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02-13-2012 - Financial Restructuring PlanTO: Andrew G. Pasmant, City Manager and City Council FROM: Tom Bachman, Assistant City Manager/Finance Director SUBJECT: FINANCIAL RESTRUCTURING PLAN RECOMMENDATION: City of West Covina Memorandum AGENDA Item No.: 1 Date: February 13, 2012 It is recommended that the City Council take the following actions: 1. Concur with the City Manager recommendation to request a proposal for fire protection and emergency medical services from the Los Angeles County Fire Department. 2. Authorize the City Manager to investigate all options listed below and proceed with all actions necessary for the financial well being of the community and report back as appropriate. DISCUSSION: The City adopted a 2011-12 General Fund Budget that includes $51.6 million of estimated revenues and $53.5 million of appropriations, resulting in a $1.9 million deficit. Preliminary projections for 2012-13 produce an estimated $3.8 million deficit. The reasons for the increased deficit include increased pension contribution rates and the residual effects of the salary increases for the public safety units, increases in workers' comp and liability costs, and the continual rising costs of medical premiums. These cost increases are offset against generally modest revenue increases. To address this deficit and meet the City Council's goal of a balanced budget in 2012-13, staff presented a number of options in December to reduce the majority of the deficit with the remainder of the deficit to be addressed during the budget process. This was a much smaller preliminary deficit than the City has faced in recent years due to significant cuts that have occurred over the last several years. Some of the more significant cuts included eliminating almost 100 full time employees City wide, cuts to all levels of service including public safety, and initiating pension reform for all of the miscellaneous employee units. At that point, both staff and the City Council felt confident that given all of the actions taken to date, the deficit could be closed and the budget could be balanced. This confidence quickly got turned upside down on December 29, 2011. As a direct result of the State of California action, the Supreme Court decision ruled that the State of California had the ability to eliminate redevelopment agencies and that redevelopment agencies could not stay in existence by making" a continuation payment to the State. This ruling means that the City's redevelopment agency was dissolved on February 1, 2012, and the impacts of that dissolution will have severe ripple effects throughout the City's General Fund. At a minimum, the General Fund deficit will increase by an additional $1.8 million due to the loss of revenues and shared administrative costs with the redevelopment agency. The worst -case scenario would be a loss of a total of $4.8 million annually, which consists of the $1.8 million plus $3.0 million in annual payments to the General Fund due to agreements between the City and the redevelopment agency. This worst -case scenario, which would increase the 2012-13 projected General Fund deficit to $8.6 million, is based on a provision in the legislation that dissolves redevelopment agencies that states interagency loans are suddenly invalid. If this provision of law is upheld, it would wipe out $21.5 million in loans the redevelopment agency owes to the City, thereby reducing the General Fund reserve from $27.5 million down to $6 million. These loans make up Finance does on Track-It/Agenda Items/Budget Data/12=13�BudiefO4tl6bkPlan 02 13 12 75% of the General Fund reserve. This would have a devastating effect on the City's ability to provide its most critical services, including public safety The table below shows the different scenarios described above. 1. Projected 2012-13 General Fund Deficit (Pre RDA Impacts) $3.8 million Loss of RDA admin revenues and cost sharing $1.8 million 2. New Minimum Projected 2012-13 General Fund Deficit $5.6 million Potential loss of General Fund loans $1.9 million Potential loss of Sales Tax Reimb Agmt $1.1 million 3. Potential Worst Case Projected General Fund Deficit $8.6 million STATE ACTIONS CREATE INSTABILITY Due to the sudden and dramatic impacts caused by the state action that dissolved redevelopment agencies, the City, knowing it will have much less resources than envisioned just over one month ago, will have to undertake a number of immediate and drastic actions in order to restructure its service model. The choices that City is facing are not created by any local action. Rather, the financial challenges created by the recession have been exacerbated by the State of California's continual interference in local affairs and financial takeaways from cities. Since the 1990s, the State has diverted over $40 million from the City. These continual raids have caused cities to organize and support various ballot measures such as Proposition 22 to stave off hostile state actions. As a result of the State actions and their devastating impacts on the local finances, the City has no choice but to consider all options and evaluate their impacts, both financially and operationally. Therefore, it is recommended that the City study all options and bring back the results of those studies for City Council consideration and final action. STAFFING REDUCTIONS The dissolution of redevelopment agencies means that functions of the City's redevelopment agency no longer exist. The only exceptions to this are duties necessary to wind down the affairs of the. redevelopment agency, manage ongoing projects that are subject to existing contractual obligations, and some housing functions. The dissolution also means that much of the City's administrative staff that allocates portions of their salary to the redevelopment agency will lose that funding source. Total loss of General Fund resources due to the dissolution is the previously mentioned $1.8 million. This does not include the $744,000 annual cost of the existing six full time redevelopment agency staff. The Successor Agency will receive limited funding to manage the winding down of the agency and certain ongoing projects. At its January 17 meeting, the City Council directed staff to provide a staffing reduction to them in February. Staff will provide such a plan that will live within the loss of the $1.8 million to the General Fund and the $250,000 - $400,000 estimated administrative funds that will be provided to the Successor Agency in the future. The City has also elected to have the Community Development Commission become the successor agency for housing functions. This agency will receive a yet undetermined amount of resources to carrying on the housing functions of the foriner redevelopment agency. SALARY AND BENEFITS NEGOTIATIONS Eighty three percent of the General Fund costs come from personnel costs and almost 80% of the General Fund budget is allocated to public safety departments. The public safety departments, unlike all other department, are generally 100% funded by the General Fund. All nine bargaining units are up for negotiations this year. It will be not only a goal, but a requirement, that the City negotiate salary and benefit concessions to reduce both current and future personnel costs. CONSIDER ALTERNATIVE SERVICE MODELS With the sudden drop in resources and the potential for the elimination of the majority of the General Fund reserve, the City must immediately look at alternative service models that can be sustained by current revenues. Those models could include but are not limited to: • Conduct feasibility studies of transferring fire and law enforcement services to the County of Los Angeles. These studies would include levels of service and the costs Finance dots on Track-It/Agenda Items/Budget Data/12c13 Budiai`Outl6okPla4,02:13a12 0 associated with. such, the process and time table to make the transfer, and savings to be generated by such transfer of services. Other issues such as the continuation of the ambulance transport service by the City would also need to be analyzed as it provides a substantial source of revenue to the City. 0 Developing and evaluating alternative hybrid service models while retaining the City fire and police departments. This would also include evaluating different service levels and costs of such. CONDUCT COMMUNITY SURVEY It will be necessary to change both the levels and possibly the providers of many of the services the community is accustomed -to receiving. A community wide survey could provide valuable information regarding community opinions on retaining or contracting out public safety services, determining what levels of services residents expect and want, and are they willing to pay for increasing services or continue the current service levels, and if so, how much. LOBBYING EFFORTS The legislation that dissolved redevelopment agencies contained a number or inconsistent or ambiguous provisions, as well as many unint ' ended consequences. The City should initiate lobbying efforts both on its own as well as participating in statewide efforts to work with legislators to educate them on the multitude of problems that were created as well as seek corrective measures to those problems. The City should also participate in finding a legislative solution to replacing redevelopment activities in some form in the future. ECONOMIC DEVELOPMENT STRATEGY With the, elimination of 'redevelopment, that State also eliminated one of its most successful economic development and job. generating tools. It is clear that the legislature was not expecting the outcome of their actions and as a result, cities will need to take charge of their own futures. It is recommended that the City' undertake a study to evaluate options for moving forward in a post -RDA environment and begin a review of our options for the preservation of the local economy. LEGAL ACTIONS The City of Cerritos, along with nine other cities filed a motion for a stay order and injunction seeking to stop the February 1, 2012, dissolution of all redevelopment agencies. Among the issues raised in their motion are that the bills that implemented the dissolution violated numerous provisions of the California Constitution. The motion also argues that ABIX 26 also impairs valid and binding contracts in violation of the California Constitution and the United States Constitution. This motion was heard in Sacramento Superior Court on January 27. Ruling from the bench at the end of the hearing, the judge dismissed most of the arguments of the petitioners, with two exceptions; (1) the argument that the distribution of property tax under AB 1X 26 will violate Proposition I A, and (2) the argument that the implementation of AB I X 26 will result in impairment of contracts that will violate the' Contracts Clause of the California and U.S. Constitution. Based on this ruling the City will need to consider appropriate legal action to protect the validity of the existing loan agreements between City and the redevelopment agency, FISCAL IMPACT: None, by this action. Prepared Ky: Tom Off8liman Assistant City Manager/Director of F���, Finance docs on Track-It/Agenda Items/Budget bata/12-',l3lB6dii�fOatl�UPlia,02:"13'12