06-16-2020 - AGENDA ITEM 12 FISCAL YEAR 2020/2021 PRELIMINARY BUDGET DISCUSSIONAGENDA ITEM NO. 12
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AGENDA STAFF REPORT
City of West Covina I Office of the City Manager
DATE:
June 16, 2020
TO:
Mayor and City Council
FROM:
David Carmany
City Manager
SUBJECT:
FISCAL YEAR 2020/2021 PRELIMINARY BUDGET DISCUSSION
RECOMMENDATION:
It is recommended that the City Council: 1) receive and file the Preliminary Fiscal Year Preliminary 2020-21
Operating and Capital Improvement Program Budget, 2) direct that the Preliminary Budget be broadly publicly
disseminated, and 3) schedule the 2020-21 Budget for consideration at the June 23rd City Council meeting.
BACKGROUND:
The City of West Covina fiscal year is a 12-month period used to measure revenues and expenditures. It starts July
1 and ends June 30 the following year. At its highest level, a municipal budget identifies the needs and interests of
the community and allocates available resources to those interests while remaining fiscally strong for the future. In
crafting the following proposed allocations, the staff was guided by the principles of fiscal sustainability &
responsibility. This budget represents the City's 2020-21 financial plan.
The City's financial policies, plans, and reporting systems help the operating departments achieve their objectives
and affect the City's long-term fiscal health. The City's accounting program maintains accounting records in
accordance with Governmental Accounting Standards Board (GASB) pronouncements and Generally Accepted
Accounting Principles (GAAF).
Public comments about budget priorities are considered as part of the annual municipal budget. There have been
several meetings this month regarding the 2020-21 budget, and public participation solicited.
The preliminary budget for fiscal year 2020-21 was an agenda topic at the June 2nd City Council meeting. After
receiving a staff presentation and asking questions, the City Council referred the budget to the City's Finance &
Audit Committee. That Committee met on June 3rd and on June 1 lth. The June 1 lth meeting agenda focused on
options for fire and ambulance services.
The City Council also directed that the budget be broadly publicly disseminated — a community budget workshop
was held on Tuesday, June 9th. A budget survey (Attachment No. 2) had elicited by June 9th more than 100
comments. A special City Council meeting regarding the budget will be held on June 23rd.
further exacerbates the problem. A recent study by MIT scholars, published in the National Bureau
of Economic Research Journal, quantifies this in terms of national GDP and proposes better social
and economic outcomes with more "targeted policies." Half of the State's employer contributions
to these state retirement systems come from local governments; therefore, California's local
governments are particularly affected by demographic shifts, effective workforce, current
volatility in costs and investment returns.
The consequences of the pandemic make it imperative that California's local governments, with
limited tools to raise revenues or limited capacity to spend (constrained by the "debt limit" under
Article XVI, Section 18 of the California Constitution and Proposition 4 "Gann Limit"),
immediately focus on economic policy for the general public good. Local governments must tap
existing state and federal recovery resources, which will most likely not be sufficient to close the
gap. They must engage their unions, bondholders, retiree representative, CalPERS, financial
institutions, service providers, plaintiffs in lawsuits, creditors, and other stakeholders. This
engagement must focus on interests, must be collaborative to achieve a win/win negotiation frame
to deliver local governments' paramount mission of serving the public, especially in more
vulnerable and underserved communities. Traditional competitive negotiation frameworks in these
difficult times will only mean devastation for the public that local governments serve. A local
government has a substantial chance of being subjected to a crisis by failing to agree. This fragility
requires a different frame than the usual competition, self-interest, and political blame.
Local governments must develop policies and implement them to deal with unprecedented
circumstances. Most likely, a vaccine is 12-18 months away. Negative impacts on sales taxes, hotel
taxes, user fees, and other municipal revenue sources are certain. Moreover, with a recession
probably already having been triggered, and considerable uncertainty regarding the timing of
recovery, future years' property taxes are also likely to be negatively impacted.
Immediate actions are needed by local governments to protect reserves, maintain essential
services, and retain their workforce intact to the extent feasible. Without early and immediate
action, many local governments will soon approach insolvency and then rapidly find that they are
unable to pay debts when they come due. In this scenario, local governments may be unable to
repay internal borrowings before the end of the year. While financial officers generally have
immunity from personal liability, this protection disappears when there are known violations of
the law. Moreover, local government officials cannot allow employees to come to work if they
know the municipality will be unable to pay them.
Municipal officials must recognize that fund balances do not necessarily equate to available cash.
The accuracy of underlying data (existing financial, budget information, audits, and other available
material) is critical. The fundamental cash flow analysis is only as good as the underlying data and
assumptions. City managers and treasurers must examine the danger of structural deficits burning
through reserves.
The extent of federal and state assistance accessible for local governments is an ongoing issue. As
of now, the municipal bond market has essentially frozen. For local governments that do not
currently have a bank line of credit, obtaining one now may be difficult. Short-term borrowings
may be possible through notes in anticipation of tax or other revenues (TRANS, RANs), or by
internal borrowing from pooled cash. In both cases, the impact of COVID-19 on revenues may
impede or limit these potential short-term fixes.
The pathway forward requires that local governments:
• Evaluate significant sources of revenue and expense categories to understand
vulnerabilities (another factor to consider is the unemployment rate);
• Pinpoint major revenue streams at risk, identify anticipated timing of impacts, discuss
available options, and focus on cash collections;
• Consider effects on General Fund (reduction of sales tax, TOT, impact fees, and facility
usage, the potential reduction in assessed values, and likely Ca1PERS losses and increases
in future unfunded liabilities), Enterprise Funds (reduction in commercial usage, no shut-
off enforcement, decrease in new connections, "stay-at-home" orders and reduction in
usage fees, and Successor Agencies (potential decrease in assessed value and reduction of
future tax increment);
• Build consensus within governing council, commission, or board that early action is a
necessity, not a choice;
• Initiate discussions with labor unions and other key creditor stakeholders, including
opening the books and recognizing the impact on revenues during the pandemic and in the
post -pandemic era; and
• Determine how to provide first -response services in the event of inability to fund staffing.
Upon establishing policy, identifying potential impacts, and meeting with labor groups and other
key creditor groups (if any), local governments should be prepared to take early action, including:
• Placing contracts not critical to the government's mission on hold;
• Reducing capital spending;
• Having local businesses jump in to cover the gaps in services where possible and economic;
and,
• Reducing personnel costs, such as by eliminating leave cash -outs, placing planned wage
increases on hold, and considering implementing furloughs and, as a final resort, layoffs of
non -essential positions.
Local public entities facing severe financial straits must explore, debt restructuring, moratoriums,
and adjustment as potential solutions. Such exploration takes place in the shadow of the resolution
of last resort: Chapter 9 of the Bankruptcy Code. However, the initial focus should be on
accomplishing the necessary restructuring outside of court. As part of attempting to successfully
negotiate, resolve issues, and achieve an out -of -court restructuring, local governments must:
1. as discussed above, evaluate cash flow, finances, and availability of unrestricted funds and
develop financial and operational plans;
2. commence discussions with key stakeholders (the reality of a potential Chapter 9 filing
encourages negotiation and creates leverage for an agreement);
3. prepare the outlines of a possible Chapter 9 plan of debt adjustment or term sheet (to help
facilitate negotiations and make use of the leverage); and
4. retain experienced professionals to provide guidance and representation.
Under constitutionally framed police powers, local governments may use fiscal emergency
declarations constructively. The Contracts Clause under the U.S. and State constitutions ordinarily
precludes contract impairment. However, the Contracts Clause does not bar a state or municipality
from enacting its legislation impairing municipal contracts if required by a financial emergency.
The four factors required for legislative impairment of contracts include:
1. There must be an actual emergency from which the contract modification arises.
2. There must be a public interest at stake.
3. The modification must be tailored to the emergency.
4. The modification must be temporary and limited to the extent necessary to address the
crisis.
The U.S. Supreme Court has said that a contract impairment may be constitutional if it is
reasonable and necessary to serve an essential public purpose.
Local governments can constructively use a fiscal emergency declaration to commence, promote,
and positively leverage negotiations with labor and other key stakeholders. However, any non-
consensual modifications that arise out of a fiscal emergency declaration are temporary and,
therefore, would not address long -tern systemic problems such as unsustainable pension and
retiree health care obligations.
Chapter 9 provides a framework for eligible governmental entities to restructure debt. While
Chapter 9 is federal law, state law governs the gateway to Chapter 9. For example, California law
(AB 506) requires municipal debtors to engage in "neutral evaluation" (mediation) before being
eligible to file for Chapter 9, except in the case of a declared statutory fiscal emergency under AB
506. The likelihood that payment and other obligations will be suspended during the chapter 9 case
and reduced and/or modified under a Chapter 9 plan can create significant leverage that can lead
to negotiated changes that may be adequate to allow the local public entity to avoid Chapter 9.
The mediation process allows "confidential" negotiations out of court and within the exceptions
of Brown Act. It provides a format for attempting to shape perceptions of liquidity and feasibility
of go -forward plans. If an agreement is reached with some or all key creditors, Chapter 9 may be
avoided or made more efficient if still necessary. AB 506 was enacted after the Chapter 9 filing
of Vallejo, and Stockton first used the mediation process before its Chapter 9 filing. In contrast,
San Bernardino discovered it was out of cash, could not negotiate with creditors, declared a fiscal
emergency, and entered Chapter 9. Unlike in Chapter 9, there is no automatic stay of litigation or
other creditor action as part of the AB 506 process and, accordingly, where an immediate stay is
needed, the mediation process will not be a viable option.
Chapter 9 is designed to enable a municipality that is unable to pay its debts as they come due to
continuing to provide essential services to residents while working out a plan to adjust its
obligations. To avoid disruption of necessary services, Chapter 9 facilitates the continuance of
insolvent municipalities rather than their dissolution. Not unlike Chapter 11 bankruptcy
reorganization for non -governmental entities, two primary benefits of a Chapter 9 filing are (1)
breathing spell imposed by the automatic stay, and (2) the ability to adjust creditors' claims through
the planning process.
To avoid the point of a fiscal emergency post COVID-19, and to address their budgetary
challenges, local public entities must act proactively. If a proactive approach is not taken in time
or is not sufficient, it may become necessary for a local public entity to engage in debt
restructuring. Debt restructuring should be conducted outside of court if possible, with Chapter 9
lurking in the shadows and only entered as a last resort. Most importantly, in these times of fiscal
distress, local governments must govern. Governance requires a different mindset with
collaborative efforts to search for the common good.
David S. Kupetz is a partner in the law firm, SulmeyerKupetz. He is an expert in municipal debt
adjustment, business reorganization, restructuring, bankruptcy, and other fiscal crisis solutions
and related litigation. dkupetzAsulmeyerlaw.com
Frank V. Zerunyan is a Professor of the Practice of Governance, Director of Executive
Education, and Director of USC Reserve Officer Training Corps (ROTC) Programs at the
University of Southern California Sol Price School of Public Policy. frank.zerunyangusc.edu
1. http://www.dofca.gov/twitterdocs/4-10-20_COVID-
19_Interim_Fiscal_ Update JLBC_Letterpdf
2. https://www.politico.com/states/California/storyl2020/04/23/California-cities-expect-to-
lose-at-least-7b-due-to-coronavirus-1279441
3. https://lao.ca.govIPublications/Report/4106
4. https://https:Ilwww.ppic.org/publication/public pensions-in-californial
5. Acemoglu, D. Chernozhukov. V et al. `A Multi -Risk SIR Model with Optimally Targeted
Lockdown " NBER Working Paper no. 27102April 2020.
6. Duzert, Y. and Zerunyan, F.V. Newgotiation for Public Administration Professionals,
Vandeplas Publishing-2019
7. California Constitution Article W, Section 7
8. Sonoma County Organization of Public Employees v. County of Sonoma, 23 Cal. 3d 296
(1979).
9. United States Trust Company of New York v. New Jersey, 432 U.S. 1 (1977).
10. California Government Code section 53760
City of West Covina
FY 2020-2021
BUDGET SURVEY
SU M MARY 1 06-09-2020
Results are as of June 9, 2020 at 9:20 am.
A total of 282 people participated in the budget survey. Please note that
the questions were not required to be answered, therefore the results per
question may not reflect the total number of responses.
FIN
Which of the following applies to you?You may select more than one response.
4%
D
Yo
■ West Covina
Residents
■ Employed by City of
West Covina
■ West Covina Business
Owner
■ West Covina Property
Owner
■ Other
278 RESPONSES
Please rate, on a scale of I (low) to 5(high), your priority level for the following
City Services:
1 2 3 4 5
Community Programming (Recreational Programs, Senior
10% 9% 22% 26% 34%
Programs, Classes, City Events)
Economic Development (Business Assistance, Code
6% 13% 26% 28% 27%
Enforcement, City Planning)
Fire Services (Rescue and Emergency Medical Services,
4% 12% 25% 25% 33%
Fire Prevention, Arson Investigation)
Fiscal Sustainability (Stable Reserve Fund)
4% 15% 30% 27% 24%
Housing (Affordable Housing, Homeless Services)
15% 1 1 % 19% 17% 38%
Improved Infrastructure (Street Improvements, Sidewalk
5% 13% 25% 29% 29%
Repair,Traffic Signals)
Police Services (Crime Prevention, Investigation, Patrol
35% 19% 18% 8% 20%
Services, Traffic Enforcement)
282 RESPONSES
Like many other Cities, West Covina's revenues come from property taxes, sales taxes, transient
occupancy tax, franchise tax, business license tax, documentary transfer tax, among others. In
addition, the City receives revenues from fees from building permit fees, city class fees, to animal
Iicensees.These make up the City's General Fund, which is the largest portion of revenues to the
City. Additional revenues include other special funds (including successor agency monies) that are
restricted for specific uses.
As the General Fund is the only revenues source the City can change what would you consider
increasing in order to alleviate the City's budget constraints? Please note that changes to tax rates
usually require a vote by the people (property & sales tax) and fees for services are usually
restricted to cover material and staff time.
Total Revenues by Fund Type
$117,301,786
v �m F-d,
ox zix
RESULTS
Property Tax (41 % of City's General Fund)
Sales Tax (24%)
OtherTaxes (13%) (Transient Occupancy Tax, Franchise
Tax, Business License Tax, Documentary Transfer Tax,
Contractor's License Tax)
Building & Engineering Permit Fees (2%)
Animal Control & Licensing (M)
Fines & Forfeitures (1 %)
Keep Tax/Fee the
Increase Tax/Fee Same
1 1 % 89%
21 % 78%
46%
53%
48%
52%
34%
65%
43%
56%
272 RESPONSES
As the role of a local government is to provide services (public safety, economic &
community development, recreation, elections, affordable housing, and many others) and
infrastructure (roads, sewer, tree trimming) for its residents, the biggest General Fund
expense is salaries and benefits.The City's General Fund expenditures of which 53% is for
salaries and benefits, 33% maintenance & operations, and 14% debt service.Where would
you reduce or eliminate to help to alleviate the City's budget constraints?
RESULTS
70% 65%
60%
ao
50%
40%
30%
IL 20%
10%
0%
Police
Department
General Fund Expenditures by Department
$66,672,236
Public Services
Flre SSg56,355
$20,021,267 8% C"'u",
30% I Development
es tsn eec
16%
7% 4% 8%
■
Fire Services Public Services
Services
Community Support Services
Development
274 RESPONSES
What do you think are the biggest challenges facing the City's budget? (please select one)
Incre
Retiree
Obligz
30
Bond Debt
Obligations, 8%
Health Care
Costs, 10%
Economic
Impacts of
COVID-19
expecting a
revenue
shortfall, 53%
272 RESPONSES
DISCUSSION:
The State Auditor has identified West Covina as one of 18 California cities facing fiscal challenges by assessing
levels of risk using various financial indicators. Factors include cash position/liquidity, debt burden, financial
reserves, revenue trends, and retirement obligations. Due to cash flow requirements, changes to the city
organization will be immediately required to achieve economies and efficiencies in city operations, to bring
substandard facilities and equipment to standard, and to maintain essential services. Though it is important that the
fiscal impacts of COVID-19 and structural issues not be conflated, COVID-19 has brought these issues to the
forefront for West Covina and all California municipalities (see Attachment No. 1).
As the City works without delay to address pandemic fiscal realities, it will be increasingly more important for the
city to consider all options in the provision of municipal services. Work continues on several initiatives including
pension obligation bonds (see Attachment No. 3), risk management program, and alternatives for fire and EMS
services (see Attachment No. 4). As changes are implemented, the city will analyze implementing service delivery
options, to include levels of service, service quality and expected performance, service revenues and costs, required
transition activities and other relevant factors as new service delivery methods are implemented. Timing, labor
relations and cash flow considerations during the fiscal emergency will be critical factors.
City Fund Structure
A number of different funds are utilized to account for the City, the Successor Agency to the Former
Redevelopment Agency, and the West Covina Housing Authority financial resources. Funds are classified into the
following fund types:
• General Fund
• Special Revenue
• Debt Service
• Capital Projects
• Proprietary
• Private Purpose Trust
The City has established multiple funds, under each fund type, to assist in accounting and record keeping for the
City and outside agencies. A brief description of all the funds begins on page 17 of the budget.
Proposed Budget Information
For FY 2020-21, estimated revenues (including transfers in) on an all funds basis are $117,301,786. Many funds
make up the total budget amount, with the largest being the General Fund in the amount of $66,672,236, or 57% of
the City's total budget.
In the past year, have you attended any of the following meetings pertaining to the budget?
70%
60%
50%
40%
29%
30%
59%
20%
12%
10% ■0%
Finance & Audit Budget Workshop City Council Meeting —
Committee Meeting Budget Item
113 RESPONSES
Do you plan to attend any of the following meetings pertaining to the budget?
70%
60%
50%
40%
30% 27%
61%
20%
12%
10% ■0%
Finance & Audit Budget Workshop City Council Meeting —
Committee Meeting Budget Presentation
181 RESPONSES
ATTACHMENT NO. 3
Agenda Item No. 6
Consideration of Issuance of Pension Bonds
Discussion
West Covina City Council Meeting
February 4, 2020
The City's Current CalPERS Situation: Why The Unfunded Liabilities?
■ CaIPERS was founded in 1932 and currently has 2,890 member agencies including
the State, counties, cities, school districts and special districts
■ The City joined CalPERS in May 1966
■ The City has always paid its required contributions to CalPERS
■ Over the past few decades CalPERS system went from excess cash ("super -funded")
to being under -funded, thus creating unfunded liabilities
■ In general, unfunded liabilities of CalPERS agencies are the result of:
■ Lowering the CalPERS discount rate, from as high as 8.25% in 2004 to 7.0%
today
■ Investment losses, especially in 2008
■ Increased benefits offered by many employers between 1999 and 2012
■ Increased life expectancy
■ CalPERS' previous contribution policy, which eased the burden on employers
after the Great Recession, but did not make faster progress in paying off
unfunded liabilities
The City's Current Ca1PERS Situation
■ In the most recent actuarial study the combined funded ratio is 64.8% @ 7.0%
Discount Rate (combined for Safety and Miscellaneous plans)
■ At 6/30/20, the City is estimated to have a total unfunded liability of approximately
$200 million ($199,686,217)
■ Without POBs, CalPERS projects that future required payments toward unfunded
liabilities will increase by $8.7 million (72%) from $12.3 million in FYE 2020 to a peak
of $21.0 million in FYE 2031.
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
Estimated Amortization Payments, 6/30/18 Actuarial
Off~ o�1 O�� e O�y O�6 Off^ Oho OHO O'�° O' O'IlO'"� O'�b p'11 O'Ib O'l^ O'�� O'�o Off° O�y Oaf O�� o" OQy O�6 Off^41,1411111
ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti
-Misc @7.0% -safety @7.0% -Total 7.0%
What is a Pension Obligation Bond ("POB")?
■ A bond issued by a municipality from which the proceeds are used to reduce
the accrued unfunded liabilities of its pension system (in this case, CaIPERS)
■ Bond proceeds are typically deposited into a retirement system (in the City's
case, CaIPERS), and are managed in a similar manner to existing investments
■ If investment returns at a retirement system are higher than POB borrowing
costs, budgetary savings to the municipality are very likely
• Unlike most municipal bonds, interest payments on POBs are generally taxable
for purpose of federal income taxes
The City's Goals for POBs
1 . Achieve fiscal sustainability and financial stability. The City will align
projected revenues/projected expenditures and adopt best management
practices
2. Change the payment pattern (e.g., a smooth pattern for bond repayment,
vs an irregular pattern with no bonds). A predictable payment pattern
makes budgeting easier
3. Obtain higher expected investment returns on investments at retirement
system (e.g., 7%) than borrowing cost (e.g.,-3.5-4.0%)
4. Leave amortization period unchanged
5. Raise the funded level of the pension plan (e.g., from 64.8% to 92.5%)
6. Establish a long-term legally sound plan well -suited to the City's needs
California Judicial Validation Overview
■ Pension Obligation Bonds are validated in California as obligations
imposed by law.
■ Validation is necessary because all debt issued in California absent
a Constitutional exception must be voter -approved.
■ Validation involves a formal court proceeding in the County's
Superior Court and takes approximately 120 days, including:
■ City Council approves resolution
■ A complaint is filed in Superior Court
■ The Court orders notices published in a local newspaper
■ A deadline for responses occurs (commonly, there is no opposition)
■ Judgement is issued. Appeal period expires 30 days later
■ Bonds are issued
■ Once a final validation judgement is entered, investors have
assurance that the Pension Obligation Bonds are legal, valid and
binding without voter approval and the terms of the Trust Agreement
cannot be subject to challenge.
POB Example: $157.9 Million Bond
• Results in approximately 92.5% funded ratio at 7% discount rate
• Includes amortization bases up to 24 years, POB is 24 years
• Expected borrowing cost is 3.813% including all costs of issuance
• Produces large expected savings in most years (—$2.3-7.3 million)
• Has up to $6.5 million dissavings/additional cost in later years
• NPV Savings estimated at 22.3%, $44.8 million
$25,000,000
$2.3 to $7.3 million $0.1 to $6.5 million
of annual savings annually of
$20,000,000 increased payments
$15,000,000
$10,000,000
$5,000,000
$0
O O O O O O o 0 0 0 0 o O O O O O O O O O O O O O o
Fes+ N W A lfi O1 V W N O F+ N W A lfi O1 V W lWD O F+ N W A lfi O1
-$157.9 Million Bonds, A+ Rating -No Bonds 7.0%
*Bond interest rates as of /2020
6
Government Finance Officers Association* concerns regarding POBs
Note: Only one applies to the proposed transaction:
1. Invested POB proceeds might earn less than the borrowing costs
— This is indeed possible. Instead of CalPERS expected long term earnings rate of
7.0%, lower actual investment returns could occur. The chances of returns over a 25
year horizon below the 3.5-4.0% borrowing cost are low, but they do exist.
2. "POBs are complex instruments that carry considerable risk ... and may include swaps or
derivatives..."
— No. These are fixed rate bonds.
3. "Issuing taxable debt to fund the pension liability increases the jurisdiction's bonded debt
burden and potentially uses up debt capacity..."
— No. The Validation Proceeding will exclude POBs from any debt limit.
4. POBs are "typically issued without call options" making it more difficult to refund bonds if
interest rates fall or a different debt service structure is desired in the future.
— No. These bonds will be issued with par calls
5. "POBs are frequently structured in a manner that defers the principal payments..."
— No. These bonds will pay principal every year they are outstanding and have the
same final maturity as the underlying unfunded liability amortization.
6. "Rating agencies may not view the proposed issuance of POBs as credit positive..."
— We will be advocating for an upgrade from S&P due to the POBs and other changes
at the City.
Source: GFOA - Pension Bond Risks Jan 2015
Total Revenues by Fund Type
$117,301,786
General Fund
a 57%
Successor Agenc
13%
Enterprise Fund
1%
Internal Service
5%
Debt Sr
Funds Funds
0% 21%
Total Expenditures by Fund Type
$110,081,284
Succes
Enterpri
SS
Intern
Fund
396 0% 15%
Estimated expenditures (including transfers out) for all budgeted funds are estimated at $110,081,284. The General
Fund makes up 61% of the organization's total budget, or $66,672,236.
POB Issuance Statistics
■ Since 1986 approximately:
❑ $106 billion in pension bonds have been issued
❑ $28 billion issued in California, from 80 issuers
❑ Recent local California pension bonds issued:
❑ AAA, Glendora, $64 million 2019
❑ AA+, La Verne, $52 million 2018
❑ AA, Monrovia $11.5 million 2017
❑ AA, City of Riverside, $32 million 2017
❑ AA-, Baldwin Park, $54 million 2019
❑ Post 2012, all POBs have been sold as fixed rate bonds
Data Sources: MSRB EMMA, IPREO, SDC, Bloomberg, Boston College
8
Finance Team
Todd Smith
Managing Director
Cardiff, California
760.632.1347
Todd. Smilhohilltopsecuri ies.com
Tammy Ofek
klvidpa .A-: srr. ::df & Compa^v
Dcn-cnd Ear. Califcrnia
tammvo@woifco.net
Don Hunt
Partner
Los Angeles, California
213.592.9316
Don. H untanortorrosefulhright.com
Brian V&taorth. CFA
Ci•c� :r
Erc,nc, Caifcrnia
310.401 K-17
Brian.Whitwortho,hII �ecurities.com
Eric Scriaen
Blike Poleyer
Principal t k. :l:ian
Vice Pre=i--enl NH ..::iscrs
Sa• Ra-ael va ifcrnia
Ca shca.cli`crr,,a
415.78: 2 _c a.Li._?
41 '?d 25x2-004
Eva- E.�
Mike -. r---.e . e..rs.eom
Russ Trice
Partner
Los Angeles, California
213.892.9317
Russ.TricepnorbrimsefuMghtcom
Staff Recommendation:
■ That the City Council adopt Resolution No. 2020-08
❑ Authorizing the Issuance and Delivery of Pension Obligation Bonds,
approving the execution of a Trust Agreement, authorizing a validation
action, approving certain professionals for the refunding and related
matters.
10
West Covina Fire
Department
Finance &
Audit Committee
Presentation
Presented BY:
Fire Chief Vincent A. Capelle
❑ Fire Department overview
❑ Fire Department Risk Assessment/Standards of coverage/Needs Assessment
❑ Reorganization by use of "BROWN OUT" model without Overtime use
❑ Reorganization by elimination of 2 Fire Engines and 3 Paramedic Rescue
Ambulances, contract patient transport with CARE ambulance service
❑ Contract Fee for Service with Los Angeles County Fire Protection District
(Annexation of Fire Et EMS Services)
• Fire Administration-
• Fire Chief (Fire Marshall)
• Assistant Fire Chief (Eliminated 2017)
• 40-hour Training/EMS Captain (unfilled 3/2020)
• Senior Administrative Assistant
• Management Analysis (unfilled 05/2019)
• Senior Accounts Clerk
• Part -Time office aide (eliminated 7/2018)
• Fire Prevention -
Deputy Fire Marshall (unfilled 7/2018)
• Fire Protection Specialist (civilian)
• Fire Protection Specialist (part-time)
• Administrative assistant
• Station #1 - Engine company (1 Captain, 1 Engineer, 1 Firefighter/Paramedic)
Paramedic Rescue Ambulance (2 Firefighter/Paramedic)
• Station #2- Engine company (1 Captain, 1 Engineer, 1 Firefighter/Paramedic)
Truck Company (1 Captain, 1 Engineer, 1 Firefighter, 1 Firefighter/Paramedic) (moved to station#4)
Paramedic Rescue Ambulance (2 Firefighter/Paramedic)
Command Vehicle (1 Assistant Fire Chief)
• Station #3- Engine company (1 Captain, 1 Engineer, 1 Firefighter)
• Station #4- Engine company (1 Captain, 1 Engineer, 1 Firefighter/Paramedic) (closed 08/2018)
Truck Company (Quint Capable) (1 Captain, 1 Engineer, 1 Firefighter, 1 Firefighter/Paramedic) (from Station #2)
Paramedic Rescue Ambulance (2 Firefighter/Paramedic)
• Station #5- Engine company (1 Captain, 1 Engineer, 1 Firefighter)
Develops "Standards of Response": Fire, Emergency medical, Hazardous Materials, Technical
rescue and other specialty responses.
• Written policies Ft procedures
• Distribution of resources
• Concentration of resources
• Reliability of fixed and mobile response forces
• Risk Assesment
•Standards of Coverage
•Needs Assessment
- rire �uNNre�Siuii-
• 159 calls for service Fire (2019)
• $4 million in Contents and property loss (2019)
• 4 Civilian injuries (2019) 2 fatalities (2020)
• Fire Prevention-
• 3500 inspections (approx.) 2500 not completed
• Emergency Medical Services-
• 6535 calls for medical related
• Brush /Wildland/Urban Interface-
• Fuels unburned many years difficult access
• Urban Search and Rescue-
• Large box stores
• Malls
• Parking structures
• Hazardous Materials-
Standards of coverage determines a safe and effective response force for Fire
Suppression, Emergency Medical Services and other specialty services.
• Community baseline
• Based upon Risks
• What Level of Service
• Critical Task capability
• Service level objectives
• Evaluation of Reliability of Resources
Total Expenditures by Category
$110,081, 284
Salaries & Benefits
Capital Projects& --- 53',
Debt
1
Operations
33%
Personnel costs inclusive of all City funds are anticipated to be $58.7 million. Pension costs for the California
Public Employment Retirement System (Ca1PERS) continue to increase again this year and are anticipated to rise
for the next several years.
General Fund
The City's primary financial goal is to provide an appropriate level of municipal services meeting the needs of the
present without compromising the ability of future generations to meet their own needs. This will require that
community leaders continue to take an active role in the city's efforts to think and act sustainably. The City of
West Covina's General Fund continues to be negatively impacted by economic conditions, increases in pension
costs, the State's elimination of redevelopment, and most recently from the COVID-19 virus (see attached article)
The following chart is a comparison of General Fund Revenues and expenditures for the past 5 years.
General Fund Revenues
Total General Fund revenues are projected to be $66,672,236, an increase of $1,313,463 or 2% from the prior year
adopted budget. Although many of the revenue sources of the City are slightly increasing, due to the COVID-19
pandemic, many of the major revenue sources are expected to decline. The numbers that are budgeted reflect a
decrease in business license, transient occupancy tax, animal control & licensing, and franchise taxes. The
assumptions in the 2020-21 budget for revenues are based on the economy being re -opened. The revenues will
need to be monitored very closely during the year and adjustments made as revenues are being negatively impacted
by the pandemic. Allocated costs are a type of expense that are clearly associated with and can be readily assigned
to a certain business process, project or department. Allocated costs have been reallocated into the General Fund
for Miscellaneous Reimbursements in the amount of $1.5 million.
Property tax and sales tax continue to be the City's main source of revenue at 41% and 24%, respectively. The
City is also expected to see an increase in permit fee revenue due to the fee schedule being updated during fiscal
year 2019-20.
• Engine Company- Engine 4
• Fire Administration/Fire Prevention- AC, Deputy Fire Marshall, Fire Inspector
• Brush /Wildland /Urban interface- Crossed Staff apparatus/ regular staffed apparatus with capabilities
Type 3 Fire Engine
Type 6 Patrol
Type 1 Water Tender
• Urban Search Et Rescue- Cross Staffed apparatus/ Training Et Equipment
• Hazardous Materials- Cross Staffed apparatus/ Training Et Equipment
• Training location-
• Fire Station Maintenance/Repair/Rebuild- > 27 million dollars
Station #1 $5,100,000
Station #3 $3,300,000
Station general projects $535,000
Needed Station improvements $18,950,000
Apparatus Purchase/Replacement- $3,488,550
Two Fire Engines
One Fire Truck (Quint Capable)
Two Rescue Ambulances
Type 1 USAR Heavy Rescue (not priced above)
Type 1 Haz-Mat Response apparatus (not priced above)
Type 3 Fire Engine (not priced above)
Type 6 Fire Patrol (not priced above)
Type Water Tender (not priced above)
• Communications Equipment- $583,000
• End of Service live 2008/2014 mobile £t portable radios
• Fire Fighting equipment (Person Protective Equipment)- $468,500
Fire Fighting Turnout Gear $220,500
Self -Contained Breathing Apparatus (SCBA) 2007 end of life (received thru grant 2006) $123,000
SCBA- annuat testing and Maintenance (years out of testing) $125,000
r M%_
11
Needs Assessment
4,
Cities without extra revenue source, (sales tax, UUT, Sewer, Trash):
Cities (With dual service) with extra revenue source, (sales tax, UUT, Sewer, Trash) :
West Covina FD
West Covina PD
$191.92
106,311
16.04
1540.74
Alhambra FD
Alhambra PD
$235.53
83,653
7.6
1349.24
Burbank FD
Burbank PD
$357.92
103,340
17.3
956.85
Downey FD
Downey PD
$218.60
111,772
12.41
1643.71
Pasadena FD
Pasadena PD
137,122
23.00
811.37
Santa Monica FD
Santa Monica PD
.
I$364.03
$500.56
89,736
8.42
1031.45
Cost per capita:
National- $348.00
California- $414.00
West Covina- $192.92
Firefighters per capita:
National- 1000
Locally- 1100
West Covina- 1541
• Reorganization by use of "BROWN OUT" model without Overtime
use
• When there is a vacancy by way of any leave type position not back filled
• Members on the apparatus will be moved to another apparatus.
• The station will be browned out during this time.
• Potential for multiple units Browned out during any one day
West Covina
Fire Stations
and Districts
• CONS • PROS
• No resource to respond to calls
for service
• Delay in response times
• Fires will be larger
• Medical patients will not get
treatment
• Hazard calls will cause
increased destruction
• Potential Mutual Aid will be
delayed due to call lag and
increased requests can not be
filled
• Liability claims to the city will
increase
• Fire Department budget will
not be spent on Overtime
• CONS • PROS
• No resource to respond to calls
for service
• Delay in response times
• Fires will be larger
• Medical patients will not get
treatment
• Hazard calls will cause
increased destruction
• Potential Mutual Aid will be
delayed due to call lag and
increased requests can not be
filled
• Liability claims to the city will
increase
• Fire Department budget will
not be spent on Overtime
General Fund Revenues
Property Taxes _ $66,672, 236
41% Sales Tax
24%
Transfers In
cl%
Other Reve
<1%
Interdepart
Charg(
2%
1196 Kevenue Trom orner .
Agencies 2%
4%
General Fund Expenditures:
Other Taxes
13%
es & Permits
2%
,feitures
At this time, General Fund expenditures for FY 2020-21 are projected to be $66,672,236 reflecting a balanced
General Fund budget. This equates to an increase in budgeted expenditures of $1,313,463 when compared to the
adopted budget for FY 2019-20.
The chart below indicates that Support Services (which includes Administration, City Clerk, Finance and Human
Resources), Community Development, and Police Department percentages remain the same as last year. Public
Services and Fire both decreased by 1% and Transfers Out increased to 3% from 1% last year. The increase in the
Transfers is mainly due to debt service payments for the 2018 bonds. The reduction in the Fire Department
percentage is due to the overtime budget being decreased from $2.1 million in fiscal year 2019-20 to $782,948 in
fiscal year 2020-21.
• This model will cause dangerous situations to the residents and is a
danger to Fire Fighters.
• This model is not viable alternative for a municipal fire
department.
• Reorganization by elimination of 2 Fire Engines and 3 Paramedic
Rescue Ambulances, contract patient transport with CARE
ambulance service
• 2 Engine Companies with 3 personnel will be staffed with 4 personnel
• 1 Truck Company with 4 personnel will remain 4 personnel
• 2 Engine Companies with 3 personnel will be eliminated (12 personnel)
• 3 Rescue Ambulances with 2 personnel will be eliminated (18 personnel)
• Total of 30 Layoffs
• Total daily staffing of 12.
• 21 Fire Personnel needed to respond to a Structure fire
• Contract Patient transport with CARE Ambulance INC.
• Fee for service lease model
• Pass thru model
West Covina
Fire Stations
and Districts
X4I0P61
• No resource to respond to calls for
service
• Delay in response times
• Fires will be larger
• Medical patients will not get
treatment
• Hazard calls will cause increased
destruction
• Potential Mutual Aid will be
delayed due to call lag and
increased requests can not be
filled
• Liability claims to the city will
increase
• Loss of Patient transport revenues
• Delays in transport of critically ill
patients
• PROS
• Fire Department budget will
not be spent on Overtime
• This model will cause dangerous situations to the residents and is a
danger to Fire Fighters.
• This model is not viable alternative for a municipal fire department.
• Contract Fee for Service with Los Angeles County Fire Protection
District (Annexation of Fire Et EMS Services)
• Los Angeles County Fire Protection District would provide apparatus, equipment,
personnel, training, station maintenance at fee for service agreement.
• All risk incidents will have immediate availability of the entire Los Angeles
County resources.
• Los Angeles County assumes all liability for fire suppression and prevention
services.
• All overtime costs will be paid by Los Angeles County
• All current West Covina Fire Department members will be eligible to transfer
• Los Angeles County assumes all future retirement costs
❑ Established in 1920
❑ 175 Fire Stations
❑ Over 3,000 Firefighters
❑ Over 7,000 Fires per year
❑ Over 320,000 Medical calls
per year
❑ 59 Cities
❑ Providing service for over 4
million residents
❑ Class 1 Department
❑ Health Et Hazmat Div.
❑ USAR Ready
❑ Wildland Div.
❑ Air Division (8 helicopters)
❑ Swift Water Rescue Teams
❑ Prevention/Community
Outreach Teams
• Azusa
El Monte
• Baldwin park
Rosemead
• Bradbury
South El Monte
• Claremont
Temple City
• Covina
Cudahy
• Duarte
Huntington Park
• Glendora
Inglewood
• Irwindale
Lynwood
• San Dimas
Maywood
• Diamond Bar
South Gate
• Industry
Bell
• La Puente
Bell Gardens
• Pomona
Commerce
• Walnut
Cities in San Gabriel Valley
Los Angeles County Fire Model
Op,
FtD
O v
i ieil Ilu- I z'� :li
`.c'0
Om
General Fund Expenditures by Department
$66,672,236
Public Services
Fire $5,456,355
$20,021,267 I8%
30% -_
Police
$31,163,
47%
Community
Development
0 ifin aafi
3%
Transfers Out
$1,620,322
3%
pport Services
$6,249,680
9%
General Fund revenues and expenditures are equal and the budget is balanced once again this year as illustrated in
the chart below.
15t Alarm Fire Residential
WCV
+4 Engines
+1 Assistant Chief
+1 Truck/Quint
-m +2 Rescues
1 st Alarm Fire Residential
LAC
+4 Engines
VAfi +1 EST
+1 Battalion Chief
+1 Truck/Quint
+1 Squad
2nd Alarm Fire Residential
WCV
Dependent of the availability
of surrounding agencies.
2nd Alarm Fire Residential
LAC
+3 Engines
+1 HazMat
Task Force
+1 Mobile Air/
Light Unit
+1 Assistant Chief
+1 Emer. Support
Unit
+1 Truck/Quint
+1 USAR
Task Force
+2 Battalion Chiefs
+1 Dozer Team
1st Alarm Fire Wildland
WCV
+4 Engines
•
+1 Truck/Quint
1st Alarm Fire Wildland
LAC
+7 Engines
+3 Helicopters
�3 +1 w/Crew
xa +1 Dozer Team
rgmW" +1 Patrol
+4 Camp Crews
FOm +1 Water Tender
Vol +3 Superintendents +2 Super
+1 Assistant Chief +2 Rescues Scoopers
Seasonal
+2 Battalion Chiefs � . PM quad
2nd Alarm Fire Wildland
WCV
Ao+1 Rescue
• Dependent of the availability
of surrounding agencies.
2nd Alarm Fire Wildland
LAC
+7 Engines
, +1 Dozer Team
.QM +1 Patrol
.4M +4 Camp Crews
�^ +1 Heavy Equipment ,g' � +1 Water Tender
• • Superintendent ••
�� +1 Helitanker bw +1 Helitender
+2 Battalion Chiefs -,a +1 Emer. Support
Unit
+1 Assistant Chief
1 st Alarm Fire Commercial
WCV
+4 Engines
+1 Assistant Chief
+1 Truck/Quint
A0+2 Rescues
1st Alarm Fire Commercial
LAC
+5 Engines
+1 EST
+2 Battalion Chiefs
+2 Trucks/Quints
+1 Squad
2"d Alarm Fire Commercial
WCV
A9+1 Rescue
• Dependent of the availability
of surrounding agencies.
2"d Alarm Fire Commercial
LAC
+4 Engines +2 Trucks/Quints
+1 HazMat +1 USAR
Task Force Task Force
+1 Mobile Air/ +2 Battalion Chiefs
Light Unit
+1 Assistant Chief +1 Dozer Team
+1 Squad +1 Emer. Support
Unit
• CONS • PROS
• Disbanding of West Covina • Decrease redundant service giving enhanced service to the
local Fire citizens of West Covina
• Increase service deployment for less cost
• Increased available resources without any delay
• Indirect cost in City budget for Fire Service is eliminated
• No further increase of UFL costs
• Potential savings, city budget of $50+ million dollars,10 years
• $27 million, needed to bring FD to minimum is eliminated
■ West Covina (+3) ■ Los Angeles County (+4%) ■ West Covina with needs
oo N oo ^ 7
N
n W lo
N
co 7 M O M O N ^ M
0c M
p �o M n n W M M iM N
O _ CD
of .p M O M V M u-f a,V Ql � W M P M O
.p M p N D` In 00 7 O a0 M
N ol N O n oo � M `D N N N M N O
u
O O P ^ n D` N V u'f - O O ^ � n N
N N Q` W M O O I� 00 M N N V
O
M oo N V M N p, I� �t'1 M O N N V N M N
N N N N N oo N N Oo
N t/T N to
O O N
O O n N N P N
N co
o p ^ co N
n � �
20/21 21/22 22/23 23/24 24/25 25/26 26/27 27/28 28/29 29/30
THANK YOU
$80,000,000
570,000,000
$60,000,000
550,000,000
540,000,000
$30,000,000
$20,000,000
$10,000,000
General Fund Comparison
14/15 15/16 16/17 17/18 18/19 19/20 20/21
Actual Actual Actual Actual Actual Adopted Proposed
Fiscal Year
General Fund Reserves:
• Revenues
• Expenditures
To maintain the City's credit rating and meet seasonal cash flow shortfalls, economic downturns or a local disaster,
the budget provides for an anticipated fund balance for the general fund. The General Fund ending unassigned fund
balance, or reserve, is equivalent to a "savings account" to cover unexpected costs or significant economic
changes. The intent is to not use this for normal operating expenses. Unless changes are made to this preliminary
budget, the General Fund ending unassigned fund balance is projected to be approximately $9,593,864 million,
which is 14.3% of operating expenditures, which does not meet the City's required 17% per the City's reserve
policy. Another standard for unrestricted budgetary fund balance is recommended by the Government Finance
Officers Association (GFOA). GFOA recommends, at a minimum, that general-purpose governments, regardless
of size, maintain unrestricted budgetary fund balance in their general fund of no less than two months of regular
general fund operating revenues or regular general fund operating expenditures. Per the City's policy, when
reserves dip below the required 17%, a plan must be implemented to replenish the reserves within the next few
years. Staff will return to the City Council with a plan to replenish the reserves at a future date.
At this time, the General Fund's estimated ending fund balance for FY 2020-21 is $16.1 million; however, $6.5
million is considered nonspendable. The nonspendable portion consists of unpaid loans to the former
Redevelopment Agency which have been approved by the Department of Finance (DOF) and will be repaid over
the next few years in the amount of $3.3 million, approximately $200 thousand in receivables, and land held for
resale in the amount of $3 million.
Capital Improvement Program:
Staff is recommending a number of CIP projects for FY 2020-21, all of them being funded from special revenue
funds. These projects are listed in the budget beginning on page 317.
Attachments
Attachment No. 1 - Post Pandemic Fiscal Realities
Attachment No. 2 - Budget Survey Results as of June 9, 2020
Attachment No. 3 - Pension Obligation Bonds Presentation
Attachment No. 4 - West Covina Fire Dept Finance & Audit Committee Presentation
CITY COUNCIL GOALS & OBJECTIVES: Achieve Fiscal Sustainability and Financial Stability
Enhance City Facilities and Infrastructure
Enhance the City Image and Effectiveness
Protect Public Safety
Respond to the Global COVID-19 Pandemic
Engage in Proactive Economic Development
ATTACHMENT NO. 1
Local governments must plan without delay
for post -pandemic fiscal realities
By David S. Kupetz, J.D. and Frank V. Zerunyan, J.D
The COVID-19 pandemic continues to devastate the national and global economies. The economic
impact from the pandemic will disrupt California's fiscal condition and harm local government
revenues this year and, potentially, for years into the future. In a letter addressed to the California
Legislature, the State's Director of Finance predicts a recession and "significant negative effects
on state revenues."
Most municipalities predominantly depend on sales tax, property tax, transient occupancy tax,
documentary transfer tax, gas tax, parking user's tax as well as licenses, permits, and fees. Politico,
in a recent article, estimates the loss from these sources due to the pandemic to be about $7 billion
in revenue shortfalls for California local governments over the next two fiscal years, assuming the
"stay at home orders" are lifted by June 1. The article warns that this estimate can grow
exponentially should the "stay at home orders" last through the summer and beyond.
The market is another critical indicator of vulnerabilities for state and local governments. Any new
economic downturn may particularly exacerbate the vulnerability of California's already
challenged pension system. California's Legislative Analyst's Office (LAO) estimates the State's
unfunded pension liabilities to be a total of 93.1 billion ($59.7 billion at Ca1PERS and $33.4 billion
at CaISTRS). Adding retiree health unfunded liabilities to this figure increases the total to nearly
$200 billion. These are significant unfunded liabilities, which continue to grow due to changing
market assumptions. Even before COVID-19, these organizations decreased their rate of return by
.5%. If markets further constrict, local government budgets will have to fill the gap.
There were already many local governmental entities facing significant financial challenges pre -
pandemic. As identified by the California State Auditor and spotlighted on the Auditor's website,
some of these pre-existing problems plaguing various municipalities include insufficient liquidity,
excessive debt burdens, inadequate reserves, declining revenues, and unsustainable employee
retirement and health care obligations. These problems existed during a sustained period of
economic expansion. With the onset of a recession, without proactive action, many local public
entities will be hammered by reduced revenue collections coupled with escalating pension and
healthcare expenses.
The California League of Cities developed a study surveying its member cities in California.
Roughly 170 cities responded to the survey reporting that by 2024 they will spend an average of
15.8 percent of their general fund on pensions. About 10 percent of the cities anticipated spending
more than 21 percent of their general fund. All these predictions were before COVID-19. These
unfunded liabilities do not include California's bonded debt.
The "silver tsunami" in the state and the decreasing birth rates pose demographic challenges to
these systems by increasing the number of retirees and decreasing the number of active workers to
pay for higher pension costs. Stay at home orders for California's most productive age workers