6/20/2017 City of San Juan Capistrano Agenda Report F1a TO: Honorable Mayor and Members of the City Council FROM: ~n Siegel, City Manager SUBMITTED BY: Ken Al-lmam, Chief Financial Officer P' PREPARED BY: Michelle Bannigan, Assistant Finance Director )"Y\(3 DATE: SUBJECT: Consideration of Resolutions Amending the Operating and Capital Improvement Budgets for Fiscal Year 2017-18, Adopting the Proposed Seven-Year Capital Improvement Program for Fiscal Years 2017-18 through 2023-24, Establishing the Fiscal Year 2017-18 Appropriations Limit, Establishing the Fiscal Year 2017-18 Property Tax Rates for Open Space (Measure D) General Obligation Refunding Bonds, Series 1998, and Open Space (Measure Y) General Obligation Refunding Bonds, Series 2017; and Approve Revised Investment Policy RECOMMENDATION: By motion, 1. Adopt the resolution amending the Operating and Capital Improvement Budgets for Fiscal Year 2017-18; 2. Adopt the resolution adopting the Proposed Seven-Year Capital Improvement Program for Fiscal Years 2017-18 through 2023-24; 3. Adopt the resolution establishing the Fiscal Year 2017-18 Appropriations Limitation; 4. Adopt the resolutions establishing the Property Tax Rates for the Open Space (Measure D) General Obligation Refunding Bond, Series 1998, and Open Space (Measure Y) General Obligation Refunding Bonds, Series 2017, for Fiscal Year 2017-18; and, 5. Approve the City's revised investment policy.
Page 2 of 12 EXECUTIVE SUMMARY: On June 21, 2016, the City adopted a two-year budget that provided a financial spending plan for Fiscal Years 2016-17 and 2017-18. Prior to the beginning of the second year of each two-year budget cycle, it is the City's practice to examine the budget that was adopted for that second year and evaluate whether adjustments are warranted as a result of changes in the City's funding or spending requirements. The Operating Budget adopted on June 21, 2016 provided a balanced budget for the City's General Fund for Fiscal Year 2017-18. However, recent events largely outside of the City's control have caused the projected expenditures of the General Fund for Fiscal Year 2017-18 to exceed projected revenues by $1.2 million. As described in greater detail below, staff has proposed spending reductions to close the funding gap created by these recent events. Upon approval of the adjustments proposed by staff, the amended General Fund budget for Fiscal Year 2017-18 will be brought back into balance, with a small surplus of revenues over expenditures in the amount of $4,235. At the end of Fiscal Year 2017-18, the spendable fund balance of the General Fund is projected to be $14.8 million (55.9% of annual operating expenditures). The Water Operations Funds include the Operations, Debt Service, Groundwater Recovery Plant (GWRP), and Non-Potable Water Operations funds (collectively, the "Water Operations Funds"). The total proposed increase in revenue budgeted for the Water Operations Funds in Fiscal Year 2017-18 is $1.6 million. This proposed increase in budgeted revenue is a result of an update in the number of acre feet expected to be sold in Fiscal Year 2017-18. This updated estimate is based on the actual customer demand over the most recent twelve month period. The proposed budget for the Water Operations Funds reflects a decrease of $395,545 in budgeted expenses. The Fiscal Year 2017-18 budget for the Water Operations Funds is balanced with revised revenue estimates exceeding expenses by $3.0 million, after making the first loan repayment to the Sewer Operations Fund and Sewer Capital Improvement Fund of $1.4 million and providing capital project funding of $477,500. The Sewer Operations Fund available fund balance is projected to be $1.7 million (49.5% of operating expenses) at June 30, 2018. This is an improvement from the available fund balance originally projected in the Fiscal Year 2017-18 Adopted Budget of $1.3 million at June 30, 2018. The anticipated increase is primarily due to a carryover of $523,000 in the available fund balance that is projected for June 30, 2017. The Fiscal Year 2017-18 budget is balanced with revised revenue estimates exceeding expenses by $236,059, after funding $500,000 for sewer capital replacement. The proposed Fiscal Year 2017-18 Budget includes adjustments to reduce the City's Capital Improvement Program (CIP) expenditures from $8.4 million to $6.1 million. The proposed reductions are primarily due to delays in the receipt of the development fees that fund these projects. Funding has been reduced for Sewer Fund capital projects in order to secure the necessary cash flow to meet approximately $17.6 million of capital project funding needs required by the South Orange County Wastewater Authority (SOCWA) over the next seven years (an increase of $5.3 million from the City's prior Seven-Year Capital Improvement Program that was adopted as a part of the two-year budget on June 21, 2016).
Page 3 of 12 A summary of the proposed budget adjustments is presented in Attachment 1. The Resolution to amend the Fiscal Year 2017-18 Operating and Capital Improvement Budget is presented in Attachment 2. DISCUSSON/ANAL YSIS: General Fund On June 21, 2016, the City Council adopted a balanced budget for the General Fund for Fiscal Year 2017-18. However, since the time of budget adoption, several significant financial challenges affecting the General Fund have arisen, as described in greater detail below: Increase in Law Enforcement Costs ($476,000) - The amount budgeted for the City's law enforcement contract with the Orange County Sheriff's Department (OCSD) in the City's Fiscal Year 2017-18 Adopted Budget was $9,254,000. This amount was determined by providing for a 5% increase over the contract estimate that was provided by OCSD for Fiscal Year 2016-17 ($8,813,000). After adoption of the City's two-year Budget for Fiscal Years 2016-17 and 2017-18, OCSD revised its estimate of costs to be $8,972,000 for Fiscal Year 2016-17 and $9,730,000 for Fiscal Year 2017-18. The increase in contracted law enforcement costs for Fiscal Year 2017-18 represents an 8.4% increase over the prior year actual cost and a 1 0.4% increase over the prior year budget for this cost. These increases are primarily the result of increased compensation costs relative to the recently approved agreements with the associations that represent the employees of the Sheriff's Department. An adjustment has been proposed to increase the budget for contracted law enforcement costs by $4 76,000 in order to bring the budget for this cost into agreement with the most recent estimated provided by OCSD for Fiscal Year 2017-18. Decrease in Sales Tax Revenues ($362,000) - Based on the most recent sales tax projections provided by the City's sales tax consultant (Hdl, Inc.), sales tax revenues collected in Fiscal Year 2017-18 are expected to be $200,000 higher than the amount expected to be collected in Fiscal Year 2016-17. However, this updated projection of sales tax growth for the City is substantially less than the 4% growth that Hdl, Inc. had projected when the City's two-year budget was adopted on June 21, 2016. The main reason for this substantially reduced increase in sales tax from that of the consultant's original estimate is reduced consumer spending and a reduction in expected car sales. This is a state-wide trend that reflects continued caution in consumer spending. As a result, an adjustment has been proposed to decrease the Fiscal Year 2017-18 revenue estimate for sales tax revenue by $362,000. Decrease in Development Fees and Charges ($251,000) - General fund revenues from development-related fees and permits are projected to be $251,000 less than the amount originally budgeted, based upon updated information received from developers regarding the timing of their projects. Certain development projects that were expected to move forward during Fiscal Year 2017-18 that are no longer included in revenue budgeted to be received includes the following: Distrito La Novia, Whispering Hills (East Canyon and West Canyon), Oliva (Phase 2), and San Juan Meadows.
Page 4 of 12 Increase in Animal Control Service Costs ($130,000)- The City's Fiscal Year 2017-18 Adopted Budget projected no increase in the City's animal control service costs for the two-year budget based on the amount ($160,000) that was expected to be paid in Fiscal Year 2015-16. However, since then, the cost of animal control services has increased. Total actual costs paid for Fiscal Year 2015-16 amounted to $176,000 ($16,000 over the amount budgeted). In April 2017, the County informed the City that the City's cost for animal control services for Fiscal Year 2016-17 and Fiscal Year 2017-18 will be $250,000 and $290,000, respectively. The primary drivers of this increase include: increased compensation costs related to recently approved Memorandum of Understanding (MOU) agreements with employee associations, a $200,000 settlement agreement that the County of Orange entered into that must be shared among the fourteen contract cities, and contracted extra help. In an effort to mitigate the increasing expenditures for animal control and animal shelter services, the County of Orange is not filling twenty-three personnel vacancies. Based on the information provided by the County, an increase of $130,000 in the amount budgeted for animal control service costs have been proposed for Fiscal Year 2017-18. Increase in Storm Drain Costs ($50,000} - On April 7, 2015, the State Water Resources Control Board adopted the Proposed Final Amendment to the Water Quality Control Plan for Ocean Waters of California (Ocean Plan) and the Proposed Final Part 1 Trash Provisions of the Water Quality Control Plan for Inland Surface Waters, Enclosed Bays, and Estuaries of California (ISWEBE Plan) (together "Statewide Trash Policy"). As a South Orange County National Pollutant Discharge Elimination System (NPDES) copermittee, the City must develop a program to comply with the Statewide Trash Policy. The current time line required for this requirement provides that by September 2017, the City must ascertain whether it intends to implement a system for its storm drains that provides full capture of trash or a system that achieves full-capture equivalency using a combination of other methodologies. Staff estimates that the cost of this new program will be approximately $50,000 for Fiscal Year 2017-18. Proposed Adjustments to Address Impact of Events Described Above In order to address the $1.2 million funding gap created by the above events, staff is proposing adjustments to the General Fund Fiscal Year 2017-18 Operating Budget that include the following: Retain Landfill Revenue ($600,000) - The Fiscal Year 2017-18 Adopted Budget appropriated $600,000 from the City's General Fund to augment funding of the City's street projects. The source of this funding was landfill mitigation revenue to be paid by the County to the City's General Fund as a result of an agreement entered into with the County in 2016. At the time of preparation of the two year budget for Fiscal Years 2016-17 and 2017-18, this funding was identified by the City as surplus funding not needed to finance General Fund operations. Accordingly, this revenue was programmed to supplement the City's funding for street projects. However, due to the significant financial challenges that have arisen in recent months, budget adjustments proposed for Fiscal Year 2017-18 include the General Fund retaining the City's landfill mitigation revenue. The impact of the General Fund's retention of this revenue is a one-year delay of one of the City's arterial street rehabilitation projects (Camino Capistrano at 1-5 Southbound
Page 5 of 12 Street Rehabilitation Project) until Fiscal Year 2018-19. In Fiscal Year 2018-19, the City will begin to receive a full allotment of increased gas tax revenues in the amount of $660,000 per annum as a result of a major street funding initiative that was recently passed by the State Legislature. In Fiscal Year 2017-18, the Gas Tax Fund of the City will receive approximately $200,000 of initial year funding from this initiative for use on City street projects. Proposed budget adjustments for the Gas Tax Fund reflect this additional revenue in the amended budget of the Gas Tax Fund for Fiscal Year 2017-18. That funding along with the substantially increased gas tax funding to be received by the City in future years will offset impacts on the City's street program that are created by the General Fund's retention of the City's landfill mitigation revenue. Reduce Budgeted Department Expenditures ($190,000) - Expenditures already approved and reflected in the budget adopted for Fiscal Year 2017-18 were revisited and departments were able to identify $190,000 of budgeted expenditures that could be reduced or delayed. Proposed budget adjustments reflect these reductions. Freeze Two Vacant Positions ($110,000)- Proposed budget adjustments include the freezing of two vacant positions (Public Works Specialist II and Associate Civil Engineer) providing a combined General Fund savings of $110,000. Reduce Training Budget ($28,000) - Substantial reductions have been proposed for planned staff training and conferences ($28,000). Increase Cell Tower Lease Revenue ($18,000) - A budget adjustment has been proposed to reflect the revenue from a new Verizon cell tower to be erected adjacent to City Hall that was not anticipated in the original adopted budget. Reduce lnterfund Charges to General Fund ($215,000) -An additional $215,000 of General Fund expenditures were reduced by adjusting the amount charged to the General Fund by other funds of the City, including the City's internal service funds. As a result of the adjustments proposed above, General Fund operating revenues are expected to exceed operating expenditures by $4,235 for Fiscal Year 2017-18, and result in a spendable fund balance of $14.8 million (55.9% of operating expenditures) for the General Fund at the end of Fiscal Year 2017-18. Total Revenues Total Expenditures Revenues Over Expenditures Spendable Fund Balance, July 1 Spendable Fund Balance, End of Period G I FundS Adopted Proposed Budget Proposed Budget Description FY 2017/18 Adjustments FY 2017/18 $ 27,260,845 $ (731,845) 27,171,870.(647, 105) 88,975 (84,740) $ 26,529,000 26,524,765 4,235 13,695,908 1,120,265 14,816,173 $ 13,784,883 $ 1,035,525 $ 14,820,408 Spendable fund balance as % of operating expenditures, excluding capital outlay 51.9% 55.9%
Page 6 of 12 Water Operations Funds The Water Operations Funds include the Operations, Debt Service, Groundwater Recovery Plant (GWRP), and Non-Potable Water Operations funds (collectively, the "Water Operations Funds"). The number of acre feet of water expected to be sold in Fiscal Year 2017-18 has been updated to reflect the quantity of water delivered to customers in the most recent twelve month period (through February 2017). This is a conservative projection of the acre feet expected to be sold in Fiscal Year 2017-18. Actual sales wi.lllikely be somewhat higher than that of the preceding twelve month period as a result of the elimination of penalties for excessive water use. The quantity of domestic (potable) water projected to be sold in Fiscal Year 2017-18 has increased from 5,513 acre feet to 6,388 acre feet. For non-potable water, based on the most recent information available regarding the demand for non-potable water, the quantity of non-potable water projected to be sold has been reduced from 694 acre feet to 560 acre feet. In addition, due to the increased level of groundwater available in the San Juan Groundwater Basin, the Fiscal Year 2017-18 annual production estimate for the Groundwater Recovery Plant (GWRP) is expected to increase from 1,475 acre feet to 3,456 acre feet. The effect of revised projections for quantities of water expected to be sold have resulted in proposed Fiscal Year 2017-18 budget adjustments that increase revenues by $1.6 million. Of this amount, $1.1 million is for increased water commodity charges due to increased customer sales and $495,250 is due to an increase in grant revenues to be received from the Metropolitan Water District of Southern California (MWD) as a result of the increased GWRP production. A detail of the proposed revenue adjustments can be found in Attachment 1. Adjustments have also been proposed for the amounts budgeted for expenses of the Water Operations Funds. Total proposed operating expense revisions will result in a net decrease in expenses in the amount of $530,405. Although imported non-potable water costs are expected to increase by approximately $20,000, imported potable water costs are expected to decrease by approximately $896,000 during Fiscal Year 2017-18 based on higher production from the GWRP than originally budgeted. These reductions in operating expenses are offset by an increase of $450,000 in estimated legal costs due to ongoing litigation. The proposed amended budget includes a use of $74,000 of funds accumulated from unexpended drought penalty citation revenue for a Limited Term Field Customer Service Representative and a Full-Time Office Assistant. The Water Conservation Coordinator is frozen through May 2018 because the Public Works/Utilities Department is using the position's funding for contracted valve and hydrant maintenance services contracted through 1-Water (approved by City Council on December 6, 2016). Further information regarding the proposed expense adjustments is provided in Attachment 1. As a result of the adjustments proposed for the Fiscal Year 2017-18 budget, Water Operations Funds revenues are expected to exceed expenses by $3.0 million even after making a loan repayment to the Sewer Funds and providing limited capital project funding. This will result in a reduction in the accumulated deficit of the Water Operations Funds from $6.7 million to $3.7 million as of the end of Fiscal Year 2017-18. The amount of the deficit takes into account the negative position of the available fund balance of the Water Operations Funds, as well as the balance outstanding on a 2015 promissory note payable by the Water Operations Funds to the City's Sewer Fund that financed water customer refunds
Page 7 of 12 and settlement costs relating to litigation that was settled in 2015. A summary of the impacts of proposed budget adjustments on the Water Operations Funds is as follows: Sewer Operations Fund Water 0 erations Funds Summ Adopted Proposed Budget Proposed Budget Description FY 2017/18 Adjustments FY 2017/18 Total Operating Re-.enues Funding from Drought Penalty Resen.e Total Re-.enues and Other Sources Total Operating Expenses Operating Re-.enues 0-.er/(Under) Expenses Loan Repayment to Sewer Funds Capital Project Funding Re-.enues 0-.er/(Under) Expenses $ 20,295,540 20,295,540 17,336,179 2,959,361 (1,496,360) (647,000) 816,001 $ 1,598,1 70 74,000 1,672,170 (395,545) 2,067,715 (34,640) 169,500 2,202,575 $21,893,710 74,000 21,967,710 16,940,634 5,027,076 (1,531,000) (477,500) 3,018,576 The proposed Fiscal Year 2017-18 Budget includes adjustments to increase revenues by $17,320 (for interest) and increase expenses by $85,224. The increase in expense projections are primarily due to the need to purchase emergency generators at the De La Vista and Rosenbaum lift stations and to increase the City's share of operations and maintenance costs for the South Orange County Wastewater Authority (SOCWA) based on SOCWA's proposed Fiscal Year 2017-18 Budget. A detail of the proposed expense adjustments can be found in Attachment 1. As a result of the proposed adjustments, Sewer Operations Fund operating revenues are expected to exceed operating expenses by $236,059, after capital project funding, which will result in a projected available fund balance of $1.7 million (49.5% of annual operating expenditures) at June 30, 2018. A summary of the impacts of proposed budget adjustments on the Sewer Operations Fund is as follows: Sewer Operations Fund Summary Adopted Proposed Budget Proposed Budget Description FY2017118 Adjustments FY2017/18 Total Operating Re-.enues $ 3,456,790 $ 17,320 $ 3,474,110 Total Operating Expenditures 3,367,827 85,224 3,453,051 Operating Revenues Over/(Under) Expenses 88,963 (67,904) 21,059 Loan Repayment from Water Operations Fund 715,000 715,000 Capital Replacement Project Funding (500,000) (500,000) Re-.enues 0-.er/(Under) Expenses 303,963 (67,904) 236,059 Fund Balance, July 1 950,672 523,144 1,473,816 Fund Balance, End of Period $ 1,254,635 $ 455,240 $ 1,709,875 Contingency reserve as% of operating expenses, excluding capital outlay. 37.3% 49.5%
Page 8 of 12 Capita/Improvement Program (CIP) As a result of delays in the receipt of development fees that provide the primary source of funding for the City's capital projects, staff proposes the budget adjustments summarized below to reduce the CIP spending that was reflected in the budget adopted by the City Council for Fiscal Year 2017-18: Capital Improvement Projects by Type Adopted Proposed Proposed Budget Budget Budget Project Type 2017/18 Adjustments 2017/18 Transportation $ 3,207,550 $ (475,000) $ 2,732,550 Parks and Open Space 853,000 (603,000) 250,000 Drainage 203,000 203,000 Buildings and Facilities 152,000 152,000 Water 882,000 (277,000) 605,000 Non-Potable Water 575,000 (324,000) 251,000 Sewer 2,555,000 (661,000) 1,894,000 Total CIP Expenditures $ 8,427,550 $ (2,340,000) $ 6,087,550 The proposed adjustments to the CIP appropriations for Fiscal Year 2017-18 are set forth below: Project Name Proposed Spending Adjustments for 2017-18 Projects Arterial Streets Major Rehabilitation Program (CIP 18109) South Orange County Wastewater Authority PC #2 Rehabilitation (07701) La Pata Water Line Relocation (CIP 16801) Capistrano Royale Fire Flow Pump (CIP 17804) Citywide Playground Upgrades (CIP 09203) Citywide Trail Improvements (CIP 07204) Traffic Signal Cabinet Upgrades (CIP 16101) Increase (Decrease) in Fiscal Year 2017-18 CIP Expenditures $ (421,000) (461,000) (467,000) 190,000 (106,000) (70,000) 18,000 Proposed Projects to Delay Los Rios Park Phase II (CIP 18204)- Delayed to Fiscal Year 2019-20 Calle Arroyo Recycled Pipeline (CIP 18601)- Delayed to Fiscal Year 2018-19 Proposed Projects to Unfund Parks and Recreational Needs Assessment Report (CIP 18203) Neighborhood Traffic Calming Projects (CIP 15102) New Hydraulic Capital Project #6 (CIP 07703) (330,000) (324,000) (97,000) (72,000) (200,000) Total Impact on Fiscal Year 2017-18 CIP Expenditures $ (2,340,000) ==,;,;,===-===
Page 9 of 12 Since the adoption of the Fiscal Year 2017-18 budget, certain changes have occurred that affect the funding sources and spending requirements of the City's Capital Improvement Program (CIP), as summarized below: The primary funding source for park projects are park in lieu fees that are paid by private developers. As a result of delays in the timeline of private development projects, at the beginning of Fiscal Year 2017-18, there will be $760,000 less funding available for park projects than had been anticipated in the originally adopted budget for Fiscal Year 2017-18. As a result, staff proposes a reduction of $603,000 in planned Fiscal Year 2017-18 capital project expenditures for parks and open space projects, including the following projects which will be delayed by one year: Parks and Recreational Needs Assessment Report (CIP 18203); Los Rios Park Phase II Improvements (CIP 18204); the Citywide Playground Upgrades Project (CIP 09203); and the Citywide Trail Improvements Projects (CIP 07204). The Citywide Playground Upgrades Project (CIP 09203) and the Citywide Trail Improvements Project (CIP 07204) are recurring projects in the City's CIP. Historically, CIP 09203 has received funding annually and CIP 07204 has received funding every other year. In the proposed Seven Year CIP, these projects would receive funding again in Fiscal Year 2018-19. Proposed adjustments to the Fiscal Year 2017-18 budget include delaying the Los Rios Park Phase II Improvements Project (CIP 18204) until Fiscal Year 2019-20 when sufficient development revenues are expected to be received. In addition, the Parks and Recreational Needs Assessment Report (CIP 18203) is recommended for unfunding at this time in view of a limited assessment that is planned for 2017. Similar to the parks and open space capital projects, the non-potable water capital projects have a cash flow challenge. The primary funding source for non-potable capital projects is revenue from non-potable water ratepayers. However, the number of active service connections is $258,000 less than expected, resulting in less nonpotable water sales revenue to be received by the City. As a result of the cash flow deficit, proposed adjustments to the Fiscal Year 2017-18 budget include a delay in funding for the Calle Arroyo Recycled Pipeline Project (CIP 18601) until Fiscal Year 2018-19. In April 2017, City staff was provided a revised capital improvement plan by SOCWA. This revised capital improvement plan requires that all SOCWA members increase their capital contributions to SOCWA based upon the capacity rights each member holds in the various components of the SOCWA wastewater treatment system. The City's share of these capital contributions through Fiscal Year 2023-24 is $5.3 million more than what had been reflected in the City's seven year CIP plan that was adopted by City Council on June 21, 2016, as a part of the City's seven year CIP program. Most of the impact of the revised SOCWA capital funding requirements will affect the fiscal years beyond Fiscal Year 2017-18. For example, although the chart above reflects a reduction in Fiscal Year 2017-18 funding for the SOCWA PC #2 Rehabilitation project (CIP 07701 ), the City's capital funding requirements for this same project in Fiscal Year 2018-19 will be $4.9 million (Attachment 3, Exhibit A, page 2). This is approximately $2.5 million more than what had been budgeted to be spent on SOCWA PC #2 Rehabilitation project (CIP 07701) in Fiscal Year 2018-19. In preparation for this ramped up capital spending that will be required in Fiscal Years
Page 10 of 12 after 2017-18, staffs proposed amendments to the Fiscal Year 2017-18 budget include the defunding of Hydraulic Capital Project #6 CIP 07703. One of the City's arterial street rehabilitation projects (Camino Capistrano at 1-5 Southbound Street Rehabilitation Project) in the amount of $421,000 will be delayed one year until Fiscal Year 2018-19, when the City will receive its full allotment of funding ($660,000) from the recently passed state legislation to increase state-wide funding for streets projects. Development impact fee revenue estimates have been reduced to reflect the most current information available regarding the timeline of private development projects for the following revenues: systems development taxes and fees, parks and recreation fees, drainage fees, Capistrano Circulation Fee Program fees, and water and sewer development revenues. In addition, Gas Tax revenue estimates have been increased based on the State legislature's recent approval of an increase to the State Gas Tax. A detailed list of the proposed CIP revenue and expenditure adjustments for Fiscal Year 2017-18 can be found in Attachment 1. It is important to note that the water and sewer system's capital project funding needs are significant to allow the system's aging infrastructure to continue to provide reliable service to system rate payers. The revenue requirements presented in Attachment 3 (specifically Exhibit A, pages 22, 25, and 26) demonstrate the level of funding that will be needed in Fiscal Years 2019-20 through 2023-24 from all sources: rate payers, grant funding, state loans, or debt issues. On an annual basis, the City adopts its updated Seven-Year CIP plan. Attachment 3 includes the Resolution and the City's Seven-Year CIP plan for the City Council's consideration and approval. Appropriations Limit Article XIII of the California State Constitution requires local governments to establish a limitation on the amount of proceeds of taxes which may be appropriated for spending. It is the City's responsibility to calculate the annual appropriations limit. The previous fiscal year's limit is increased by a factor calculated by changes in population and inflation. Cities may choose an inflation factor, which is either the change in the California Per Capita Personal Income (CCPI) or the change in the local assessment tax roll that is due to non-residential construction. The population factor option is either the growth rate in the city or the county. The choice of each of these factors is an annual election of the City by means of resolution. Based on the foregoing methodology set forth in state law, the appropriations limitation for Fiscal Year 2017-18 has been determined to be $77,109,541 (Exhibit A of Attachment 4). The City's budgeted expenditures are significantly below the limit and, therefore, the City's Fiscal Year 2017-18 Budget is in compliance with the State Constitution with respect to this matter. Property Tax Rates for Voter-Approved Bonded Indebtedness The City must annually establish those property tax rates that are necessary to cover the cost of voter-approved bonded indebtedness through an ad valorem tax rate levied on all
Page 11 of 12 properties in the city. The calculation for these tax rates is based upon th~ debt service requirements for the year in question, adjusted for any excess/deficit reserve in the Debt Service Fund, to determine the dollars needed from property tax assessments to meet the annual debt service on the general obligation bonds. This figure is divided by the estimated secured value of the property obtained from the Orange County Assessor, to arrive at a tax rate per $100 of assessed valuation. Once the rates are set, the County of Orange is notified of these rates so they can place them on the property tax rolls. The City of San Juan Capistrano currently has two such tax rates to be included on the tax rolls: Measure D - 1990 In April of 1990, voters approved Open Space General Obligation Bond Measure D for $21,000,000. This bond measure provided for the preservation of City open space land through acquisition from private property owners. Additionally, the measure provided funds for the implementation of an Open Space Master Plan and construction of specific facilities. The City acquired three parcels: the Kinoshita Farmland, the Swanner Ranch, and Williams Ranch in our Northwest Area. The bonds, originally issued from 1990 to 1992, were refinanced in June 1998 at a lower interest rate than the original bonds. The projected property valuation for Fiscal Year 2017-18 will result in a levy of $0.00591 per $100 of assessed valuation for Measure D (Attachment 5). Measure Y- 2008. On November 4, 2008, voters approved Measure Y, which provided $30 million in bond funding for Open Space, Natural Areas, and Clean Water Protection and Preservation projects. This bond measure provided for the acquisition, preservation, enhancement and improvement of land to protect and preserve open space, natural areas, creeks and streams, historic areas, undeveloped hillsides and natural ridges from potential residential and commercial development, and to provide additional recreational amenities such as bike and walking trails, equestrian facilities, parks, and sports fields. Pursuant to Measure Y, $30 million in bonds were issued under this measure in January 2010. The City used these funds to acquire approximately 132 acres at the eastern boundary of the City and has earmarked the remaining bond proceeds for the improvement of the Northwest Open Space Park. The projected property valuation for Fiscal Year 2017-18 will result in a levy of $0.02897 per $100 of assessed valuation (Attachment 6). This is a reduction of $0.72 in the amount of the annual tax levy for this bond's debt service for each $100,000 of assessed valuation, as a result of the City's recent refinancing of these bonds. Investment Policy As a part of the financial review associated with the budget process, the Finance Department and the City's investment advisor evaluated the City's investment policy. Attachment 7 to this agenda report reflects a red-lined version of the revised investment policy that resulted from this evaluation. Attachment 8 provides a clean version of the revised investment policy. It includes changes that were recommended by the City's investment advisor, PFM Asset Management. The most significant changes reflected in the revised policy are (1) replacing the 25% provision permitting investments in excess of three years with a provision that requires that the weighted average maturity of the portfolio not exceed 3.0 years (in order to
Page 12 of 12 conform to the investment management methodology of the City's investment management firm), (2) clarifying that the diversification requirements apply at the time of purchase and do not require the sale of securities prior to maturity, (3) removing the one-year timeframe provided for the delegation of authority to the City Treasurer, and ( 4) other technical changes to conform to the requirements of the California Government Code. FISCAL IMPACT: The fiscal impact of the proposed adjustments to the Operating Budget for Fiscal Year 2017-18 on each fund of the City is summarized in Attachment 2. The fiscal impact of the proposed adjustments to the Seven-Year Capital Improvement Program for Fiscal Years 2017-18 through 2023-24 is summarized in Attachment 3. ENVIRONMENTAL IMPACT: Not applicable. PRIOR CITY COUNCIL REVIEW: On June 21, 2016, the City Council approved the Fiscal Years 2016-17 and 2017-18 Operating and Capital Improvement Budget. COMMISSION/COMMITTEE/BOARD REVIEW AND RECOMMENDATION: On, May 16, 2017, the Utilities Commission recommended that the City Council approve the proposed budget adjustments for the Fiscal Year 2017-18 budget as they relate to the City's Water and Sewer Operating and Capital Funds. NOTIFICATION: Not applicable. ATTACHMENTS: Attachment 1 - Summary of Proposed Budget Adjustments Attachment 2- Resolution Amending the Fiscal Year 2017-18 Operating and Capital Improvement Budget Attachment 3- Resolution Adopting the Fiscal Years 2017-18 through 2023-24 Seven-Year Capital Improvement Program Attachment 4 - Resolution Establishing the Appropriations Limit for Fiscal Year 2017-18 Attachment 5- Resolution Establishing the Property Tax Rate for Voter-Approved Bonded Indebtedness (Open Space Measure D-1990) for Fiscal Year 2017-18 Attachment 6- Resolution Establishing the Property Tax Rate for Voter-Approved Bonded Indebtedness (Open Space Measure Y-2008) for Fiscal Year 2017-18 Attachment 7- Revised City Investment Policy (red-lined) Attachment 8- Revised City Investment Policy (clean)