City of Palo Alto Infrastructure Efforts

Best Practices in Capital Budgeting

February 21, 2013

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Challenges and Themes Infrastructure – the unloved child

Jurisdictions behave similarly to private sector (profits) and focus on short-term results

Infrastructure planning and solutions are a “long haul” with incremental steps instead of immediate solutions. No silver bullet!o Effort to identify, quantify, and address infrastructure/capital

spending in Palo Alto has occurred over last 20 years. Repeated efforts to identify GF infrastructure deficit and how to fund capital needs

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Infrastructure is a National, State and Local Problem

The American Society of Civil Engineers (ASCE) estimated in 2009 that the U.S. needed $2.2 trillion dollars of infrastructure spending over the next 5 yearso $1.2 trillion has not been budgeted. o Engineers assigned a report card grade was a D

ASCE Region 9 gave California an overall grade of C on its infrastructure o investment has not kept up with the state’s growing population

demands and on much-needed renewal and maintenanceo State needs an additional annual investment of $65 billion

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Infrastructure Issues in PA In 1992, the City Council of PA raised the issue of a “hidden”

deficit or backlog in General Fund infrastructure spending

o As a percentage of CPA’s capital budget was 5.4% of its operating budget compared to an average of 9.5% in survey cities; PA was spending approximately $1,400 per capita in services vs. an average of $840 in other cities.

Why had City fallen behind? What were limitations and challenges?

o Impacts of Props 13 and 218, property tax and voter approval hurdles

o State takeaways such as ERAF further eroding prop taxes. Since beginning of ERAF, City has lost some $76 Million

o Variety and number of City assets

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Wave 1 of Analysis, Planning and Funding: 1996 through 2002

“Adamson Study” of 1996 Focused on Existing Infrastructure o Adamson assessed 25 years of needs and analysis showed City had

$33 million in backlogged capital work; $62 million of work in next 10 years; and $5 million in additional staffing costs over 10 years. Essentially, GF needed $100 million or $10 m per year to catch-up and keep-up its existing infrastructure

o Study plan did not include new facilities e.g. new public safety building, new municipal service yard

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Wave 1 of Analysis, Planning and Funding: 1996 through 2002

By time of above studies the City was spending approximately $4.6 million per year, $5.4 million short of projected needs. How did we attempt to close this gap?o Created new Infrastructure Reserve (IR) and funded it with monies

from an Emergency Reserve ($5 million), from General Fund Budget Stabilization Reserve or rainy day reserve) by modifying our guidelines for the BSR from 20% of operating expenditures to 15-20% goal.

o IR of 13.0 million. So 1.3 million a year was available. o Based on prior performance, staff believed an additional $1.0

million in operating surplus could be used for ongoing infrastructure.

o Also, with new hotel developments or new revenue we believed another $0.9 million per year could be transferred to the IR

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Wave 1 of Analysis, Planning and Funding: 1996 through 2002

By 2002, total of above sources around $7.8 million per year and this was transferred to capital fund annuallyo In 1998 Staff proposed an increase in TOT of 2-3% (above then

current rate of 10%) to raise an additional $2.2 million . Business community opposed tax and dot.com bust arrived

Positive results from Wave 1 effort: o While the goal of $10 million per year was not reached, City gave

identity to an important issue and took initial steps to shore up capital spending

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Wave II of Analysis, Planning and Funding: 2002 through Present Beginning of Wave IIo Around 2006, City had made an important BSR policy

change to further enhance infrastructure funding: any amount in excess of 18.5% of budgeted operating expenses in a given year would go into the IR

o Inadequacies of Adamson (no inflation); lack of required funding, and update of data led to what Palo Alto does best: conduct another infrastructure study

o In 2007, City hired Kitchell (architects and engineers) to conduct another “Facility/Buildings Assessment Report” to:Determine remaining life of buildings, capital expenditures over

next 20 years to maintain facilities in serviceable conditionIdentify physically or functionally obsolete facilitiesDetermine appropriate level of staffing to maintain buildings

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Wave II of Analysis, Planning and Funding: 2008 through Present

Kitchell findingso Weighted average age of buildings is 49 years o In 2008 dollars, City needed to spend some $44.3 million over next

20 years with $33.3 identified for first 5 years ($ did not include program, seismic, code upgrades)

o Replace or significantly renovate 6 facilities at a cost of $14.5 million

o Identified maintenance staffing needs whereby an additional 5 FTEs were needed (above current 9) to achieve “typical” staffing levels. Need plumbing, HVAC, and electrical workers).

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Lessons Learned Lessons Learned/Conclusions

o Infrastructure easy to ignore and suffers in down economy o Studies to assess needs criticalo Slow, upward hill battle to increase funding so keep at it

o Staff must keep infrastructure on Council’s and Public’s Front Burner

As a consequence of Kitchell Study and knowing that new revenues would be necessary for major infrastructure work,

Council established an Infrastructure Blue Ribbon Commission (IBRC)

1996 2002 2008 2013

GF $3.3 m $6.3 m $8.7 m $14.2 m*

SIF 1.0 1.1 1.2 1.7

Total $4.3 m $7.4 m $9.9 m $15.9 m

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Infrastructure Spending Insufficient

City Council forms an 18 member Brown Act Infrastructure Blue Ribbon Commission (IBRC)

IBRC Mission: “To provide a recommendation to the City Council on infrastructure needs, priorities, projects and associated funding mechanisms to address the infrastructure backlog and future needs”

Over a year held more than 150 meetings – over 50 of those were in a public forum

IBRC spent considerable time reviewing and scrubbing in-house infrastructure data and worked with staff to create a 30 year master list of needs

Formed subcommittees such as financing, categories of infrastructure, and a futures infrastructure needs

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Infrastructure Spending Insufficient IBRC insisted on simple definitions or categories to explain

infrastructure needs to Council and Public.

“Catch-Up” = deferred maintenance or backlog. Research showed $42 million in needs. Committee recommended adding $4.2 million annually over 10 yearso “Keep-Up” = consists of ongoing/operating and planned

maintenance. Found a need to add incremental $2.2 million annually to the operating and capital budget

o “New and Replacement” = Reconstructing or rehabilitating substandard building and to build new buildings e.g. Fire Stations, Municipal Service Center and Public Safety Building = $210 million

Funding recommendations. Spent considerable time on this and developed four alternatives for Council consideration

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Infrastructure Spending Insufficient IBRC had 25 recommendations, the most important of which

were:o Establish and Infrastructure Management System (IMS) to track

work accomplished and plan future work. IMS would facilitate long range financial planning

o Create single position or point of responsibility/accountability at a high level in organization

o Form a public commissiono Report 2x year to Council on infrastructureo Mandate periodic audits of infrastructure maintenance by City

Auditoro Build new Public Safety Building, Municipal Services facility, and

replace 2 fire stationso Funding recommendations and creation of a new Operating

Reserve for Infrastructureo Dedicate 23% of GF operating budget annually toward capital work

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Infrastructure Spending InsufficientPost IBRC Work:IBRC held several meetings with Council to discuss recommendationsCouncil has held four retreats to study recommendationsDuring development of FY 2013 budget, Council directed staff to add $2.2 million to infrastructure funding to meet “keep-up” recommendation of IBRCAdded $7.6 million in additional transfers from General Fund operating – resulting from excess revenues and employee compensation concessionsCouncil has directed staff to lay the groundwork for a November 14 revenue election to fund infrastructure that cannot be accommodated with existing resources

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Infrastructure Spending InsufficientSteps taken:oFormation of IBRCoReducing compensation costs of all labor groups through difficult negotiations to solve a structural deficit and to identify existing resources for capital projectsoIdentifying alternative service delivery methods to deliver services as efficiently as possible e.g. contracting out parks and golf maintenanceoUsing public-private partnerships to complete capital work on specific facilitiesoMaximizing grantsoConducting Cost of Service and Impact Fee studies to raise additional revenuesoPA active in lobbying legislature to allow local jurisdictions decide on % necessary to approve tax measures: from 2/3 to simple majority

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Infrastructure Spending Insufficient

Conclusions and Lessons Learned:Involve community in understanding infrastructure problem and promoting solutions. Fostered knowledge of City budget and legal restrictions, a good working relationship with staff, and “believable” recommendations. Commission a potential outreach vehicle for revenue measuresGet your costs squared away e.g. salaries and benefits before going to public Credibly and publicly identify all existing resources before requesting new revenuesCoordinate capital work with interested commissions e.g. Planning Commission and Comprehensive Plan Persevere

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Proposed CIP FY 2014-18

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City of Palo Alto Infrastructure

Questions and Answers

Links:

Final IBRC reporthttp://archive.cityofpaloalto.org/civica/filebank/blobdload.asp?BlobID=29816

Staff report discussing funding options and potential ballot measurehttp://www.cityofpaloalto.org/civicax/filebank/documents/29538