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HomeMy WebLinkAbout1998-04-06 City Council (40)TO: THE SUBJECT OF THIS RE.POR]~ ~SA City of Palo Alto City Manager’s Report HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE SERVICES DATE:, APRIL 6, 1998 CMR:158:98 SUBJECT:RESULTS OF SURVEY OF OTHER CITIES’ CAPITAL SPENDING ON GENERAL FUND INFRASTRUCTURE, RESERVE LEVELS, AND DEBT OUTSTANDING REPORT IN BRIEF This report is being submitted in order to provide background information to the Council prior to the Finance Committee review of a separate staff report (in late April) on options for financing a comprehensive General Fund infrastructure program. This report was written after analyzing financial data from seven cities. The other cities’ capital spending levels, outstanding debt, levels of financial reserves, and other sources of financing was reviewed in order to draw conclusions about Palo Alto in relation to those other cities. Conclusions that may be drawn from the survey analysis include: Palo Alto spends a very large amount per capita, but dedicates a higher percentage of its spending to operating budget needs. As a result, capital spending is less as a percentage of the budget than the average of the other cities surveyed. If Palo Alto were to spend the average amount on capital improvements that the surveyed cities spend as a percentage of the total budget, its capital budget would increase by over $3.0 million per year, to about $7.9 million. An important consideration for implementing an enhanced infrastructure program would be to fund a higher level of capital spending on an annual basis. Palo Alto’s General Fund uncommitted reserves are high when measured on a per capita basis; when calculated as a percentage of the total budget, however, Palo Alto’s reserves are lower than the average of the seven cities CMR:158:98 "Page 1 of 13 surveyed. Given that Palo Alto has a separate set of reserves for funding vehicle and computer purchases and a very diverse economy and revenue stream, the City is well positioned with current reserves to weather times of temporary economic downturn. Therefore, it is appropriate and prudent for the City to tap the Infrastructure Reserve as a source of funding for future infrastructure capital work. Although the City of Palo Alto has issued very little debt in comparison to the other cities, when all overlapping debt that Palo Alto taxpaYers are liable for is considered, Palo Altans pay for the highest level of general debt outstanding of the cities surveyed. This is primarily due to the recent voter-approved PAUSD general obligation bonds for the Building for Excellence program. While this should give the City some pause in considering new debt, statistics show that Palo Alto is a wealthy community, and can perhaps afford, or perhaps might tolerate, more debt than the average city. Palo Alto levies slightly above the average amount of local taxes measured on a per capita basis. As was the case with reviewing debt levels, there may be room for additional tax revenue, considering Palo Alto’s relative wealth and its support for high levels of service. CMR:158:98 ’Page 2 of 13 This is an informational report and no Council action is required. DISCUSSION In April 1998, the Finance Committee will review a staff report on prioritizing and financing General Fund infrastructure !rnprovements. In preparation for that meeting, it may be helpful for Council to consider how other cities finance their infrastructure in comparison to Palo Alto. Such data provides a context with which to make decisions about Palo Alto’s overall spending for capital improvements. This report provides information on other cities’ capital spending levels, debt financing, General Fund reserves, and other revenue and financing sources. This information may be of use as the Council considers infrastructure financing options. Cities Surveyed: Information requests were sent to 12 cities. Staff obtained operating and capital budgets, and Comprehensive Annual Financial Reports from seven cities: Mountain View, Menlo Park, Redwood City, Burlingame, ~Santa Clara, Santa Monica, and Santa Barbara. While it is difficult to fred a perfect match between Palo Alto and other cities, staff Considered several factors in choosing cities to survey. The cities surveyed had most, if not all of the following characteristics: close in size to Palo Alto (populations ranging from 50,000 to 100,000); established prior to the 1950’s with an aging public infrastructure; and cities that are already substantially developed. Of the cities that responded, two most closely met the comparability criteria: Mountain View and Redwood City. Of the other cities surveyed, the following should be considered: Menlo Park and Burlingame: although half the population of Palo Alto, they are both older peninsula cities. Menlo Park is also of interest as an immediate neighbor; and Burlingame, like Palo Alto has a vibrant downtown business district. Santa Clara: although larger than Palo Alto, with a population of 100,000, and although its commercial development is continuing to grow, it is of approximately the same age as Palo Alto. Santa Barbara and Santa Monica: although both have populations of about 90,000, Santa Barbara has similarities to Palo Alto including a priority for historical buildings, a vibrant downtown, and being an older city. In addition, it is a wealthy city, and is adjacent to a major university. Santa Monica has similarities in that it is an older city and offers a wide range and variety of services to its residents. CMR:158:98 Page 3 of 13 It is important to note that the survey covers only seven cities. Although definitive conclusions cannot necessarily be drawn from the survey, the results do provide interesting comparisons and useful information in support of future infrastructure decisions. Capital Spending Levels The full results of the survey are summarized in Attachment 1. For General Fund capital spending on a per capita basis, Palo Alto is just below the midrange of cities surveyed, which by itself could be interpreted to mean Palo Alto spends an adequate amount on infrastructure. General Fund capital spending per capita: General Fund and Street Improvement capital spending per capita: Average: $82 Average: $107 Palo Alto: $75 Palo Alto: $97 However, with the wealth of buildings, parks, and other facilities in Palo Alto, spending in the midrange is not necessarily sufficient to keep up with the deterioration rate of those facilities over time. Ideally, a detailed analysis of capital spending patterns would review Palo Alto capital spending and the number and condition of its public facilities compared to the other cities surveyed. Simply looking at capital budgets does not indicate the age, condition, usage and rate of deterioration of facilities. However, such a detailed analysis would require the cooperation of other cities, as well as a comparison of detailed infrastructure inventory data. None of the cities surveyed indicated that they had comprehensive data on the precise age, Condition, and costs for repair on their facilities and facility components (roofs, electrical systems, etc.). As a very rough indicator of spending in relation to the number of and condition of facilities, one might infer that a city with a larger operating budget would probably also have more facilities to maintain and rehabilitate: a city that spends more on parks probably has more parks, and a city that spends more on recreation probably has more recreation facilities. Therefore, the relationship between total spending and capital spending may be useful to look at as a proxy indicator of the adequacy of capital spending in relation to the number of public facilities in a city. The survey data confirms what is already known about Palo Alto: its operating budget, and therefore its service levels, are very high. Palo Alto spends $1,392 per capita on its operating budget, about 66 percent more than the average of the cities surveyed. The next highest city aider Palo Alto, Santa Monica, spends $1,197 per capita, followed by Santa Clara with $820. CMR:158:98 Page 4 of 13 General Fund Operating Budget spending per capita "IAverage:[ Palo Alto:’ $840 I $1,392 If Palo Alto spent the average amount per capita, its operating budget would be over $30 million less than its current $83 million budget. This comparison is not quite accurate on its face. Because Palo Alto is the only city surveyed that has an Electric and a Gas Fund, it should be expected to have somewhat higher General Fund administrative and support costs than the other cities. However, administrative and support costs overall make up a relatively modest portion of overall General Fund spending in Palo Alto, and in other cities. It would be accurate to say that operating budget spending, and the breadth of services offered in Palo Alto, are virtually unparalleled. With a high level of service, one would expect Palo Alto to also have a large number of public facilities to maintain. Indeed, while other cities may have one or two of the following facilities, no other city has all of the following, as does Palo Alto: Jr. Museum and Zoo Community theatre Baylands Interpretive Center and Foothills Interpretive Center A large open space park in the foothills Eight fire stations Three community centers Six libraries A children’s theatre With a much higher level of spending on the operating budget per capita than other cities surveyed, it is interesting to note that when capital spending is measured as a percentage of the General Fund operating budget, Palo Alto is well below the average of cities surveyed. General Fund capital budget as a percentage of General Fund operating budget Average: I Palo Alto:9.5%5.4% IfPalo Alto spent what the average city spent on capital improvements as a percentage of the operating budget, its annual capital spending would increase by over $3.0 million per year, from about $4.5 million in !997-98 to about $7.9 million per year. CMR:158:98 Page 5 of 13 General Fund Reserves The health of the City’s fmancial reserves is important to consider when determining how to finance infrastructure improvements. To the extent that reserve levels are healthy, they can be used to augment capital spending levels. To that end, Council approved the setting up of an Infrastructure Reserve last year, which can be tapped to augment infrastructure spending. The City’s General Fund reserves (uncommitted reserves), are well above average on a per capita basis in Palo Alto, compared to the other cities surveyed. IGeneral Fund uncommitted reserves per capita Average: $303 Palo Alto: $399 The City’s committed General Fund reserves are the Reserves for: Encumbrances and Reappropriations, Notes Receivable, Infrastructure, and Inventory. The City’s uncommitted General Fund reserves are the Reserves for: Budget Stabilization; Emergencies; and Streets and Sidewalks and School Site Projects. As of June 30, 1997, the uncommitted General Fund reserves totaled $24 million. These reserves may have a stated purposeset by Council policy, such as the Reserve for Emergencies, but may be used for any purpose deemed appropriate by Council through Council action. That is, they are not legally restricted and therefore are available for use. (The Reserve for Infrastructure is technically available for any use, with Council approval. However, because it is intended to be spent on infrastructure, it is not counted as uncommitted for this analysis.) When reserves are compared instead to the General Fund budget, Palo Alto’s General Fund reserves are below the average of cities surveyed. General Fund uncommitted reserves as a percentage of General Fund operating budget Average: [ Palo Alto:39%29% However, what those numbers do not show is that Palo Alto’s General Fund reserves do not have to cover either ongoing or emergency vehicle purchases, or computer purchases, as those items are self funded through an intemal service fund arrangement. That is, while Palo Alto’s General Fund departments pay into the Vehicle and Computer Replacement Funds annually, the reserves to fund vehicles and computers are not within the General Fund. The City’s reserves for vehicles and computers totaled over $7.0 million as of June 30, 1997, and have grown since that time. CMR:158:98 Page 6 of 13 In contrast, of the cities surveyed that have also set up a separate fund for vehicle purchases, only Santa Clara has a larger percentage of its General Fund operating budget represented by uncommitted General Fund reserves. No city besides Palo Alto has funded a computer internal service fund. Taking these facts together, staff believes the current level of General Fund reserves are appropriate. Inassessing reserve levels, one must also take into account the composition ofPalo Alto’s revenue base, and the vulnerability of that base to economic downturns, state revenue shifts, and statewide voter initiatives that may limit revenue. Palo Alto’s revenues are much more diversified than other cities surveyed; it is the least dependent on sales and property taxes to fund its operating budget than the other cities surveyed. Its General Fund sources of revenue are less than one third dependent on sales and property tax revenues, meaning almost 70 percent of its funding comes from other sources. In addition, Palo Alto’s economy has shifted in the last decade to be more diversified, and less vulerable to recessions or cyclical business cycles than a city which is more dependent on one or two types of sales for the bulk of its sales tax. Palo Alto’s largest source of sales tax is department stores, representing 18 percent of total sales tax receipts; and its three largest sectors, department stores, restaurants, and new car sales, represent 41 percent of total sales tax. Sales and Property Tax as a Percentage of All General Fund Revenues and Transfers In Average: 44% Palo Alto: 31% In comparison to the cities surveyed, when Counting both General Fund reserve levels and availability of other funds for vehicles and computers, and when factoring in Palo Alto’s diversified economic base and revenue stream, Palo Alto is well positioned with its current level of uncommitted reserves to weather economic downtums and emergencies. Therefore, it is appropriate and prudent for the City to tap the Infrastructure Reserve as a source of funding for future infrastructure capital work. General Fund Debt Outstanding Besides capital spending levels and reserves, .another component of a capital financing plan to consider is level of debt outstanding. It gives an indication of how leveraged the City is and therefore, how much more room there might be to use debt to finance improvements. The City ofPalo Alto’s Debt Policy (CMR:210:97) was adopted by Council with the 1997- 98 budget. One of the criteria for considering debt is: "If funding a large project (or grouping of similar projects) would have a significant negative impact on the availability of funding for other ongoing capital needs. Large projects can include a new building, a substantial CMR:158:98 Page 7 of 13 upgrade or rehabilitation to an existing building, a new non-building facility (such as a a park), a grouping of similar facilities (such as a several athletic fields or tennis courts or heating ventilation, and air conditioning systems (HVAC), or bike bridges), or land acquisition costs. While a rigid dollar parameter should not be established, a General Fund project that exceeds $1.0 million and which cannot be phased over several years of funding would be a likely candidate to consider for debt financing. (The threshold would be greater for larger funds, such as the Electric Fund). Conversely, because the cost of financing includes legal and financial fixed costs, it is generally not cost effective to debt finance a project of less than $2.0 million. For that reason, projects of less than $2.0 million should be grouped together to realize efficiencies in financing costs." ’ Paying for some portion of the City’s infrastructure backlog with debt financing is a viable ¯ option. Debt is attractive in that as it allows costs to be spread over time and matches those costs to the use of the facilities being financed over time. Assuming staffing resources are available to plan, design, coordinate, and administer the additional capital work, debt financing also allows a city to complete a larger portion of capital work earlier. Debt does, however, result in costs of issuance, and locks the City into annual debt service payments, thereby reducing future budget flexibility. The .first two indicators below show that Paio Alto has relatively low General Fund indebedtedness, measured both on a per capita basis, and as a percentage of the General Fund operating budget. It should also be noted that even with the City’s upcoming golf course debt issuance, Palo Alto’s direct General Fund debt outstanding will still be about average. General Fund debt outstanding per capita General Fund debt outstanding as a percentage of the General Fund operating budget Average: $256 Average: 34% Palo Alto: $133 Palo Alto: 10% Another measure of debt is total direct and overlapping genera!taxpayer debt outstanding,. including city, school district, County, special district (i.e., Santa Clara Valley Water District) and special assessment debt (i.e., parking structure debt). This measure of total taxypayer debt outstanding does not not include Utility Fund debt, which is paid for by ratepaYers, not taxpayers. By looking at total directand overlapping debt outstanding, Palo Alto taxpayers have the highest level of general debt outstanding by this measure of the cities surveyed. CMR:158:98 Page 8 of 13 Total taxpayer direct and overlapping debt outstanding per capita !Average:] Palo Alto: $1 ,~474 I $3,302 The largest portion of total direct and overlapping debt outstanding in Palo Alto is the Palo Alto Unified School District’s (PAUSD) debt, which totalled $113 million as of June 30, 1997 out of $19~ million total Palo Alto overlapping debt outstanding. The largest portion of this amount 1~ attributed to the recent bond sale for the Building for Excellence program, followed by the County with. $39 million and the SCVWD with $10 million of debt outstanding. Palo Alto’s debt outstanding includes $8.0 million in parking district debt not paid for by general taxpayers, and $8.0 million in general City obligations, which include debt for the Civic Center buildout and seismic improvements, and 1978 golf course improvements. Palo Alto has been fairly conservative in issuing debt. However, when all overlapping debt, including PAUSD debt is considered, Palo Altans pay for a fairly high level of debt. Given the relative wealth of the community and its appreciation for high service levels, staff believes that additional debt financing by the City should be considered. Other Revenue Sources During the review of the various modules of the Infrastructure Management Plan, Council has asked why other surrounding cities have been able to afford major new facilities. One factor discussed in a preceding section is the percentage ~of general fund revenues that are dedicated to the capital budget. Another factor is the City’s desire-and ability to grow. Population growth typically corresponds to growth in sales and property taxes over time. Of the cities surveyed, the average growth in population over the last 10 years was 11 percent, while Palo Alto has grown just over 5 percent, or less than half the average. Some neighboring cities have grown much more dramatically: Mountain View has grown 13 percent over the last 10 years, Redwood City has grown 21 percent, and Menlo Park has grown 8 percent over that time period. The growth in population translates into growth in revenues: more residents spend more money, attracting more businesses which generate still more property taxes. Increased population typically coincides with additional housing, and higher property tax revenues. Population growth, last ten years Average: [ Palo Alto:9%5.3% Despite a lower amount of population growth than the other cities surveyed, Palo Alto is at the midpoint as far as growth in sales and property tax over the last ten years. That is, Palo CMR:158:98 Page 9 of 13 Alto’s sales and property tax growth has been less directly related to population growth, perhaps indicating how strong the underlying local economy is. It is also worth noting that over the last 10 years, while Palo Alto’s property and sales tax grew 47 percent, Mountain View’s grew 71 percent and Menlo Park’s grew 78 percent. While Palo Alto has had a strong tradition of balancing the affects of growth, including traffic and other consequences, other cities have been less cautious in allowing new development. IGrowth in Property and Sales Tax, Last Ten [ Average: Years [ 45%IPalo Alto: 47% One option that the City Council may wish to consider in financing infrastructure improvements are additional local taxes. An important consideration for the Council would be the level of local taxes per capita in comparison to other cities. Local taxes are considered here, as opposed to statewide taxes (sales and property taxes), and include: transient occupancy tax (TOT), utility users tax (UUT), property transfer tax, and business license tax. The results of the survey indicate that Palo Alto is slightly above the average for local taxes per ~apita: Localtaxes per capita: (Includes UUT, TOT, Bus License Tax, and Property Transfer Tax) Average: $192 Palo Alto: $204 Cities with higher local taxes include: Burlingame, with local tax per capita of $400. Budingame, adjacent to theSan Francisco Airport, receives substantial revenue from theTOT; Santa Monica, with local tax per capita of $420. Santa Monica receives substantial General Fund revenue from its UUT and its TOT. Although slightly above the average for local taxes, Palo Alto is well below Budingame and Santa Monica. The relative wealth of the community and its desire to have a high level of services are two factors which suggest that a modest local tax increase might be supported by voters. (It should be pointed out that any tax increase proposed, provided it is not earmarked for a specific purpose, must have a majority voter approval.) CMR:158:98 Page 10 of 13 Other Financin~ Sources Of the cities surveyed, several have other sources of financing available to them that are worth noting, including general obligation bonds, a redevelopment agency, or assessment district financing. That financing is summarized below, and explained in more detail in Attachment 2. City Palo Alto Menlo Park Mountain View Redwood City Santa Clara Redevelopment Agency Improvements Community Center, Senior Center, and mini-park in East Menlo Park Police/fire building; downtown beautification Downtown beautification; police facility Convention Center Golf Course Fairway Improvements Assessment District/Other Financing Vehicles Parking structures Sidewalk repairs; street tree maintenance Redwood Shores. maintenance & improvement district Parking structures Sales of Surplus City Property New library -- General Obligation Bonds Library Over 10% of General Fund reserves come from sales of surplus property CMR:158:98 Page 11 of 13 city Santa Monica Santa Barbara Redevelopment Agency Improvements Redevelopment district for downtown retail center and adjacent parking structures. .Downtown pedestrian shopping mall, train station improvements, downtown parking garages. Assessment District/Other Financing Vehicles Downtown improvements, downtown parking structures; City parcel tax used to pay for parks and recreation construction and improvements Seismic improvements assessment district Sales of Surplus City Property General Obligation Bonds Library CONCLUSION Several conclusions may be drawn from these survey results, including: Palo Alto spends a very large amount per capita on the General Fund, but dedicates a high percentage of its spending to operating budget needs. As a result, capital spending is less as a percentage of the budget than the average of the other cities surveyed. IfPalo Alto were to spend the average amount on capital improvements that the surveyed cities spend as a percentage of the total budget, its capital budget for 1997-98 would increase by over $3.0 million per year, to about $7.9 million. An important consideration for implementing an enhanced infrastructure program would be to fund a higher level of capital spending on an annual basis. Palo Alto’s General Fund uncommitted reserves are high when measured on a per capita basis; when calculated as a percentage of the total budget, however, Palo Alto’s reserves are lower than the average of the seven cities CMR:158:98 Page 12 of 13 , Redwood City: from additional spin offs to the businesses resulting from Great America and the Convention Center business. Redwood City financed many of the road and drainage infrastructure improvements that led to the development of the Redwood Shores community through a general improvement district, which operates similar to an assessment district. Redwood Shores is tO the east of Highway 101 between Whipple Avenue and San Carlos, and it is a newer residential community within Redwood City, as well as being the home to an office park area that includes Oracle. Redwood City also has a downtown redeveloPment agency, which financed sidewalk and beautification improvements, as well as a parking garage and a plaza adjacent to City Hall. Santa Barbara:Santa Barbara financed major downtown redevelopment through a redevelopment agency. Through its efforts, a major outdoor regional shopping mall, intertwined with the downtown main street itself, was built. Redevelopment funds also constructed downtown parking garages, improvements to the Amtrak Station, and will help construct a small visitors’ center. Finally, a voluntary seismic assessment district was set up to provide funds for commercial property owners that wanted to finance seismic improvements. surveyed. Given that Palo Alto has a separate set of reserves for funding vehicle and computer purchases and a very diverse economy and revenue stream, the City is well positioned with current reserves to weather times of temporary economic downturn. Therefore, it is appropriate and prudent for the City to tap the Infrastructure Reserve as a source of funding for future infrastructure capital work. Although the City of Palo Alto has issued very little debt in comparison to the other cities, when all overlapping debt that Palo Alto taxpayers are liable for is considered, Palo Altans pay for the highest level of general debt outstanding of the cities surveyed. This is primarily due to the recent voter-approved PAUSD general obligation bonds for the Building for Excellence program. While this should give the City some pause in considering new debt, statistics show that Palo Alto is a wealthy community, and can perhaps afford, or perhaps might tolerate, more debt than the average city. ¯ Palo Alto levies slightly above the average amount of local taxes measured on a per capita basis. As was the case with reviewing debt levels, there may be room for additional tax revenue, considering Palo Alto’s relative wealth and its support for high levels of service. ATTACHMENTS Attachment 1: Attachment 2: Survey data Summary data on cities’ more unique funding sources PREPARED BY:Jim Steele Manager, Investments and Debt APPROVED BY: CITY MANAGER APPROVAL: CC: n/a Meli~sa Cavallo Acting Director Administrative Services Emi~ Harrison Assistant City Manager CMR:158:98 Page 13 of 13 I--ZLU 0 0 ~o o ~ o u~ Attachment 2: Summary of More Unique Funding Sources Menlo Park: Mtn. View: Uses a landscape and lighting assessment district to assess property owners to pay for all street tree trimming costs and half the costs of sidewalk repairs, with the City paying the other half Single family homes are assessed up to $28.70 annually for sidewalk and curb and gutter maintenance, and up to $45.82 for street tree maintenance. Theses assessments raise about $475,000 annually. This source of financing would be more difficult for a city to initiate after Proposition 218: a determination of general benefits vs. special benefits would have to be quantified, with property owners assessed only for special benefits. Such an assessment would also require a vote of property owners. Menlo Park also obtained voter approval to sell general obligation bonds to expand and renovate its library. Menlo Park has a redevelopment area in East Menlo Pa~k. Tax increment financing (the growth in property tax revenues from the redevelopment area after that area was formed) was used to construct a senior center, a community center, and a small parkin East Menlo Park. Mountain View has two redevelopment areas. The first is the downtown area, and tax increment property tax revenues go to financing the debt that was used to finance downtown beatification. The second is the North Bayshore area, adjacent to the Bay. Road and other infrastructure improvements there were used to attract new businesses to this area, which is an industrial park area. Tax increment property tax revenues went to constructing Shoreline Park, and to major capital improvements at the golf course. Santa Clara: The new downtown library was financed in large part by a land sale to the North Bayshore Redevelopment Agency from the General Fund. The downtown Police and Fire building built in the mid 1980’s was financed from tax increment funding within the downtown redevelopment area. Santa Clara has a redevelopment area on the north side of Highway 101. Among its projects, it owns the land under which the Great America Theme Park and the Convention Center is located. The Redevelopment Agency uses tax increment property tax revenue to finance additional capital improvements in the redevelopment area, and the City benefits from the additional sales tax generated, and from additional room tax revenues, and 0 0 0 ~0 O~0 ~~ m d ~ 0 ~~0 0 ~0 0 0