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HomeMy WebLinkAbout13 STATE BUDGET 02-02-04AGENDA REPORT Agenda Item 13 Reviewed: ~ City Manager Finance Director MEETING DATE: FEBRUARY 2, 2004 TO: FROM: SUBJECT: HONORABLE MAYOR AND MEMBERS OF CITY. COUNCIL WILLIAM A. HUSTON, CITY MANAGER~v V IMPACT OF STATE BUDGET RECOMMENDATION: That the City Council direct staff to: 1. Through the mid-year budget review (scheduled for the City Council February 17, 2004 meeting) identify options for offsetting the loss of City income in fiscal year 2003-04 due to State imposed diversion of revenue; 2. Prepare a report which identifies for the City Council's review a list of measures that can be taken in the event further State imposed diversions of City income occur in fiscal year 2004-05. BACKGROUND At its last meeting, the City Council directed staff to report to the City Council projected financial impacts caused by the State diverting local government revenue to partially offset the State's deficit. Beginning in 1992-93, the State began diverting property tax revenue from cities and counties as a means to meet the State's obligation to fund schools under Proposition 98. As the State's budget problems increased, it simply decided to take more and more revenue from local government. Since the Educational Revenue Augmentation Fund (ERAF) was established in 1992-93, the City has lost $13 million in property tax revenue because of the State mandating diversion of local government revenue for ERAF. By creating ERAF the State put in place a mechanism which enables it to use local government property tax revenue to fund schools. The State has not stopped its revenue grab with ERAF. The City's two other largest sources of General Fund income, sales tax and Vehicle License Fee (VLF), are also at risk. The City's 2003-04 budget is $105 million. The General Fund, which includes most operating expenses, is $35 million. The three largest sources of General Fund income (sales tax, property tax and VLF) make up 78% of its total income. This report will summarize the State-mandated diversions of City revenue this fiscal year and what potentially could occur in fiscal year 2004-05. Impact of State Budget February 2, 2004 Page 2 FISCAL YEAR 2003-04 The City's General Fund will suffer the loss of: VLF--The State budget mandated that three months of VLF revenue be withheld from local government and diverted to the State general fund. VLF is the City's third largest source (11%) of General Fund income. For this fiscal year it is projected that VLF revenue will be $1,130,000 less than budgeted because of the State's action. If the Governor had not recently taken action to backfill VLF (due to his decision to reduce the VLF), the City would have lost $2,500,000. ERAF--As described above, the State has been diverting local government property tax revenue to partially fund the State's Proposition 98 obligation. In this fiscal year, the City's General Fund had $1.5 million diverted to ERAF. This amount was taken into account when the budget was prepared and adopted so no further adjustment in projected revenue is necessary. The Redevelopment Agency will lose approximately $332,000 in tax increment revenue to ERAF. This amount had not been expected when the budget was adopted. FISCAL YEAR 2004-05 Until the State adopts its budget and action is taken on two ballot measures, it is not possible to predict how the City's budget will be actually affected. However, it is possible to describe what is at risk. VLF--The Governor's proposed budget provides for full payment of VLF to local government which for the City would be $4 million. To do that requires reductions in State expenditures, particularly in social service programs. It remains to be seen whether the State Legislature will adopt a budget which fully or partially allocates an amount that covers the portion of the VLF reduced by action of the Governor late last year. At risk to the City is the backfill portion of VLF. This amount is the difference between the current VLF rate and what it had been before the State reduced VLF rates by 67 percent. When the State decided to reduce VLF rates several years ago, it "promised" local government that the State would backfill the loss with its funds. The backfill amount for the City is approximately $2,500,000. · ERAF--The Governor's proposed budget calls for more local government property tax revenue being diverted to ERAF to fund the State's Proposition 98 Impact of State Budget February 2, 2004 Page 3 obligation to schools. The Governor's proposal would result in a 10% reduction in 2004-05 General Fund property tax revenue which equates to approximately $600,000. The Redevelopment Agency would also lose approximately $600,000. Proposition 57. The March 2004 statewide ballot includes Proposition 57 which if enacted authorizes the State to issue $15 billion in bonds to finance a portion of its accumulated deficit. To sell the bonds, if Proposition 57 is enacted, the State needs a dedicated revenue stream to secure payment of the annual principal and interest amounts. Beginning in 2004-05 the State would reduce sales tax revenue collected by local government by lA cent (or 25% of sales tax income) and use that amount to secure the bond payments until the debt is retired. For the City this would amount to an approximate loss of $4,250,000. To replace the diverted sales tax revenue, the State would allocate an equal amount of property tax revenue to local government. This property tax revenue would come from the ERAF. In other words, the State would offset the loss of sales tax income by returning local government property tax income confiscated by the State over the past eleven years. The risk with Proposition 57 is reliance upon the State to annually replace lost sales tax with property tax revenue that at this point is allocated to schools (i.e., ERAF). Local government will be dependent upon the whims of the State Legislature which historically has not followed through with commitments made to local government with regard to replacing diverted revenue. Proposition 42--The Governor's budget proposes to reallocate transportation funds earmarked for cities to the State. Proposition 42 monies are derived from a rate applied to the sale of gasoline. The funds are restricted to road projects that provide traffic congestion relief. If the Governor's proposal is enacted by the Legislature, the City will lose approximately $200,000. State Transportation Plan--Each year the State allocates gasoline taxes earmarked for regionally significant transportation projects. The Governor's proposed budget calls for diversion of funds allocated to local governments through this program to the State general fund. The City was to receive $300,000 for preliminary engineering work on the Red Hill Avenue grade separation project. Potential November 2004 Ballot Measure--The State Building Industry Association (BIA) has prepared a ballot measure that potentially will appear on the November 2004 Statewide ballot. Its provisions are not entirely clear at this point but would appear to eliminate all VLF payments to local government (and potentially some sales tax revenue) in exchange for more property tax revenue Impact of State Budget February 2, 2004 Page 4 (i.e., ERAF) to local government. There are rumors the BIA might attempt a legislative approach to this proposal. It can be assumed the intent of the BIA is to shift the focus to construction of more housing. As noted above, it is not possible at this point to state with any degree of certainty what might happen in fiscal year 2004-05. What is known is the array of local government revenue at risk. The next major milestone that determines the severity of State imposed takeaways of local government revenue is Proposition 57. If it fails, then it is almost certain that local government will be hit hard. If it passes, the issue becomes will the State actually backfill the loss of 1,4 cent sales tax revenue. And if the BIA measure moves forward and passes in November, there will be implications not fully understood at this point. From a planning standpoint, the coming months will be a financial roller coaster for local government.