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Home My WebLink About0181.095A1TENTION: FROM: , -'. .,..:~ .. till . :-A_~:/'" City of Palo Alto City Manager's Summary Report HONORABLE CITY COUNCIL FINANCE COMMI'ITEE CIT\" MANAGER DEPARTMENT: FINANCE AGE.'liDA DATE: MARCH 21, 1m CMR!181:9S SUBJECT: RENT PAID FOR GENERAL FUND PROPERTIES USED BY UTILITIES OPERATIONS RECOMMENDATION This is III inf<lrmational !cpon. and DC Council &<-'Iion is required. A recent reapprai,al bas n:suIted in significanl changes 10 Gen<nI Fund rental cbarges 10 1fu: utility fundS. including Ibe Refuse Fond, for 1995-%. Staffbas prepared the 1995-96 budget ""ing a pI'OpOS8l outnne<I in Ihis reporI; however, given the financial si8)1i.fk:an<:e oflhis issue, staff felt it,..as appropriaIe '" disc>JSS Ihis as a budge! issue prio< 10 Firumce Committee review oflhe overall. budget 1'01.10' lMPUCADONS No change in City policy is suggested. City policy is 10 !rea! Ihe utility funds IS businesses. They are ICC'" m!e<I for as en!erprise f.mc!s on the City's boob, meaning !bey are separate and distinct accounting entitiel;, and are expecled I<> """,ver the full COS!> of their openttloru Ihrough the rates that !bey charge. The .rulity funds pay for the di=t sernr..es they receive from the General Fund, incluGlDg • !Bir market ten! for the la.'ld sites used. All options discussed m Ibe report for rental chJirges are consisterll with """ting the utility funds as businesses. EXUJlTIYt SUMMARY A land reappraisal was perfonued by Appraiszl Resea.,ch C<xpocation (ARC) in December 1994. The previous oppra:sal was done in 1989. Real estate "al= have changed dramatical1y since the bst appraisal was done in 1989. As. result of'lbe ARC appraisal, 1he rents recommended were sucl! that Ibe reo! charged the Refuse Fund lOr the landfill io<."I'ellSed $2.0 million, wIn.'1e that chJirged the other Utility Funds decreased $1.6 million. CMR:ll1:!05 Staffbas prepared 5<VCl8l cptions b Coun<:illo consid« f<lc the 1995-96 blJdget Although staffbelieves that ad'j.lSting Ihe mlI for !he water, wastewater, electric and gas funds should be made in 1OIaI1tI' cbc 1995-96 Budget. staff does DOl believe implementing It.e appraiser'. recommendations b the landfill rent an in. ooe year is necesseriJy !he best option for either the General fund or Ihe Refuse fund. Refuse rates would need 10 go "l' about 12 percent m 1997, and another I percem in 1999, 10 cover the full 52 IIllllion landfill rent increase as cecomlnended by the appraise<. Furth=<Jl'e, the ""xl ph""" of the landfill closw-e is le!rtlItively scheduled in the year 2000. That cto. __ phase wm result in .. decreaso in landfill acm-go ,tnd. Ih=fuie, rent payments 10 the General Fund would go dwn by about haii Refuse raks would then decreaso by abo'.lI 25 percent 'l> er two years in 2002 and 2003 (Attachment A). Staff believes that rale tlucluations oftbis magnitude are no( optimal K>r ratepayers, and that they ought In be .",idecl. In orclcr 10 smoolh Refuse Fund rate., statrbefie1les thaI some lOOn of landfill rent payment "sm<>oChlng" should occur over .. nwnber of )'ears. Under such a =arlo, rather than charge the fun $2 million incm.se next year, and then reduce landfill rent by abcoA balf when the nexllandfill closure pbase 0CC\Ir!i, .. steady stream set of payments can be ~ that wollid collect the same oversll rem a."I>OUlIl over I given number of years, but with equal payments each year, thereby av"iding' ramping up and !ben "ramping down"_ r ... a!lmpacf Staff prepared cbc 1995-96 budgot by in<;oq>orating the option coolli1ned in Attachment A wbicl!. show. the impact 00 Refuse rntes ofbolding landfill rent cooslant over ei~ yean. II resuIIs in • JII'O.iected 1 percenI rale increase in 1997, and another 1 percenI ill 1999. with no projected decreases in Ia!er years. The impact oflhese actions is. net decreaso in rent paymeuts '" the General Fund of $0.4 Dll1lion foe 199"~96, MIen <OOlpared 10 Ihe 1994·95 rent payments. The Council is expected '" consider these staff recoourJeDdations i!S part of the 1995-96 Il>Jdget miew; ~uently. no recommendation is made at Ibis time. ATIACBMENTS A) .Refuse Customer Rate In<:re .... Under Different Rent Payment Sc"narlos CMJt:181:9S · .' PREPARED BY: run Steele. Budget Manager CllY MANAGER APPROVAL: CMR;lJl:95 -. ..- (} City of Palo Alto City Manager's Report SUBJECT: RENT PAID FOR GENERAL FUND PROPERTIES USED BY uriLrriES OPERA nONS This is an in!<Jrn1aIioDsl report, and DO Council action is required A '=niland rcappraisaI has "",uIted i:t significan! change. 10 Gene.-al Fund rental cbarges 10 the Utility FU/lds, inctucling the Refuse Fund, fOr !he 1995·96 year. Staffbas prepared the 1995-96 budge1lL<ing • propooaI outlined in 1hls report; bowever, glven the finaocial signilkanee of1hls issue, st.aff felt it was appropriatt 10 discuss this as • !>udget issue prior 10 finan<;e Committee review of the overall !>udget. JlAO<GRQUNP City polky is 10 treat !be utility funds as !>usinesses. They an: accounted for as enterprise funds on the C".:y. boob. meanjng they are separate and distinct accoonting entities, and ~ expected 10 recover tt.e full COSIS of their operations lbroogIJ the nles that they charge. The utility funds pay fOr !he <flrecl servi<:es they receive from the 0eneraI Fund, including legal services, payroiI, pun:basing. CIC. -The Genen!l Fund, in lUm, pays the utIlity funds full cost lOr the utilities !bat City facilities receive. Over the years. IheCiIy'l General Fund acquired land fOr municipal use. Some oftlwse sites arc now being nsCd by1be virioos utililies. For exa.'l1ple, land used by the EJe.."1ric Fund includes the various 1Ubs'.afions, whlIe the Water Fund uses \'lIrious reservoir and wen .'les, and the Refuse FUIKl uses the landJi II site. The utilities pays the Gen<:nI Fund. fair made: renI fOr the !and sites it uses_ If the utility funds w= private companies, they would either rent !and from aood!er landlord, 0< would purchase land slles foe their own use. rnerefOre, the City's cbarges 10 the utility funds fOr rent is coosistenl with lireating the utilii}' funds like businesses. 1994-ts Rents ud Resnlb or Reappralsal The rental values charged 10 the utility funds are based on land values, professionally IIJlI>rOised 00 a period:'C basi .. In between appraisals, r",,1s are increased by an amoon! equal .... "'. -~~ "~. . '"' '. -~ 10 the 8.:Iy Atea coosum<:l price index (em A reappraisal was performed by Appraisal Rcsean:h CorporaIion (ARC) in December 1994. The Pfl'Vk>'JS appraisal was done in 1989. Real estate values have C!UllIged drama!ically since the last appraisal was c:ooe in 1989. As a result of the ~llC apprajsaI. the reots recommended, by fund, Iotaled sa mJ1lioo: $OOO's 1994-95 1995-96 Percent Renl Reappraised Change Renl WaletFWId $1,093 $ 565 (48.3) EIe<:tri<: fund 2,%6 1.815 (3"-8) Gas FImd 140 198 35.6 Wastewatc< Fund 29 80 175.9 Refuse Fund 3,138 5,178 65.0 TOTAL S1,372 51.836 6.3% Appraisal Metllodology The most dramatk incretse in value .. ·as '" the landfill site, which is because i! is appraised as !he equh-akD! of resem·ch and &ve1opment (R&D) acreage, wlnl. most oflhe utilily siles are appraised as resklentlat Appraisers typically ,"lilac land at the "highest and best lISe, • not current use. This metbodoIogy is defined as follows: . To have a value, • site must have a ut>lity (function) which is in demand .•• The objective of the slle analysis is 10 gather the data which tends 10 indicate a site', highest ar.d best use, and 10 estimate the nrue fA the land in terms of this use. Highest and best we may be descnl:>ed as that use which funy ck"Velops the slle', pOtentiat This use may change with time and conditions. Zoning of. particular site :. :.; '~~ '. :-->. " ,:~",' <--' .. --" .. .. might be 10< • sing!e-f'amiIy !>ou..<e. How.ver, because of shifting ewwmk: and social patterns, tile highest pRSeIlt ut!lizatioo of this site might be achieved by COIlvetSioo 10 commercial uses; or it may be possible 10 anti<:ipote developmenls, which will bring aboiJc • change in highest and best permitted u..<e, and endow •• i~ with future vaJue even thcugh there is 00( C\IITCIl1 dema.'ld fur such use. The term also is employed 10 designate. program of ut:liza!ioo which is 10 prooace the greatest future ~fi! 10 1he owner. This rIllIy include more than one potential future use, each ofv.hlch is foreseen 10 be the most profitable use at a ;1atc:d time. Uses permitted by zooing regulations may be ~ valuable than the potential use 10 which the land is adapted ..• 1The A~i<al ofRCJl Estate by the American Institute or Real Estate Appraisers). Over the last several years, while rc:sid<:nli.al propetty values have gone down in market value in Palo Aho and 1he Bay Area in ge:>eral, R&D values have gone up ffir Palo Aho. The appnj= compared =<1> and development values k>< various industrial parks. Their S'Jl'Vey included sites III Shoreline, CbarlesIoo Rood, and EI Camino Real in Moontaln VIeW. and Park BouI"""'" in Palo Alto. Based on 1heirsurvey, 1hc landfill was assessed a rental vallie based on 511 per square foot {sq. Ill. wblch is on 1he \ower end oflhe sites surveyed. The reason for valuing !he landfill site at the lower end is that the landfill is currently undeveloped, i.e~ has limited road access and 00 ut!lity roonectioos. This appraisal methodology is coosistel!t with ecooomi<: theory. FA:onomic 1heo<y defines oppOr\UDIty cos! as 1he cost of some'.hing that is foregone t>y choosing <>d>er options. "The (n:al) cost ofllSing something in. plIIticuIar venture is \he benefit iOregooe (or opportunity lost) by 00( IlSing it in the !>est alt=ative use" (Lipsey and Steiner, Economics, 197 S, pg. 156). By choosing 10 have a landfill site, the City lost the <>ppertuDity 10 develop that land fa< its highest and best we, whl¢h could <>d>erwise provide .., income stream 10 the City of Palo Alto. That decision "costs" :he City General Fund the amount it could be earning by renting or leasing the space out as R&D_ It is appropriate. tberefCre. that the Refuse rates [e~ payment to the GcnmJ Fund lOr that furegooe reven". stream, which woold otherwise be &Val1.hle \0 the City 10 pay lOr .services. CMII!111," .. '.' o Options Staff has considered several options in prepar.ng the 1995-96 budget AJf.hough staff believes it is approp.; .. te to make Io!2J adjustments ror rent from the water, ... ·astewater. electric and gas funds for the 1995-96 Budge!, staff does no! believe implementing the opp<aiser's recommendations fo< the lai,elfiU rent aU in one year is necessarily !he best option fo< either :he General Fund or the Refuse Fund. Refuse roles woold need \0 go up about 12 percent in 1991 and another ! percent in i m. to cover the full S2 mHlioo landfill rent increase as recommended by the appniser. (See Atta<luIl"nl A lOr moo: <k1ai!). Furthermore, the ~xt phase of the Ia.'!dfill closure is scbeduled in the year 2QOO. That ck.sure pbase. will =11 in a c!ectease in landfill acreage and, lherefore, rent payments woold go clown by aOOu! baIt: Refuse rates would tben decrease by about 25 percent over two years in 2002 and 2003. SWfbelievcslha! rate fluctuations of this magnitude are not optimo.l foe ratopayer.;, and thai they ooght \0 be avoided. optioo t ~ J MY' All Rent:s at the 1994-25 l&Yehi This option W!lS 001 considered because it unfairly cbarges Utility Funds. higher ront than what. fair appraisal would cbarge, and under rocover.; from Ille Refuse fund what the landfilfs real nluc i ... Q!!ioo 2' Steady Stream of Refuse Repts In order to slllOOth Refuse fund rates, staff be!ie>'es !hat some form of landfill renl pa)'lIk.'Il1 "smoodung" sbooJd ()(;Cur over a r;umber of years. Under ,,,,,It. scenario, rather than cbarge the full 52 mt1fioo increase next roar. and IDen reduce landfill rent by about ItaIfwbcn the ne.'Illandfill closure phase oocurs, • steady stre= set of payments can be devised !hat would collect the same overall rent amount over I given number of years, but "'ith equal payments each year, thereby avoid"mg a ramping up and then "ramping oo..'tI". For example, if YOll knew yoo bad to pay S! ,000 per mooth for five years ror you< mortgage. and !hen \bat payment would be reduced 10 $500 per monlb for another five y=, • "steady s1ream" of equal payments of $750 p. .... mooth w""ld generate the same pa)'ments over the len year time period. Although this calculation does not factor in the time value of mooey, it can stilI pr>Jvide some useful options foe CoullCillO consider. The variable that impacts what the steady stream of payment equals is the time period sokc'",d. Therefure. staff ccnsidered three steady stream options: a fiv~ year Sire""" an eight year stream, and • len year stream. The .. optioos are ShOWla on Attachment A. PaJt:'lolJ '-' ------------------------.. -- ~ ,~}~./ -:-... " -" .1 . ,'",' .. ..... ' ;~" . . . 4-. " Option la· Hgld Refuse Renl, Coostanl fur ENe Years AtIaCbment A shows the impaa 0<1 Refuse rates ofbold'Ulg landfill rent COfL<tan! over five yws. It results in • projected 10 pen:ent rate increase in 1997. end &nOther 10 percent in 1999, IIId decreases <>f 7 percenllIId 8 percent in 200 llIId 2003 respectively. While Illis is smooIher than immediately implementing in the fuH rent increase. it .liD results in • ",te volatility" WrIh die closing ofw next landfill phase in aboUlflve yeus, tbere would be. less in =tal income Ii> the General Fund of about $2 mi!lion. This loss would hs-i. 10 be made up in tile General Fund Ihrougb some combina6on of ocher "'"enue increases and expenditure teductioos. f!gtiQn 2b: Hoid Refuse Rents Constant fur Tea Yw;s Attachment A shows tile impaa 0<1 hfuse rates of bolcf1l1g l""dJ111 rent constant ever len years. It results in a projeaed 1 percent rate increase in 1997 and another 6 percent in 1999, willi "" projected decreases in later yeus. Becau. ... this option streICh .. payments out over • "'Iatively long time period, staff does 001 believe it is optimaI. Qmon 2c; Hgld RefitS RpoorS Consent for Elitf;t Years Attachment A shows the impact 0<1 Refuse rales of bolcmg landf'.n rent cOl1S!l!nt over I years. It resulb in a projected 1 petOenlra!e increase in 1997, and another 7 percenI in 1999, wi1h DO p<>jected c!e=ases in later years. This option is "smoother" 1l>.an Optlon 2a, arul of • sh<xIec lime period than Option 2b arul is, therefore, the option staff cbose in preparing the 1995-96 budget. It would result in • loss of $0.9 million in rental income 10 Ille General Fund a1ta 1hc eight y ..... an: UJ'. StafJ further n=mmends Iba! Ihls &nIOiIDI be reviewed at tile time oftbe next &Jl$lf8isaI in approximately five years. [fland values bad changed much, or if tile da!e ~ w next phase oflhe landfill c1os>= changes slgniticanL1y, w steady stream could then be adjusted. CONCUJSJON SlRffbas prq>ared w 1995-96 Budget, based on the 1O.'Io,.·ing premises: o AOOp6oo of \he full wam, wastewater, electric and gas fund rent changes, effective July I. 1995; and o AOOp6oo of a steady stream of landfi~ renl payments over eight yean;. CMlt!181:95 I'oc< I,,, The &npa.. ... oflhese actions is • nee <kcrease in rem payments to the 0en<nI fllDd of $.4 1nl1lion be 1995.96, VI'hen comparol!o the 1994-95 rent payments. The Coum:i1 is c"*",,,'Iod '" mtiew dlesc s!Bif~ as pan of the 1995-96 Budge! review; coosequently. no ~ is made at \his time. CMR:lll'* Ye.r; 1896 1a97 19118 1999 2000 2001 , .:. 2002 2003 2004 2005 ... ' ."': Attaohment Ii. Rent Pay mente at Amounte RlICommendlld by Appraleer, No Lavelling" of Paymente 12.00% 8.00% .15,00% .10.00% Refuse Fund Customer Rate Increaeea Under Different Rent peyment Scenlrloa Lev.1 Peymente Over 5 V .. ,.. '0.00% 10.00% .7,00% -8,00% Leve' Payment. . < Level. P8)'111811t11 Ov.r10Vee,.. . OYer. V .. ,. "4Statr~) • 7,00% 7.00% MO% .7,00% *