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City Management Discloses Bleak City Revenues, Warns LB Is Now In Situation Similar In Some Ways To Recession of Mid-90's

Dept. of Finance Dir. Torrez issues memo, approved by Taboada

(May 6, 2002, revised May 7) -- With the City Council continuing to spend using pre-Sept. 11 budget assumptions, LB city management in a memo by Finance Director Bob Torrez and approved by City Manager Henry Taboada, says several city revenue sources are not performing as previously assumed and accordingly, "The City finds itself in a situation similar, in some ways, to its situation during the recession of the mid-1990s. An uncertain economy coupled with demands for fewer taxes and more City services make it difficult to plan for the future."

The memo will be presented as part of an agendized Council item at the May 7 Council meeting, revelations carrying possible political implications in the Mayor's race (now a three-way contest with incumbent Mayor and write-in candidate Beverly O'Neill, Vice Mayor Dan Baker and write-in candidate Norm Ryan).

"With six months remaining in the fiscal year, we should expect that projections of year-end performance will change monthly. Nonetheless, at this time, overall trends are of concern," Mr. Torrez's memo, approved by Mr. Taboada, advises. Based on six months of receipts, total General Fund revenues are on a trend to come in roughly $6.2 million short of the adjusted revenue budget figure of $337,666,925.

Among the areas we found noteworthy:

Secured Property Taxes: $25.882 million (Mar. 02 YTD). LB's current budget (adopted by the Council in late Sept. 01) used the County Assessor's 6.3% growth rate at the end of FY 01 (ending June 30/01, using final "clean up" figure in August). But the County now expects property tax to increase only 4%, which would leave LB's property tax revenue share roughly $680,000 short. Property tax (collected by County, from which LB gets a sizable percentage) is one of LB's largest revenue sources with roughly $45.8 million expected by Sept. 30/02.
Sales Tax (point of sale, typically "cash register" sales): $17.568 million (March 02 YTD). "[T]he City now has complete sales tax data for the Thanksgiving-Christmas period. The results are disappointing," Mr. Taboada advised. "Sales tax revenues for the last quarter of calendar 2001 (received during the first quarter of calendar 2002) totaled $9.2 million compared to $10.1 million for the final quarter of calendar 2000. Year-to-date, base sales tax revenues are $957,000 less than for the same period a year ago."
City management blamed this on several major factors statewide including "a recession, which may or may not have ended, depending on which economist one listens to; a drop in tourism, which greatly affected the Southern California region; and, the tragic events of September 11, which exacerbated the slump in the nation's and the State's economy. Although reports of a recovery are discussed in the press almost daily, we have yet to see any significant signs of that recovery in Long Beach and the rest of the State."
The memo said, "If these trends continue, the shortfall in base sales tax revenues could exceed $2 million by year-end. LB sales tax from point of sale transactions (i.e. cash register receipts, not including City Hall's contractual arrangement with SCE) are expected to total roughly $38.669 million by Sept. 30/02.

Transient Occupancy Tax (TOT, "hotel bed tax"): $2.64 million (through Feb. 02, the most recent available) compared to $3.136 million a year earlier. [We presume these figures represent the General Fund portion of the total TOT. The Council, by ordinance, has decided to give the General Fund only roughly half of LB's TOT; details below.]

"Long Beach hotels experienced a significant decline in occupancy within the first five months of the fiscal year. Through February, which is the latest data available, occupancy has averaged 61.3 percent, compared to 69.7 percent a year ago (reference table below)."

[The memo does not cite a source for the occupancy figures, so we don't know if they are from the "LB Area Convention and Visitors Bureau" or elsewhere. We presume the revenue figures are City Hall's own.]

The decline in hotel occupancy rates "can be attributed directly to the events of September 11. The outlook for the full year is a shortfall of about $1.2 million in budgeted General Fund revenues. Recent economic reports have indicated a recovery in this sector may follow the recovery in the general economy expected later this year," the memo said.

It added, "The TOT is also the primary source of revenue for the Special Advertising and Promotion Fund (SAP), which funds the Convention and Visitors Bureau and other City promotions and the Redevelopment Agency (RDA) repayment to the Harbor Department for the Convention Center expansion loan. Shortfalls of $722,300 in SAP TOT and $492,500 in RDA TOT are also projected."

Gas Pipeline Franchise Fee: $3.76 million (Mar 02 YTD), compared to $8.805 million (Mar 01 YTD).

"The City receives 2 percent of the Southern California Gas Company's (SoCalGas) gross annual revenue that is generated within the City of Long Beach. The fee is for the right of SoCalGas to transport natural gas through pipelines located within the City to SoCalGas customers, primarily the large electric generation plants within the City. The revenue received by the City is determined by the price of natural gas and volume transported. These revenues were very volatile last year, and, due to the energy crisis (and perhaps industry manipulation of natural gas prices), City revenues from this fee came in at unprecedented amounts in FY 01. Since adoption of the FY 02 budget, natural gas prices have stabilized at normal price levels, and usage by the generation plants has dropped as well. As a result, the fee is currently on a trend to close the year more than $4 million under budget," city management's memo advised.

And what about Norm Ryan's Prop J utility tax cut for which City Hall forecast dire consequences and the public voted in by a near 70% margin?

UUT on telephone: "The FY 02 projection is above target by $1.3 million," the memo said without comment.

UUT on electricity: "If current trends continue, a gain of approximately $2.0 million may be expected from this revenue by the end of the fiscal year." (The memo indicated SCE's large PUC authorized rate hikes at mid-year FY 01 included numerous tiers with varying rate increases and SCE "could not provide an accurate estimate of the effect on electricity sales, and, therefore, it was not possible to accurately forecast the UUT on future sales.")

UUT on gas: "A shortfall of approximately $4.5 million is, therefore, projected for this current fiscal year," the memo said.

UUT on water: "The FY 02 projection is slightly above target," the memo indicated.

One bright spot was business license tax revenue: "Total FY 02 [business license tax] revenues may be approximately $180,000 higher than budget. The estimate does not take into account the recently approved amnesty program and the 15 percent discount for on-time payment; the amount discounted to date totals $122,000, which reflects a 60 percent participation rate. Fortunately, this loss has been offset with an increase in new business license revenue of $194,000 YTD. The true effect of these programs will be known later in the fiscal year."

The bottom line: "The FY 02 adopted budget consists of $357.6 million in expenditures and $333.2 million in revenues. The gap between expenditures and revenues was filled with $24.4million in carryover (a combination of the 2 percent savings and additional unbudgeted revenues) from FY 01. All things being equal, a similar gap could logically be expected in the FY 03 budget. If current trends continue, there will not be any carryover [emphasis in original] to help balance the FY 03 budget," the memo advised.

To deal with these development, Finance Director Torrez said the City Manager "has already had several sessions with his Executive Management Team to develop budget strategies. In addition, with today's report, the City Manager is again directing all departments that report to him and that have General Fund budgets to adhere to the budget policy. That policy is as follows:

1. All non-safety departments will manage their FY 02 expenditure budgets to close the year at no more than 98 percent of their General Fund budgets; and
2. Police and Fire Departments are exempt from this policy, however, they should not exceed their current appropriation levels."

The memo added:

"If City revenue performance and/or departments' expenditure trends do not improve, then the options discussed during the First Quarter budget performance report will likely need to be exercised beginning in the month of May. Those options would be phased in and include:

Soft hiring freeze
Hard hiring freeze
Halt all non-critical travel
Defer non-critical purchases"

The memo added, "These options, if exercised, would be necessary to not only ensure the General Fund ends the year balanced, but to generate funds that could be carried forward to help balance the FY 03 budget."

And city management's conclusion:

"The City finds itself in a situation similar, in some ways, to its situation during the recession of the mid-1990s. An uncertain economy coupled with demands for fewer taxes and more City services make it difficult to plan for the future. Further, there is again concern that the State will turn to City revenues to balance its budget....
Earlier in this report, the potential scenarios for the General Fund budget were illustrated; those scenarios assumed current revenue trends continued for the rest of the year and into FY 03. If so, the outlook is rather bleak. Although of no real consolation, Long Beach is not alone,as cities throughout the State are faced with the same, or worse, outlook....
...Without a dramatic improvement in revenues, strategies to close a potential gap in FY 03 must also be employed. Several strategies are listed below:
1. Exclude enhancements or discretionary budget increases in FY 03 budgets unless a new funding source is identified.
2. Implement carefully selected budget reductions.
3. Employ use of reserves.
4. Optimize revenue collection through audits and aggressive enforcement of the Municipal Code (e.g., TOT, UUT, BLT, Franchise payments, etc.)."

The revelations could help amplify City Hall's spending practices as an issue in the Mayoral runoff and 7th district Council race.

Last year, pursuant to the City Charter, the Manager presented his proposed budget to the Mayor by August 1, who in turn presented it to the Council pursuant to Charter by August 15 with her recommendations.

Despite the events of Sept. 11, and reports detailing LB's thin police levels amid rising crime, neither the Mayor nor the Council have since moved to provide taxpayers with any serious public safety increases or conserve taxpayer resources by making meaningful spending reductions.

The Council has had the power to revise the budget at any time.

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