CITY OF BURBANK FINANCIAL SERVICES DEPARTMENT STAFF REPORT

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1 CITY OF BURBANK FINANCIAL SERVICES DEPARTMENT STAFF REPORT DATE: July 17, 2018 TO: FROM: Ron Davis, City Manager Cindy Giraldo, Financial Services Director SUBJECT: Burbank Infrastructure and Community Services Protection Transactions and Use Tax (Local Sales Tax Measure) RECOMMENDATION: ADOPT AN ORDINANCE OF THE COUNCIL OF THE CITY OF BURBANK IMPOSING THE BURBANK INFRASTRUCTURE AND COMMUNITY SERVICES PROTECTION TRANSACTIONS AND USE TAX TO BE ADMINISTERED BY THE CALIFORNIA DEPARTMENT OF TAX AND FEE ADMINISTRATION SUBJECT TO ADOPTION BY THE ELECTORATE (Adoption must be by 2/3 vote of the City Council). BACKGROUND: While the economy is growing at a stable pace and revenues are rebounding, increases to employee pension costs and the once potential loss of the City s Burbank Water and Power (BWP) In-Lieu of Tax transfer led to a long term recurring General Fund annual deficit projection approaching $30.5 million. The leading cost driver impacting the City is required increases to pension funding payments. Due to deferred pension funding on the part of the City, and changes imposed by CalPERS aimed at restoring the statewide financial health of pension plans, the City s required payment toward the unfunded pension liability is anticipated to increase significantly. The FY General Fund unfunded pension liability payment was $12.9 million. However, this payment is anticipated to increase to $27.5 million by FY Recovery back to the FY payment level is projected to be achieved in FY In addition to the fiscal challenges posed by the increasing CalPERS funding requirements and the once potential loss of the BWP In-Lieu of Taxes transfer, the City also faces a significant backlog of unfunded infrastructure needs. If not addressed, the growing infrastructure backlog will inevitably result in the deterioration of the quality of our roads, facilities, and services the Burbank community has grown to expect. In total, the City has identified just over $683 million of non-utility unfunded infrastructure needs. This total Page 1 of 13

2 includes $470 million in deferred maintenance for existing City assets and $213 million for new City assets which would help meet an identified City need or otherwise improve the quality of life or character of the City for our residents. Chart 1 details the broad categories of identified infrastructure needs. Chart 1: $683 Million Total Identified Unfunded Infrastructure Investing in the City s infrastructure has been one of the City Council s top priorities. As part of the FY budget, the City Council allocated $3.9 million in unrestricted General Fund dollars towards infrastructure. Of the $3.9 million allocated, $3.3 million went towards funding City street pavement improvements. In order to achieve this level of funding, the City applied $2.9 million of available one-time funds received from Former Redevelopment Agency loan repayments. The use of the one-time funds does provide immediate assistance toward slowing the rate of our street deterioration, however a larger and long-term sustainable funding source will need to be identified in order to see improvement in our overall street pavement condition. To sustainably improve the pavement condition of City streets, an $8 million annual funding source will be required. This goal could be achieved through the following funding plan: Existing Annual Funding*: $3,000,000 SB1 Annual Revenue $2,500,000 Commit City SB1 Match from Potential New Revenue Source $2,500,000 Total Sustainable Long-Term Street Pavement Funding $8,000,000 *Includes the use of existing restricted dollars and $1 million from the General Fund. Should the City want to address 75% of the total identified unfunded infrastructure for existing City assets over the next 25 years, the City would require an annual funding source of nearly $18 million as shown in Chart 2. Page 2 of 13

3 Chart 2: Required Funding to Meet 75% of Existing Asset Need Over 25 Years ($1,000s) Essential Elements to Secure Burbank s Future The City Council, labor groups, and staff have worked collaboratively toward implementing a multi-year strategic plan which aims to sustainably correct the City s structural deficit and begin to deal with the significant backlog of infrastructure needs while, at the same time, preserving the City s high quality services. To that end, three essential elements have been identified as necessary in order to secure Burbank s future. Essential Element 1: Measure T In-Lieu of Taxes Transfer The first element, which is now complete, is Measure T which was approved by voters on June 5, The passage of Measure T modified language in the City Charter which allowed the City to become compliant with both Proposition 26 and 218 and preserved the City s long standing practice of transferring no more than 7% of gross electric retail sales to the General Fund. This voter approved measure effectively protects $12.5 million in annual funding used by the General Fund to fund essential City services and infrastructure. With a passage rate of approximately 81.1%, Measure T results confirm the community s commitment toward sustaining valued City services and infrastructure by helping to preserve the City s long-term financial health. Essential Element 2: Council and Labor Savings Initiatives The second element directed by Council is to identify and implement long-term sustainable cost saving measures with minimal to no impacts on community services. Thus far, an estimated $9 million in annual savings have been identified and are projected to be fully implemented by the end of our five year forecast. Chart 3 below details the significant Council and labor initiatives which will save the City an estimated $9 million annually for the long-term. Page 3 of 13

4 Chart 3: Council and Labor $9 Million Savings Initiatives ($1,000,000s) In addition to these long-term sustainable initiatives, the City Council imposed shorter-term cost saving measures aimed at generating additional one-time savings. The generated one-time savings could be used as bridge funding to allow the City more time to implement a long-term strategic plan that will secure Burbank s fiscal health. These measures include no new salary increases for staff in all labor groups and a citywide hiring freeze. Updated Financial Forecast With the passage of Measure T and the projected implementation of the identified Council and labor initiatives, the City s five year forecast has significantly improved from the initially projected $30.5 million annual operating deficit. The City s updated five year forecast can be seen in Chart 4. Chart 4: General Fund Forecast FY through FY ($1,000,000s) Page 4 of 13

5 The General Fund Five-Year Forecast projects a $166,000 recurring deficit in FY , growing to $9.5 million in year five (FY ). Additionally, without corrective action, the General Fund will deplete its available one-time funds (not including formal reserves or setasides) in FY The FY Budget as adopted assumes the use of one-time funds to close this projected gap while City staff and City Council continue to work together on long term sustainable strategies to correct the structural deficit and address the nearly $470 million in existing asset infrastructure needs facing the City in the coming years. As it stands today, the City s funding shortfall needed to close the remaining operating budget gap and to address just 75% of the existing asset infrastructure can be seen in Table 1: Table 1: Projected Long-Term Annual Funding Gap Long-term Operating Deficit $9,454 Needed Infrastructure Funding $17,937 Total Required Annual Funding ($1,000s): $27,391 Essential Element 3: Potential New Revenue Source Despite the actions already taken, the City will be unable to avoid cuts to services nor apply additional funding toward the backlog of City infrastructure needs without an identified new revenue source. City Council directed staff to research potential new revenue sources that could be pursued. During the June 26, 2018 City Council Meeting, City Council reviewed various revenue options that could be available to the City to generate additional General Fund revenues. When evaluating the various potential revenue sources, three general criteria were applied: Criteria for Evaluating the Appropriateness of Revenue Options: 1) Is the revenue sufficient? Revenue generated should address the remaining structural gap and provide funding to at least begin to address the City s Infrastructure backlog. With total required annual funding of nearly $28 million, the City should focus efforts on options that generate +$15 million annually. 2) Is the source of funds fair and equitable to Burbank constituents? Revenue source should not be overly burdensome to Burbank residents. Burbank services and infrastructure benefit residents, local businesses, and the surrounding communities. 3) Will it be successful and timely? A complex tax change may be difficult to communicate to voters effectively. Further, a solution requiring multiple votes of the people may lead to voter fatigue. The identified solution needs to be executed in a timely manner such that the Page 5 of 13

6 valued City services can be preserved and the growth of the infrastructure backlog is curtailed. When we applied the above criteria of sufficiency, fairness, and likelihood of success, a local transaction and use tax, which is commonly referred to as a sales tax, measure matched best: 1) A ¾ cent sales tax measure would generate approximately $20 million annually. 2) Historical trends show that roughly one-third of City sales tax revenue comes from resident spending, one-third comes from local business spending, and the final onethird comes from non-burbank residents shopping in local Burbank businesses. This distribution helps ensure that all Burbank constituents contribute equitably towards the solution. 3) Should City Council approve the attached ordinance (see Exhibit A), a local sales tax measure can be taken to the voters for consideration as part of the November, 2018 General Statewide Election. Local Control of Sales Tax Capacity In addition to matching the three criteria best, another benefit of a local sales tax measure would be 100% local Burbank control with all proceeds protected from future state and county take-aways and use. For example, as recently as March of 2017, the County of Los Angeles took Measure H to voters. This Measure, funded by a ¼ cent sales tax, aims to fund homeless services countywide. However, while the City of Burbank will contribute approximately $8 million annually, Measure H failed to dedicate any local return to cities to assist with our local homelessness issues. To impose Measure H against the cities, the County had to receive after the fact special state legislation which allowed them to utilize ¼ cent of the potential sales tax capacity provided to cities. As such, until Measure H is ended, this ¼ cent capacity taken by the County is now no longer available to the City of Burbank. Should the City of Burbank be successful with a ¾ cent local sales tax measure, the County would not be able to raid our local sales tax capacity again. Thus implementing a local sales tax now would protect the local sales tax capacity for local use such as funding City of Burbank services and infrastructure. California Cities: Local Revenue Measures Increasing expenses and deferred infrastructure costs is a statewide problem facing most California cities. In order to address some of the same issues facing the City of Burbank today, many cities have turned to their local voters. In the November 2016 election there were 224 non-school local tax measures. Of all California cities, 32% went to the voters with some form of a revenue measure. Those who took a general purpose measure saw an 84% success rate, while those who took restricted or specific purpose measures had a reduced success rate of 56%. The most common revenue option taken to the voters was a local sales tax measure that ranged from ¼ cent to one cent, most frequently being a one cent sales tax measure. In the most recent election on June 5, 2018, one additional Los Angeles County city, and five total cities statewide took a general purpose local sales tax measure to their voters. These five city measures ranged from a proposed ¼ cent to one cent, and all measures Page 6 of 13

7 included the term of till ended by voters. All five city local sales tax measures passed. As it stands today, approximately 185 California cities have a voter approved local sales tax measure. Burbank Community Input: Survey Results Highlights Community engagement has consistently been a priority for the City of Burbank. Due to the significance of the projected operating deficit and infrastructure funding backlog, and the potential service reductions or revenue enhancements that would be required to successfully address them, engaging the community and hearing their priorities is as critical as ever. As one means of facilitating this input, the City Council directed staff to pursue a citizen survey. The City contracted with FM3 to survey the community on the importance of various City services and their willingness to increase taxes to preserve these services and City infrastructure. The initial survey was conducted from November 28, 2017 through December 3, 2017 and it included 2,635 City of Burbank registered voters. According to FM3, the overall margin of error on the survey results based on the full sample is +/- 3.1%. A complete presentation on the survey results was provided to the City Council and community during the January 23, 2018 City Council meeting. In regards to community priorities, among the items that the community ranked extremely or very important, over 70% of those polled agreed on the following: 90% - Maintaining fire, police, and 911 response 87% - Protecting local ground water quality and supply 84% - Keeping neighborhoods safe and clean 83% - Maintaining long-term financial stability 78% - Repairing streets 75% - Maintaining services for the disabled, veterans, and seniors 74% - Earthquake retrofitting of city buildings, and bridges 73% - Improve traffic flow & safety on streets 73% - Maintaining Parks and Recreation programs for children and youth 73% - Maintaining public parks, sports fields, and community centers In addition, three accountability provisions rated high among voters as either extremely or very important: 1) Requiring that all funds be used in Burbank 90% 2) Requiring audits 69% 3) Requiring citizens oversight 68% Overall, 82% of those polled agreed that maintaining our essential services was extremely or very important. In the end, after learning about a potential ¾ cent local sales tax measure that would maintain City services and help address infrastructure, 69% stated they would vote yes and support this new potential revenue for the City. At this point, the survey is about 7 months old and FM3 is completing an updated survey to gather additional community input. City Council directed staff to return with these Page 7 of 13

8 updated community survey results. Results from this follow-up survey are also scheduled to be presented to the City Council and community at the July 17, 2018 City Council meeting. Should the Burbank voters approve a ¾ cent local sales tax measure in November of 2018, the City could not only close the remaining operating structural gap but provide significant new funding to begin to address infrastructure needs. Chart 5 below shows how the City could choose to invest the combined benefits brought forth through the thoughtful and strategic execution of the three essential elements. Chart 5: Three Essential Elements to Secure Burbank s Future Investment Strategy ($1,000,000s) DISCUSSION: During the June 26, 2018 City Council meeting, the City Council directed staff to return with the ordinance necessary to proceed with establishing a November 2018 Local Measure. The ordinance will allow our community to consider through a ballot measure the implementation of a ¾ cent local sales tax (the Measure) with appropriate citizen oversight. The attached ordinance (see Exhibit A) if adopted by the City Council, will complete this action, and place the Measure on the November 2018 ballot. In total the City has an annual funding shortfall of $27.4 million dollars (see Table 1); if approved by voters, the ¾ cent local sales tax measure will provide a projected $20 million dollars annually, leaving an approximate $7.4 million annual funding gap. While the proposed new funding source does cover the projected long-term operating deficit of $9.5 million, there are inherent risks included in the City s forecast that may cause either revenues or expenditures to differ significantly from the projected totals. CalPERS Pension Liability Funding On December 21, 2016 the CalPERS Board of Administration lowered the discount rate (the assumed long term investment rate of return) from 7.5 percent to 7.0 percent using a Page 8 of 13

9 3 year phase-in. CalPERS provided reports for FY includes the first year of the phase-in or a percent assumed rate of return. The rate will drop to 7.25 percent for FY , and then to the approved 7.0 percent in FY Since pension plans rely on investment returns to provide a significant portion of retiree pensions, a reduction in discount rate leads to a higher plan normal cost and to a decline in plan funding status. Table 2 below shows the City s current unfunded liability and normal cost based on the current percent discount rate and what it would be if the discount rate was already reduced to the planned 7.0 percent discount rate. Table 2: Analysis of Discount Rate Sensitivity Normal Cost at 7.375% Unfunded Liability at 7.375% Normal Cost at 7.0% Unfunded Liability at 7.0% Misc. Plan % $219,113, % $257,605,693 Police Plan % $89,565, % $102,835,886 Fire Plan % $56,766, % $66,924,106 Citywide Total $365,445,526 $427,365,685 Estimated General Fund Portion $257,181,565 $300,082,712 As shown in Table 2 above, a decline in the discount rate from percent to the planned 7.0 percent generates an increase in both the annual plan normal cost as well as an increase in the City s unfunded pension liability. We have projected that the City s unfunded pension liability payment will return to the current year level in FY , 23 years from today. This projection already accounts for the impact of the planned reduction in discount rate to 7.0 percent. CalPERS actuarial assumptions include inherent risks that lead to changes in required employer funding. Actuarial calculations supplied by CalPERS are based on a number of assumptions about long-term demographic and economic behavior. Unless these assumptions (terminations, deaths, disabilities, retirements, salary growth, and investment return) are exactly realized each year, there will be differences on a year-to-year basis. The year-to-year differences are called actuarial gains and losses and serve to lower or raise required employer contributions from one year to the next. Therefore, employer contributions will inevitably fluctuate, especially due to the variance between the expected and actual investment returns. Should actual investment returns deviate from the expected rate by just 1 percent over the next four years, the City can roughly calculate the General Fund annual unfunded liability payment to increase or decrease by $650,000. While the City projects pension funding to recover to current year levels in approximately 23 years, there are many factors that may lead to deviations from this projection. CalPERS has expressed interest in risk mitigations which may lead to further declines in planned discount rates. As such, while the City projects recovery in 23 years based on current known assumptions, it would be prudent to plan for an even longer term recovery. Page 9 of 13

10 City Infrastructure Investment Based on the proposed investment of the ¾ cent local sales tax measure (see Chart 5), it is anticipated that there will be approximately $10 million annually that will be available to apply toward the City s deferred infrastructure. As previously discussed, in order to address 75% of the existing asset need over the next 25 years, $17.9 million in annual funding would be required (see Chart 2). Based on the projected annual infrastructure revenue of $10 million, the City can anticipate the following funding use: Estimated Available Annual Infrastructure Funding: $10,000,000 Uses:* Street Pavement Funding Plan City SB1 Match $2,500,000 General Fund Existing Asset Infrastructure $7,500,000 $10,000,000 *assumes continuation of state gas tax SB1 revenue, otherwise $5 million would be needed to complete the street pavement funding plan leaving only $5 million for General Fund existing asset infrastructure. With a fully funded street pavement plan, the City will address $45 million of the existing asset infrastructure need. This will bring the existing asset infrastructure need down to $425 million from the $470 million previous estimate (see Chart 1). With $7.5 million in annual funding made available, the City would be able to meet 75% of the remaining asset need over the next 45 years. Chart 6 below shows how the City may be able to pay down 75% of the remaining infrastructure need if it dedicated the $7.5 million available revenue to these assets. Chart 6: Pay down of 75% of Existing Asset Infrastructure Need After Street Pavement Funding Page 10 of 13

11 It should be noted that the remaining $425 million existing asset infrastructure need represents the need as of the current fiscal year. Over the next 45 years many new needs will arise which will have to be prioritized against the existing demands. As such, it is reasonable to expect that not all available proceeds will be dedicated to currently identified existing assets. Therefore, the period to address 75% of the existing need will be longer than 45 years or the City will need to address a percentage lower than 75%. ¾ cent Local Sales Tax Measure Oversight Both the City Council and the community have expressed an interest in the establishment of appropriate polices and oversight over the revenues that would be generated by the Measure. Section , Oversight, of the proposed sales tax ordinance (see Exhibit A) contains a framework for oversight for City Council s reference. Prior to the November election, staff will return to the City Council with options on how the City can structure such oversight. The following basic components will be included for City Council consideration: The establishment of an Infrastructure Oversight Board Oversight board to include City of Burbank residents. Responsibilities to include: o A regular (no less than annual) review of proposed infrastructure spending, with prioritization of infrastructure funding. o A regular (no less than annual) review of the status of funded projects. Expanded responsibilities for the existing Retirement Plans Committee The Retirement Plans Committee is an existing seven member, Brown Act committee which includes the City Treasurer, Assistant City Manager, Management Services Director, Financial Services Director, and three labor bargaining unit representatives. While this committee currently primarily oversees the City s 457 Deferred Compensation Plan, expanded responsibilities could include: A regular (no less than annual) review of the status of the City s pension funding and benefits. The goal being to ensure that financially responsible decisions are made to ensure the long-term financial sustainability of City employee pensions and to review compliance with Council s adopted policy that all labor groups pay half of the normal cost of City pensions. Expanded responsibilities for the existing Audit Committee The Audit Committee is an existing Brown Act committee which includes two City Council members, the City Treasurer, City Manager, BWP Chief Financial Officer, and the Financial Services Director. Expanded responsibilities could include: Oversight and reporting out on an annual audit of revenue proceeds received and expended, performed by an independent audit firm ensuring that all proceeds are used in the City of Burbank. New Financial Policies Establish a financial policy that will allocate no less than 50% of the Measure revenue annually toward needed infrastructure improvements, which includes the full funding of the City s Street Pavement Funding plan discussed on page two of this report. Establish a financial policy that will at a minimum require that the annual normal cost Page 11 of 13

12 of the City s pension plans be funded. Additionally, funding goals will be established that, when achieved, will allow the City some flexibility to absorb future pension funding changes that may be caused by changes in the economy, additional CalPERS actuarial assumptions changes, or new State or Federal legislation or court rulings. Timeline for Local Sales Tax Measure During the June 26, 2018 City Council meeting, the City Council directed staff to return with the appropriate ordinance necessary to proceed with establishing a November 2018 Local Measure that will allow our community to consider through a ballot measure the implementation of a ¾ cent local sales tax with appropriate citizen oversight. The attached ordinance (see Exhibit A) if adopted by the City Council, will complete this action. If City Council does adopt the attached ordinance, a separate agenda item during the July 17, 2018 City Council meeting requests the City Council to place the sales tax measure on the November 2018 election. Chart 7 illustrates the anticipated timeline should City Council move forward and adopt the proposed ordinance (see Exhibit A) and place a local sales tax measure on the November 2018 ballot. The last day that the City Council may call this election is July 31, Chart 7: Sales Tax Measure Timeline Fiscal Emergency As the City Council has heard on numerous occasions, and most recently during the presentation on the General Fund financial forecast on June 26, 2018, as well as explained in great detail above, the City is facing a structural imbalance in the General Fund and a significant infrastructure maintenance and improvement back-log. In total, the City is facing a funding shortfall of more than $27 million annually to cover operating and infrastructure costs. If the City does not add a new revenue source, the Council will be faced with implementing significant cuts in all areas of City services and the City s infrastructure deficit will only worsen. Also, without a new revenue source, critical infrastructure repairs such as to City streets, sidewalks and earthquake retrofit of City buildings and bridges will be further deferred. If the Council were to delay this measure until the November 2020 election and if passed, the City would not benefit from the new revenue receipts until just before the start of the 2021/2022 fiscal year. By then the City s operating shortfall alone would be nearly 6 million dollars. Based on all of the information provided, this is an emergency measure to preserve not only the fiscal health of the City, but to preserve the quality of life Page 12 of 13

13 of the City. CONCLUSION: The City s financial forecast continues to face challenges. While the economy is growing at a stable pace and revenues are rebounding, the rate of expenditure growth will outpace the growth of revenues. City Council, labor groups, and staff have worked collaboratively toward executing three essential elements aimed at securing Burbank s future. With the success of Essential Element 1: Measure T and the implementation of Essential Element 2: Council and Labor Savings Initiatives, the City has managed to close the General Fund structural gap from the originally projected $30.5 million to the current projection of $9.5 million. The City of Burbank celebrated its 100 year anniversary in 2011 and along with deferred maintenance, decades old facilities and assets, and new modernized community infrastructure needs and wants, have led to a current unfunded infrastructure total of $683 million. Excluding all new assets, to address just 75% of the existing infrastructure need over the next 25 years, the City would require nearly $18 million in annual funding. While the $20 million projected annual revenue from a ¾ cent Local Sales Tax Measure does not meet the full annual funding need, it does provide the City with a significant sustainable long-term funding source. This funding can restore long-term fiscal operational health and provide the City with reliable street and infrastructure funding that will serve the community of Burbank for its next 100 years. In response to City Council and community requests, the proposed ¾ cent Local Sales Tax Measure will include appropriate audit and citizen oversight. Staff will return to City Council with oversight options for City Council consideration prior to the November 2018 election. EXHIBITS: Exhibit A: AN ORDINANCE OF THE COUNCIL OF THE CITY OF BURBANK IMPOSING THE BURBANK INFRASTRUCTURE AND COMMUNITY SERVICES PROTECTION TRANSACTIONS AND USE TAX TO BE ADMINISTERED BY THE CALIFORNIA DEPARTMENT OF TAX AND FEE ADMINISTRATION SUBJECT TO ADOPTION BY THE ELECTORATE Page 13 of 13