming in order to achieve the goal of “Zero Waste by 2030” as outlined in the Council-approved Zero Waste Plan and to ensure that the RRR Fund is self-sufficient. If the recommended solid waste rates are approved, staff anticipates the fund will generate adequate revenues to sustain operations.

 

Big Blue Bus Fund

The Big Blue Bus (BBB) fund balance reflects a balanced budget through FY 2023-24.  While the forecast reflects the use of some BBB reserves [Metro’s Municipal Operator Service Improvement Program (MOSIP) funds] in the third year to maintain a balanced budget, what is not included in the forecast is potential budgetary savings and reduction in overall expenditures as a result of service adjustments in March 2019 where BBB service will be reduced by approximately 5%, as well as significant savings from BBB’s workers’ compensation allocation as claims have dropped over the last year resulting in a positive impact to the department’s operating budget. At the December 18, 2018 Council meeting, Council authorized the reduction and redeployment of bus service to more productive routes which could also result in $3 million in annual savings. Lastly, the department also expects to realize a historical savings in supplies and operating expenses. Budget changes will be reflected in the FY 2019-21 Biennial Budget.

 

The Big Blue Bus FY 2018-19 operating revenue reflects a 6% increase from the prior year as a result of higher than projected funding marks as well as the passage of State Senate Bill 1 (SB1), which allocates additional funding to transportation agencies to support the provision of efficient transportation services. As a result, BBB will receive an additional $1.9 million beginning in FY 2018-19 and this revenue is projected throughout the ten-year forecast. Additionally, State Transit Assistance (STA) funding, which was notably reduced over the last three fiscal year periods, recovered in FY 2018-19, allocating an additional $2.4 million to the fund balance. Although funding can fluctuate from year to year, the ten-year forecast reflects this overall increase in STA funding throughout the ten-year forecast. BBB’s operating revenue reflects a $0.6 million decrease due to the termination of the agreement with Playa Vista in FY 2018-19. BBB’s passenger and advertising revenue reflects a conservative 1% increase over the ten year forecast period.

 

The department continues to be proactive in the identification and development of strategies to remain fiscally and environmentally sustainable. Additionally, capital expenses are reflective of the department’s introduction of electric vehicles to the fleet and the related infrastructure. Finally, BBB will be introducing battery electric buses that will impact fleet fueling, servicing and fleet operations. The new technology will impact utility costs and overall operational costs but is impossible to predict for this forecast.

 

Airport Fund

The Airport Fund will generate adequate revenues to sustain its operations throughout the next ten years. The Airport Fund is expected to fulfill its loan obligation to the General Fund by FY 2020-21. Airport closure is scheduled for January 2029.

 

Community Broadband Fund

The Community Broadband Fund will maintain a positive fund balance throughout the forecast period. Community Broadband operations will continue to focus on research and development of new service opportunities and the flurry of legal and policy changes to the telecommunications industry by state and federal government agencies, while maintaining support of existing customer obligations.

 

Beach Fund

The Beach Fund will not be able to fully sustain both operating and capital expenditures in the last two years of the forecast. The projection reflects conservative parking revenue growth due to the recent declining trend in the number of cars parked at the beach. Staff will continue to monitor fund performance and plan to identify other sources of revenues and/or consider other ways to capture revenue from beach visitors for use of the beach. Beach visitors are expected to increase so there will be demand for increased services in maintenance, security and recreational programming. The projection also includes repayment of a $3.8 million loan to the General Fund.

 

Cemetery Fund

The Cemetery Fund will maintain a positive fund balance until FY 2027-28 as lot sales revenues are expected to decrease significantly due to depletion of adult plot inventory. Staff is in the process of assessing overall Cemetery operations, its staffing model and projected plot sales including green burial plots. Staff will explore options to reduce ongoing administrative costs at the Cemetery, including the possibility of the City maintaining the property while contracting out service operations, with the goal of keeping a positive fund balance.

 

Funds Requiring Subsidies

Housing Authority Fund

The Housing Authority Fund has a projected operating shortfall of approximately $1 million to $1.5 million annually throughout the forecast period. This assumes a continuation of the current funding levels and no reductions to U.S. Department of Housing and Urban Development (HUD) funding to housing authorities. The Housing Authority will continue to require an operating subsidy from Successor Agency residual payments set aside in the Special Revenue Source Fund.

 

Pier Fund

The Pier Fund is not able to sustain an adequate balance to cover both its operating costs and large capital expenditures. Capital needs that cannot be funded by the Pier Fund during the forecast period must compete with General Fund-supported capital needs. General Fund subsidies to support Pier Fund capital needs are projected to total $14 million over the ten-year forecast period. It has been Council practice to subsidize the Pier as a public space rather than create a loan receivable to the General Fund. Additionally, the Pier Fund has a projected operating structural deficit of $0.6 million in FY 2021-22 that increases to $1.4 million in FY 202223 due to an anticipated decrease in lease revenues from construction impacts of the Pier Bridge Replacement Project. The Pier Fund will require an operating subsidy from the General Fund in FY 2021-23.

 

The charts in Attachment B show the projected fund balances for the other funds (Water, Wastewater, Resource Recovery and Recycling, Big Blue Bus, Airport, Community Broadband, Beach, Cemetery, Housing Authority, and Pier).

 

Human Services Grants Program and Organizational Support Program for Santa Monica Arts and Culture Non-Profits

The City engages in a competitive process to allocate funding for a wide range of safety net services for Santa Monica residents through the Human Services Grants Program (HSGP). Funds are awarded to agencies for a multi-year period and provide predictable resources for stable program operation and organizational support.  On June 23, 2015, Council awarded four-year grants to nonprofit agencies through the FY 2015-19 HSGP.  The current fiscal year, FY 2018-19, is the last year of the grant cycle.

 

Per a November 8, 2018 Information Item (Attachment C), Human Services is currently engaged with Canavan Associates to redesign performance measures and outcomes and implement a data management solution for human services programs. This project will be the foundation for a reimagined, interdepartmental RFP for community-based services that will align City-funded programs to the outcomes identified in the City’s Framework for a Sustainable City of Wellbeing. An interdepartmental team will work to develop this “Framework RFP” for a Fall 2020 release, with awards and contract execution concurrent with the FY 2021-23 Biennial Budget.

 

In lieu of the current HSGP timeline, which would require an RFP release in February 2019 to inform the next four year grant cycle, staff recommends that Council renew grant funding to current HSGP contracts for two additional years, through June 30, 2021. Funding levels are contingent on available funding per Council’s adoption of the first year and approval of the second year of the FY 2019-21 Biennial Budget.

 

Historically, Cultural Affairs has managed its Organizational Support Program (OSP) grant process for nonprofit arts organizations at the same time and with the same fouryear cycle as HSGP’s RFP process. This year, OSP will continue to be opened as part of the regular schedule and the new round of awards will be part of the FY 2019-21 budget. Cultural Affairs will change the length of the grants from four years to two years, which will put OSP back in sync with the next planned round of HSGP funding in FY 2021-23.

 

Cultural Affairs staff is currently completing a community and grants assessment that is being conducted by consultant Diane Burbie of The Aspire Group. This assessment will inform the next round of Operating Support Program (OSP) grant guidelines, which will be released in early February 2019. Grants from this program will continue to provide discretionary, multi-year support for day-to-day operations of Santa Monica’s arts and culture agencies, funding that is traditionally difficult to obtain in the arts sector.

 

Community Development Block Grant (CDBG) and Home Investment Partnership Act (HOME) Program

To receive federal Community Development Block Grant (CDBG) and Home Investment Partnership Act (HOME) Program grant funds, the City must prepare and submit a Council-approved One-Year Action Plan to HUD by May 15, 2019. The Action Plan outlines how funds will be expended and confirms that funded activities are consistent with the City’s Five-Year Consolidated Plan adopted by Council on May 12, 2015. The

 

City must hold two public hearings prior to the adoption of a OneYear Action Plan allocating federal CDBG and HOME Program funds. This public hearing will satisfy one of the two meeting requirements to receive public input and recommendations for the Proposed FY 2019-20 Action Plan. The City will hold another public hearing prior to the adoption of the Proposed FY 2019-20 Action Plan.

 

Building the FY 2019-21 Biennial Budget

Over the next several months, staff will prepare the FY 2019-21 Proposed Biennial Budget, as well as the FY 2019-20 exception-based Capital Improvement Program (CIP) Budget (this will be the second year of the FY 2018-20 Biennial CIP Budget). The FY 2019-21 Biennial Budget will lay the foundation for performance-based budgeting. By using metrics to analyze what works, resources can be more reliably directed to areas that help achieve measurable outcomes. The Framework for a Sustainable City of Wellbeing adopted in the last budget cycle is the basis for identifying the results that matter most to the community.

 

At the upcoming Council Retreat on January 26, 2019, staff will share the results of various tools used by departments, members of the community and City staff, to identify the top priorities, based on the Framework, to focus on in the next biennial budget. Staff will ask Council to define up to six Framework Priorities and provide direction on areas of focus to assist staff in the development of the budget.

 

Boards, Commissions, and Task Forces historically make their recommendations and priorities known through written communication to the Council. Staff has worked these groups to continue this practice and have encouraged their communications come to the Council in order to be considered for the January 26, 2019 retreat.

 

On April 23, 2019, staff will provide Council a preview of high-level budget decisions for FY 2019-21. These may include potential tradeoffs as the City seeks to close the projected FY 2020-21 budget shortfall and to reallocate resources to outcome areas that may require greater investment. They may also include discontinuation of services or activities and/or reallocations to improve efficiency and effectiveness.

 

The Proposed Biennial Budget will be submitted to Council and available for public review prior to the Budget Study Sessions on June 4-5, 2019 at which point staff will present Framework Priority presentations to the Council. Council will convene a public hearing on June 25, 2019 to consider, receive public comment, make revisions to, and adopt the first year and approve the second year of the Biennial Budget. Staff seeks community input on the Biennial Budget. Members of the public can provide comments for consideration during the budgeting process by sending an email to councilmtgitems@smgov.net or by giving public testimony at the June study sessions and June 25 public hearing.

 

Past Council Actions

Meeting Date

Description

5/22/18 (Attachment D)

Financial Status Update, FY 2018-19 Proposed Budget, and FY 2018-20 Proposed Biennial CIP Budget

 

Financial Impacts and Budget Actions

There is no immediate financial impact or budget action as a result of the recommended action. At the upcoming Council Retreat on January 26, 2019, staff will ask Council to confirm the Framework Priorities and provide direction on areas of focus to assist staff in the development of a balanced FY 2019-21 Proposed Biennial Budget.  At its April 23, 2019 meeting, Council will provide additional direction on staff recommendations that may include trade-offs in order to reallocate funding to priority areas and eliminate future shortfalls.

Meeting History

Jan 22, 2019 5:30 PM  City Council Regular Meeting
draft Draft