1.1 Roots of the Budget Gap
1.2 Fiscal Outlook for the City of Long Beach
5.1 Three-Year Overview
Financial Strategic Plan (balance sheet style numerical document)
5.1.1 General Administrative and Management
5.1.2 Employee Compensation, Benefits and Work Practices
5.1.17 New Fees and Taxes
5.1.18 Existing Fees or Taxes

1.1 Roots of the Budget Gap

The City of Long Beach is facing an extremely difficult financial situation. In this regard, we are not unique. Many cities, counties special districts and states across the nation face similar, even worse financial dilemmas. The simple reality is that we have a structural budget deficit, where ongoing expenses exceed the revenue coming in. This situation is not new; in fact, this City has operated with a structural deficit for the past 15 years. What is new, however, is that discretionary reserves have been depleted and one-time funding sources used to cover past and current City structural deficits are not available to the extent needed to bridge the existing gap. Also, the deficit has grown due to costs of new programs, new capital debt, inflation, wage and benefit cost increases, and the loss of revenue due to the voter-approved Utility Users Tax (UUT) cut. It is clear that costs must be significantly reduced to bring expenditures in line with revenues.

It took several years to get to this point, and it will take a number of years to balance ongoing expenses and revenues. The difficulty will be in downsizing the organization without severely impacting essential services to the public. Responses from the Voice Your Choice community survey will guide us in prioritizing City services and programs, and will serve to steer us in making the right decisions.
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1.2 Fiscal Outlook for the City of Long Beach

With regard to an economic recovery, the outlook is not good. Most major revenues are either in decline, flat, or with the exception of property taxes, showing relatively minor growth.

Projected growth of existing revenues is minimal, and therefore does not present a significant, viable option for addressing the budget gap. In fact, for the next three years (FY 03 - 05), reduced revenue caused by the UUT rate cut will essentially offset growth in all other revenue. A look at the City’s four largest revenue sources, which make up 50 percent of total General Fund revenue, puts this point in perspective.

Secured property taxes ($48 million) are fairly robust, likely due to sales activity prompted by low interest rates and a limited housing supply in the region, which drives up prices; however, recent growth in sales activity and housing values has been at a declining rate. In addition, most new property tax revenue expected from major development projects will flow to the Redevelopment Agency.

Sales taxes ($39 million) are expected to grow at rates only slightly higher than inflation, even after taking into account recent retail development. In fact, the largest retail project in the history of the region, Long Beach’s highly successful Towne Center, will generate approximately $2.5 million annually in sales tax revenue to the City, including the new Wal-Mart. It would take 21 new "Towne Centers" added to the City just to eliminate the budget gap projected for FY 04.

The UUT, previously the City’s largest revenue source, is being reduced from the $57 million collected in FY 00, down to about $33 million by FY 06, even after taking into account increases to the underlying commodity rates upon which the tax is applied. Staff has reported throughout the last several years that the annual losses of UUT, resulting from the November 2000 voter-approved UUT reduction, would offset any growth in other revenues, resulting in a situation where costs would increasingly exceed revenues.

The fourth highest General Fund revenue, Motor Vehicle In-lieu ($27 million), is dependant on continued funding from the State. This revenue, commonly referred to as the VLF (Vehicle License Fee), is a potential target for the State in balancing its budget. Should VLF revenue be significantly reduced, not only would the budget reduction options put forth in this report need to be accelerated, but additional severe cuts to many more General Fund services would need to be immediately implemented or new revenues identified.

The City Manager’s proposed FY 03 budget included a $46 million structural deficit that was balanced using cash reserves and one-time revenues. The City Council took action and reduced the proposed FY 03 budget prior to adopting it. The structural deficit is now projected to grow from the current $46 million to over $50 million in FY 04 due mainly to an already negotiated 3 percent increase in non-safety employee wages and the continued reduction of the UUT. For FY 05, pension payments are expected to begin that will increase the projected deficit to over $80 million.
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5.1 Three-Year Overview

This three-year financial plan is designed to address the City’s structural budget deficit in a logical and balanced manner. Cost reductions are the primary options recommended within the Plan. Every attempt has been made to avoid impacts on public services. However, due to the magnitude of the gap, service impacts are unavoidable. Moreover, program reductions beyond those presented in this plan will create severe disruptions to core services. The financial strategic plan on the next page identifies the program reduction and revenue options by major program areas. This strategic plan is a summary of hundreds of specific options to address the structural deficit (see Attachment 5, pending completion.) The Plan reduces the gap over several years. Therefore, it includes the use of some one-time options; doing so avoids severe service disruptions, maintains the viability of the City as a full-service government, while at the same time bridging some of the gap while the City’s revenue base expands. A summary of each area’s options is provided on the pages following the financial strategic plan.

[LBReport.com note: The financial strategic plan is a balance sheet style document setting forth management's strategy numerically. Because it is central to the report, we've posted it separately on its own page (on the hyperlinks in these paragraphs) for quick download. However, it is also included in our download link to the report without attachments (276 kB) as well as the full City Hall document download (12 MB).]
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5.1.1 General Administrative and Management

Reductions in management and administrative staffing throughout the organization make up a significant portion of overall cost reductions in the proposed Plan. These reductions equal approximately 13.2 percent of the overall plan solutions, totaling $11.3 million in reduced expenditures. Management staffing would be reduced by close to 25 percent, or approximately 48 positions in General and related fund programs over the next three years, with an estimated $5.3 million in savings. Reorganization and consolidation of department responsibilities will be required to achieve this significant reduction in staffing, single focus management positions will have to be collapsed with other managerial responsibilities. Some examples include consolidation of administrative oversight with marketing and customer relations’ responsibilities, and combining accounting oversight with budgeting functions.

Administrative support staff would also be dramatically reduced during this period, requiring an increasing workload for remaining staff. In some cases, work previously performed will have to be deferred. It is anticipated that reductions in this area will result in increased response times to requests for information and special studies. Ad hoc analyses currently performed on a routine basis will have to be delayed if not a high priority, or deferred altogether. In addition, memberships in professional organizations, attendance at conferences and administrative supply budgets will be significantly reduced. Increasing the use of technology will be explored to help offset the impact of the proposed administrative reductions including use of the internet and automated phone systems for conducting City business. Organizational consolidation and elimination of overlapping responsibilities will also play a critical role in reducing staffing levels.

5.1.2 Employee Compensation, Benefits and Work Practices

The most significant spending reductions proposed are in employee compensation and benefits, reflecting input received through the community survey. These cost reductions apply to management as well as non-management staff. Reduced costs in this area make up 27.2 percent of the overall planned budget curtailment and total $23.4 million over the three-year period. The proposed reductions in this category total approximately 10 percent of current General Fund salary, wage and benefit costs.

It is also recommended that the City implement a new non-safety employee retirement plan where lower retirement benefits will be provided to new employees. Though the community survey related a general desire to rescind recent retirement enhancements granted to employees, State law prohibits the City from unilaterally reducing the pension benefits of existing employees. A new retirement plan tier is not expected to generate savings of consequence for the next three years, but it will save the City money later this decade.

Staff has previously discussed, in public session, that the primary cause of the City having to make payments to CalPERS again (approximately $36 million beginning in FY 05) are the unprecedented investment losses experienced by CalPERS. The recently approved benefit increases for public safety and miscellaneous employees contributed to the cost, but investment losses by CalPERS is the primary reason that the City will soon no longer be superfunded. Long Beach is not alone in this predicament. Cities and other government agencies throughout California have been notified by CalPERS that their payments will be increasing dramatically; in many cities, those cost increases are immediate.

Staff from the Department of Financial Management has scheduled meetings between a coalition of public agencies, chaired by the City of Long Beach, and CalPERS to determine if there are options available to minimize, reduce or defer these unexpected CalPERS costs for all cities. The City may wish to pursue legislative remedies should these discussions with CalPERS be unsuccessful. Further, the safety employee (Police, Fire and Lifeguards) pension plan offered by the City is now common to many municipalities in the State. A reduction to their pension benefits would put the City at a competitive disadvantage with other agencies in attracting and retaining public safety personnel, and therefore is not advisable at this time.

Since reducing pension benefits is not an immediate option, and introducing lower costs benefit tiers will not provide the immediate relief needed, the only viable option is for employees to support a much larger share of their pension and health benefits and, or, take wage reductions, cut backs in skill pays and reduced overtime. Reductions in this area are subject to negotiation with labor unions; therefore, the exact composition of the reductions cannot be specified at this time. Information from the outside compensation and staffing survey, which should be completed by April 2003, should play a key role in future labor negotiations. As previously communicated, there will also be no across-the-board management compensation increases this fiscal year.

The City and its employees have contributed to the pension plan in varying amounts over the years. Pension fund contributions are generally categorized into an employer and an employee share. Current City union agreements require the City to pay the employer share of the pension contributions, as well as the full employee share for public safety employees (9 percent of salary) and 7 of the 8 percent employee share for all other employees. Employees paid the employee share of the pension contributions until 1980, at which time the responsibility began to shift due to MOU negotiations to the City. Refer to Attachment 6 for a brief historical summary of the pension plan. Employee compensation and benefit cost reductions will likely impact the City’s ability to retain and attract employees in the future. Implementing these reductions will require a close working relationship with labor unions and employee representatives. The City’s employees share responsibility for the solutions needed to preserve core service functions within the City. The financial plan contains many changes that will bring about dramatic impacts for City provided services. Should the proposed reductions in compensation and benefits not be implemented to the extent needed, further reductions in services, widespread job losses, including sworn staffing levels, will be unavoidable.
...[Other cost savings/reduction areas specified in text]

5.1.17 New Fees and Taxes

As is evidenced by the level to which cuts are being proposed, cost reductions are the primary means suggested to solve the budget deficit. Increases to fees and taxes were sought at the point in the BEP where it became clear that additional cuts to programs and services would be excessively severe. This category includes fees or taxes not currently being collected by the City. New fees generally require City Council approval, while new taxes require voter approval.

In many of the options identified, revenue increases are designed to bring a fee or tax to levels comparable to surrounding cities and/or to recoup the actual cost of the service provided. No new fees or taxes are proposed to take effect in FY 03. The following options, among others, are being evaluated for possible implementation beginning in FY 04:

• Applying Business License Tax to businesses currently considered exempt
• Charging for certain preferential parking permits
• Applying a tax on natural gas produced by oil operators
• Establishing a private collection agency contract to recover lost towing revenue
• Charging an "After Hours Release Fee" for towed cars
• Levy a port container tax
• Assess a library tax dedicated to support the Library System
• Establish entertainment venue admission tax

The exact nature of these increases will be determined in the months that follow, as the City Council receives community input and deliberates on the Plan...
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5.1.18 Existing Fees or Taxes

Again, the BEP was not predicated on raising taxes or fees. Nonetheless, a number of existing City fees and taxes were evaluated by staff for possible increase should the City Council approve. Increases to either would require City Council approval, while tax increases also require voter approval. In many of these options, proposed increases will seek to bring the fee or tax up to a comparable market level with surrounding cities, or to recoup the actual cost of the service provided.

The following options, among others, are being evaluated for possible implementation beginning in FY 04:

• Civic Center parking rate increase
• Street sweeping parking violation rate increase
• Increase select other parking violation rates
• Business License Tax discount – sunset in December 2002
• Increase returned check fees to recoup costs
• Increase gas service re-connection fee to recoup costs
• Increase gas service establishment fee to recoup costs
• Utility late fee increase
• Oil production tax increase
• Increase number of adult sport teams and fees
• Business License Permit/Investigation fee increase
• Animal control fees increase
• Recreation swim fee increases
• Certain health clinic fee increases
• Towed vehicle storage fee increase

A combination of increases to existing fees and taxes mentioned above are considered feasible for FY 04 and are included in the Plan at approximately $5.8 million, or 6.7 percent of the structural deficit.

Increases to existing fees and taxes are not contemplated for FY 05 or FY 06.

5.1.19 One-Time Revenues/Transfers

One-time revenues are those that are not expected to be received on a recurring basis. An example would be the $5 million received from Southern California Edison several years ago as part of the renegotiated franchise agreement. Transfers come from other City funds, primarily Internal Service and Enterprise funds, may be one-time or may be counted on for several years. In the current fiscal environment, new transfers from other funds are being considered only due to the severity of the General Fund’s budget situation. Before affecting a transfer, the fiscal condition of the fund making the transfer must be taken into account. The result of transferring from other funds is that equipment and capital replacement in these funds will be deferred, and it affects the ability of these funds to respond to unanticipated needs.

The following new or incremental one-time revenues and fund transfers are being considered:

• Transfer from General Services Fund
• Transfer from Employee Benefits Fund
• Airport Fund repayment to the General Fund
• Transfer from Insurance Fund
• Sale of City Hall East

A combination of the above is estimated to contribute $2.6 million in FY 04, $3.9 million in FY 05 and $3.9 million in FY 06. These one-time transactions do not reduce the structural deficit but provide a more desirable option to severe budget reductions partially bridging the gap while the City restructures its budget.

The City Council designated $35 million Emergency Reserve was not used as a funding source in this proposed plan. ...

We also provide a link to the entire document with attachments (roughly 12 MB) on City Hall's web site. Click Complete document with attachments (Caveat: 12 MB).