City of Culver City, California
City Council Agenda Item Report
RECOMMENDATION:
Staff recommends the City Council receive and file a Financial Update Report from
the Chief Financial Officer related to current economic and financial conditions of the
City.
BACKGROUND:
The current economic situation faced by local governments across California is
starting to be felt more widely now as more and more businesses file for bankruptcy;
the unemployment rate continues to climb; credit markets continue to fail; retail sales
fall; and consumer confidence is down. Culver City is not immune from this
situation, and has been able to weather the economic downturn rather well to date;
but the upcoming months and the next several fiscal years will be a challenge for
staff, the City Council and Culver City residents. Fortunately, Culver City is in better
position to weather this economic downturn than many other cities. The following
steps are currently being taken:
Fiscal ‘Pullback’ Measures
On October 13, 2008, the Chief Financial Officer gave a presentation to the City
Council on the City’s economic and financial condition. At that time, it was stated
the City needed to continue taking proactive steps to prepare it for continuing
economic difficulties. The City Manager sent out a memo entitled “Fiscal ‘Pullback’
Measures” on October 22, 2008, with the following immediate steps to be taken:
Meeting Date: 12/22/08 Item Number: A-1
AGENDA ITEM: Receive and File Financial Update Report from the Chief
Financial Officer.
Contact Person/Dept.: Jeff Muir, CFO Phone Number: 310.253.6016
Fiscal Impact: Yes [X] No [] General Fund: Yes [X] No []
Public Hearing: [] Action Item: [X] Attachments: []
Public Notification:
Master E-Mail Notification List (12/17/08);
Department Approval:
Jeff Muir (12/15/08)
City Attorney Approval:
Carol Schwab (by H. Baker) (12/16/08)
Fiscal Impact Review:
Jeff Muir (12/15/08)
City Manager Approval:
Jerry B. Fulwood (12/17/08) City of Culver City, California
City Council Agenda Item Report
o Implementation of an immediate hiring freeze, excluding Public Safety
positions. All vacant positions will be reviewed on a case-by-case basis with
the City Manager.
o Cessation of overtime, excluding Public Safety or emergency situations. All
exceptions to be reviewed and approved by the City Manager.
o All Departments shall achieve a 25% budgetary savings in Training &
Education, Conferences & Conventions, and Special Events & Meetings line
items during the current fiscal year. Any exceptions must be discussed with
and approved by the City Manager.
o Assessment of current usage of part-time and contract employees.
o Assessment of current usage of consultants.
o Review opportunities for increased efficiency in procurement and contracting.
Early indicators show that current vacancies are assisting the General Fund, and
other affected funds, to maintain a relatively lower than anticipated expenditure
percentage through the first four months of the fiscal year. Overtime is also showing
a reduction since the “pullback” measures were implemented. Reports are in
process for the assessment of current usage of consultants and part-time and
contract employees. The results of these reports will be included in the mid-year
review (currently scheduled for February 9, 2009). The 25% budgetary savings
target is being tracked and departments will be notified if their numbers near the
threshold.
Staff had initially anticipated bringing back an updated Comprehensive Financial
Plan (CFP) in November with the results of the first quarter budget review. After
thorough consideration of several factors, it was decided to wait and present the full
CFP with the final Year-End 2007-08 Review with audited figures and Mid-Year
Budget Review when more data on actual revenues and expenditures for fiscal
2008-09 would be available for analysis.
A first quarter budget review report was completed in October. Due to the lag in
timing for receiving revenues|1010|, a significant downturn in revenues through
September 2008 was not apparent. Although the economy has been slowing and
contracting slightly since December 2007|1010|, the unprecedented economic volatility
being experienced on a local, state, national, and international scale did not begin
until the end of the first quarter (i.e. September) of fiscal 2008-09. Therefore, the
second quarter of fiscal 2008-09 will have much more telling data as to how the
economic conditions have changed, and how they are affecting Culver City.
|1010| Example: Actual sales taxes lag a full quarter, meaning revenues received in December are for the quarter
ending September 30
th
|1010| The National Bureau of Economic Research, the organization charged with identifying the start and end to
business cycles, declared that the U.S. entered a recessionary period beginning in December 2007. City of Culver City, California
City Council Agenda Item Report
State Update
The State has also gone through a much deeper fiscal struggle the last couple of
months after its 85-day-late adoption of its fiscal 2008-09 budget. Just six weeks
after adoption, the state was reporting an $11.2 billion dollar shortfall in fiscal 2008-
09 that has now grown to $14.8 billion. It is also estimated that through the end of
fiscal 2009-10 the state will be facing a deficit in excess of $40 billion. At this time
there is still no word if the state will be taking any funds from cities, and staff remains
diligent in its watch of any moves by the state in that direction. The Redevelopment
Agency will be losing $2.26 million to the state in the form of an ERAF shift from the
initial budget adoption, and Transportation will be losing $1 million in State
Transportation Assistance (STA) funding. Both agencies face further funding
takeaways for sure, although it is not known at this time exactly how much. The
Legislative Analyst’s Office has proposed making the Redevelopment Agency ERAF
shift permanent (however the governor has not made this indication yet), and it is
estimated Transportation may lose another $500,000 in STA funding for fiscal 2008-
09. Further information will be received on this issue in January.
Investments
As the City Council is aware, the City holds a $1 million senior medium term note in
Lehman Brothers that is seriously at risk due to the bankruptcy. At the bankruptcy
court level, things are progressing at a glacial pace, likely because this is the biggest
bankruptcy ever. Lehman was given another extension to prepare a revised
creditors list, which should be ready by late January/early February, but that is
assuming they make good progress on unraveling all of their swap deals to make a
more accurate assessment of assets and liabilities.
In October, the City joined a working group of cities, counties and agencies in similar
circumstances and has banded together with them to take action. Although $1
million is significant, the City is in a much better position than some other agencies
that have a significantly higher amount at stake. Twelve entities to date are
participating in the joint legal action, with total exposure of $33 million. Some of the
more current actions taken by the group in the last month include:
o Working group works via e-mail and weekly conference call to keep updated
on breaking events on Capitol Hill.
o Directed lobbying of the Secretary of the Treasury to see if the Troubled
Asset Relief Program (TARP) can assist local government agencies in
recovering funds invested in Lehman.
o Cities that have hired lobbyists (including us) have instructed those lobbyists
to follow activities on Capitol Hill to determine if TARP or some new financial City of Culver City, California
City Council Agenda Item Report
relief package can include very direct language that covers local governments
for their losses.
o Securities Investor Protection Corporation (SIPC) forms were mailed to
entities the week of December 1; early deadline for most protection is January
30, 2009.
o Government Finance Officers Association (GFOA) agreed to put an article in
their next newsletter regarding this issue.
o It is the consensus that the Obama Administration will be more accessible in
listening and working through this situation than the current Administration,
and strategies are being developed.
The next conference call of the working group is scheduled for December 17 in the
afternoon, which is the day this report is finalized for the agenda and delivered to
City Council. Any updated information that may come from this call will be reported
to the Council during the oral presentation.
Input Requested from Bargaining Groups
A request was sent to the City’s six bargaining units for their input with any revenue
generating or cost cutting ideas. The Culver City Management Group submitted
suggestions Monday, December 15, and staff will be reviewing these items during
the next month. No other submissions were received as of the finalizing of this
report.
DISCUSSION:
There is no getting around the fact that the city, state and nation are facing tough
economic times to a degree that has not been seen in years. While the City has
been very fortunate in the past several years to have been able to build a relatively
healthy General Fund reserve, in part due to major development activity, it is going
to be put to the test the next several years.
“Rolling” Two-Year Budget Process:
In fiscal 2007-08, the City adopted a two-year budget format process. It is not an
ordinary two-year budget process, but what staff refers to as a “rolling” two-year
budget process. The first of the two years is officially adopted, and the second year
is approved. The next year when the second year becomes the first year of a two-
year budget, it is fully reviewed again and then is adopted with the next fiscal
(forecasted) year becoming the approved (i.e. 2007-08 Adopted & 2008-09
Approved Budget 2008-09 Adopted & 2009-10 Approved 2009-10 Adopted
2010-11 Approved, etc.). City of Culver City, California
City Council Agenda Item Report
In the upcoming budget process, the approved 2009-10 budget will be fully reviewed
and reanalyzed before being adopted, and the “forecasted” fiscal 2010-11 budget
will be approved. By actively engaging in this process, staff is able to get a
considerably better fiscal picture of where the City will be at least a year out and the
City Council is better able to allocate resources to meet the needs of the City, staff
and its residents.
Although no one was able to predict the current economic catastrophe currently
facing the nation, staff was able to note slight shortfalls during the last budget
process thanks to this “rolling” two-year budget process and make changes
accordingly. The City is now in a position, though, where additional significant
adjustments need to be made. Staff has continually been monitoring the City’s
financial condition, and will be presenting recommended mid-year adjustments to the
City Council for the fiscal 2008-09 budget.
Fiscal 2008-09 Outlook
The first quarter budget report submitted to the City Council in November showed
General Fund revenues moderately in line with budgeted projections. Staff
anticipates that second quarter results, especially for certain revenue receipts, will
start showing the expected downturn in some revenue categories. However, since
the real economic turmoil did not begin until late September and early October, the
most significant downturns are expected to be seen in the third and fourth quarters
(again, due to the lag in receipts in many revenue categories) As mentioned
previously, General Fund expenditures are much lower than anticipated, and were
so even before the “Pullback” Measures memo submitted by the City Manager,
mainly because of the high level of current vacancies. This will help offset some of
the lower performing revenues and assist in the fiscal year ending within projections.
Estimated 2008-09 Mid-Year Adjustments
There are two specific revenue category adjustments that will be brought forward to
the City Council during the mid-year budget review for the General Fund. They are
in the Property Tax Category and the Sales Tax Category. The Property Tax is an
adjustment to the initial projection received from our consultant, and will put us more
in-line with what our property tax receipts should be through the end of the fiscal
year. The discrepancy is primarily expected in the “County Pool” portion of property
tax receipts, which, due to the large number of foreclosures and re-assessments to
lower values throughout LA County, is much less than anticipated.
The sales tax adjustment is based on two factors: 1) an adjustment due to an
overpayment in fiscal 2007-08 by the State for the Sales Tax In-lieu (triple-flip City of Culver City, California
City Council Agenda Item Report
property tax shift), which means they will be deducting it from this year’s payment;
and 2) reduction in the base Sales Tax amount due to current reports from economic
forecasts and preliminary sales reports from national retailers.
The current adopted sales tax amount for fiscal 2008-09 did take into account a
downturn in receipts, specifically due to the renovation of Westfield Shopping Center
and loss of some major sales tax contributors. The adopted budget amount is less
than the adjusted budget for fiscal 2007-08, and less than the 2007-08 actual
receipts. This foresight assisted the City in not taking as severe a hit as it could
have given the current economic downturn.
Staff is anxiously awaiting the results of the sales tax “true-up” amount to be
recorded for December 2008, which should be announced on December 17 or 18 by
the California State Board of Equalization, too late to be included in this written
report. This amount should assist staff in developing a better picture of where sales
tax receipts are headed for this fiscal year and next. Estimated receipts are received
the first two months of a quarter, with the third month being a “true-up” payment that
reflects adjustments for actual receipts for a quarter. Unfortunately, we will not have
the exact picture of the holiday season results until March 2009.
The Transportation Fund will note the $1 million State takeaway of State
Transportation Assistance funds, and if any new adjustments are received between
now and the time the mid-year report is brought to Council, those will also be
included.
The Refuse Fund will be including slight revenue adjustments due to the decline in
development activity currently being experienced in the city. These adjustments are
not thought to affect the overall fund as expenditures are believed to not be fully
expended by the end of the fiscal year.
The Redevelopment Agency will be making some minor positive adjustments to tax
increment receipts (and related expenditures such as housing set aside and
statutory pass through payments) based on the most current assessed value report
received from the County in August. A budget adjustment will also be needed to
appropriate the $2.26 million ERAF payment.
Fiscal 2009-10 Outlook
The outlook for fiscal 2009-10 is much different from the original one shown in the
approved budget. The City’s Approved Fiscal Year 2009-10 General Fund Budget
was already facing an approximate $1 million deficit. This gap was closed by
increasing the excess appropriations amount from 96.5% to 96.0%, and rolling back City of Culver City, California
City Council Agenda Item Report
the 3% operating and maintenance CPI increase. These two techniques closed the
gap, but did not fix the underlying deficit.
Current estimates, with the planned adjustments, show an additional $3 million gap
between General Fund operating revenues and expenditures for fiscal 2009-10.
These adjustments, specifically to revenues, are a direct result of the current
economic downturn. This amount is a preliminary estimate and may decrease or
increase based on results of continued analysis performed as staff moves through
the upcoming “rolling” two-year budget process. The receipt and entry of actual
revenues for October through December 2008 will also better assist staff in
forecasting this amount.
The revenue categories that will be adjusted due to the economic downturn are
sales tax, business tax, and transient occupancy tax. Property tax will be adjusted
based on a new calculation from the adjusted 2008-09 projection, and fines and
forfeitures will be adjusted due to a City Council approved increase to parking
violation fines, which will be noted during the budget process.
Sales Tax
As mentioned above, the original fiscal 2008-09 sales tax projection was based on
the anticipated renovation of the Westfield Shopping Center and loss of some major
sales tax generators over the last year or two. The mid-year adjustment takes into
account the much weaker economy and plummeting auto sales. Economic reports
reviewed and received, along with conferences attended by staff, indicate that fiscal
2009-10 (especially in calendar 2009) will be much more severe for retail sales and
auto sales. These factors will contribute to a recommended reduction to the
projected base sales tax amount for fiscal 2009-10.
Business Tax
Business Tax is calculated on the gross sales amount of businesses, and basically
mirrors sales tax in activity. Given the expected downturn in sales tax, there will also
be a reduction in the projected business tax amount for fiscal 2009-10. This will be
slightly offset by the business tax audit findings from the business tax audit being
conducted during fiscal 2008-09. It is anticipated that non-compliant businesses will
be discovered during the audit, thus adding to the on-going base business tax
receipts and offsetting some of the downturn.
Transient Occupancy Tax
Current information relating to hotel occupancy rates is not encouraging, and a
reduction in the approved fiscal 2009-10 projection will be recommended. Vacancy City of Culver City, California
City Council Agenda Item Report
rates have increased significantly the past couple of months, and reports indicate
this will continue through at least the first half of 2009. Airport travel through LAX is
down, and in general people are not traveling as they were the past several years.
Transient Occupancy Tax (TOT) receipts are up to a relatively respectable level,
though, through October 2008, thanks in part to some of the major hotels in the city
being fully open after renovations. This helps somewhat, but the overall affect of low
vacancy rates is hitting the entire industry, not just Culver City. TOT receipts will
start showing a notable reduction in coming months.
Known Adjustments to Expenditures
When forecasting the second year of the two-year budget, estimates some times
must be used since actual data is not known. CalPERS sends estimated employer
retirement rates to cities, which we use to calculate the retirement amounts for that
year. These amounts can fluctuate slightly up or down from the actual rates. The
City received the actual CalPERS employer retirement rates in October for fiscal
2009-10, which were higher than the estimated. This will increase the actual amount
for retirement costs slightly for all funds and will be noted during the budget process.
The dramatic losses in the stock market have severely affected CalPERS
investment portfolio. Due to the ‘smoothing’ CalPERS implemented in the wake of
the dot-com crash, the gains and losses in their portfolio are amortized over a longer
time period and employer rates will not rise as dramatically as they would have
under the old methodology. However, CalPERS recently informed client agencies
that the estimated employer rates provided for 2010/11 would likely be increased by
2% to 4% of payroll if there is not a rapid recovery in the market.
Development Projects
New development activity within the City has not continued at the pace it has in
previous years. This is a direct result of the current economic downturn, specifically
in the credit markets as developers are unable to secure financing for their projects.
Some of the larger developments in which one-time revenues were being projected
in the budget for fiscal 2009-10 will most likely be pushed to future years. The
funding from these larger projects is categorized as one-time funding and is not
included in the “ongoing” revenue total that calculates the operating surplus/deficit
amount for a fiscal year.
Conclusion
There are several additional factors that staff will be taking into consideration during
the next month in preparation of the Mid-Year 2008-09 Financial Update,
Comprehensive Financial Plan update, and Fiscal 2009-10 & 2010-11 Budget
Process. The mid-year report will be extremely beneficial in enabling staff to make City of Culver City, California
City Council Agenda Item Report
much clearer decisions for the upcoming budget process since more actual data will
be available to analyze for the current fiscal year. This will also assist staff to better
forecast for the Comprehensive Financial Plan update and include meaningful
assumptions for the five- to fifteen-year outlook being presented.
FISCAL ANALYSIS:
There is no fiscal impact associated with this item. At this time, staff is scheduling to
bring the Mid-Year 2008-09 Report, Comprehensive Financial Plan update, and
Fiscal 2007-08 Final Year-end Report to City Council on February 9, 2009. Staff
also plans to ‘kick off’ the 2009-10 budget preparation at the February 9
th
meeting,
seeking City Council and public input on priorities and ideas for these fiscally
challenging times.
MOTION:
That the City Council:
Receive and file this report.