HomeMy WebLinkAbout04.0- Announcements Entered Into Rec, at MCC/CDC Mtg: L�L/7i z
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Agenda Item No: — A
Fin b Crfy ClerklCD Secretary
City of San Bernardino
City of San Bernardino
p Budgetary Analysis and
San Bernar Recommendations for Budget Stabilization
Prepared by.
N'pSA &
e
City of San Bernardino, California
Finance Department
300 N D Street, 4'h Floor
San Bernardino, California
City of San Bernardino, California
June 26, 2012
To Mayor and Common Council:
This report contains an analysis of the City's FY 2007-08 to FY 2012-13 budgets,
budget projections and recommendations for budget stabilization and resiliency in
California's cyclical economy. The purpose of the analysis was to identify cost
containment and cost recovery strategies necessary to reduce costs and increase
revenue so the City can align expenditures with annual revenues while addressing
immediate and long-term fiscal obligations.
The City of San Bernardino has been affected by the serious economic recession as
have other cities and has taken steps over the last several years to reduce costs.
Nevertheless, costs continue to outpace revenue due to increased operational
expenses and significant rapid declines in property tax revenues as a result of a drop in
property values and decline in sales tax revenue. Deficits of major proportions are
projected in all five years of the forecast created as part of this project. To ensure basic
operational service levels are maintained and anticipated cash flow requirements are
met, steps will be needed immediately to reduce costs.
A deficit was projected in the City's FY 2011-12 Budget, and with the loss of
redevelopment, we assume the deficit issues will be more significant until the assets
held by the Successor Agency can be liquidated and placed back on the property tax
rolls. Measures are necessary to mitigate ongoing costs and/or enhance revenue
generation during the current fiscal year and the upcoming 2012-13 fiscal year. It is the
organization's top priority to address these issues with the adoption of the FY 2012-13
operating budget, as the City's reserves and discretionary funds have been depleted,
and the City faces insolvency. Simply put, the City must now take substantial action to
reduce its spending and increase revenues.
The action plan attached identifies realistic short and long-term solutions to address the
financial challenges lying ahead for FY2012-13 and thereafter. The plan is broken
down into two phases; Phase 1) Immediate Budget Balancing and Cash Flow
Management Plan; and Phase 2) Budget Stabilization Plan. City Management staff look
forward to assisting the Mayor and Common Council in implementing these necessary
phases though a series of tough decisions to balance the City's financial resources with
the cost of delivering essential City services.
Attachment A to this report provides a look at the numbers involved and City staff will be
holding a Budget Workshop for the Mayor and Common Council whereby the City
Departments will be presenting their budgets. The budget details at the workshop will
include proposed deep cuts with the goal of presenting a balanced budget to the Mayor
and Common Council for adoption in July 2012.
If these measures do not achieve immediate and substantial cost savings, then the City
will have to explore other alternatives to deal with its fiscal crisis, including developing
plans for reducing costs further and providing lower service levels, suspending certain
debt payments from unrestricted sources, consideration of AB 506 proceedings to
restructure debt obligations, including unfunded liabilities, and preparation for a potential
Chapter 9 filing.
Respectfully Submitted,
Andrea Miller Jason Simpson
Interim City Manager Director of Finance
Table of Contents
CONTENT
EXECUTIVE SUMMARY .................................................................................................1
BACKGROUND...............................................................................................................3
BUDGET PROJECTIONS .............................................................................................17
FISCAL SUSTAINABILITY PLAN ..................................................................................27
BUDGET STABILIZATION OPTIONS ...........................................................................27
CONCLUSIONS ...................................... .. ........ .. ...... .. ............................................43
TABLES
Table 1 Major Revenue Trends From 2008-2012........................................................3
Table 2 Housing Starts, Sales and Investment ...........................................................4
Table 3 Land Use by Net Taxable Value.....................................................................5
Table 4 Sale Tax Comparison ...................................................................................6
Table 5 Unemployment Comparison .........................................................................6
Table 6 5-Year Budget & Fund Balance Estimates ...............................................3333
Table 7 5-Year Expenditure Projections by Department ......................................272-7
Table 8 FY 2011-12 Personnel Expenditures by Department...............................272-7
Table 9 Comparison of Paramedic Subscription Programs .................................272-7
Table 10 Historical Pension Expenses ... ... ... ... .. .. ... ... ... ... .._.. .. ... .. ... ... .. . 36
Table 11 Revenue Options Summary.........................................................................42
ATTACHMENTS
ATTACHMENT A: 5-YEAR FORECAST
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EXECUTIVE SUMMARY
San Bernardino, like many California cities, has faced a reduction in one-time fees and
tax revenues that have significantly outpaced increases in expenditures outside of the
City's control. This report provides an update on the City's fiscal condition and
discusses changes that are necessary to avoid significant impacts to basic service
delivery and the possibility of bankruptcy. Reserves in the General Fund were
exhausted years ago, reserves in the internal service funds were also depleted and the
City has encumbered itself with various debt obligations and labor agreements putting
additional and unnecessary risk on the General Fund. The City has declared numerous
fiscal emergencies based on fiscal circumstances and has negotiated and imposed
concessions of $10 million per year and has reduced the workforce by 20% over the
past 4 years. Yet, the City is still facing the possibility of insolvency due to a variety of
issues including accounting errors, deficit spending, lack of revenue growth, and
increases in pension and debt costs. The City has reached a breaking point and faces
the reality of deficient cash on hand to meet its contractual and debt obligations due in
July 2012.
Staff believes this report provides a comprehensive understanding of the City's current
fiscal condition. To assist the Council to begin making the difficult and courageous
decisions necessary to address the City's fiscal issues, staff has been reviewing and
analyzing conditions and mechanisms which affect the current and future financial
performance of the City. This report is not to serve as a detailed implementation plan to
address the issues in a specific manner. Rather, the report is drafted to validate the
immediate need to take action and to provide staff with policy direction necessary to
develop a specific cost reduction strategy to bring revenues inline with expenses in an
attempt to avoid insolvency if at all possible.
The options available to the City involve difficult choices and require the support of the
organization, the Mayor and Common Council, and the community. Over the past
several years, the City has utilized General Fund reserves, asset sales and one time
revenues to maintain City services. To address the projected deficits in previous fiscal
years, the City has reduced positions, negotiated compensation reductions, and
implemented new revenue measures. Unfortunately, the decline in taxable sales and
property values over the last several years has resulted in revenue losses of $10 to $16
million annually. Additionally, previously negotiated compensation reductions will
sunset at the conclusion of fiscal year 2011-12 creating an increase in salaries and
benefits of $10 million effective July 1, 2012, and increased costs in future years as
merit increases resume. Beginning in FY 2012-13, expenditures are projected to
exceed revenues by $45 million and absent any changes to improve revenues and
reduce expenditures, the City will face increasing annual deficits. The City's financial
constraints are compounded with the depletion of all General Fund reserves, which
were as high as $19 million in 2001, and failure to fund long-term liabilities.
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Viable options to balance expenditures against revenues require new service delivery
models involving reducing personnel levels and associated costs, revenue measures
which require voter approval, revised fee structures which can be approved by the
Common Council, and/or further compensation and benefit reductions. While such
increases are possible, the options are constrained by current economic conditions
including high unemployment, low per-capita incomes and the expressed concerns of
burdening current residents and businesses with further tax or revenue fee increases.
As outlined in this report, staff has developed a plan to stabilize the City's financial
situation including the following key areas:
• Service delivery model changes
• Changes in compensation philosophy
• Revenue increase options
The next step for the City will be to create an implementation plan which will identify
cost reductions that the City can make without the need for agreement from the labor
groups, tax measures that the City Council may wish to consider, and additional labor
negotiations. Without question, the timely implementation of Phase 1, Immediate
Budget Balancing and Cash Flow Management Plan, is necessary given the current
fiscal crisis and the expected cash-flow constraints expected and rapidly approaching in
fiscal year 2012-13 and beyond.
Since the City has a current deficit in its General Fund, the City does not have sufficient
unrestricted cash available to pay its ongoing obligations. As such, substantial and
immediate action is necessary to remedy this dire situation.
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BACKGROUND
The City of San Bernardino is located in San Bernardino County in Southern California.
Pursuant to the State Department of Finance (May 2012), the City's population is
211,674 residents. Population has increased rapidly since the 1970's, but since the City
is mainly a bedroom community, the growth has outpaced the revenues needed to
provide services. The largest employers are local government agencies, California
State University San Bernardino, San Manuel Band of Mission Indians, and San
Bernardino Community Hospital. The business base is geared to the support of these
employers.
Since the City's peak of General Fund revenue in 2008 of $133 million, the City has
experienced losses in key areas such as sales tax, property tax, franchise fees, utility
users tax (UUT), permits and funds transferred from the Economic Development
Agency (EDA). The chart below details the reduction of roughly $11.69 million in
General Fund revenues.
Table 1
Ma or Revenue Trends from 2008-2012
Revenue Source Peak Revenue 2011-12 Variance
2007-2008 Revenue
Prop. Tax Secured $11 .6M $9.5M ($2.1M)
Prop. Tax in Lieu of VLF $18.9M $15.7M (S3.2M)
Sales Tax $22.3M S1 9.03M ($3.27M)
Franchise $3.32M $2.88M ($450K)
UUT $24.4M $22.5M (S1 .9M)
Licenses and Permits $9.2M $8.6M ($600K)
Totals $89.72M $78.21M ($11.69M)
The chart above is consistent with the findings in other California cities. According to a
recent blog by calculaterisk.com, which was shared by the City's property tax consultant
HdL, who is predicting that nationwide we are near the housing bottom. There are
actually two bottoms for housing. The first is new home sales, housing starts and
residential investment. The second is for sales prices. Sometimes these can happen
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years apart. Calculaterisk.com reports that the first housing bottom was spread over a
few years from 2009 until 2011. They believe the second bottom, prices, hit in March
2012. This doesn't mean prices will increase significantly any time soon. Usually
towards the end of a housing bust, normal prices mostly move sideways for a few more
years, and real prices adjusted for inflation could even decline for another 2 or 3 years.
It is reasonable to assume the housing market will find its bottom at some point in the
very near future; if it hasn't already. The chart below provides an illustration of the
national housing market since 1968. While this may be the steepest decline in over 40
years, we shouldn't assume an aggressive increase of investment or pricing. Rather,
we would be wise to assume no to slow growth over the next several years leading to
flat property tax revenues for residential properties in 2012-13 with slight growth over
the next fiscal years. Commercial properties continue to search for the bottom. Based
on information from the City's property tax consultant, HdL, for FY 2012-13 the City
faces $17,202,341 of non-residential property tax appeals exposure to its total assessed
value. The current appeals figure isn't significant, which may lead us to a bottom of
commercial prices as well. Overall, City revenues generated from property
assessments are expected to be flat.
Table 2
Historical Home Starts, Sale and Investment
Comparing Peaks and Troughs for Starts, New Home Sales,and Residential Investment
—Starts,Single-Family —New Home Sales Reslderrtlal Investment as Percent of GOP
4000 I 7.0%
11800 _—_ -- W1
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1.600
y 1400 . —_ _ 5.0%
N
F 1,200
7
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Because we do not anticipate much growth with housing new starts or employment in
the near future, and with the loss of the EDA, we should assume construction related
permit activity will also be flat or possibly continue with its decline. Permit activity within
most California cities has been very volatile with trends pointing to decreasing activity.
The chart below reflects the City's property tax base according to land use. Typical of a
large, older community, the City is fairly balanced with 52% of taxable property
assessed value as residential, 19% commercial and 15% industrial. Despite the
diversity in property tax generation, 80 % of the City's taxable parcels are residential.
Because of the high percentage of residential parcels, we should assume service
requirements will remain high and that a sustainable and resilient revenue base is vital
to support essential City services.
Table 3
Land Use by Net Taxable VaIUE
Category NetTaaable Value Numberof Parcels
Residential $5,337,905,953 44,947 Land Use by Net Taxable Value
Commercial $1,988,781,002 2,295 h4kca neous
Industrial $1,557,715,525 M I%
Nasrellaneous $86,979,310 346 Bowrrmem
Government $5,397,890 12
Institutional $56,782,161 207
Dry Farm $1,382,18.5 7 ^�
Recreational $25,297,404 58 dyb g%
IniB ted $43,094 1
Veen $356,9]$079 4,524
Exempt $0 3,347 Vaslt arum
Outer Parcels $7,500 41 O%
SBE Nonunitary $5,219,774
Personal(Unsec) $862,093,032 ON
Unknown $24,201,315 61 Omwaarob
$A308,219,224 56,526 0%
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Based on data provided by the City's sale tax consultant, HdL, the City's sales tax
revenue diversity reflects the statewide average for all business types (see charts
below).
Table 4
Sales Tax Comparison
City of San Bernardino Statewide Totals
■ Restaura ■ Restaura
■ Business ■ Food and nts& ■ Business ■ Food and nts&
and Drugs Hotels and Drugs, Hotels,
Industry 6.03% 11.60% Industry, 6.60% 13.00%
12.71% 16.51%
■ General
■ General Consume
Consume r Goods,
■ Buildin r Goods 27.06%
and 29.75%
■ Buildin
Construct
and
ion Construct
10.179'0 ■ Autos ■ Fuel and ion ■ Autos ■ Fueland
and Service 7.80% and Service
Transport Stations Transport Stations,
ation 14.16% ation, 14.52%
15.57% 14.50%
The overall diversity of the sales tax base within the City presents an opportunity for
future revenue growth. The City's population, size, and economic development
opportunities on former EDA properties provide for an optimistic outlook. Despite these
positive traits, the City will need to play a role in job creation in order to fully realize its
true sales tax generation. As the table below indicates, the City unemployment rate as
of April 2012 was 15.7%. When compared to the State of California and San
Bernardino County unemployment figures for April 2012 of 10.9% and 11.7%
respectively, we begin to understand this as a component of a decline in sales tax
generating revenues well below the peak in 2007-08.
Table 5
Unemployment Comparison
State of California County of San Bernardino City of San Bernardino
10.90/0 11.7% 15.7%
Unemployment rates as of April 2012
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■■
The City may want to establish a working relationship with the County's Workforce
Investment Board on job placement and/or an economic farming program to grow local
businesses which could lead to local job creation.
STRENGTHS WEAKNESSES OPPORTUNITIES & THREATS (SWOT) ANALYSIS
To best understand the issues facing the City and to develop a go-forward plan, a
Strengths, Weaknesses, Opportunities, and Threats (S.W.O.T.) analysis was completed
at a macro level with the following findings:
Strengths:
• The City maintains several enterprise operations including Refuse, Water, and
Sewer.
• The former EDA, now the Successor Agency, owns real property assets needed
for economic development opportunities throughout the City, including the
Carousel Mall
• Sales tax revenue diversity leading to decreases in sales tax leakage
• Strategic location within the region
• Diversified employment and tax base
• Measure Z approved by the voters for expanded services
Weaknesses:
• Starting General Fund balance has been erroneously stated for the past 2 fiscal
years
July 15 Staff Reported Fund
Fiscal Year Audited Fund Balance Balance
FY 2009-10 $2,708,319 $2,557,900
FY 2010-11 $410,293 $1,770,400
FY 2011-12 $(1,181,603) $2,044,100'
'Mid-Year report presented April 3, 2012.
• Failure to complete the FY 2010-11 audit on time delayed necessary budget
reductions further depleting cash
• Expenses are over budget in FY 2011-12.
• Use of reserves to balance past budgets
• No reserves to balance future budgets
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• Depletion of Internal Service Funds to balance the previous budgets
• High capital lease balances for equipment which is traditionally funded through
Internal Service Funds
• Insufficient economic development programs in place due to loss of
redevelopment
• High ratio of public safety costs to overall General Fund revenues
• Unemployment above State and County averages
Opportunities:
• Privatization of City services beyond base level and for one-time or fluctuating
programs
• Implementation of an Early Retirement Incentive Program (ERIP)
• Place a priority on economic development programs
• Reallocate general government costs to General and Restricted Funds
• Revenue enhancement and optimization including the sale of surplus City assets,
marketing of the ambulance subscription program and balancing one-time fee
revenues with appropriate staffing levels
• Delay capital projects and low priority one-time expenses to preserve capital
• Open negotiations with employee labor groups in an effort to seek sustainable
compensation and staffing levels
Threats:
• The possibility of insolvency and the need to initiate a neutral evaluation process
under AB 506 process
• Depletion of operating cash which will affect the City's ability to meet debt
obligations and to carry out all desired programs and projects
• Sunset of employee compensation concessions on June 30, 2012, of S10 million
annually
• Anticipated increases in employee benefit costs due to PERS and health care
rate increases
• Loss of the Economic Development Agency resources to support economic
development programs / projects
• Insufficient resources for needed infrastructure improvements and repairs.
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• State budget impacts and overall failure of the State Legislature to focus on their
own financial issues
• General Fund Reserves will remain depleted and the City's operating condition is
at risk without immediate implementation of cost cutting measures, enhancement
of revenue collection measures, and implementation of new revenues
• Slow growing revenue base underperforming when compared to expenditure
growth
Based on the immediate need to improve cash flow and reduce expenses and the
findings of the SWOT analysis, the recommendations have been structured to
implement the two phases of proposed financial restructuring; Phase 1) Immediate
Budget Balancing and Cash Flow Management Plan; and Phase 2) Budget Stabilization
Plan. To fully understand the impacts of the proposed financial restructuring, each
Phase of restructuring is presented in the following three areas; 1) Operations; 2)
Personnel; and 3) Revenue.
Operations:
Phase 1
1. Freeze and/or eliminate all vacant non-essential positions.
2. Evaluate restructuring Fire personnel with the possibility of closing one or more
inefficient Fire Stations to reduce overtime with minimal impact to response
times.
3. Evaluate restructuring of Police personnelat with the possibility of reducing non-
essential services and administrative duplication while maintaining a high level of
service to the community.
4. Reorganize the Community Services and the Public Works Departments in an
effort to implement full-cost recovery of operations, better utilization of restricted
funds and evaluate consolidation of duplicate services and administrative
functions.
5. Evaluate the City Attorney's Office related to contracting out additional legal
services under the management of the City Attorney.
6. Defer one-time equipment and capital improvement purchases without dedicated
funding sources.
7. Implement full cost recovery for fees such as building, planning, etc.
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Phase 2
8. Continue to defer funding accrued liabilities for retiree health, workers'
compensation and general liability until FY 13-14.
9. Evaluate joint services and public/private partnerships (P3).
10.Implement a quarterly review of expenditures and freezing of expenditures if
necessary.
11 .Strengthen revenue collection measures involving existing revenue sources
including code enforcement, false alarm fees and paramedic subscriptions.
12. Implement best practices for revenue audits every 5 years of UUT, TOT and
Franchise Agreements starting in FY 2012-13.
13.Implement cost containment strategies balancing activity levels with available
resources.
Personnel:
Phase 1
1 . Best practices and industry standards now recommend the City have employees
pay the employee portion of retirement costs.
2. Consider implementation of an Early Retirement Incentive Program (ERIP) as an
option to lower personnel costs to sustainable levels.
3. Consider negotiating with employees to fund a portion of the employer share of
retirement costs.
Phase 2
4. Revise the "step" process to slow down the average annual growth of salaries
thereby structuring the growth in salaries with anticipated revenue growth.
5. Evaluate the use of part-time/contract employees or rehire retirees on part-time
basis.
6. Implement an overtime reduction and management plan to reduce unanticipated
overtime expenses.
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Revenue:
Phase 1
1. Adopt and implement comprehensive financial policies to ensure current and
future deficits are avoided.
2. Initiate the voter-approved process to increase property transfer tax to levels
consistent with other agencies.
3. Expand Utility Users' tax to include sewer and sanitation.
4. Consider an increase in the current ambulance subscription fee from its current
S24 per year to the regional average of $48.
5. Sale of all City/Successor Agency-owned parcels in order to generate additional
property taxes as well as economic development once the transfer occurs.
6. Sale of cell tower lease revenue agreements for one-time lump sum payment
7. Review Sanitation operations to identify and implement cost reduction
opportunities necessary to ensure the Sanitation enterprise can pay its S3.5
million Franchise Fee to the City.
Phase 2
8. Conduct an audit of property assessments and tax bills to possibly generate
additional revenue that was lost due to across-the-board reductions by the
County of San Bernardino during the downturn in the economy.
9. Consider implementation of a Community Financing District (CFD) on new
development necessary to pay its fair share impacts on public safety services.
10.Analyze the opportunity to consolidate the City's 74 maintenance districts in an
effort to reduce City administrative costs and any General Fund subsidies.
11 .Consider implementation of a street sweeping fee to recover costs for the
services provided.
12.Parcel Tax for Public Safety could be raised with declaration of fiscal emergency
for lower voter threshold.
13.Implement performance measures within the false alarm fee program necessary
to recover costs of police services.
14.Review fee structure for Building and Planning permit revenues along with
incentives for large projects and expedited permit fees.
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0`
BUDGET PROJECTIONS rM
City staff has developed budget projections through 2016-2017 that project annual
General Fund operating deficits of $45 million with expenditures significantly exceeding
revenues in each year. Roughly half of the annual deficit is attributed to unfunded
liabilities in City's Retiree Health, Workers' Compensation and General Liability
accounts. The remaining half is attributed to increasing operational costs and the end
of employee concessions. As early as FY 2009-10, expenditures exceeded revenues
and the City had begun to utilize prior year fund balances to avoid service cuts or delays
in projects. Because expenditures continue to exceed revenues, fund balances have
been depleted and have reached a critical point in 2012-13 where the City will begin the
year with an actual deficit and significant cash flow constraints. Put into perspective,
this projected deficit in 2012-2013 represents almost 38% of the General Fund budget
for that year. The remaining fund balances cannot pay for ongoing operating costs and
large sustained reductions will be required. Reducing ongoing expenses must largely
come from ongoing reductions in personnel costs since these costs represent about
75% of total General Fund expenditures. Of the personnel costs in the General Fund
about 78% are for public safety.
The State's budget included takeaways from cities including the elimination of
redevelopment agencies and the remaining portion of vehicle license fee (VLF)
revenues. (VLF) revenue losses from the State budget are approximately $1 million.
Additionally, the City is faced with increasing pension costs, as CalPERS adjusted the
investment returns increasing retirement costs to all its members starting in FY 2013.
Cost recovery measures would strengthen the City's financial position and greatly
improve its bottom line. While some cost recovery measures can be implemented at the
Council level, significant revenue sources require voter approval which is uncertain and
not within control of the City staff.
TIMING OF COST REDUCTIONS & REVENUE ENHANCEMENTS
Cost reductions will need to be identified as soon as possible in FY 2012-13 and must
be ongoing in nature. Reductions have been implemented through the end of FY 2011-
12 but are insufficient to ensure that revenues exceed expenditures by June 30, 2012.
Cost reductions must take into account the recent State actions affecting
redevelopment, pension cost increases, and the end of employee concessions and
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provide the organization time to implement a new policy direction affecting the City's
budget.
Given the deficit spending in recent years, the City does not have sufficient funds to fill
the gap with one-time measures and is unable to grow itself out of the financial
dilemma. The City needs to develop and implement a budget sustainability plan along
with the appropriate policies to restore reserves. Furthermore, the City must maintain
reserve levels in all of its internal service funds at adequate levels.
Table 6 below provides a current and forecasted illustration of the City's General Fund
performance from FY 2008-09 to FY 2016-17. Because expenditures have exceeded
available revenues and cash on hand over the past several years, the City's fund
balance is now negative. Phase 1 , as outlined in this report, is geared to balance
revenues against expenses. Phase 2, is to replenish the City's fund balance to positive
levels and to restore needed reserves.
Table 6
5 Year Budget & Fund Balance Estimates (Amount in Millions)
Acluels—2008-09 to 2010-11 Budget 2011-12 to 2016-17
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
150.00
° 100.00
f 50.00 Expenditures
Revenue
(50.00)
(100.00) —Fund Balance
(150.00)
(200.00)
(250.00)
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Table 7, below provides a graphic illustration of the City's General Fund cost centers.
Ideally, the allocation of financial resources should reflect the Common Councils overall
priorities.
Table 7
5 Year (2012-1310 2016-17) Budget Projections by Department
•Police
•Fire
2008-09 2009-10 2010-112011-12 2012-13 2013-14 2014-15 2015-16 2016-17
180.00 _ General Government
N
C
c Public Works
160.00
■Community
140.00 Development
■Parks&Recreations
120.00
■City Attorney
100.00 ■Debt Service
80.00 ■City Clerk
60.00 — ■Finance
40.00 _ ■City Manager
Mayor
20.00
■Human Resources
Common Council
■Civil Service
■City Treasurer
EXPENDITURES
As noted above, 73% of the FY 2011-12 General Fund budget is dedicated to public
safety services (Police, Fire, Code Enforcement, Animal Control, and Emergency
Preparedness). Within the services provided, $6.1 is funded under Measure Z
approved by the voters for enhanced crime and gang prevention programs.
The table below reflects the City's allocation of General Fund resources on personnel.
While the numbers below are reflective of what is seen in most full-service cities in
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California. they unfortunately do not reflect the Council's other priorities outside of public
safety. The desired expenditure profile should reflect a diversity of priorities and funding
to support those priorities in other departments.
Table 8
FY 2011-12 Full-Time Personnel Expenditure Comparison by Department
(In thousands)
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$o
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In recent years when expense reduction plans were put in place, programs outside of
public safety sustained severe cost cutting measures.
San Bernardino Public Safety expenditures consume the majority of the budget, with
73% of the General Fund budget in FY 2011-12. Additionally, in FY 2011-12, an
estimated S5 million, or 4%, of the General Fund budget was allocated to other
departments to support public safety functions. Clearly. if San Bernardino wants to
maintain its efforts in the public safety arena, expenditure reductions in these service
areas may not be something that the Council desires. Notwithstanding, all options for
the provision of public safety should be explored and San Bernardino should look for
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opportunities to implement new programs and staffing plans to reduce costs while
maintaining essential services.
COST ALLOCATIONS
Through researching annual expenses and staffing allocations, we have found that
many departments do not appropriately allocate staffing costs to funds outside of the
General Fund. Additionally, we found that General Government services (Mayor,
Common Council. City Attorney, Human Resources, Information Technology, Finance
and the City Clerk) are not charged as an overhead expenses to operating departments.
A typical practice for local government is to allocate General Government costs across
all funds. Instead, the General Fund is picking up a majority of the costs despite the
fact that these services are provided to all funds. The City's Workers Compensation
costs are also not appropriately charged to the departments. These costs should to
allocated based on actual expense and not on "across-the-board" methodology. The
City should update its current cost allocation plan and Workers Compensation charges
to identify the appropriate rates to charge departments in and outside of the General
Fund.
Implementing a cost allocation plan would help offset current expenses away from the
General Fund and into the appropriate areas without impacting existing service levels.
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FISCAL SUSTAINABILITY PLAN rM
It is critical that San Bernardino act swiftly to decrease its expenses and increase its
revenue. However, to ensure that actions are meaningful and will make an ongoing
impact to the financial health of the City, the following should be integrated as
underlying goals:
1 . The City will proactively seek to protect and expand its tax base by encouraging
a healthy, underlying local economy. San Bernardino should encourage
shopping, dining, and visiting at San Bernardino stores, restaurants, and hotels.
San Bernardino should explore ways to capitalize on its resources such as its
regional location and retail opportunities
2. The City will establish and maintain appropriate cash reserves.
3. City revenue performance will be reviewed no less than m2nthlygaa#er4y and
appropriate budget adjustments will be made in advance of the end of a budget
year if revenue performance is not meeting projections.
4. The City will consider competitive contracting of services and equipment when
appropriate and where clear, cost-effective alternatives exist.
5. The City will establish appropriate cost-recovery targets for its fee structure and
will annually adjust its fee structure to ensure that the fees continue to meet cost
recovery targets.
6. The City will work in partnership with its employees to ensure fair compensation
and that costs related to pension and other benefits are appropriately allocated
between employer and employees.
7. The City will work to strengthen revenue collection practices and procedures.
BUDGET PHILOSOPHY
An important strategy for avoiding structural budget deficits is to adopt a budget
philosophy that is relatively easy to understand and can serve as a meaningful
framework for maintaining financial discipline. Reporting the state of the municipality's
finances to the governing body for public discussion is a way for the fiduciary
responsibilities of the elected officials and executive managers to be understood by the
public and organization.
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The following reflects best practice policies in public financial management. It is a
typical practice for cities to have adopted budget policies of the type described below.
Structurally Balanced Budget. The annual budgets for all City funds should be
structurally balanced throughout the budget process. Ongoing revenue should be
equal to or exceed operating expenditures in both the proposed and adopted
budgets. If a structural imbalance occurs, a plan should be developed and
implemented to bring the budget back into structural balance.
Multi-Year Financial Forecasting. To ensure that current budget decisions
consider future financial implications, a five-year financial forecast should be
utilized by the staff and Council. The annual General Fund proposed budget
balancing plan should be presented and discussed in context of the five-year
forecast. Any revisions to the proposed budget should include an analysis of the
impact on the forecast out years. If a revision creates a negative impact on the
forecast, a funding plan should be developed and approved to offset the impact.
The five-year forecast should be updated quarterly to reflect changes in revenues
and unexpected changes in expenditures. The forecast should be presented to
the City Council for discussion and to provide information to the public.
Use of One-Time Resources. One-time resources (e.g., revenue spikes,
budget savings, sale of property, and similar nonrecurring revenue) should not be
used for current or new ongoing operating expenses. Examples of appropriate
uses of one-time resources include rebuilding reserves, retiring debt early,
making capital expenditures (without significant operating and maintenance
costs), and other nonrecurring expenditures.
Established Reserves. San Bernardino has multiple funds, based on different
revenue sources and requirements. Because there are risks (both known and
unknown), it is important that reserve levels in all funds be maintained as a
hedge against such risks. Without proper reserves, there can be major
disruptions in services when unforeseen financial demands emerge, requiring
immediate attention. The City should maintain an adequate reserve level and/or
ending fund balance for each fund, not just the General Fund, as determined
annually and as appropriate for each. For the General Fund, different types of
reserves should be maintained, including an economic uncertainty reserve to
provide a cushion for unexpectedly low revenues in any given year, and a
contingency reserve for other emergency needs that arise. More about reserves
is explained below, including recommended levels. City Council and City
Manager authorization should be required for the expenditure of established
reserves, along with repayment requirements.
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Debt Issuance. A municipality should not issue long-term (over one year) debt to
support ongoing operating costs (other than debt service) unless such debt
issuance achieves net operating cost savings and such savings are verified by
appropriate independent analysis. All debt issuances shall identify the method of
repayment (or have a dedicated revenue source) without an impact to operations.
Employee Compensation. Negotiations for employee compensation should
continue to consider total compensation bargaining concepts and focus on all
personnel services cost changes (e.g., step increases and the cost of benefit
increases). Compensation costs should be included in the five-year financial
forecast to ascertain affordability to the municipality, within context of expected
revenues.
Fees and Charges. Fee increases should be utilized, where possible, to assure
that program operating costs are fully covered by fee revenue. Opportunities
should be explored to establish new fees for services where appropriate.
Capital Improvement Projects. Capital improvement projects with annual
operating and maintenance costs exceeding $258,000 should not proceed
without City Council certification until funding is identified in the applicable year of
operation.
Grants. City staff should seek, apply for and effectively administer federal, state
and other grants that address the City's priorities and policy objectives and
provide benefits. Before any grant is pursued, staff should provide a detailed pro-
forma that addresses the immediate and long-term costs and benefits to the City.
One-time operating grant revenues should not be used to begin or support the
costs of ongoing programs.
Performance Measures. All requests for departmental funding should include
performance measurement data by program so that funding requests can be
reviewed and approved in light of service level outcomes to the community and
organization.
Priority Based Budgeting. San Bernardino should consider implementation of
priority based budgeting to ensure resource are allocated based on community
priorities.
To resolve its structural budget deficit and prevent a recurrence in the future, the City
needs to adopt a budget philosophy similar to the measures above to help elected and
appointed officials maintain the financial discipline crucial to a growing community like
San Bernardino.
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Recommendation 1: Adopt a budget philosophy to provide a meaningful and easy
to understand framework for maintaining financial discipline. Present a report to
the City Council on the financial results of the policies at least fourepme times per a
year. Present an updated five-year forecast to the City Council at least two times a
year.
EXISTING AND ANTICIPATED BUDGET ISSUES
Without significant and immediate reductions in spending or significant increases in on-
going revenue, there will be a continuing significant gap between expenditures and
revenues during the next five years. Deficits are projected in all five years of the
forecast.
The significant points in this analysis are:
• The City does not have sufficient resources to fill the ongoing structural deficit
and will not be able to maintain current levels of services or meet contractual or
debt obligations.
• While the City has had unrestricted fund balance to fill a large portion of the gap
in the past few years, that fund balance has now been spent. The City does not
have sufficient one-time monies from other sources at its disposal to fill the gap.
• Because of the time necessary to implement new revenue sources, significant
reductions in expenditures will be required to meet the limitations of available
revenue.
A deficit of approximately $45 million is projected for FY 2012-13, representing 38% of
the total General Fund. A significant part of the deficit is the result of deferred funding
of the City's internal service funds including: Retiree Health. Workers Compensation
and General Liability. Currently, these funds are cash deficits in the millions of dollars.
The balance of the deficit, roughly $20 million, is a combination of flat revenues, end of
employee concessions, increasing benefit costs and the elimination of the EDA. In FY
2011-12, the EDA allocated funds for General Government functions (City Manager,
Finance, Human Resources, Clerk, City Attorney, etc) that are now the responsibility of
the General Fund. The loss of EDA funds to these activities requires a revised cost
allocation to all restricted funds. Despite the reallocation, the General Fund will likely
remain responsible for a significant share of these expenses in future budgets.
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FIVE YEAR FINANCIAL PERSPECTIVE
The forecast shown as Attachment A is not a prediction of future policy decisions by the
City Council, nor is it the City staff recommendation as to what spending and revenue
levels should be. It simply reflects negotiated employee compensation commitments,
California Public Employee Retirement System (PERS) rates as currently known, and
revenue projections based on an assumption of modest growth in the economy. As can
be seen, expenses have increased steadily from FY 2008-09 while revenues remain flat
over the same period. The rate of revenue growth has not been sufficient to meet the
contractual and debt obligations of the City. Additionally, since the City has previously
allocated General Fund reserves to meet budget obligations. there are no additional
sources with which to fill the gap.
In the past several years, the major reason for the deficit was the sudden drop in
revenues combined with exhausting internal services funds without a plan to replenish
the cash, compensation/benefit increases. and need for increased public safety
services. For the future, key contributors to the deficit are the need to replenish cash in
the Internal Service Funds, loss of redevelopment and increased PERS employer rates,
along with revenues that have decreased in recent years and are expected to be flat or
experience only slight growth during the period of the five-year forecast. PERS rates
are causing a greater portion of the City's available resources to be allocated to that
purpose, rather than to service delivery. Increases in PERS rates and pension
obligation bond payments will cost the City in excess of $1 million between FY 2011-12
and FY 2015-16. The percentage of General Fund budget spent on PERS benefits will
go from 13% in FY 2011-12 to 15% in FY 2015-16, a 2% increase for an expenditure
which is basically an overhead cost over which the City has little control in the short
term.
PAST BUDGET BALANCING STRATEGIES
Over the past few years, the City has balanced its budget through a combination of cost
reductions (including layoffs, unfilled vacancies and labor concessions), transfers from
other funds, and use of unallocated fund balance. San Bernardino has gone through
personnel reductions, which resulted in more than 250 issued layoff notices over the
past three years. All City departments have made changes to reduce costs. For
example, training budgets have been virtually eliminated. This has helped save costs,
but is not sustainable in the long term because the City needs to have highly skilled and
trained employees, especially when there are fewer of them. Many employee positions
have been eliminated. The positions held vacant may need to be filled if they are
essential to service delivery. This presents an opportunity to move staff from non-
essential positions to essential positions which are currently vacant.
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A major aspect of the problem facing San Bernardino can be found in the fact that while
expenditures have been reduced and many positions have been eliminated, personnel
costs per employee and overtime costs have continued to increase. Specifically the
General Fund budget indicates that the City budgeted approximately $102 million for
personnel expenses in FY 2011-12. Effective June 2012, the City's 3-year agreement
with certain employee labor groups terminates and labor costs are forecasted to
increase by $10 million annually. Additionally, the City is facing increases in overtime
costs and PERS rates which are offsetting reductions made from prior year layoffs.
Personnel costs currently constitute approximately 73% of all General Fund
expenditures. Therefore, personnel costs will need to be reduced in order to create a
stabilized budget. Of the total allocated to salaries and benefits, public safety comprises
79% of the entire General Fund personnel expenditures. Therefore to effectively reduce
expenses, cost reductions from both police and fire are necessary.
Recommendation 2: Initiate significant immediate changes to the expenditure and
revenue base, with major reductions in spending taking effect in FY 2012-13.
INTERNAL SERVICE FUNDS
Internal Service Funds have been established for several uses, pursuant to accepted
governmental accounting practices. An Internal Service Fund is a fund for goods and
services provided for specific purposes. Rates for each Internal Service Fund are
established and charged to departments for the goods and services provided to them.
The City of San Bernardino has several internal service funds:
Fleet Services. For the provision of maintenance on, materials and supplies for,
and replacement of, City vehicles and other gasoline or diesel-powered
equipment, and maintenance of a warehouse inventory of materials and supplies
for all City departments.
Liability and Property Insurance Fund. For the administration of the City's
self-insurance programs and the payment of liability claims.
Workers Compensation Fund. For the administration of the City's workers'
compensation and payment of liability claims.
Unemployment Insurance Fund. For the payment of unemployment insurance
claims from released workers.
Telephone Support Fund. For the provision of maintenance on, materials and
supplies for, and replacement of the City's telecommunications systems.
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Utility Fund. For the administration and allocation of utility costs citywide.
Central Services Fund. For the provision of in-house reprographics and
duplication services.
Only two Internal Service Funds (workers' compensation and liability) have actuarial
bases for determining funding level. Both of these funds appear to be presently
underfunded given the risks. There has not been an analysis to actually determine what
level of funding is needed to ensure that basic services paid for by those funds can be
maintained. Each of the internal service funds should be carefully analyzed to
determine the proper level of funding to pay for the services or equipment that depends
on those funding sources. The City should initiate a study to establish the basis for
allocating costs for the City's internal service funds, beginning with fleet and building
maintenance.
Recommendation 3: Conduct an analysis of each internal service fund to
determine funding requirements for the services and equipment paid for out of
each of those funds and create a five-year forecast for each ISF. Set rates to
departments based on a cost allocation study and funding requirements for each
ISF.
COST DRIVERS
The major cost drivers for the City's General Fund are compensation and retirement
costs. Other costs are the City's debt payment on pension obligation bonds (S3.5 million
annually for now and expected to increase to $6 million/year in FY 2021-22), contracts,
commodities and fixed charges which represent about 15% of total General Fund costs.
The compensation and retirement cost drivers are described in more detail below.
RETIREMENT COSTS
The City's costs for employee retirement have increased from $1 million in FY 2006/07
to nearly S1 .9 million in FY 2011/12. By FY 2013/14 the annual cost will be over $2.2
million. To put this into perspective, the City was spending about 9% of its General Fund
budget on retirement costs in FY 2006/07. In FY 2011112 it will need to spend 13% of
the budget on those costs, and by FY 2015/16 it will require 15% of the budget for
retirement obligations.
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UNDERSTANDING EMPLOYEE RETIREMENT COSTS
The City pays the PERS costs for the majority of its employees. PERS divides the rates
into two parts: 1) employee rates and 2) employer rates. It has been a common practice
for San Bernardino and many other agencies to pay both parts of the rates. However,
recently the City was able to negotiate with the employee groups for all new hires after
October 2011 to pay the full employee share.
What is referred to as employee rates are set by PERS at 9% for safety employees and
8% for miscellaneous (non-safety) employees. Through negotiated agreements, San
Bernardino's public safety employees pay the full 9% (with an incentive pay offset) and
portions of the City's non-safety employees based on their date of hire pay the 7 & 8%
share (the difference in share is based on the PERS benefit afforded to the particular
employee).
The City could negotiate with current employees to pay all or a portion of the employee
share. Further, the City could negotiate any level of sharing with its employees and is
not limited to 7% or 8% for miscellaneous and 9% for safety as the employee share.
Some cities are planning for a greater share of PERS costs than what has commonly
been referred to as the "employee share" as shown below. For instance, the City of
Newport Beach has a new City Council policy that says, "The retirement benefits portion
of total compensation will be structured over time to achieve a 50/50 cost sharing
between the City and the employees, including the implementation of defined
contribution programs in the event such programs are authorized for the City's use."
Effective organizations use a variety of strategies to manage the size of their workforce.
One strategy, an early retirement incentive plan (ERIP), increases retirements above
natural attrition by enhancing employee retirement benefits. This tactic allows
employers to decrease payroll costs, reorganize staff, and trim down higher-paid middle
management without layoffs. The organization achieves fiscal savings only by keeping
the positions vacant or replacing retiring employees, who are typically at the top of the
salary schedule, with entry-level employees. California has several retirement incentives
available; however, the cost-effectiveness of these programs must be examined within
the context of an aging workforce. The program used by most public agencies is
referred to as the "golden handshake" which was made available under the California
Public Employees Retirement Law (Gov. Code, 20903).
For background on the Golden Handshake (as known as the CalPERS Two Years
Additional Service Credit benefit), it is an option that allows an agency to provide two
additional years of service credit to members who retire during a designated window
period because of imminent demotions, mandatory transfers, or layoffs. And while it can
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provide some short-term savings, it adds to a city's future retirement costs and limits
flexibility when it comes to filling vacated positions since the CaIPERS program requires
that they remain permanently unfilled.
To evaluate the value of this program for our City, we need to:
• Determine all individuals who meet the minimum eligibility for retirement (at
least age 50 and at least 5 years of service credit) who are employed in the
designated classification, department or organizational unit
• Determine the annual pay rate for each person
• Determine the age for each person
• Multiply the annual pay rate by a PERS cost factor and then by .95
• Section 20903 of the PERS guidelines also requires that after the costs are made
public the City must establish a window period of at least 90 days and no more
than 180 days to solicit interested potential retirees to receive the two-year
service credit.
These factors necessitate that the program be carefully managed to ensure that the
option is only offered in instances where a financial justification exists. If that is not the
case, the City could put itself in a situation where additional layoffs are needed to pay
for early retirements.
PERS Golden Handshake Contract Amendment
In order to adopt the PERS golden handshake contract option, PERS requires that the
Council adopt an ordinance approving a contract amendment that the amendment be
applicable to all City employees who are miscellaneous or safety members in PERS.
The PERS contract amendment process requires the City to adopt a resolution of
Intention as well as an Ordinance amending the PERS contract. The California
Government Code requires at least a twenty (20) day waiting period between the
adoption of the Resolution of Intention and the adoption of the final ordinance. The
effective date of the Ordinance is 31 days after the final reading. Once the Council
determines to implement the ERIP, the City must then comply with the requirement to
publish the costs at least two weeks prior to the opening of a window period which must
be at least 90 days and no more than 180 days.
It should be noted that given the program limitations and the City's cash position, the
PERS program may not in itself satisfy the City's goal of balancing available revenues
against expenses.
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Public Agency Retirement System (PARS) Retirement Options
PARS is the third largest multiple employer public retirement system in California. They
have been operating since 1983 and assist public agencies in plan designs and
implementation of retirement programs in conjunction with already existing PERS
retirement programs.
The PARS early retirement program goes far beyond the limitations of the PERS option
and it is far more flexible. The PARS program can be structured to provide years of
service credit or years of age credit, the terms of the payment of the benefit can be
defined and eligibility can be structured to meet City and employee needs.
Unlike PERS, the PARS program allows the City to determine the number of positions
by classification and department, thereby minimizing economic risk. Also, once the
Council determines a need for a separation incentive program, the plan administrator
can implement the program and can offer early retirement incentives as necessary as
broadly or as narrowly as necessary. The City has used PARS in the past for early
retirement of public safety staff.
PARS offers the flexibility of providing structured payments to the employee including
lump sum payments, monthly payments for life, or a monthly payment for 5, 10, or 15
years. The PARS early retirement option could be offered as a supplement to PERS
and can be structured to complement PERS and social security eligibility.
The cost for the PARS retirement option program is calculated based upon the number
of early retirements offered plus an administrative fee of 6% based upon cost of the
retirements. It is considered a fee-for-service plan. Rather than paying for the cost
within the first two years, costs are paid as expended. Most importantly, if the City
approves the PARS retirement option it can be utilized during these budget hearings.
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BUDGET STABILIZATION OPTIONS r
Eliminating the estimated deficit in FY 2012-13 and future years will require difficult decisions.
The City already has reduced costs and staffing levels in many areas, so reducing additional
costs will be a matter of determining what is not important or essential and returning to basic
services. It can be assumed that every service and program provided is important to
someone. Therefore, decisions will need to be made between numerous important services
and interests. Given the size of the gap and the growing costs of operations, revenue
increases alone should not be the only option considered to eliminate the deficit and put the
City on stable financial footing. Therefore, as previously mentioned, the following three
strategy approach including these components is suggested.
1 . Evaluate and Implement new revenue opportunities
2. Compensation strategies that measure full cost of compensation package
3. Implement Service delivery model changes for full cost recovery and costs containment
Each strategy is described in this section of the report, with specific suggestions for
consideration. Any public organization has a need to balance services to the community with
employee compensation and benefits. Most of the budget balancing solutions will need to
come through a combination of reducing personnel costs, changing service delivery models
including out sourcing some city services, more efficient revenue collection procedures, and
voter approved tax measures. The total number of personnel and the compensation costs are
no longer sustainable given the City's resource base.
The ideas presented in this report resulted from discussions with the City management staff,
analysis of costs, and viability of alternative methods of providing services. The focus is on
delivering valued services to the public, so the following principles were identified.
• San Bernardino desires to continue with the current operation of its public safety
programs.
• What is most important is that high quality, basic services be delivered. not necessarily
that they all be delivered by City employees when services can be provided less
expensively by the private sector or another agency.
• The fundamentals of the municipal corporation must be maintained to properly manage
the organization and reduce risk and liability.
• Financial stability and sustainability is important to employees and to the City's ability to
recruit and retain motivated, competent and capable individuals.
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REVENUE
Opportunities exist to increase fees for some services to match the costs of the service being
provided, consistent with the City's policy of full cost recovery where possible. In recent
months, the City commissioned the Matrix Group to complete a comprehensive fee study for
planning and engineering. The fee study will assist the City in its implementation of full cost
recovery for services provided in those areas. In order to measure cost recovery for other
areas of the organization, the City must establish, track and monitor performance measures.
Specific areas for improved cost recovery include recreation programs, false alarms, code
enforcement, and sanitation. This role will be handled by a management analyst or budget
officer within the proposed Administrative Services Department.
The City needs to grow its current revenue streams. In order to do so, the City will need to
implement economic farming programs which assist current business through the growth
cycle. Other sizeable revenue increases, however, would need to come from voter-approved
tax increases.
The items above are described in the sections below.
POTENTIAL TAX INCREASES
City staff has estimated the potential revenues associated with the following tax increases. All
would require voter approval.
REAL PROPERTY TRANSFER TAX
In California, localities including San Bernardino have imposed a tax on the transfer of property
located within the city. The tax, known as the documentary transfer tax or real property transfer
tax, is largely based on the federal documentary stamp tax, which was repealed in 1976. In
California, counties and cities have been authorized to impose a tax on deeds of transfer of
realty located within such county or city. The amount of the tax is based on the consideration
or value of the realty transferred. The current County rate is one dollar and ten cents ($1.10)
for each one thousand dollars ($1000) of value. Of that amount, the City receives $0.55 and
the County receives the remaining $0.55. Charter cities, however, may impose transfer taxes
at a rate higher than the county rate. The transfer tax must be paid by the person who makes
signs or issues any document subject to the tax or for whose use or benefit the document is
made, signed or issued. Real Estate Transfer Taxes, authorized as documentary transfer
taxes by the California Revenue and Taxation Code on the sale or transfer of real property are
currently levied by all counties and many cities.
Real Property Transfer Taxes may be applied only to residential sales or to other types of real
estate transactions including commercial and industrial sales. Revenue raised from the Real
Property Transfer Tax is added to the City's General Fund.
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The City should may wish to consider implementing a new rate structure that includes tiers,
exemptions and caps by property type to provide a base level
of funding necessary to deliver essential services to the community. The pFelposed rate would
UTILITY USER TAX
Many cities charge a tax on utilities, ranging up to 9.5% (Huntington Park). San Bernardino
currently charges 7.75%. Each 1% increase on utilities currently taxed (telephone, cable,
electric, water and gas) would yield approximately $3 million annually. Each 1% on utilities not
currently taxed (sanitary sewer service, sanitation, refuse collection) would yield several
hundred thousand dollars annually.
Utility user taxes (UUT) are paid by San Bernardino residents and businesses and are
collected by the utility providers who serve them. The utility then remits the tax payments to
the City. Annual revenue in FY 2010/2011 from utility user taxes (electric, gas, water, cable,
land line phone, and cell phone) was $22 million. The City has made annual revenue
projections considering possible tax increases at 1% and 2%. Further, sanitary sewer service,
sanitation, and refuse collection are currently not part of the utility user tax. The City may want
to consider modernizing and expanding the utility user tax to cover utilities not currently
included.
A utility user tax increase can only be voted on during a general election (a simple majority is
needed), unless the City Council declares a fiscal emergency and puts the potential tax
increase to a vote during a special election. It should be noted that costs for special elections
are higher. For San Bernardino, a special election costs approximately S200,000.
SALES TAX
San Bernardino presently has a sales tax rate of 8%. Of this, .5% flows to the General Fund
budget of San Bernardino, amounting to $25.2 million. The City's voter-approved Measure Z
took effect in April 2007, increasing sales tax by .25 percentage point. For FY 2012-13,
Measure Z is expected to generate $6 million of the City's anticipated S25.2 million in sales tax
revenue. Measure Z will remain in force for 15 years from the date of implementation, or until
2022.
Because the City recently approved Measure Z, we are not recommending the City seek
additional increases to the existing sales tax rate.
TRANSIENT OCCUPANCY TAX
The Transient Occupancy Tax (TOT) is a tax charged on hotel stays. San Bernardino presently
has a TOT rate of 10%, which is the County average. In the San Bernardino / Riverside
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County area, some cities charge as much as 12.7% (Palm Springs). For our City, TOT
generates just under $2,500,000 per year in revenues, meaning that each 1% of the tax
generates about $250,000.
Increasing the rate by 1% would put the rate at the highest level in the County and would
generate only S250,000 in revenues. There might also be some negative impact of the higher
tax rate on occupancy rates at the local hotels and spas. For these reasons, we are not
recommending an increase of the existing TOT.
911 COMMUNICATIONS FEE
While often called a "fee," this potential revenue source is actually a tax requiring voter
approval. A 911 communications fee would yield approximately $6.7 million a year. The tax
would be charged on most personal and business telephone lines and cell phones in the City.
Some exemptions typically exist, mainly relating to customers on lifeline service and service to
non-profit organizations and government offices.
The City of San Jose has this fee and estimates that approximately 90% of the phone
accounts in their community are taxed. The justification for charging a fee to telephone
subscribers is that only people who have telephones can call 911 for emergency services. As
stated in the San Jose ordinance, "Subscribers to telephone service derive significant benefits
from ongoing operation of the modernized integrated system installed at the San Jose
Emergency Communications Center" in the form of more efficient dispatch of services to a 911
emergency request.
PLASTIC BAG TAX
Implementing a tax on plastic bags could generate additional revenue, which could be
dedicated to particular purposes. A tiered or structured system could also be developed to
minimize the impacts.
Recommendation 4: Determine the Mayor and Common Council's interest in asking the
voters to approve new or increased taxes. If supported by Mayor and Common Council,
develop an action plan and schedule to seek voter approval of new revenues.
PROPERTY ASSESSMENT AUDITS
General Fund revenues in the form of Property Tax revenues have been impacted in recent
years by the downturn in the housing market and little growth in housing new starts. While this
would indicate that it is unlikely that Property Tax revenues will recover in the short term
evidenced by a no-growth revenue assumption in FY 2012-13 despite given recent minor
increase in assessed values, it would be helpful to conduct an audit of assessed values
assigned to each property within the City. Indeed, in prior years, with across the board
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reductions in assessments without review and analysis, conducting an audit of property
assessments to ensure accuracy may generate additional revenue and avoid costly appeals.
Recommendation 5: Engage a private firm to perform an audit of the property tax
assessments to ensure data is current and accurate.
FRANCHISE AGREEMENTS AND LONG-TERM CONTRACTS
Like most cities, San Bernardino has long-term contracts and franchise agreements with a
variety of vendors. Similar to most cities in Southern California, the City should evaluate the
benefit, if any, in providing services such as street sweeping, tree trimming, graffiti abatement,
street light maintenance, and refuse service and other ancillary services through franchise
agreements.
To ensure the services are being provided as cost effectively as possible, and at competitive
rates, staff should review in-house operations as well as external contacts with terms
exceeding two-years to identify opportunities to renegotiate the terms or to outsource the
services to outside contractors. Additionally, potential revenue generating contracts, such as
refuse services, may be restructured to provide revenues up-front to improve the City's short-
term cash position and to afford the City time to work through its options for budget
stabilization.
Recommendation 6: Evaluate all franchise agreements and contracts for cost cutting
and/or revenue generating opportunities.
FEEINCREASES
A fee is a charge imposed on an individual for a service that the person chooses to receive. A
fee may not exceed the estimated reasonable cost of providing the particular service or facility
for which the fee is charged, plus overhead. Examples of City fees include building permits,
recreation classes, false alarms and development impact fees.
The City should make every effort to make annual adjustments to fees and to institute full cost
recovery for development fees (with annual cost adjustments). Areas that may generate
increased revenues for the City, which we believe are under performing, are related to utility
franchises, paramedic subscription fees and false alarm fees.
UTILITY FRANCHISE FEE
A potential revenue source to be considered, although it requires state legislative action, is to
revise the utility franchise fee paid to municipalities in areas served by Southern California
Edison (SCE). Inequity exists in what older communities such as San Bernardino receive from
franchise agreements when compared with newer cities which have negotiated with SCE.
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The Franchise Act of 1937 sets one-half of one percent as a minimum franchise fee charged.
Because of the methods used by the California Public Utilities Commission to set and account
for investor-owned utility rates, SCE blends the cost of all franchise fees across its entire rate
base, regardless of the return to each respective city. As a result, every SCE customer is
subject to a 0.84% franchise fee charge, regardless of whether the customer resides in a city
that is being paid a 1% fee or a 0.5% fee. San Bernardino receives only 0.5%, while some
other, newer communities receive 1% franchise fee because of rates they negotiated with
SCE. The result is that some cities are subsidizing others. Analysis should be conducted of
the potential new revenue to the City if a legislative change was enacted. This proposal has
been presented to other fiscally challenged cities including Santa Ana and Stockton. The
potential of legislative change should be monitored. with San Bernardino alone, or with other
cities throughout the State, advocating for change.
Recommendation 7: Analyze the amount of additional revenue that would be received
by the City if a change in the utility franchise fee allocation were implemented. Advocate
for a change in legislation to correct the inequity of payments to cities of utility
franchise fees.
RECOVERING PARAMEDIC COSTS
Paramedic subscription programs function as a form of insurance in that subscribers are not
responsible for paying out-of-pocket costs for emergency medical services (EMS) above what
is covered through insurance, Medicare or Medi-Cal.
California cities that have paramedic subscription programs charge from S24 to $60 annually
per household. The most common rate is S48 per year which is double what the City is
currently charging. Some cities have varying rates for local businesses. convalescent homes,
and low-income residents (e.g., residents who qualify for low-income discounts on their city
water bill). Revenues vary by city and can be evaluated in terms of market penetration; the
ratio of subscribing households to the total number of households.
The Table below compares several cities' paramedic subscription programs (data from 2009
and 2011).
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Table 9
Comparison of Paramedic Subscription Programs in the Southern California
POPULATION CITY
HOUSING� OF •
UNITS REVENUE MEMBERS
Arcadia' 56,546'- 20,304 S160.000 11 ,000 54% $40
Buena Park* 81 ,460"' 24,280 S400,000 13,000 54% $45
Corona- 154,520 * 45,485 $1 ,050,516 23,244 51% $48
Fullerton` 137,481'** 47,044 $815,000 16,981 36% $42
Orange* 138,010*** 44,319 $650,000 10,896 25% $48
Westminster 90,677*** 27,419 $235,000 5,419 20% $42
Newport
Beach* 85,990*** 42,711 $297,600 6,200 15% $48
Alhambra* 83,661*** 30,216 $100,000 3,744 12% $48
Monterey
Park* 61,153*** 20,734 $115;000 2,538 12% $50
Santa Ana** 327,731*** 73,174 $154,362 7,344 10% $48
Burbank* 104,427*** 44,055 $180,000 4,064 9% $48
Montclair* 37,163*** 9,677 $24,250 674 7% $36
San
Bernardino 211,674*** 45,000 $9,600 400 .89% $24
*May 2009 Data ** 2010/11- Data (Data Source: City of Santa Ana) ***May 2012 Data (Data
Source: CA Dept. of Finance, Demographic Research Unit)
The City should consider increasing the current rate and implementing a marketing plan in an
effort to increase subscription revenues. Currently, the program generates $9,600 plus an
additional $360,000 annually in collections for non-subscribers.. Based on the City's total
number of housing units (45,000), which is equal to the number in the City of Corona, the City
should actively market the program in an effort to raise revenues equal to its peers.
Recommendation 8: Consider increasing the paramedic subscription rate Ito recover
costs associated with Fire/Paramedic Service.
Market penetration rates are related to community demographics, population density, whether
transport services are provided, and the amount of EMS fees. According to Firemed officials (a
private firm that operates an EMS membership program throughout Oregon), communities with
a high percent of residents over 60 years of age and those in rural areas have higher market
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penetration (i.e., number of members). Given the large number of residential parcels in the
City, we believe there is an opportunity for this program to improve its performance in the
recovery of costs for fire/paramedic services.
Recommendation 9: Develop a marketing program for paramedic subscriptions with a
goal of market penetration to at least 50% of households. Develop marketing efforts to
target those most likely to subscribe and plan a campaign that will be ongoing.
FALSE ALARM FEES
Responding to false alarms is unproductive use of Police Department resources. While we are
unaware of the actual minutes spent per alarm response, we believe possibly 25-50% of total
alarm calls are false alarms. Based on the fees currently charged and the costs of officers
responding, it appears that the City may be losing thousands of dollars each year that is not
paid for by fees. All City costs (police response and administrative overhead) incurred by false
alarms should be paid for by the alarm owner. It is recommended the City review the
responses costs and ensure the fee is sufficient to recover the actual costs.
Recommendation 10: Determine the fee level required to recover all City costs
associated with false alarm response and increase fees accordingly.
ASSET MANAGEMENT
Cities own many buildings and physical facilities such as parks, office buildings, and corporate
yards. Asset management, the process of monitoring the inventory and leasing of these
investments, can and should be considered as a cost reduction strategy.
The City of San Bernardino has an asset inventory now. It should develop a comprehensive
asset management program that includes effective administration, identify market rental rates
and subsidies, and sell unneeded and under-performing properties. Over the long term, an
asset management program should integrate with maintenance and replacement schedules for
the development of long-range capital improvement program funding needs.
The identification of surplus, under-performing properties that can be sold will result in one-
time revenues and a reduction in ongoing maintenance costs. Market rate rents should be
calculated and updated periodically for all City and Successor Agency properties that are
rented or leased. Market rental rates as well as the level of subsidy should also be identified
for properties rented or provided to community and non-profit organizations and for economic
development purposes. The subsidies should then be supported by the appropriate program
and funding source. This will identify the true costs of such programs, allow them to be
properly charged, and provide relief to the General Fund.
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Every parcel owned by the City or Successor Agency represents property taxes that the City
does not receive. Currently the City and Successor Agency own 294 parcels with total book
value of $300 million and a likely sale estimate of less than 5100 million dollars. Given the
City's 18% of the property assessment, the sale of these parcels would generate roughly S18
million dollars.
The City and Successor Agency may also wish to explore selling or leasing some of the
parcels at below-market rates in order to incentivize developers and other business interests to
spur additional economic development and development-related revenues.
Recommendation 11: Develop a comprehensive asset management program, identify
market rental rates and subsidies, and sell unneeded and under-performing properties.
Conduct an analysis of all property assets as part of the asset management program.
COMPENSATION AND BENEFITS
With personnel costs accounting for about 85% of the General Fund, reducing them is
essential to bring spending in line with resources. Changes to compensation or benefits are
subject to negotiation with bargaining units. High cost drivers are noted in this section for
possible negotiations.
PENSION COSTS
Pension reform is being much discussed at the state and local levels because costs are
increasing at rapid rates significantly beyond increases in revenue and are no longer
affordable to most public agencies. In San Bernardino, City-paid pension costs have grown
from $1 million in FY 2006-07 to $2.2 million in the upcoming FY 2012-13 Budget. Costs are
projected to grow to 2% in FY 2013-14.
Pension costs are a combination of an "employer" and "employee" share. PERS sets the
employer share for each agency depending on actuarial assumptions. For San Bernardino. the
employer share is 30% of compensation for public safety employees and 17% for non-safety
employees. Those levels will grow to 31% for safety and 18% for non-safety in FY 2014/15.
The employee share is set by PERS at 9% for public safety and 8% for non-safety and 7% for
non-safety new hires, although agencies and their employees can negotiate a higher cost
distribution between the agency and employees than the "employee" shares set by PERS.
The City has already been able to negotiate a two-tiered retirement benefit program wherein
newly hired employees will receive a retirement benefit of 2% at 55 for non-safety employees
and 3% at 55 for safety employees. Savings under this program will build with workforce
turnover, as employees under the current system reitre and are replaced by employees at the
new rate. Therefore, initial cost reductions are minimal but savings to the City in the long term
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will be significant. This agreement has allowed the City to improve its pension obligation in the
long term while it continues to work toward short term solutions.
To address growing public safety pension obligations, the City issued pension obligation bonds
(POBs) in 2005. This is a common strategy to reduce unfunded liabilities through the issuance
of fixed rate bonds. As the chart below depicts, the City's annual pension costs were reduced
by $2 million after the issuance of the bonds. However, the timing of the issuance of bonds
and subsequent deposit of bond proceeds into the City's public safety account CaIPERS lost a
significant amount of its pension portfolio. The market losses have negatively impacted the
City beyond the losses of its deposited funds and have completely reserved all the saving
realized from the issuance of POBs. In future years the City will need to be mindful of the
growth in POB liabilities, as they will increase over time.
Table 10
Historical Pension Expenses
zs000000
20000000 ■2005 Series A-2 Capital
Appreciation Bonds
15000000 ■Employee Portion
■ Police
10000000
■Fire
5000000 _ ■Mist
i
0 -_ r
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
SALARY-STEP ADJUSTMENTS
Traditional public agency salary schedules with an average of five or six steps in the range
were developed before the onset of widespread collective bargaining and were intended to
provide an opportunity to reward employees annually for their performance and for the growth
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of their experience and productivity as they become more effective on the job. The increases
are often known as merit increases, and many are implemented automatically.
Some labor groups in San Bernardino have maintained a salary schedule with only five or six
steps. Consequently, it only takes three and a half to four years for the employee to get to the
top step. During this period the employee is typically awarded a step increase, and if
available, cost of living adjustments negotiated by their bargaining group. Because of this
practice, new employees have sometimes received raises of between eight and nine percent
annually in the first few years of their employment with the City. Most employees at the City
are presently at the top of their salary range.
A 10 to 15 step range for management and non-management employees would reduce the
City's costs and could spread the opportunity for performance increases over six to nine years
rather than the current three and a half to four years. Such a change in the salary schedule
would need to be negotiated with each of the City's bargaining units and would be considered
by both sides as part of the total compensation package during negotiations.
Recommendation 12: Implement a 10 to 15 step range to spread out merit (performance)
increases over six to nine years rather than the current three and a half to four years
REGIONALIZATION AND SERVICE SHARING OF FIRE SERVICES
Fire departments across the country are moving towards a regionalized approach to providing
fire protection and emergency medical services to reduce costs to individual cities and to
improve fire service delivery. The Orange County Fire Authority (OCFA) is an example of a
regional fire service covering 22 cities plus unincorporated county areas and is established as
a Fire District and contract service provider. Regionalization can be accomplished through
contracts for service (e.g., contracting with a county fire department) or by a joint powers
authority.
Regionalization can range from complete consolidation of fire departments to service sharing
of one or more functions. Under a service sharing model, typically one agency provides the
services to others on a contractual basis.
Examples of service sharing opportunities between fire departments include fire dispatch,
training, specialized response units (such as urban search and rescue and hazmat), and
equipment use. Through regionalization, fire stations that may be near stations in other
communities can be eliminated, along with their associated staffing and facility costs. Other
benefits of regionalization and service sharing include:
• Responses are coordinated across city lines including back-up for those responses.
• Support functions such as dispatch and communications are coordinated. This
eliminates duplication, increases efficiency, and saves money.
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• Joint purchasing leads to savings. Firefighters use the same protective clothing for
larger purchase orders and quantity discounts
• Specialized fire fighting and rescue teams, vehicles, and equipment are shared. No
single community can afford to keep enough firefighters on hand to respond to every
specialized emergency. Urban search and rescue (USAR) and Hazmat vehicles and
equipment can be shared rather than each city having its own.
• Non-emergency resources such as training facilities, health centers, and other support
systems can be shared to reduce expense and standardize programs.
• Stations and equipment can be consolidated. Stations can be located more strategically
instead of being redundant, e.g. stations within a mile of each other in adjacent cities
can be relocated or browned-out.
• Training and other specialized facilities and equipment can be centralized and shared.
• Web-based video conference training can be shared. For example, the Rancho Santa
Fe Fire Protection District based in San Diego County operates a multi-jurisdictional
interactive video training system developed by the Tandberg Company that connects 61
different locations. This also enables staff to remain in their stations for the training.
Mutual aid and automatic aid agreements throughout the County of San Bernardino now
provide a solid foundation for a regional approach to fire service delivery. The existing
relationships between the cities can be expanded to achieve significant economies of scale in
management, administration, training, and all aspects of operations. The City's Fire
Department could be the vehicle to accomplish expanded regionalization as the lead agency,
or there could be sub-regional fire agencies created by consolidating several existing
departments.
The creation of regional fire service requires extensive study, input and acceptance from
surrounding communities and the support from the Fire Department to take on a lead agency
role. Despite these obstacles, there are potential long-term benefits of regionalization worthy
of discussion.
Recommendation 13: Initiate discussions with City Fire, Cal Fire and other cities in the
area about a regionalized approach through the establishment of a Fire District with San
Bernardino as the lead agency. If successful, this could create economies of scale by
eliminating redundant programs and costs.
POLICE DEPARTMENT COST SAVINGS OPPORTUNITIES
To substantially reduce costs in public safety services, the City will need to reduce staffing, or
seek out contract opportunities for the City's Police Department to provide services to adjacent
communities.
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In recent years, several municipal police departments have provided services to others under
contracts for service. In fact, its common place for public safety departments to share dispatch
services. Similar policing contracts have existed in the following cities:
• Brea contracted services to Yorba Linda
• Whittier contracted services to Santa Fe Springs
• Maywood contracted services to Cudahy
Other options are to outsource animal services, regionalize specialized police services, and
pursue full cost recovery of fees for services to outside agencies.
Similar to Recommendation 13 above, extensive studies are required and the willingness of
other jurisdictions to participate.
ANIMAL CONTROL
San Bernardino County provides animal control services to several cities as well as
unincorporated County areas. The City should consider an alternative with County as an
alternate service delivery method.
Recommendation 14: Consider contracting with the County of San Bernardino for all
animal control services. Develop a detailed implementation plan.
CIVILIANIZATION OF POLICE TRAINING
Training is an important function within the Police Department. It is currently carried out by
sworn personnel. Significant savings could occur by using retired police officers on a part-time
basis to conduct training programs and reallocating full time sworn positions from this function.
The City could increase free patrol time through this change if the full time positions were
reallocated.
Recommendation 15: Utilize retired police officers as trainers and reallocate full-time
sworn personnel from this operation.
DEPARTMENTAL CONSOLIDATION
The City has yet to fully experience economies of scale in management and administration
through the merger of departments and functions. Economies of scale could be achieved by
merging functions between Information Technology, Finance, Human Resources, as one
Administrative Services Department. Such a merger would save a minimum of S200,000
annually by reducing one executive management position and consolidating administrative
functions. There are a number of specific programs and activities within all departments that
should be carefully evaluated as to how merger should occur. It is possible that some
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programs or services could be merged with other departments. Detailed evaluation of
alternatives will be needed to determine the precise configuration of merged departments.
Additional opportunities may exist by contracting services to an outside agency. These
services may include information technology, design engineering, public works and building
inspection, refuse, economic development; community services and legal services.
Recommendation 16: Consider merging Information Technology, Human Resources,
Risk Management with the Finance Department to create an Administrative Service
Department and merging Library Services with Parks & Recreation to create a
Community Services Department.
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IMPLEMENTATION AND CHANGE MANAGEMENT
The recommendations presented in this report are difficult and there are no easy choices. Most
of the options identified represent fundamental changes in service delivery and the number
and compensation of employees. The nature of the City's financial challenge is such that
small changes will not create financial stability. During the past few years, the City has been
creative, employee associations have been forthcoming with various levels of compensation
reductions and deferrals, fund balance has been used, and unfortunately reserves have been
completely depleted.
Unfortunately, the economy will not grow the City out of its budget problem. Time is of the
essence due to the growing costs and the inadequacy of unallocated funds and other one-time
methods to balance the budget. Those have been depleted. At this point, structural changes
and changes to service delivery models are absolutely necessary to bring the City to financial
health.
Reducing costs does not happen without work. Therefore, given the urgency of the need to
make structural changes, staff, and/or consultants, will need to be assigned to this task, setting
aside other work. To enable staff to focus on this task, other new initiatives should be deferred.
Additional analysis will be required to confirm transition costs and policies, practices or
procedures that will need to be modified as a result of implementation. Implementing the
recommendations in this report will require hard work as well as time. Taking any of the
concepts to reality will not be instantaneous.
IMPLEMENTATION SCHEDULE
The following schedule is suggested as a starting point for the City's discussions. The City has
a projected deficit of $45 million for FY2012/13 consisting of $25 million in operations and an
addition $20 million in deferred liabilities and internal service funding. To realistically
implement a budget stabilization plan, a goal of $25 million in reductions in on-going costs to
be implemented as part of the FY 2012-13 Budget is needed. The remaining $20 million in
deferred liabilities must be dealt with concurrently in order to replenish internal service funds to
appropriate levels. In order to avoid financial challenges associated with lack of reserves for
required cash flow, time is of the essence for making reductions through the implementation of
both Phases of this report.
COMMUNICATIONS AND TRANSPARENCY
City management has taken steps to communicate openly and candidly and engage
managers, employees and unions/associations about the City's financial position and the
options available to create financial stability and resiliency. These communications will
continue. Employees and managers may well have other ideas to offer that should be
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CONCLUSIONS
There are many who feel that taxes are high enough already and that expenditure cuts must
come first. This is a sentiment that has resonated with City leaders as reflected in the
approach taken to address the structural deficit which up to now has not relied on an increase
to any of the General Fund taxes. Nonetheless, the pursuit of new revenue sources and/or
increasing existing revenues through enhanced collection and enforcement strategies is a
strategy that can no longer be ignored. However, seeking to increase revenues that are
subject to large fluctuations, such as the documentary transfer tax or sales tax, should not be
treated as a cure-all. As was the case with revenue received during the real estate boom,
some increased revenue is short-lived. Therefore, in conjunction with a new revenue strategy,
it is recommended that a portion of any new revenue received be directed into the City's
Budget Stabilization Fund. Funding the Budget Stabilization Fund will ensure that reserves are
available for those economic times when economically sensitive revenues will fall. In addition
to dealing with the economic cycles, funding the Budget Stabilization Fund will allow the City to
better deal with uncertain legal liabilities. It is important to note that the new revenue options
described above would have little to no budgetary impact on the Fiscal Year 2012-13 budget
as the collection of these enhanced revenues would not occur until very late in the fiscal year
at the earliest. However, these solutions would have a positive impact on reducing the
structural deficit beginning in 2013-14.
The financial situation in 2012 is a systemic problem held over for years going back into the
1990's. Revenues are simply not sufficient to cover the cost of the services being provided.
City management and City residents have both made public safety the top priority in the City,
having approved ballot measures to allocate additional resources to the Police Department.
Other services have been cut to support the emphasis on public safety. Clearly, reductions to
the expenditure side of the budget are not going to produce the level of savings that will be
needed to balance the budget.
The City has been working diligently to manage its operations through an unprecedented
decrease in revenues while experiencing cost increases. As a comparison might note, the City
entered this challenge with a distinct disadvantage in that it has lower levels of discretionary
revenue and the resultant lower levels of operational expenditures than other similar cities.
Nevertheless, the City has taken steps to reduce costs over the last several years because it
has been forced to do so by declining revenues, however, the expenditures have still outpaced
revenues. In this effort, employee associations have been forthcoming with some
compensation concessions, yet costs continue to be much higher than can be afforded by the
City. The revenue forecast shows that significantly lower costs will be required for the
foreseeable future.
During this period of time, it has been noted that Council, residents and businesses in the City
expect and deserve a well-maintained street network, manicured parks, cultural opportunities,
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neighborhoods, in addition to fundamental public safety services. The challenge to the City will
be to identify what it can afford and how that relates to the type of community services it wants
to provide. Staff has approached this analysis with the understanding that all current City
services are important and that service reductions should be pursued as a last resort, only
after efforts to reduce costs, optimize service delivery and improve revenue performance have
been taken. While it is difficult for policymakers and executives to consider such topics as
reductions in employee compensation, changes in the way services have been traditionally
delivered (which also impacts employees) and revenue increases, there are strong
justifications for each area to be on the table for discussion. The fact remains that, in spite of
the actions taken to date, San Bernardino's financial situation requires immediate action.
Change in past service delivery models and significant revenue increases are required.
While the service delivery changes suggested in this report are likely to be resisted because of
the impacts on personnel, the suggestions are not radical and are being used successfully in
other similar jurisdictions. Additionally, because other local government agencies are also
looking for ways to reduce costs in response to financial challenges, there is greater
opportunity to discuss and implement regionalized or shared services than before.
Finally, the analysis indicates the City receives a lower level of revenue than other similar
cities, so revenue augmentation should also be on the table. However, options to increase
revenues significant enough to provide ongoing budget stabilization are limited, cannot be
implemented without voter approval, and will take time to be realized even if approved.
Listed below is the summary of options and the estimated revenue or costs savings derived
from each recommendation contained within this report. Several of the recommendations can
be implemented at the staff level with Council approval. However, should the desire not be
there to restructure the organization to staffing and service levels matching available revenue
resources, a voter-approved tax measure is needed. This report contains several options for
the City and Council to consider prior to placing a measure on the ballot. We recommend the
City consider all other options first prior to making a decision to place a measure on the
ballot.
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Table 11
Revenue O tions Summar
ESTIMATED
Utility User Tax 1%, Increase $3,000,000
Utility User Tax 2% Increase $6,000,000
911 Communication Fee $6,700,000
Increase Real Property Transfer Tax $3,000,000
Transient Occupancy Tax $250,000
Develop & Implement
Marketing Plan for the $690,000
Paramedic Subscription Program
Implement False Alarm Fees $100,000
Sale of Surplus Land and $18,000,000'
Land Held For Resale
Proceed from property held by the Successor Agency would
need to be allocated among taxing jurisdictions
In order to achieve financial sustainability and to maintain healthy reserves, the City will need
to take bold, decisive action to implement changes. The recommendations in this report will
assist the City in realigning annual revenues with annual expenditures and setting the path
toward financial sustainability and economic resiliency. Achieving financial health beyond
stability will require a partnership of the City Council, staff and community.
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ATTACHMENT A rm
FORECAST
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analyzed and considered. The best thinking of everyone in the organization will be needed to
make the necessary fundamental changes. The City has competent and capable employees
who are committed to providing valued services to the community and who are proud of the
professions they represent. Engaging City staff in the next phases of the budget stabilization
process is important to the long-term health of the organization.
Communicating early, transparently and frequently about proposed changes, as well as why
the changes are important, is an essential part of effective change management. Openness,
engagement and a spirit of teamwork will be critical for the City to emerge from what will be a
very difficult phase of fundamental changes to the organization. Because so many of the
recommendations have the potential to directly impact staff; executive management should
create an internal communication and engagement plan, as well as a plan for communicating
whether proposed changes will impact the public and if so, how. In addition to creating the plan
the executive management should determine how to staff and support it, and make sure it is
effectively implemented.
Recommendation 17: Create an internal and external communications and engagement
plan. Temporarily reassign positions within the City to provide analytical support for
implementing a budget stabilization plan and a communications plan.
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