City of Los Angeles Community Budget Day

City Budget Update

Presented by

Ben Ceja Assistant CAO

October 26, 2013

1

Executive Summary

The City has entered a new period of growth and fiscal balance.

• Fiscal year 2013-14 is a turning point in the City’s financial position. Established a “new normal” of a lower workforce Solid set-aside fund balance of over $400 million

$326.7 million Reserve Fund on July 1, 2013 (6.71% of General Fund Revenues - highest ever)

$61.5 million Budget Stabilization Fund (After $8 million is transferred to General Fund per Adopted Budget)

$21 million Unappropriated Balance Positive increase of City revenues, including property and sales

taxes, over 3% for the past year Continued implementation of a strategic plan including a Five

Guiding Principles approach Rate of growth in pension and OPEB have been mitigated

Adopted new tiers for new sworn and civilian hires Increased employee contribution towards retirement health

benefits from 0% to 2% (sworn) or 4% (civilian) No Fiscal Emergency Resolution, no furloughs, no layoffs under the

2013-14 Adopted Budget Met Capital Improvement Expenditure Policy (“CIEP”) of 1% 2013-14 Adopted Budget creates a roadmap to budget surplus by

2017-18

2

Executive Summary

The City has entered a new period of growth and fiscal balance.

• In First Financial Status Report released on October 17, 2013, CAO reports on:

• 2012-13 revenues which came in higher than budgeted by $116.7 million.

• 2013-14 revenues which are still to early to state whether they will come in higher or lower but currently are tracking on budget.

• Reserve Fund which was higher than expected by about $65 million. • Four-Year Outlook which was unchanged from Adopted Budget but

which contains two scenarios showing a surplus by 2017-18 under one and a continued but smaller deficit in 2017-18 under a second scenario.

• 2013-14 projected department deficits of $25.3 million which identify 5 main drivers of the deficit including: Fire Department $14 million Election Cost for Public Health Initiative $4.6 million Police Department $3.8 million City Attorney $2 million Transportation $0.88 million

• Ongoing issues of concern with regard to labor-related litigation, class action liability, federal and state actions taken, and pension issues.

3

Budget Guiding Principles in Action

I Responsible Fiscal

Management

II Focus on Core

Services

III Alternative Service

Delivery Models

IV Sustainable Workforce

V Protect, Maximize

& Enhance Revenue

• Reserve Fund at 6.71%

• Budget Stabilization Fund at $61.5 million

• Budgeted 1% of General Fund revenues for capital improvements

• Partially mitigated accrued police overtime liability

• Responsible use of one-time revenues

• Maintenance of effort for street repairs set at 800 miles for 2013-14 and 735 miles thereafter

• Restoration of fire services linked to deployment plan

• Police hiring at 10,000 officers maintained

• Restored library services

• Approved formation of an Economic Development Department and completed consolidation of Office of Public Safety into LAPD

• Convention Center management agreement approved

• Economic Development non-profit implementation in progress to attract and retain businesses in the City

• New marketing program adopted between Zoo and GLAZA

• New private parking contractors identified, Council approval pending

• Contained staff growth to 0.2% from 2012-13 levels

• Tier II for civilian employees begins on July 1, 2013

• Minimized service impacts and avoided furloughs or layoffs through the pursuit of labor concessions

• Assumes no future salary increases through 2018 and assumes employee contributions of 10% of medical premiums

• Identify 71% ongoing and 29% one-time solutions to balance budget

• Enhancements to collection efforts

• Improved transportation grant accounting provided additional $42 million one-time revenue

• Review of 900 special funds to ensure proper General Fund cost reimbursement

• Alternative financing methods for major infrastructure projects

4

2013-14 Budget Solutions

2013-14 Adopted Budget Solutions

• Leading into 2013-14, the City reduced the previously projected $1 billion budget gap by 80%

• The 2013-14 Budget addresses deferred liabilities and investments to City services and infrastructure.

• In addition to closing the $216 million budget gap, the City is increasing the budget for new services and facilities by $121 million.

Source: City of Los Angeles, Office of the City Administrative Officer

216

0

50

100

150

200

250

300

350

400

Previously Projected Deficit Budget Solutions

Mill

ions

Other Changes $18

Efficiencies and Reductions $17

One-Time Revenue $133

Pension Savings $56

Economy-Driven Revenues $113

5

Major General Fund Revenue Stabilized

• Actual General Fund revenues in 2012-13 exceeded 2012-13 Budget by $116.7 million.

• Property Tax – Year end surplus primarily due to early receipt of secured property tax revenues ($24 million) which will correspond to a lower receipt in 2013-14.

• Ex-CRA Funds – Higher than expected incremental tax receipts. However, in 2013-14 receipts are expected to be down due to lower than estimated receipts from due diligence review.

• Business Tax, Utility Users’ Tax, Parking Users’ Tax – receipts were below plan which will lower the base amounts for 2013-14

• The City is projecting conservative revenue growth of 3% annually.

-4.8%

0.8% 1.9%

7.0%

3.3%

1.5

2.0

2.5

3.0

3.5

4.0

-10%

-5%

0%

5%

10%

15%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

$ Bi

llion

s

% C

hang

e fr

om Y

ear A

go

Fiscal Year Ending

Seven General Fund Taxes

% change -- Left Scale 7 General Fund Taxes ($Billions) -- Right Scale Pre-recession LevelProperty (includes VLF and ex-CRA receipts), Utility, Business, Sales, Hotel, Documentary and Parking Taxes

Estimates Actuals

Source: City of Los Angeles, Office of the City Administrative Officer

6

Economy Shows Signs of Improvement

Economic indicators show signs of recovery.

Source: Beacon Economics

• The City’s economy is recovering although the City and economy are at risk if another federal shutdown occurs or the debt ceiling fight continues.

• Important tourism and trade industries are performing strongly.

• Taxable sales have increased 19.4% from their recession-era lows in 2009.

• Average annual wages in the City grew 2.9% from 2011 to 2012.

• Home prices in the City trended upward throughout 2012 and reached four-year highs in the first quarter of 2013.

• Foreclosures in the City fell by 54.5% from the first quarter of 2012 to the first quarter of 2013.

• For the first quarter of 2013, retail vacancy rates were at their lowest point in four years.

• Vacancy rates for industrial properties have dropped from 8.7% in the first quarter of 2012 to 7.3% in the first quarter of 2013.

7

2013-14 Adopted Budget Reflects Conservative Revenue Projections

7 Major General Fund Revenues

72%

Licenses, Permits, Fees

and Fines17%

Power Revenue Transfer

5%

Parking Fines 3%

Miscellaneous Revenue

2%Transfers from Special Funds

1%

Source: City of Los Angeles, Office of the City Administrative Officer

Sources of General Fund Revenue for Fiscal Year 2013-14

$ Thousands 2012-13 Actual

Receipts 2013-14 Budget

$ Variance from 2012-13

Actuals % Variance from 2012-13 Actuals

Property Tax $ 1,550,389 $ 1,549,568 $ (821) -0.05% Property Tax Ex-CRA Inc. $ 58,839 $ 55,434 $ (3,405) -5.79%

Utility Users' Tax $ 620,448 $ 641,598 $ 21,150 3.41% Business Tax $ 448,832 $ 470,728 $ 21,896 4.88% Sales Tax $ 338,970 $ 352,790 $ 13,820 4.08% Documentary Transfer Tax $ 147,282 $ 160,106 $ 12,824 8.71% Transient Occupancy Tax $ 167,824 $ 174,423 $ 6,599 3.93% Parking Users' Tax $ 89,423 $ 94,947 $ 5,524 6.18% Licenses, Permits, Fees and Fines $ 724,702 $ 832,712 $ 108,010 14.90% Residential Development Tax $ 2,379 $ 2,100 $ (279) -11.74% All Other $ 518,145 $ 532,486 $ 14,341 2.77% Total General Fund $ 4,667,233 $ 4,866,892 $ 199,659 4.28%

8

Multi-Year Budget Outlook

Assumptions for budget outlook include: Civilian

employees will pay 10% of medical premiums

No cost-of-living increases for 2014-15 and beyond

No 5.5% raise on Jan. 1, 2014

Continue to manage police overtime

Four Year Budget Outlook 2013-14 to 2017-18 Based on Adopted Budget

Four Year Budget Outlook 2013-14 to 2017-18: Alternative without Labor Concessions

$4,879

$5,014

$5,156

$5,285

$4,550

$4,867

$5,032

$5,127

$5,252 $5,279

$4,500

$4,600

$4,700

$4,800

$4,900

$5,000

$5,100

$5,200

$5,300

2012-13 2013-14 2014-15 2015-16 2016-17 2017-18

Millio

nsFiscal Year

Revenues (Proposed) Expenditures (Proposed)

($153)

($112)

($96)$6

$4,879

$5,014

$5,156

$5,285

$4,550

$4,867

$5,120 $5,216

$5,341 $5,368

$4,400

$4,500

$4,600

$4,700

$4,800

$4,900

$5,000

$5,100

$5,200

$5,300

$5,400

2012-13 2013-14 2014-15 2015-16 2016-17 2017-18

Millio

ns

Fiscal Year

Revenues (Alternative) Expenditures (Alternative)

($242)

($201)

($184)

($83)

9

Record High Reserve Balances

The City’s Reserve Fund is strong.

Source: City of Los Angeles, Office of the City Administrative Officer

• The City maintains a cash Reserve Fund for contingencies and emergencies.

• The City has met its Charter mandate for a 2.75% emergency reserve.

• This year, the City met its policy goal of 5% of General Fund revenues.

• Set-aside fund balance of over $400 million includes:

$326.7 million Reserve Fund on July 1, 2013 (6.71% of General Fund Revenues - highest ever)

$61.5 million Budget Stabilization Fund (After $8 million is transferred to General Fund per Adopted Budget)

$21 million Unappropriated Balance • The City has adopted policies with respect to Budget Stabilization Fund

for future contributions and limit withdrawals based on rules.

• The City adopted an encumbrance policy that provided additional reversions to increase the Reserve Fund at year-end.

10

Pensions and Benefits – Estimated Contributions

Future City pension contributions are growing at a reduced rate. Strong investment returns are keeping funded ratios over 70%.

0%

25%

50%

75%

100%

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Fire and Police Pension Plan L.A. City Employees' Retirement System

0%

25%

50%

75%

100%

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Fire and Police Pension Plan L.A. City Employees' Retirement System

Pension Systems Funded Ratio

Other Post-Employment Benefits Funded Ratio

Source: City of Los Angeles, Office of the City Administrative Officer

Estimated Future City Contributions to Pensions ($ in millions)

$411 $382 $424 $468 $486

$537 $617$670

$745 $789

$342 $367 $403 $444 $469

$506 $576$643 $683 $721

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

LA City Employees' Retirement Fund Fire And Police Pension FundLACERS New Contribution Amount FPPS New Contribution Amount

$948 $848

$999 $943

$1,094 $1,046 $1,213

$1,127 $1,275

$1,190

11

Authorized City Staffing

• Staffing has been maintained at its current level which is down 14% from its peak in 2007-08.

The civilian workforce has been maintained near its lowest point in more than three decades.

(14%)

Source: City of Los Angeles, Office of the City Administrative Officer

13,758

13,799

13,807

13,805

13,832

13,944

14,244

14,253 14,012

13,740 13,677

13,647 13,706

21,701

22,080

22,167

21,610

22,324

22,723

22,929

22,718

21,852

19,225

18,597

18,169 18,187

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

Authorized City Staffing(Not Including Proprietary Departments)

Police (Sworn and Civilian) Others

35,459 35,879 35,974 35,415 36,156 36,667 37,173 36,971 35,86432,965 32,274 31,816 31,893

12

Strengths

• The City’s budget is based on conservative revenue assumptions.

• The City addresses budget gaps primarily through ongoing solutions.

• The 2013-14 Budget provides flexibility for uncertainties.

• Set-aside fund balance of over $400 million .

• The underlying economics of the Los Angeles region set the stage for a strong economic recovery.

Challenges

• The City’s budget outlook continues to show deficits over the next several years.

• Scenario which shows a surplus by 2017-18 depends on labor concessions.

• Focus on service restoration needs to be balanced with resources.

• External factors (i.e. federal government) and impact to economy.