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HomeMy WebLinkAbout1997-05-21 City Council (13)BUDGET 1997-98 City of Palo Alto City Manager’s Summary Report TO:HONORABLE CITY COUNCIL ATTENTION: FROM: COmaTT r CITY MANAGER DEPARTMENT: ADMINISTRATIVE SERVICES DATE:MAY 21, 1997 CMR:254:97 SUBJECT:LONG-TERM FUNDING ISSUES RELATED TO THE CUBBERLEY COMMUNITY CENTER, AUGMENTED STREETS AND SIDEWALKS PROGRAM, CITYWIDE CHILD CARE COORDINATION, AND LEASE AND COVENANT NOT TO DEVELOP AGREEMENT WITH THE PALO ALTO UNIFIED SCHOOL DISTRICT (PAUSD) Staff requests that the Finance Committee: 1) review the analysis of options, as recommended by the Finance Committee during the 1996-98 budget process, to solve the shortfall problem associated with programs supported by the General Fund Utility User Tax (hereafter referred to as the General Fund UUT Program) ’ and 2) recommend to Council staff’s proposal to cover the shortfall by using other General Funds to finance programs that have relied on UUT funds, including the Lease and Covenant Not to Develop payments, foregone PAUSD rental revenues, extended day care site payments, Cubberley operations, the augmented streets and sidewalk program, and child care coordination. RECOMMENDATIONS: Staff recommends that the Finance Committee approve and recommend to Council a formalization of General Fund support to cover anticipated shortfalls associated with the General Fund UUT Program. In lieu of other practical solutions, where the City must either substantially enhance revenue sources or mitigate expenditures associated with the General Fund UUT Program, staff recommends General Fund support until the 2000-02 budget process when options presented in this report can be re-evaluated. CMR:254:97 Page 1 of 14 In addition, staff recommends that the General Fund UUT Program be segregated into Cubberley Community Center and non-Cubberley programs (this segregation is described under the Executive Summary). The separation of the General Fund UUT Program is recommended in order to evaluate Cubbedey as a distinct community resource which can support itself, and to assess General. Fund support to non-Cubberley programs. In establishing a Cubberley Community Center program, staff also recommends that City departments pay for use of Cubberley space, as would any other tenant, and that the General Fund reimburse the current subsidy made on behalf of artists at Cubberley. POLICY IMPLICATIONS: Whereas the original package of activities and programs associated with the General Fund UUT Program was to be totally supported by General Fund UUT taxes and Cubberley rental revenues, the City now faces the need to support these programs with additional General Fund resources. General Fund ~ Program shortfalls will increase from $171,000 in 1997- 98 to $1.5 million in 2005-06. This support represents an important policy shift since the ability of the General Fund to fund increased service levels and new programs will be affected. EXECUTIVE SUMMARY: In a 1995-96 Budget Issues report (CMR: 195:96) staff identified long-term funding issues concerning the ability of General Fund UUT Program revenues to sustain expenses. The General Fund UUT Program includes: 1.City utility and telephone utility user tax revenues 2.Cubbedey rental revenues for hourly and long-term renters Lease and Covenant Not to Develop payments; foregone PAUSD rental revenues generated at Cubberley; and extended day care site payments (these expenditures will be subsequently referred to as the "PAUSD Lease") Cubberley lease management, operations and maintenance expense Child care coordination expenses The augmented streets and sidewalks program CMR:254:97 Page 2 of 14 Funding concerns centered around stagnant and potentially declining utility generated revenues that would not keep pace with expenditures and would lead to a series of projected shortfalls beginning in 1997-98. To stem these shortfalls staffproposed a short-term solution in 1996-97 and eleven options for long-term solutions. Atter reviewing staff’s proposed options, the Finance Committee remanded to staff five of the options for further analysis and asked staff to pursue the possibility of reopening the Lease and Covenant Not to Develop Agreement with PAUSD. With the passage of Proposition 218, four of the options have become more difficult to implement. Options to increase or extend the General Fund Utility Users Tax, which would raise revenues ranging from $600,000 to $1,000,000 and would alleviate the General Fund UUT Program shortfall, must be approved by voters. Options to create a sidewalk assessment district or a Cubberley landscape assessment under Proposition 218 now require that property owners only be charged for specific benefits attributable to their property and that a vote, weighted according to the amount of individual assessments, be conducted. While staffbelieves a Sidewalk Assessment District is implementable under Proposition 218 and could potentially raise between $200,000 to $600,000 annual.ly, this option is not recommended until further legal clarification on the effects of Proposition 218 is provided. In pursuing the option of reopening the Covenant Agreement with PAUSD, the School District indicated an unwillingness to renegotiate. It is not in PAUSD’s economic interests to reopen the Agreement, particularly in light of recent property tax takebaeks by the County. The most viable option, at this point in time, is for the General Fund to support the General Fund UUT Program shortfall. The shortfall is projected to be $171,000 in 1997-98 and will rise to $1.5 million in 2005-06. Included in staff’s recommendation is a plan to split the General Fund UUT Program revenues and expenditures into two categories: the Cubberley Community Center (items 2 and 4 above) and Non-Cubberley Programs (items 1, 3, 5 and 6 above). As discussed in CMR:195:96, revenues generated by the Cubbedey Community Center exceed the oPerating costs in maintaining the facility. Cubberley is an important asset in south Palo Alto that provides numerous recreational and educational services to the community, so it is important to be able to evaluate it as a separate operation. As part of the Cubberley program, staffproposes that City departments pay for their use of Cubberley space as would any other hourly customer or long-term tenant. In addition, staffproposes General Fund payments to Cubberley for the artist rental subsidy (the difference between rent charged to artists and the Cubberley non-profit rental rate charged to other users). Payments to Cubberley for rent and the artist subsidy, totaling $142,000, better reflect the revenue opportunities at Cubbedey. These changes are appropriate in the context of this proposal. CMR:254:97 Page 3 of 14 After separating Cubberley Community Center-related revenues and expenditures, what remains are Non-Cubberley Programs which include the utility revenues and the PAUSD Lease, child care coordination, and the augmented streets and sidewalks expenditures. Expenditures in this program will significantly exceed revenues through the year 2005-06 and will be supported by the General Fund until other solutions are found. It is important to note that in 2001-2002, the year in which the Calaveras Reserve is fully funded, electric rates are expected to decrease and there will be a concomitant, ongoing increase in Non- Cubberley Program support. Given the overall need for payments and support by other General Fund monies, staff recommends revisiting the structural shortfall during the 2000-2002 budget process. At that time, more information about the impact of Proposition 218 and the feasibility of some of the other alternatives will be available. FISCAL IMPACT Implementation of staffs recommendation will have a considerable impact on the General Fund. As Attachment 1 shows, the overall shortfall of the General Fund UUT Program is $171,000 in 1997-98. This shortfall is expected to rise steadily over the coming years as expenditures tied to the rate of inflation increase and as General Fund UUT revenues remain flat as a result of increased competition in the utility industry. By 2001-02, the shortfall will rise to $1.0 million and by 2005-2006 it is projected at $1.5 million. The 1997-98 City Manager’s Proposed Budget does not include rent charges for City used space at the Cubberley Community Center, nor does it include the proposed artist rental rate subsidy. If these costs were added~ the General Fund payment and subsidy would equal $142,000. The proposed budget does include support for the $171,000 shortfall expected in 1997-98 primarily as a result of non-Cubbedey program revenues not being adequate to cover all of the non-Cubberley program expenses. ENVIRONMENTAL ASSESSMENT: This does not constitute a project for purposes of the California Environmental Quality Act (CEQA). CMR:254:97 Page 4 of 14 ATTACHMENTS: Attachment 1 Attachment 2 Attachment 3 Attachment 4A Attachment 4B Attachment 4C Related CMR?s 1998-2006 Long-Range Utility Users Tax Projection Original 10-Year Plan for Use of Utility Users Tax Revenue Status of Each of Options Related to the General Fund UUT Shortfall Problem Cubberley Community Center Operation UUT Revenues v. PAUSD Lease and Covenant Not to Develop, Child Care, and Streets and Sidewalks Expenses Summary of General Fund Support to Cubberley Operation and Covenant Not to Develop Agreement CMR: 195:96 Budget Issue: Options for Long-Term Funding of General Fund Programs at the Cubberley Community Center, Augmented Streets and Sidewalks Program, Citywide Child Care Coordination, and Lease and Covenant Not to Develop Vacant School Sites with the Palo Alto Unified School District CMR:218:97 1997-98 Budget Issues CMR:254:97 Page 5 of 14 PREPARED BY:Joe Saccio, Sr. Financial Analyst, Administrative Services Department Richard James, Administrator, Community Services Department DEPARTMENT HEAD Harrison Assistant City Manager, Acting Director Administrative Services DEPARTMENT HEAD APPROVAL: CITY MANAGER APPROVAL: CC: n/a Paul Thilig~n,’ Director Community Services Department CMR:254:97 Page 6 of 14 City of Palo Alto City Manager’s Report LONG-TERM FUNDING ISSUES RELATED TO THE CUBBERLEY COMMUNITY CENTER, AUGMENTED STREETS AND SIDEWALKS PROGRAM, CITYWIDE CHILD CARE COORDINATION, AND LEASE AND COVENANT NOT TO DEVELOP AGREEMENT WITH THE PALO ALTO UNIFIED SCHOOL DISTRICT (PAUSD) RECOMMENDATIONS As a result of evaluating options selected, by the Finance Committee during the 1996-98 budget process to solve the problem created by declining utility user tax (UUT) revenues and increasing expenses (hereafter referred to as the General Fund UUT Program), staff recommends the formalization of General Fund support for programs that have relied on General Fund UUT revenues (Option 10 reviewed by the Finance Committee during the 1996-98 budget). As illustrated in Attachment 1, the Long-Range Utility Users Tax Projection, the General Fund UUT Program has ineiuded the following revenues and expenditures: Revenuers 1.City utility and telephone utility user tax revenues 2.Cubberley rental revenues for hourly and long-term renters Q o Lease and Covenant Not to Develop payments; foregone PAUSD rental revenues generated at Cubbedey; and extended day care site payments (these expenditures will be subsequently referred to as the "PAUSD Lease") Cubberley lease management, operations and maintenance expense Child care coordination expenses The .augrnented streets and sidewalks program CMR:254:97 Page 7 of 14 Included in staff’s General Fund subsidy recommendation is a plan to split the General Fund UUT Program revenues and expenditures into two categories: the Cubbedey Community Center (items 2 and 4 above) and non-Cubberley Programs (items 1, 3, 5 and 6 above). In addition, staff recommends new rental charges to City departments for use of Cubberley space and payments to Cubberley from the General Fund for the artist rental subsidy (the difference between rent charged to artists and the Cubberley nonprofit rental rate charged to other users). By segregating Cubberley-generated revenues and expenses and instituting rental payments and subsidies, the Cubberley Community Center can sustain operations and, potentially, build funds for capital improvements. The Cubberley facility is an important asset in south Palo Alto that provides numerous recreational and educational services to the community, so it is important to be able to evaluate it as a separate operation. Likewise, by tracking non- Cubberley revenues and expenditures associated with the PAUSD Lease, streets and sidewalks, and ehildcare coordination separately, the funding required to support the non- Cubberley activities is clearly defmed. In lieu of other practical alternatives at this time, it is recommended that the.significant shortfalls identified in this report.be supported by the General Fund. Furthermore, staff recommends that during the 2000-2002 budget process, when electric rates are projected to decrease, the alternatives identified in this report be revisited. BACKGROUND In a 1995-96 Budget Issues report (CMR: 195:96), staff identified long-term funding issues concerning the ability of UUT revenues to sustain General Fund programs and commitments. These issues are significant since General Fund UUT Program revenues are supporting an estimated $7.4.million in City programs and payments to PAUSD. Funding concerns center around stagnant and potentially declining UUT revenues that cannot keep pace with expenditures, and which will result in projected shortfalls beginning in 1997-98. As a result of energy deregulation, competition in the telephone industry, and pressures on water rates, there has been a fundamental change in the revenue base supporting the General Fund UUT Program. Whereas the original 1990 Ten-Year Utility Plan for Use of Utility Tax Revenue (Attachment 2) projected $8.4 million in UUT revenues in 1997-98, the current forecast shows $5.4 million in UUT revenues -- a $3.0 million decrease. Revenues generated specifically by City utilities, which were anticipated to reach $5.9 million in 1997-98 in the 1990 forecast, are now anticipated to remain fiat at approximately $4.0 million over the next nine years. This significant shortfall poses a structural dilemma as payments under the PAUSD Lease continue to steadily escalate by the Consumer Price Index (a 3.0 percent increase over 1996-97 commitments results in an additional $145,000 in expense). The CMR:254:97 P~ge 8 of 14 current General Fund UUT Program projection (Attachment 1) shows the Reserve for Streets and Sidewalks being depleted in 1997-98, a shortfall of $171,000 in 1997-98, and continuing operating shortfalls in each of the next eight years that will reach a projected operating shortfall of $1.5 million in 2005-06. To curb these shortfalls, staffproposed a short-term funding solution for 1996-97 and eleven options or alternatives to address longer-term financial issues. The long-term options identified in CMR:195:96 included: Increasing the UUT from 5 to 6 percent to generate an estimated $1,000,000 annually. Extending the UUT to interstate and international phone calls to yield an estimated $600,000. Creating a new assessment district for sidewalk repairs and replacement, whereby Palo Altans would pay either a share or the full costs of sidewalk work. This option would raise an estimated $200,000 to $600,000 annually. Establishing a landscape and lighting assessment district to fund Cubberley Community Center landscape maintenance budget of $83,000. This represents a partial solution to the shortfall problem and would be combined with other solutions. Diverting funds from the street and sidewalk appropriation to the General Fund UUT Program budget. This transfer would eliminate the shortfall, but have a negative effect on the Street and Sidewalk Repair Program. Subletting the entire Cubberley facility to a private operator. By leasing the Cubberley site and eliminating the Cubberley Community Center operation, revenues could substantially increase (amount unknown), and expenditures could be reduced by up to $1,200,000. Converting Cubberley to a long-term lease facility only and charging market rates. Based on 182,000 square feet for rental and absorption of maintenance expenses by renters, approximately $600,000 to $1,030,00 in new revenue and savings would be realized. This option would eliminate Cubberley as a Community Center. CMR:254:97 Page 9 of 14 Converting part of the Cubberley facility into a conference center. This option has the potential to increase revenue by converting part of the existing hourly rental spaces into an urban conference center. Creating a conference center would involve a substantial capital investment and supplant hourly renters. Increasing rent paid by child care providers. Under the PAUSD Lease, approximately $391,000 is paid annually for eleven school sites where child care is provided. The General Fund UUT Program receives only $59,000 in rental payments, creating a subsidy of $332,000 per year. An increase in charges to child care providers,, to recoup partial or all current costs, would yield up to $332,000. Depending upon the amount of the increase, additional charges could have a significant impact on providers. 10.Covering General Fund UUT Program shortfall with additional General Fund monies. The General Fund would absorb increasing General Fund UUT Program shortfalls over time, while maintaining current programs and commitments. This option provides a long-term solution, but may also cause a reduction or curtailment in other General Fund services and programs. 11.Eliminate the shortfall by reductions in Cubberley operations and maintenance services. There are limited changes that can be made to reduce operating expenses, based on the present Community Center concept. Such savings would not cover the shortfall and would have a significant impact on service and long-term lease and hourly rental revenues.’ After discussing these altematives at length, the Finance Committee directed staff to continue analysis of options 1, 2, 3, 4, 9, and 10 and added a 12th option, which was to pursue the possibility of reopening the Lease and Covenant Not to Develop agreement with PAUSD. POLICY IMPLICATIONS Staff’s recommendation to pursue Option 10, whereby the General Fund supports General Fund UUT Program shortfalls, represents an important policy shift. Whereas, the original package of activities and programs associated with the General Fund UUT Program was to be totally supported by General Fund UUT taxes and rental revenues, the City now faces the need, in lieu of initiating new revenue sources or reopening the PAUSD Lease, to cover shortfalls, with additional General Funds. It is projected that the UUT Program shortfalls will grow from $171,000 in 1997-98 to $1.5 million in 2005-06. Implicit in staff’s recommendation is the fact that General Fund resources used to abate the General Fund UUT Program shortfall will not be available to increase existing service levels or fund new programs. CMR:254:97 Page 10 of 14 DISCU SISSLO__N_ To fundamentally solve the long-term, structural problem posed by the deterioration in utility revenues, the City must either substantially enhance its revenue sources or mitigate expenditures associated with the General Fund UUT Program. Since the time that the Finance Committee directed staff.to pursue viable alternative solutions to General Fund UUT Program funding issues, further constraints have been imposed with the passage of Proposition 218. As appropriate, a discussion of the effects of Proposition 218 is presented with each alternative. Attachment 3 details each of the alternatives that staff has explored and the status of each. Options Not Recommended Alternatives 1 and 2: New or Enhanced Taxes Alternatives 1 and 2 offer more comprehensive solutions to long-term funding issues since they result in significant new revenues. Alternative 1, increasing the UUT from 5 percent to 6 percent would generate approximately $1,000,000 annually. Based on current projections, Alternative 1 would erase shortfalls roughly through the year 2001-2002 and would significantly strengthen reserves. Alternative 2, extending the UZ~ to interstate and international phone calls would generate an estimated $600,000 annually, strengthen reserves, and erase the shortfalls through the year 200001. These alternatives will require a direct vote by the citizens of Palo Alto. The UUT was approved by a majority vote in 1987 as a general tax. Under Proposition 218, new or increased general taxes must be approved by a majority vote during regularly scheduled elections. Should an extension or increase in the General Fund UUT be construed as a special tax, a two-thirds approval by voters would be required. This would make alternatives 1 and 2 less viable options. Proposition 218 adds an additional element of uncertainty to the continuity of these revenues in that voters, through an initiative, may overturn an existing tax by a majority vote. Alternatives 3 and 4; Assessment Districts Alternatives 3 and 4 would require creation of assessment districts that would alleviate pressure on existing funding sources and would represent new sources of revenue. Alternative 3 recommends implementing a eitywide assessment district for sidewalk installation and repairs. Unlike many cities, Palo Alto does not assess property owners for the costs of sidewalk improvements. Depending upon the property owners’ share of such costs, an assessment district could produce between $200,000 to $600,000 annually. By instituting a sidewalk assessment district, the City could divert UUT funds currently used for sidewalks toward the long-term shortfall. These additional revenues could potentially erase expected shortfalls through the year 1998-99. CMR:254:97 P~ge 11 ot" 14 Alternative 4 recommends the creation of a lighting and landscape assessment district to fund Cubberley Community Center landscape maintenance costs. As proposed, this alternative would raise approximately $83,000 and would have to be combined with other solutions. Under Proposition 218, any proposed future assessments on property owners will require more rigorous calculations of"special benefits" (because "general benefits" cannot now be assessed); mailed notice, including the basis for the assessment calculation, to each affected property owner; and a protest ballot procedure. Prior to Proposition 218, a city council could override a majority protest and approve an assessment. As a result of Proposition 218, the city must conduct a protest procedure akin to an election and the assessment cannot be approved if there is a majority protest of those land owners voting. The vote is weighted according to the proportional share of the assessment of all those landowners who actually vote. A duly approved assessment could be repealed or reduced by means of a citywide initiative. This is a risk of any tax, fee or assessment subject to Proposition 218. The latter requirement makes Alternative 4 particularly burdensome since attributing specific benefits to citizens throughout the City would be difficult to establish and easy to challenge. A sidewalk assessment district (Alternative 3), however, may more readily meet Proposition 218 constraints, since the benefit of a sidewalk improvement may be more directly tied to a property owner. A sidewalk assessment district for residential neighborhoods, for example, would serve a specific group of users. Staffdoes not recommend pursuing creation of a new sidewalk assessment district at this time, due to the recent passage of Proposition 218 and its associated additional legal and administrative burdens which are roughly estimated at around $50,000 above the current costs of establishing an assessment district. Alternative 9: Increased Rent from Child Care Providers The City pays PAUSD approximately $391,000 annually for eleven extended day sites and receives only $59,000 from the child care providers using those sites. This represents a subsidy of $332,000 per year. The City could implement a rent increase that would produce up to $332,000 in additional revenues. Depending upon the amount of the increase, this alternative may have a significant impact on providers and those seeking child care. It appears likely that any rent increase approved would have a modest impact on the structural problem and would have to be used in conjunction with other solutions to the shortfall problem. Alternative 12: Reopen Lease.and Covenant Not to Develop A~eement with PAU_S_D As stated, one of the more intractable causes of the shortfall problem is the escalating costs of pass-through payments to PAUSD under the PAUSD Lease. While the entire community benefits from not developing school sites, the costs of containing development is falling heavily upon the General Fundl In discussions with PAUSD on reopening the agreement, PAUSD indicated a definite unwillingness to renegotiate. It is not in PAUSD’s economic CMR:254:97 P~ge 1:2 of 14 interests to reopen the agreement, particularly in light of recent property tax take-backs by the County. _Recommended Alternative _Alternative 10: Provide Payments to Cu_B.b._berley Communi .W Center and Subsidize Non- Because of constraints imposed by Proposition 218 and the inability to renegotiate the PAUSD Lease, the remaining option is to support the Cubberley Community Center and non- Cubbedey programs (as described in the "Recommendation" section) with General Fund monies. This approach will require increased payments and.support over time as inflation occurs. As mentioned above, staff proposes to separate Cubberley operational costs and revenues generated from those operations from the rest of the General Fund UUT Program. As discussed in CMR: 195:96, revenues generated by the Cubberley Community Center exceed the operating costs of maintaining the facility. The Cubberley facility is an important asset in south Palo Alto that provides numerous recreational and educational services to the community, so it is important to be able to evaluate it as a separate operation. Several policy changes are recommended, however, to better reflect revenue streams generated by Cubberley and the expenditures required to maintain it as a viable fa6ility. These changes are appropriate in the-context oft his proposal. It is proposed that City departments begin to pay for use of Cubberley space, as would any other hourly customer or long-term tenant. It is also recommended that the General Fund reimburse the current subsidy made on behalf of artists at Cubberley (the difference between what is charged to the artists and the nonprofit rental rate normally charged at Cubberley). It should be noted that revenue generating Community Services classes operating at Cubberley are not being asked to pay rent in this proposal. Revenue from these classes pays for operating community programs which the Cubberley Community Center embodies. Charging these programs rent would result in non-competitive fees and the need to relocate them to other City facilities. In addition to current expenses to run Cubberley, which include facility operations, maintenance and lease management support, it is proposed that an annual budget for Cubberley capital improvements be targeted in 1998-99. Attachment 4A incorporates the proposed changes and shows that the Cubbedey facility can generate sufficient income to cover operating expenses and build funds for future, albeit, modest capital improvements such as roof repairs. After separating Cubberley Community Center-related revenues and expenditures, what remains are non-Cubberley programs, including the UUT revenues and the PAUSD Lease, child care coordination, and the augmented streets and sidewalks expenditures. Attachment CMR:2~:97 Page 13 of 14 4B isolates and projects these revenues.and expenditures over the next nine years. The financial summary shows that expenditures will significantly exceed revenues through the year 2005-06. In 1997-98, a shortfall of $511,000 is anticipated. Under this recommenda- tion, the shortfall will be supported by the General Fund. In addition to the projected continuing shortfalls, it is anticipated that in 2001-2002, the year in which the Calaveras .Reserve is fully funded, electric rates are expected to decrease and there will be a concomitant, ongoing increase in the non-Cubberley program support. Given the overall need for payments and support by the General Fund, staff recommends revisiting the structural shortfall during the 2000-2002 budget process. At that time, more information about the impact of Proposition 218 and the feasibility of some of the other alternatives will be available. FISCAL IMPACT Implementation of Option 10 willhave a considerable impact on the General Fund. As Attachment 1 shows, the overall shortfall of the General Fund UUT Program is $171,000 in 1997-98. This shortfall is expected to rise steadily over the coming years as expenditures tied to the rate of inflation increase and as UUT revenues remain fiat as a result of increased competition in the utility industry. By 2001-02, the shortfall will rise to $1.0 million and by 2005-2006, it is projected at $1.5 million. The Proposed 1997-98 City Manager’s Budget does not include rent charges for City used space at the Cubberley Community Center, nor does it include the proposed artist rental rate subsidy. If these costs were added, the General Fund payment and subsidy would equal $142,000. The proposed budget does include support for the $171,000 shortfall expected in 1997-98, primarily as a result of non-Cubberley program revenues not being adequate to cover all of the non-Cubberley program expenses. ENVIRONMENTAL ASSESSMENT This does not constitute a project for purposes of the California Environmental Quality Act (CEQA). CMR:254:97 Page 14 of 14 ~’~ ~o o oo o ~ N NN ,=II II N