A report on the Financial/Fiscal Condition of Hermosa Beach

1. Community Dialogue: Phase II
Finance Subgroup:
A Report on the Financial/Fiscal
Condition of Hermosa Beach
1

2. The team
Community Members
Rick Sowers
Ruben Jubinsky
Stacey Armato
Glen Payne
Justin Schnuelle
Erika Seward
Mary Campbell
Robert Fortunato
Manny Serrano
With assistance from:
Tom Bakaly
Wil Soholt
Viki Copeland
2

3. Overview
• Our approach / goal was to understand and communicate the City’s “Financial
Picture” in a clear, understandable manner.
• Community Dialog Finance Team looked only at the City’s budget / fiscal status
• We took a comparative approach and looked at how our City compares to other
“like” cities. There was no scientific approach to choosing the comparable
cities – each was similar in demographics or geography and serve as a
representative sample
• Finance Team divided the City’s budget / fiscal status into three questions:
1.
What is the City’s current financial condition and how does it compare
with similar cities?
2.
What are the City’s legal financial obligations and what are its “wants”?
3.
What are the City’s future opportunities and possibilities?
• Next Step: Merge the answers with the input and values from Community
Dialog Quality of Life Team to create a “tool” by which to approach and
understand important community decisions
3

4. Context
•
Summary prepared by volunteer team, under a tight timeframe
•
Dollar amounts and figures are based on best information and/or
estimates
•
Figures are based on 2013/14 budgets
•
(Excluding City of Solana figures, which are based on 2012/13
budgets)
•
Estimates and analyses are preliminary in nature and are not meant to
be an all inclusive picture
•
Based on our analysis, we believe there are significant opportunities to
explore
4

5. Question 1 - Current Financial Condition
Hermosa Beach Budget (2013/14)
REVENUES
$40 million – Total
($32 million in GF)
EXPENSES
$41 million
($30 million in GF)
Sales Tax
6%
Property
Tax
31%
Other GF
32%
Special
Funds
20%
Hotel Tax
(TOT)
5%
Utility Tax
(UUT)
6%
“Other GF” Include: Licenses & Permits,
Service Charges, etc.
“Special Funds” Include: Lighting &
Landscaping, Gas Tax, Tyco, Prop A, C, Grants
Funds, etc.
Police
28%
Fire
13%
General
Gov'mnt
9%
Public
Works
10%
Comm Serv
8%
Special
Funds
27%
Other GF
5%
“Other GF” Include: (Some) Capital
Improvement, Community Development, etc.
“Special Funds” Include: Sewer, Insurance,
Equipment Replacement Funds, etc.
5

6. Question 1 - Current Financial Condition
Five other cities evaluated for comparison are generally based on:
•
Size
•
Composition of Residents & Businesses
•
Coastal location
Not all cities provide the same type or level / quality of services; thus the
comparisons are not always apples-to-apples:
•
Manhattan, RPV & Solana have big box stores and large shopping malls;
Manhattan also has oil revenue
•
Manhattan, Laguna & Solana have major capital improvement projects
funded outside of the General Fund
•
Hermosa and RPV are the only cities with no debt
•
Manhattan has a Water Utility Dept.; Laguna invests heavily in water quality
programs
•
RPV, Sausalito & Solana contract out their Police and/or Fire services
•
Hermosa has the highest crime rate; RPV the lowest
6

7. Question 1 - Current Financial Condition
Comparison City Stats
City
Population
Land Area
(square miles)
Annual Budget*
Hermosa Beach
19,700
1.4
$41 million
Laguna Beach
23,100
8.9
$77 million
Manhattan Beach
35,400
3.9
$128 million
Rancho Palos
Verdes
42,100
13.5
$36 million
Sausalito
7,100
1.8
$25 million
Solana Beach
13,000
3.5
$25 million
* All funds
7

8. Question 1 - Current Financial Condition
Revenue & Expenses Per Capita (per person)
$4,500
$3,935
$4,000
$3,642
$3,602
$3,540
$3,384
$3,500
$3,188
$3,000
$2,500
$2,313
$2,428
$2,038 $2,099
Revenue
Expenses
$2,000
$1,500
$1,000
$862
$864
$500
$-
Hermosa
Beach
Laguna
Beach
Manhattan
Beach
Rancho
Palos
Verdes
Sausalito
Solana
Beach
8

9. Question 1 - Current Financial Condition
Revenue Per Capita
$4,000
$3,500
OBSERVATIONS
• Hermosa has lower
revenue per capita
than all cities with
the exception of
RPV
$3,540
$3,384
$3,188
$3,000
$2,500
$2,313
$2,038
$2,000
$1,500
• Special use funds
are less than 25%
of the majority of
the other cities
$862
$1,000
• The City has lower
sales tax revenue
than the
comparison group
$500
$0
Hermosa
Beach
Laguna
Beach
Manhattan
Beach
Rancho
Palos
Verdes
Sausalito
Solana
Beach
Sales Tax
Property Tax
Hotel Tax (TOT)
Utility Tax (UUT)
Other GF
Special Funds
9

10. Question 1 - Current Financial Condition
Type of GF Revenues
(portion of each individual city’s revenue)
100%
OBSERVATIONS
• Hermosa has lower
general tax collection
than the comparison
cities (UUT, TOT, Other)
80%
• The City has higher
service charges and
fines and penalties.
Parking and related
enforcement is the
largest portion of this.
60%
40%
20%
0%
Hermosa
Beach
Laguna
Beach
Manhattan
Beach
Taxes
Fines and Penalties
Intergovernmental Revenues
Other Revenues
Rancho
Palos
Verdes
Sausalito
Solana
Beach
Licenses and Permits
Use of Money and Property
Service Charges
10

11. Question 1 - Current Financial Condition
Tax Revenue By Type
100%
OBSERVATIONS
• Hermosa has comparable
property tax revenue
80%
• The City has lower Sales
& Use Taxes and TOT
(Hotel tax)
60%
40%
20%
0%
Hermosa
Beach
Laguna
Beach
Manhattan
Beach
Rancho
Palos
Verdes
Sausalito
Solana
Beach
Property
Sales & Use
TOT
Business License
UUT
Franchise
Property Transfer
Other
11

12. Question 1 - Current Financial Condition
City Expense Detail (Per Capita)
$4,500
OBSERVATIONS
• Hermosa has lower costs
on General Government
than half the comparable
cities
$3,935
$4,000
$3,642
$3,602
$3,500
$3,000
$2,428
$2,500
$2,099
$2,000
• Sausalito and Rancho
Palos Verdes do not
operate a fire department
$1,500
$864
$1,000
$500
$0
Hermosa
Beach
Laguna
Beach
Manhattan
Beach
Rancho
Palos
Verdes
• “Other funds” is a large
portion of expenditures
in other cities
Sausalito
Solana
Beach
General Gov'mnt
Fire
Police
Public Works
Comm Service
• Solana Beach
outsources their police
force (this is likely in
special funds)
Other GF
Special Funds
12

13. Question 1 - Current Financial Condition
General Fund Expenditures by Program
100%
OBSERVATIONS
• Hermosa has lower costs
on General Government
than half the comparable
cities
80%
40%
• Public Safety is the
largest component of
expenditures (56% of
budget)
20%
• The City has the lowest
expenditures for
community development
60%
56%
53%
58%
24%
39%
62%
0%
Hermosa
Beach
Laguna Manhattan Rancho
Beach
Beach
Palos
Verdes
Sausalito
General Government
Community Development
Public Safety
Public Works
Solana
Beach
13

14. Question 1 - Current Financial Condition
Other Metrics
Crime Index*
City
(Safer than X% of US
Cities
Higher is better)
Residents
per City
Employee**
Schools
(2012 Base API
Higher is better)
946 (Primary)
General Prop Tax
Supplemental for
K-12 Education
Hermosa
Beach
21
136
916 / 858 (MC/RU
High)
Laguna
Beach
28
60
923
1.019 – 1.048%
Manhattan
Beach
32
127
940
1.091%
Rancho
Palos Verdes
66
523
924
1.077%
Sausalito
29
119
740
1.074%
(Primary Only)
0.055%
Solana
Beach
43
217
944
1.027%
(Primary Only)
0.023%
1.039%
0.018%
0.016%
0.070%
0.023%
14
* http://www.neighborhoodscout.com/ca/los-angeles/crime/
**Per Full Time Equivalent

15. Question 1 – Current Financial Condition
Takeaways
•
Annual Budget of $41 Million
•
No Outstanding Debt
•
No Structural Debt
•
Comparatively low sales tax revenue
•
Lower property taxes (less revenue for schools)
•
Limited special fund revenues - other cities use
special funds for sewer, water, refuse, parking,
special districts, etc.
•
Highest crime rate (includes all types) even though
public safety is the largest expenditure
15

16. The Three Questions
1. What is the City’s current financial
condition and how does it compare
with similar cities?
2. What are the City’s legal financial
obligations and what are its “wants”?
3. What are the City’s future
opportunities and possibilities?
16

17. Question 2 – Obligations & “Wants”
City’s Legal Obligations vs. “Wants”
The City has two legal obligations to pay for:
1. Pensions and retiree health care
2. Oil Settlement
The rest of expenses are “wants” even if we, as
a community really, really want it.
•
As a community, do we want “1st class level of
services” or something lower?
•
The following list of “wants” is supposed to be all
encompassing to give everyone basic info about
each want BUT there is no obligation to do any of
them.
17

18. Question 2 – Obligations & “Wants”
Pension & Retiree Health Care Obligations
•
Pensions cost is $3.7 million / year or about 12% of
the General Fund
•
Other Post-Employment Benefits (OPEB) cost is
~$900,000 / year from the General Fund
•
Cost is estimated to rise about 4% or $150,000 per
year for the next 5 years
•
Growth of long-term obligations slowed in July 2011
and again in January 2013 by adding tiers
•
Please note that city employees are not eligible for
Social Security like private-sector workers
18

19. Question 2 – Legal Obligations
Oil Settlement Summary
• Vote Against Lifting the Oil Drilling Ban
• $17.5 million settlement payment to E&B
• $6.0 million in insurance reserves already set aside by City.
• City has several financing options to pay the settlement over multiple years.
The best option is still to be determined.
• No potential oil revenues
• Would not bankrupt the City but may affect the quality of service provided at
current revenue rates
• Vote in Favor of Lifting the Oil Drilling Ban
• $3.5 million settlement payment to E&B (already set aside by City, expected to be
paid with oil royalties)
• City to pay to relocate/construct new Maintenance Yard and employee parking
• Current estimate is $10.8 - $18.8 million (upgraded facility and parking)
• E&B to loan City $575k+ for temp and new yard (lower of prime rate or 12%,
repaid with royalties)
• Loss of ~$180,000 annual revenue from self storage building
• Potential oil revenues to City in the future
19

20. Question 2 - Future “Wants”
Capital Improvements Rough Cost Estimates
Project
New Sewer System
Storm Water Upgrades
Hermosa Ave Infiltration
South Park Infiltration
Park Upgrades
Community Center Reno.
CC – Theater Upgrades
New Maintenance Yard
New Police Building
New Fire Station
New City Hall
Remaining Life
(Yrs)
Total Budget (Millions)
Limited
$14.0
2
2
Varies
-18
$1.0
$6.0
$15.8
$29.2 (total redo)
$6.2
$10.0 - $18.8 (w/ parking)
$10.8
$5.0
$10.8
5
5
5
10
TOTAL
Ongoing Improvements
Sewer Improvements
Street Improvements
TOTAL
•
$108.7 - 117.5 million
Remaining Life
(Yrs)
Limited
Varies
Annual Budget (Millions)
$1.0
$0.7
~$1.7 million annually
Some capital improvements required just to
maintain current level of core services
20

21. Question 2 – Obligations & “Wants”
Takeaways
• Reasonable pension costs due to action
taken in prior years
• Oil Settlement obligations no matter which
way the vote goes
• Aging City infrastructure
• The current revenue pie is not big enough to
support all infrastructure improvements
(approx. $100 million)
• High service level expectations
21

22. The Three Questions
1. What is the City’s current financial
condition and how does it compare
with similar cities?
2. What are the City’s legal financial
obligations and what are its “wants”?
3. What are the City’s future
opportunities and possibilities?
22

23. Question 3 - Opportunities & Possibilities
Choices Currently Being Considered
•
Increase Fees/ Taxes
•
Increased Height / Density
•
Decrease Service Levels
•
Delaying Improvements
•
Financing / Issuing Debt
•
Drill for Oil
Priority Should Be Given To:
•
Creatively Increasing and Diversifying Revenues
•
Creatively Increasing Efficiencies
23

24. Question 3 - Opportunities & Possibilities
Some Possibilities
Description
Increase
Revenues
Increase
Efficiencies
Quality of Life /
2nd Order
Revenue
Fostering business development - reducing
barriers to entry and regulatory friction
Free parking during business hours
Redevelopment of properties / uses
Business retention
Resident / local business attraction
Multiple utilities in shared trenching
Valet, automated parking
Smart parking solutions, congestion pricing
In-town circulation improvements (esp. bike & ped)
Limited height variances & density increases
24

25. Question 3 - Opportunities & Possibilities
Some Possibilities
Description
Increase
Revenues
Increase
Efficiencies
Quality of Life /
2nd Order
Revenue
Carbon neutrality
Bury power lines
Partnerships (i.e. shared use of community
theater w/ schools)
Health & well-being
Roadway beautification
Vacation rental regulation
Eco tourism
Academic innovation / hub
Fire / Police station site configuration
Civic center redevelopment
25

26. Question 3 - Opportunities & Possibilities
Some Possibilities
Description
Increase
Revenues
Increase
Efficiencies
Quality of Life /
2nd Order
Revenue
Recreation attractions / destinations
Enhanced beach services / membership
Additional undersea cable(s)
Incubator, flex & shared space
Oil drilling
Entertainment & art attractions / destinations
Enhancements to schools, STEAM, music and arts
education
26

27. Question 3 - Opportunities & Possibilities
Takeaways
• Many opportunities and possibilities
• Only limited by our ability to engage this
talented community and think and act
differently
• Paths depend on values, priorities and ability
to innovate
27

28. Next Steps
• Incorporate these ideas into your Strategic
Planning session to differentiate our City in a
way that is a meaningful attractor to
businesses, tourists and residents who share
our values.
• Have City Government proactively work with
the Community to find creative ways to be
more effective in providing better service
while reducing waste and inefficiencies.
28

29. Appendices
29

30. Question 1 - Current Financial Condition
About City Budgets
Budgets usually include a “General Fund” and
several “Special Funds”
•
•
•
General Fund (“GF”) covers general government
operations, typically including City staff, police,
fire, parks, and public works
Special Funds are restricted funds that can only
be used for specific uses. These uses typically
include water and sewer utilities, storm water
system, and other capital improvements.
The City’s Special Funds include things like
Sewer Fund, Equipment Replacement Fund,
Insurance Fund, Downtown Enhancement Fund
30

31. Question 1 - Current Financial Condition
What has the City done to cut expenses?
•
•
•
•
•
Cut City staff costs by 11% from 2010 to 2013.
No salary or cost of living increases for City staff
since 7/1/2009.
City negotiated pension obligations lower in 2011.
State negotiated pension obligations lower again in
2013.
City deferred purchasing ~$900,000+ of new City
vehicles like ambulances, and fire engines that are
only now being purchased.
City recently rebid major service contracts (i.e.
landscaping, street sweeping, liability admin, etc.)
31

32. Question 1 - Current Financial Condition
Appendix
Personnel costs have been reduced
Year
2010
2011
2012
2013
Reg Salaries
$10.4 MM
$10.0 MM
$9.7 MM
$9.5 MM
Personnel Cuts in 2011 and 2012:
•
•
•
•
•
•
•
•
Assistant Fire Chief
Community Resources Director
Human Resources Director
Police Officers (3)
Paramedics (3)
Public Works Inspector
Planning Associate
Associate Engineer
• Combine Code Enforcement
Officer and Sr. Building Inspector
• Recreation Coordinator
• Court Liaison
• Office Assistant
• Maintenance I
• Associate Engineer
• Senior Equipment Mechanic
32

33. Question 3 - Opportunities & Possibilities
Other Considerations
Raising taxes generally requires between 50.1% 66.7% vote depending on type of tax, and end use
Increasing taxes may reduce demand – i.e. increasing
sales tax can marginally impact local sales
33

34. Question 3 - Opportunities & Possibilities
Project Fund
Debt - Annual Costs ($MM, Bonds)
$
15,000,000
20,000,000
25,000,000
30,000,000
40,000,000
50,000,000
3.0%
4.0%
$ 800,000 $1,000,000
1,100,000
1,300,000
1,400,000
1,600,000
1,700,000
1,900,000
2,200,000
2,500,000
2,800,000
3,200,000
Interest Rate
5.0%
6.0%
7.0%
$1,100,000 $1,200,000 $1,400,000
1,400,000
1,600,000
1,800,000
1,800,000
2,000,000
2,300,000
2,200,000
2,400,000
2,700,000
2,900,000
3,300,000
3,600,000
3,600,000
4,100,000
4,500,000
Approximate annual costs, based on 30 year bond
34

35. Question 3 - Opportunities & Possibilities
Credit Ratings impact interest rates
Prime
High Grade
Upper Medium Grade
Lower Medium Grade
Speculative
Highly Speculative
Substantial Risks
In Default / Little
Chance for Recovery
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBBB+
BB
BBB+
B
BCCC+
&
Below
AAA: Santa Monica
AAA: Pasadena
AA+: Manhattan Beach, Sausalito
AA-: Solana Beach
Laguna Beach,
RPV,
Hermosa Beach
not rated, no direct “City” debt
Non-Investment
Grade
Stockton
Vallejo
35