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02 Fiscal Strategic Plan B EXHIBrr Q;../5~ z -Of¿, :f:/:z.. City of Cupertino Fiscal Strategic Plan Issues Paper May 2, 2006 ....,:.'f. Ie , City of Cupertino Fiscal Strategic Plan Issues Paper Table of Contents I. Define the Problem: Analyze the Current Funding Gap. I II. Automate and Streamline Service Delivery 4 III. Stabilize and Reposition Revenue Sources 6 IV. Decrease Expenditures and Risk Exposure 9 City of Cupertino Fiscal Strategic Plan Issues Paper May, 2006 I. Define the Problem - Analyze the Current Funding Gap The 2000-2005 recession coupled with significant increases in retirement and medical costs, energy costs, new infrastructure service needs and the State of California take-always severely undermined the ability of the City of Cupertino to continue delivering high quality municipal services. The City weathered the economic storm by cutting service levels, freezing up to 17 staff positions, refinancing debt service, turning to a full cost recovery fee structure for certain services, realizing one-time revenues through sale of surplus property and reducing employee compensation through direct salary cutbacks and work furloughs. Service levels clearly suffered and sacrifices were necessary across the board. The city learned that our fiscal structure left us vulnerable to the whims of economic fluctuations and the ability of the State to raid our revenue sources. Two major revenue sources, sales tax and property tax, were principal weak points in the above scenario. Cupertino is heavily dependent on business-to-business sales taxes and its retail sales tax is significantly under performing due to the condition of older strip shopping centers in the cornmunityand the recent loss of several significant revenue producers such as Anderson Chevrolet and Drexel Heritage Furniture. Also, Cupertino is one of four no-low property tax cities frozen by pre-proposition 13 to abnormally low tax rates. The City must evaluate its revenue structure to ensure more reliable, less volatile revenue sources and evaluate its cost structure to ensure we are operating in a cost effective manner. The following fiscal strategic plan defines strategies to reposition the revenue and cost structure of the city to ensure it is not as severely impacted by future changing economic conditions and that we are able to continue funding of existing and new service levels. The city's latest audit report for the year ended June 30, 2005 shows the General Fund in a strong net income position after operating expenditures, debt service and transfer obligations. Based on this, and the fact that the federal government is estimating inflation next year in the 3.6% plus levels, one might say that the goal to achieve financial viability is already won. However, the 2004/05 financials are not representative of our true level of service. Vacancies were upwards to 11 % of our authorized workforce, maintenance of infrastructure was cut to an all-time low and because of the shortages in staffing, many budgeted projects were carried over to the current fiscal year. In addition, one-time revenues such as sale of property inflated this bottom line. 1 City of Cupertino Fiscal Strategic Plan Issues Paper May, 2006 To analyze our current funding gap and present for you a more accurate financial picture, we looked at the actual inflows and outflows to the General Fund and identified one-time, non- reoccurring revenue. In addition, we looked at the latest audit report for fiscal year 04/05 and added back the salary and benefits, deferred maintenance and deferred projects approved but not spent Finally, for 04/05, we deducted the non-reoccurring State payback, park dedication fee payback and sale of property. This provides you a snapshot of what our financial results would have been at fully approved levels of operation and without one-time revenue sources. The following chart shows total revenue (operating and transfers-in) versus total expenditures (operating and transfers-out) for the fiscal years 99/00 to 04/05. One-time revenues are shown in yellow to visually denote the magnitude of inflows versus outflows in the General Fund. 2 City of Cupertino Fiscal Strategic Plan Issues Paper May, 2006 Although Fiscal Year 04/05 ended with a $5.6 million dollar "profit", once one-time revenues are removed and expenditures are reflected at approved levels, the result is a net loss of $1.1 million dollars. This net loss figure does not reflect future concerns in the following areas: ~ Pending legislation will put $389,000 of cable franchise fees in jeopardy; ~ Pending court cases may put $350,000 in cell phone utility user tax in jeopardy; ~ The City is currently spending $1.53 million per year on active and retiree medical premiums and future liability costs. There are 150 active and 81 retired employees receiving benefits. The cost of providing this benefit has fluctuated and it is conceivable that health premiums could increase in excess of 8% per year; ~ Fuel costs have risen 30% since preparation of the 05/06 budget The City has approximately 130 rolling stock and vehicles in the fleet. ~ Asphalt is a petroleum-based product and the cost of street work has risen dramatically this year. A consultant is updating the pavement management plan, and has indicated that street jobs are coming in 25% to 46% higher than a year ago; ~ The annexation of Monta Vista, Garden Gate and Rancho Rinconada neighborhoods has lowered the overall pavement standard for Cupertino, and a disproportionate amount of funding has gone into these areas to bring streets closer to city standard; ~ Our current annual $750,000 cornmitrnent is minimal for keeping the streets in good order. Keeping pavement in good condition is the most economical maintenance strategy over the long tem; ~ Library aquarium maintenance reimbursement will be reduced by 50% ($7,500 per year) starting in 2009 and will be the City's full responsibility in 2014. Besides balancing at the basic level of operating revenues and operating expenses/debt service obligations with the above issues in mind, we will need to fund our reserves at appropriate and/or mandated levels. A healthy "net income" will be required to embark on operational or capital improvement areas that are already being discussed. Some of these projects include: ~ Additional parks on the east side of the city; ~ Reserves to accornmodate major renovation requirements of our facilities such as the Quinlan Cornmunity Center; ~ Funding for environmental components such as artificial turf and solar energy options for fields, parks and facilities; ~ Extended library hours; ~ Improved street standards; ~ Alternative energy sources; ~ E-Services; and ~ Risk reduction efforts. Based on the under-funded current and non-funded future needs, staff recornmends that the city reposition its revenue and expenditure base to fund an additional $2.5 million per year. 3 City of Cupertino Fiscal Strategic Plan Issues Paper May, 2006 II. Automate and Streamline Service Delivery We currently have 157.75 full-time equivalent positions in our budget. Although lean for a city of our size, the committee looked at the structure of our organization and areas to automate or streamline. This task was critical since approximately 70% of the general fund operating expenditures are associated with salary and benefit costs. In addition, long-term trends for what we call "hidden" costs (medical insurance premiums, workers compensation and retiree medical costs) are directly associated with the number of our employees. The more we can streamline or contract out services, the more we can control these current and long-term costs. Our hiring freeze this year demonstrated that we couldn't reduce our workforce and maintain all existing programs for any length of time. Our organization is too lean and too flat to accommodate this option without experiencing declines in customer satisfaction and service level. If we are successful in a workforce reduction, programs impacted by staffing reductions need to be identified and either contracted out, modified or eliminated. In addition, previously "frozen" maintenance positions will need to be filled to support infrastructure added during the last five years and to address mounting workload demands associated with deferred maintenance. e ;(¡~;k'iit%~¡' '.' i",.<'ßri'm"I/·;'¡;'ifj¡~<'~·f¡ijt'-tff;.-·i,;:l;~~~~;:t1Ef,\~~'~':;"~~";'~·'~'Þ'i~~.jj}!::'fr~~r4ffl(;.J1£m'iÆ~i.~-; :ê'~!;~*~~~£'~;~'d!f;~f:!1F~::{;:,j,:i¿~7;:fj~5~~f~l~t~~~~t~~'\#}.~~~~~~~i:~~~ We also need to be cognizant of our future personnel needs. This year we added a full-time Information Technology Assistant to accornmodate the workload associated with our increasing technology base. A Facility Attendant was also approved to staff the new Community Hall. At some point, possibly as early as fiscal year 2006/07, we will be facing increased law enforcement needs as a result of our annexations and the development of new residential and commercial buildings. We also foresee new staffing needs for economic development and a redevelopment agency. 4 City of Cupertino Fiscal Strategic Plan Issues Paper May, 2006 The Cornmittee identified several areas for potential short term and/or long term savings for your consideration. A. Streamline and reposition our workforce as opportunities arise. As future vacancies occur through attrition, we will need to streamline and reposition our workforce whenever feasible. All vacant positions should be reviewed to identify opportunities for automation, level of effort shifts or other cost saving ideas. We will also need to reposition our workforce to meet evolving workload demands. Greater emphasis will be placed on employee cross training and career development opportunities and on filling vacancies through internal transfers and promotions. Repositioning will provide staffing where it's needed most while reducing our long-term need for additional positions. B. Implement E-Services with the goal of bringing city hall to the customer and reducing our cost of service delivery. The City's E-Service budget was eliminated the past two fiscal years in an effort to save expenditures. This year, an E-Services master plan is being drafted which addresses automation opportunities of government services. Examples of products currently being assessed include but are not limited to: ~ Permit tracking in the Building Department, ~ Records management/retrieval in the Planning Department, ~ On-line job applications in the Human Resources Department, and ~ On-line business licenses in the Finance Department C. Pursue artificial turf in our parks to reduce maintenance and risks associated with injury. Utilization of artificial turf is a growing trend to curb the rising costs of maintenance and general liability claims. The cornmittee recommends that we use all future youth sports league fees for refurbishment of the fields and that we pursue utilization of artificial turf and solar energy whenever feasible and cost effective. D. Pursue alternate energy sources for the City's infrastructure and vehicle replacement needs. The cornmittee recornmends the City investigate use of alternative energy for application in City facilities and vehìcles where it is a proven cost benefit. 5 City of Cupertino Fiscal Strategic Plan Issues Paper May, 2006 III. Stabilize and Reposition Revenue Sources Cupertino has historically been heavily dependent on sales tax as a major general fund revenue source, however trends over the past ten years have changed not only the percentage of revenue received from this source (36% to 26%) but also the make-up of where the revenue is coming from. Ten years ago, over 50% of our sales tax base came from the retail sector where today 49% is from the business-to-business or the high-tech sector. Our largest sales tax producer, Apple Computer, comprises 26% and given the volatility of the high tech industry, this fact alone has put this revenue source in an "at risk" situation. To add to this concern, the State is continuing it's efforts to change the way Internet sales are reported and, if they are successful, will dramatically affect the amount of sales tax revenue currently received from Apple. CITY OF CUPERTINO SALES TAX BY ECONOMIC CATEGORY ''''"'·"1 , .'Io(I.~M .U( O . ~H(N).I101I ' SoI.!UWNI ,__,illS!N "'i.~1ÙUL'S N1!SSi ·__(;FNL!H.~I.Nrr¡~" __''Ol')lI'N<JI>lNTS ---l1(,<N~I'(,n^l1<'N ;__M!o;("J~.J.A."H"J> '__C( "ST,,'~~n(lN S~JXI(\(NNI <>- . . . . . . . . . . . " SlJlOOJNl();, SI.!IOO.IN'IIJ , , , l . '" . -..---.-.....-... , ' .: _t ...' ß .,ð-'" "" ".:t~ -<IV- .>l ,> ." Aè !t>" .,þ .-1''' ...<..:f " .y ,0" ,'" ,0' -6-"\.' ,0 ,.' ,'" of)' ," ,0' .p " ,. ~. ...'" -........ <' ........' 'to"''''' ,<' <' ....¿.' ",,"': ~..."". .~ -' ~ .< . .- . . . . ,,- . . . BENCHMARK YEAR ENDING QUARTER In the past four years of budget cuts, we have mainly focused our efforts on reduction of expenditures. No new revenue sources per se have been implemented with the oruy major change resulting from an independent analysis of existing fees to ensure that we are covering our costs of service. The Cornmittee believes that it would be prudent to consider the following revenue strategies: 6 City of Cupertino Fiscal Strategic Plan Issues Paper May, 2006 A. Pursue Tax Equity Allocation (TEA) relief with Santa Clara County. When Proposition 13 passed in 1978, it froze property taxes at their current levels. This action created significant problems for cities that at the time had low property tax rates because they couldn't raise those rates to meet their community needs. Four cities, including Cupertino, are significantly below the average. Our city is actively pursuing an amendment to bring us to par with the Tax Equity Allocation (TEA) rate of 7% with the County. B. Re-assess Park Dedication Fees on an ongoing basis to capture rising real estate costs associated with park acquisition. Each time a new development application comes to the City, real estate costs should be researched to ensure that the park dedication fees are current and reflect appropriate costs for property acquisition. This way, we can ensure that our purchasing power is not diminished. C. Negotiate with Hansen regarding future land use rights in exchange for annexation. Hansen currently resides in the County but utilizes Cupertino streets for access to its site. The cement trucks that frequent Foothill Boulevard and Stevens Creek inflict much more street and landscape maintenance needs than the average user. Cupertino has been absorbing the traffic and pavement issues associated with this business, but receives no revenue benefit. It is estimated the utility users tax from this site alone will bring over $1 million per year to the city. The cornmittee recornmends pursuit of annexation in exchange for future land use rights. D. Support Redevelopment/Economic Development for ValIco and other major projects. Analysis shows us that our regional mall is producing well below the average sales tax per square foot that is required to have a strong operation. We currently receive approximately $1.2 million per year from Valko in sales tax as compared to the Oakridge Mall which is remitting around $5.4 million per year. In addition, build-out projections on infrastructure will provide about $2 million per year in new tax increment for the project area starting in 07/08 and approximately $23 million for low and very-low housing over the next 30 years. To decrease our dependence on the business-to-business sector, we recommend strong support for the mall redevelopment. In addition, as new developments come before the Planning Commission and City Council, we recommend a quality retail component be incorporated into the project. 7 City of Cupertino Fiscal Strategic Plan Issues Paper May, 2006 E. Consider an Entertainment Tax and a modification to our existing Utility User Tax Ordinance in conjunction with the election this November. If the City is required to hold an election for the Referendums, the Committee recommends that we consider placing on the ballot both an entertainment tax and re- wording of our UUT Ordinance to reflect recent trends in technology and retain existing UUT revenue such as cell phone remittances. F. Phase out one-time revenue to the General Fund. Limit park dedication fee payback to the General Fund to $500,000/year for 06/07, decreasing by $100,000 increments each year with additional revenues vesting to the Park Dedication Fund. The Committee believes that the payback of park acquisition costs inflates the General Fund revenue and gives the impression that this is on-going revenue from operations. As this funding will eventually "dry up" it is prudent to replace it with true operational and annual revenue streams G. Consider assessing a sales tax in-lieu fee for discontinuance of retail land use. This concept would assess any developer who proposes taking land use currently zoned for retail/commercial use and replacing the infrastructure with non-sales tax producing product such as housing. H. Re-visit the adoption of a County Communication fee if our sales tax composition exceeds 50% from the business-to-business sector. Two years ago a 9-1-1 fee for County Cornmunications was deliberated on by the City Council. Estimates showed $1 per line per month would provide approximately $650,000 towards a $750,000 cost of service. Given our high percentage amount of business-to-business sales tax, the committee proposes to re-visit this fee if our sales tax composition exceeds a 50% benchmark. Our current mix of sales tax providers results in a high risk of fluctuation in our largest general fund revenue category, and a 9-1-1 fee would identify a new and stable revenue source to offset this risk. I. Consider a Refuse Vehicle Impact Fee. Several cities in California have successfully levied a street impact fee on their refuse providers to offset the wear and tear on city streets from these oversized vehicles. Such an assessment would pass the cost of street repairs due to heavy usage through to the garbage company and provide needed funds for maintenance, but ultimately result in fee increases to the customer. The Committee was not in agreement on pursuit of this revenue. 8 City of Cupertino Fiscal Strategic Plan Issues Paper May, 2006 IV. Decrease Expenditures and Risk Exposure The Cornmittee looked at our major programs in relation to operating costs and risk exposure associated with general liability claims and workers compensation claims. Currently, claim costs are paid directly by the Risk Management Division, which results in an understatement of the true cost of service of some of our programs. For high-exposure or highly loaded "hidden cost" programs, additional trend analysis was performed to establish what other municipalities are implementing in an effort to decrease expenses and areas of risk. Several suggestions for potential short term and/or long term savings have been identified for your consideration: A. Require developers to maintain new open space associated with their projects. With new parks and open space come the costs associated with maintaining those green spaces throughout our city. The Committee believes that it is in our best interests to use the permit process to require the developer to pay for, or provide for, mechanisms that fund the maintenance of these parks. Suggestions include the incorporation of a landscape district or homeowners association within the new development Or, as in the case of Cali Mill Plaza, the property and it's maintenance would stay with the developer. It is estimated that it costs the Pub1ic Works Department approximately $??? per year for every new acre of parkland that goes on-line. This recornmendation would hold the line on our park maintenance and help control future costs in this area. B. Require safety enhancements in new developments. The City has experienced an increase in residential burglaries this past year, which increases our sheriff costs. Many of these crimes involved taking jewelry from the homes. We suggest that new housing developments be required to have built-in safes to secure valuables and reduce accessibility of jewelry in an effort to reduce/deter crime. C. Contract School Maintenance In the 1990's, the City issued approximately $5 million in bonds to refurbish 9 school sports fields. The agreement with CUSD provided that we refurbish and maintain the fields in exchange for their use during non-school hours. This provided an excellent partnership by providing CUSD with high-quality fields and the City with expanded parkland. This has resulted however in a duplication of both maintenance equipment and workers between the two organizations. Currently, our Ground Maintenance Division mows 33.17 acres and edges 24,305 linear feet of turf at these school sites. Transitioning the mowing operation only to CUSD would reduce our long-term "hidden costs" and our vehicle and equipment replacement needs. The current cost to provide mowing service to the schools is $137,594 out of $555,000 in total expense per year. 9 City of Cupertino Fiscal Strategic Plan Issues Paper May, 2006 D. Add Capital Improvement Projects only if on-going maintenance funding can be identified (LLD, homeowners association, development maintained/owned). The City is currently using the permit process to incorporate private maintenance of sidewalks, medians and other improvements for new developments. For City projects, all associated budget costs should be considered with the adoption of the original budget for the Capital Improvement Program. E. Increase the number of Block Leaders, Neighborhood Watch programs and CERT graduates. Increases in these programs will capitalize on community policing and reduce/maintain sheriff costs. We also encourage commissioners to become involved in these programs. F. Change accounting for Enterprise Funds The Committee proposes that all Enterprise Fund activity be reflected in the individual fund whereby all costs, including building costs are recognized in one place. In addition, all revenues associated with the complex should be recognized in the fund. The reader could easily ascertain the subsidy from the General Fund and Council could quantify self- supporting percentages for each fund. G. Continue to investigate cost-saving options for medical and retiree medical insurance. The City should analyze the benefits of setting up a trust for the retiree medical reserves to increase investment return and decrease funding obligations. In addition, staff should continue to look for ways to reduce medical benefit costs including benefits for City Council. H. Adopt a Sidewalk Liability Ordinance requiring the landowner to be responsible for sidewalk maintenance and claims to third parties from failure to maintain. The City has approximately _ miles of sidewalk to monitor and maintain. The annual sidewalk, curb and gutter contract is $500,000 plus an additional $150,000 in inspection and contract monitoring costs. It requires 1.25 full time staff per year. Since it is impossible for one worker to cover the miles of sidewalk that we are ultimately responsible for, we are at risk for claims associated with needed repairs. The landowner however, already has a duty to inspect and maintain the area and is considered the most able to recognize and respond to a potential hazard. 10 City of Cupertino Fiscal Strategic Plan Issues Paper May, 2006 Sidewalk falls are ABAG's second most frequent claim with $4.5 million paid during the past 15 years in settlement and attorney fees. The City has paid over $100,00 in costs associated with these claims in the past five years and two new claims this year could equal $100,000. The Committee recommends that we continue to inspect and mark needed repairs, but that the liability for repair and associated claims vest to the property owner. I. Adopt a Tree Maintenance Ordinance requiring the landowner to be responsible for their street trees. The Street Tree Maintenance program provides for maintenance for over 13,000 trees, including safety trirnming and clearing for vehicle and pedestrian height clearance. It costs approximately $525,000 per year, which covers 4.2 positions equipment costs of almost $200,000. As per the above suggestion, the Committee considers the landowner the most able to recognize and respond to a potential hazard caused by the tree(s). We recornmend that we continue to inspect and notice needed maintenance, but that the liability for maintenance and associated claims should vest to the property owner. ***** The Fiscal Strategic Plan Committee would like to thank you for your consideration ofthe above recornmendations. We look forward to implementing a long-term plan that will reposition our revenues, streamline operations and ensure a high quality of life and city service for our residents. 11 54,000 Optimal Base FY 2000 ~--------------------------------------- 50,000 1 per ............... 1 per 400 - 2003 2004 2005 Panera Breads Panda Express Flames Wahoo Fish Taco Islands Park Place Recent Restaurant Additions Starbucks Le Boulanger Pot Sticker King Ramen Rama BJs Brewery Alexander's Cold Stone Elephant Bar T odai's Chuck E. Cheese California Pizza Pete's Coffee Kitchen