City of Los Angeles Budget Overview Presentation 2012

Presented by the Office of the City Administrative Officer

March 2012

Topics

General Overview

Fiscal Year 2011-12 Budget

Issues of Concern and Challenges

Development of the 2012-13 Budget

Overview
Good News 2011-12 is in balance at this time Reserve Fund stable (no transfer required at this time) Projected shortfall for 2012-13 reduced from as high as $250 million to

about $220 million

Bad News $220 million deficit Major issues of concern still remain City cut to the bone (4,900 positions eliminated since 2007-08) Ongoing new revenue options are limited without voter approval Cost drivers continue to be pension, health care, workers

compensation, and employee compensation

Four year outlook will continue to show significant deficits

Fiscal Year 2011-12 Budget at a Glance

The Citys General Fund

is what supports most of the municipal services in the City such as Fire and Police services.

FISCAL YEAR 2011-12 BUDGET COMPONENT City Budget General Fund Special Funds Proprietary Department Budgets Airports Harbor Water and Power

AMOUNT ($ Millions)

Authorized Positions

$6,872
$4,386 $2,486

32,274
22,103 10,171

Special funds are

generated for a specific purpose, typically approved by voters for a specific service like sewer construction.

$5,015 $977 $6,468 $1,312 $20,644

3,480 989 10,383

Proprietary Departments

are governed by separate boards but still fall within the jurisdictional review of the Mayor and City Council.

Grants and Other NonBudgeted Total City Government

47,126

Fiscal Year 2011-12 Budget

General Fund revenue

fluctuates depending on economic conditions. Diversity of revenues helps stabilize revenue volatility.

FY 2011-12 Adopted Budget $6,872 Million

Special Fund 36%

Most of the decisions that

are made on the budget year after year pertain to the General Fund.
General Fund 64%

Special funds offer little

flexibility but provide stability for the City and its services by ensuring a dedicated source of funding for key services.

Fiscal Year 2011-12 Budget General Fund Total: $4.4 Billion

No single source of income

comprises more than a third of the Citys revenue base.

FY2011-12 General Fund Revenue Sources

Top 6 economically

Sales Tax, 7% Business Tax, 10%

sensitive revenues make up close to 70% of all General Fund revenue:

Property Tax Utility Users Tax Sales Tax Business Tax Transient Occupancy Tax Documentary Transfer Tax
Licenses, Permits, Fees and Fines, 17%

Documentary Transfer Tax, 2% Transient Occupancy Tax, 3% Other Taxes, 2% Power Revenue Transfer, 6% Other Transfers, 1% Other Revenues, 5%

Utility Users' Tax, 14% Property Tax, 33%

Fiscal Year 2011-12 Budget General Fund Taxes

7 General Fund Taxes
Property (includes VLF), Utility, Business, Sales, Hotel, Documentary and Parking Taxes
% change -- Left Scale 15% 7 General Fund Taxes ($Billions) -- Right Scale Pre-Recession Level 4.0

10% % Change from Year Ago

3.5

1.9% 0.8%

0%

2.5

-5%

-4.8%

2.0

-10% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Fiscal Year Ending

1.5

Budget

Major General Fund taxes currently account for more than 70% of all General Fund revenue. The balance is fees, transfers from other funds, interest income etc. These taxes grew at an average annual rate of 3% during this period, but it took 5 years to exceed 1991-92 revenue after the recession of the early 1990s and it will take at least another year to restore these City taxes to the 2008-09 level.

$ Billions

5%

3.0

Fiscal Year 2011-12 Budget: Update on Revenues

No change in Revenue being recommended at this time for FY 2011-12. The property tax is currently very close to budget plan of $1,436 million. Known Revenue Reductions: Vehicle License Fee (VLF): State budget action reduced vehicle license fee receipts by

$4.1 million. Beginning 2012-13, ongoing reduction will be $15 million. Power Transfer: Audited financial statement for the Power Revenue Fund reduced the budgeted transfer from that fund by $3.9 million.
Risks to Revenue: Documentary Transfer Tax: receipts through January are slightly above last years level,

but are $3.6 million below budget. Utility Users Tax: because of falling natural gas prices, gas users' tax receipts will fall below budget by about $6 million.
Revenue Growth: Two economy-sensitive revenues are showing growth reflecting

improvements in the local economy. Sales Tax: Receipts to date are currently $7.6 million above plan however, no adjustments are recommended at this time. Taxable sales for the Christmas quarter will be available in late March and that will provide a basis to revise the sales tax estimate. Transient Occupancy Tax receipts are $8.9 million above plan at January. Based on strong growth in all segments of the travel industry and increasing occupancy and room rates, this revenue will likely exceed budget. The estimate will be revised after reviewing tax receipts for February and March.

Fiscal Year 2011-12 Budget: Update on Revenues

Documentary Transfer Tax -- Includes Legal Entity Transfers

Risks to Revenue: Documentary transfer tax:

225

12-Month Moving Sum

receipts through January are slightly above last years level, but are $3.6 million below budget.

Actual

Budget

200

175

Utility users tax: because of

falling natural gas prices, gas users' tax receipts will fall below budget.
UTILITY USERS' TAX 12-MONTH MOVING SUM ACTUAL
685

$ Millions*

150

125

107 102
100

75

04

05

06

07

08

09

10

11

12

REVISED

PROPOSED

Fiscal Year Ending

660
$ MILLIONS

635 $628

$625
610

585
06 07 08 09
FISCAL YEAR ENDING

10

11

12

Fiscal Year 2011-12 Budget: Update on Revenues

Sales Tax -- City Sales Tax at 1% Rate

460

% Change from Year Ago

City Tax Receipts ($ Millions)

2011-12 Estimates

18%

440
9.6%

12%

420
$ Millions

6%

400

0%

380

xb

-6%

360

-12%

340 05 06 07 08 09 Fiscal Year Ending

-17.1%

-18% 10 11 12

Sales tax performace has been steadily improving and increased by 9.6% in the Summer quarter. The City tax rate was changed from 1% of taxable sales to 3/4% as part of a state budget balancing plan. The 1/4% is now remitted to the City as part of the property tax. For comparative purposes, this table shows sales tax at the 1%-tax rate.

Fiscal Year 2011-12 Budget: Update on Revenues

City Hotel Tax Receipts
12-Month Moving Sum
Actual 2011-12 Budget

160

150

$ Millions

140

130

120

110 06 07 08 09
Fiscal Year Ending

10

11

12

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Fiscal Year 2011-12 Budget: Update on Revenues

Business Tax, still counting: March and April are the peak renewal

months for Business Tax. The budget for this year is $439 million which is $20.8 million more than last year's actual receipts.
Recent City changes to taxation of mutual funds are projected to reduce

the budgeted revenue by $2.5 million.

Controller and Office of Finance have reduced projection for this year to

$423 million which is $16 million less than budget. However, more will be known after March.

Business Tax Reform Efforts: Business Tax represents 10% of the

General Fund revenue. Pursuing the recommendations from the Business Tax Advisory Committee will result in the loss of $106 million in revenue for the first year and another $106 million in each of the next four years. This Office contracted with a firm to complete a study of a variety of business tax options, and further information will be provided at the conclusion of the study.
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Fiscal Year 2011-12 Budget General Fund Total: $4.4 Billion

Public Safety continues

to be a priority for the City, with the Police and Fire Departments accounting for more than a third (37%) of total General Fund Appropriations.

FY2011-12 General Fund Appropriations

Recreation and Parks, 3% City Attorney, 2% Library, 2% Liability Claims, 1% Water & Electricity, 1% Other Nondepartmental , 3% Capital Finance Administration , 4% Other Budgetary Departments, 10%

The next largest

Police, 26% Human Resources Benefits, 13%

appropriation is to Pensions and Retirement (20%) which almost equals the collective amount budgeted for all other City departments (21%).

Fire, 11% Infrastructure (B&S, Planning, Public Works, & Transportation), 4%

Pensions and Retirement, 20%

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Fiscal Year 2011-12 Budget Distribution of Unrestricted Revenues

While the Police and

Fire Departments accounted for only 37% of total General Fund Appropriations, combined they account for over 70% of unrestricted revenue expenditures. These expenditures include their allocation of pensions and health care costs.
Fire 17%

2011-12 Budget Unrestricted Revenues $3.65 Billion

Police 53.1%

Library 3.7%

Recreation & Parks 6%

Restricted Revenues

include sewer revenues,

gas tax, grants, and fees for special services.
Public Works Street Services Transportation Engineering

City Attorney 3.1% Other 8.8%

*Includes allocation of pension and healthcare costs.

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Fiscal Year 2011-12 Budget: Current Year Deficit Status

Mid-Year Budget Deficit: Since 2007-08, the City has faced substantial shortfalls during

the Fiscal Year that it has addressed through interim budget actions. The pattern of reporting shortfalls during the year will continue as long as the City is confronted by restricted revenue growth and increasing costs. For this year, the deficit has been addressed.
Citywide Mid-Year Deficits Addressed (millions)

2007-08 Fiscal Year Projected Deficit at MidYear

Second FSR Deficit ERIP $20 million

2008-09 $110

2009-10 $209

2010-11 $54

2011-12 $72

$155

($72) million

Other Remaining Solutions Deficit $30 million ($20) million Mid-Year FSR Revised Deficit ERIP $19 million Other Remaining Solutions* Deficit $27 million ($0) million

($46) million

*As much as $8 million in solutions pending further action. 14

Fiscal Year 2011-12 Budget: Reserve Fund Status

Rating agencies consider the governments fund balance [reserve fund] policy, history of use of fund balance, and policy and practice of replenishment of fund balance when assigning ratings. Thus, a well developed and transparent strategy to replenish fund balance may reduce the cost of borrowing. - Government Finance Officers Association (GFOA)
Status of Reserve Fund for FY 2011-12
250 $200.7 4.58% $177.2 4.04% 98.4 80.1 $ Millions 150 56.6 73.7 79.2 $194.4 4.43% $199.8 4.56% $219.3 5.00%

200

100

120.6 50

120.6

120.6

120.6

120.6

0 Adopted Actual on 7/1 2nd FSr

Emergency Contingency

Current

5 Percent

Higher than projected departmental savings resulted in a Reserve Fund balance on July 1, 2011 that exceeded the 2011-12 adopted budget by $23.5 million. The current Reserve Fund Balance is nearly $199.8 million (4.56% of the General Fund), after providing for transfers and loan repayments. Meeting the 5 percent requirement established by the Citys Financial Policies would require a balance of $219.3 million, or an increase of $19.5 million. FY 2001-02 first and last time Reserve Fund was budgeted at 5% or more of the General Fund.

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Fiscal Year 2011-12 Budget: Reserve Fund Status

It is essential that governments maintain adequate levels of fund balance [reserve fund] to mitigate risks and provide a back-up for revenue shortfalls. -GFOA

Other reasons for maintaining a strong Reserve Fund: Ardon v. City of Los Angeles related to the Telephone Users Tax.

Liability could be as high as $750 million.

Sidewalk/ADA related cases beginning to move through the courts.

Unknown liability.
Sluggish economic recovery. Actions by the State or Federal governments

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Issues of Concern and Challenges: Actions the State and Federal Governments
Actions by the State on its budget will

continue to have an impact in the City (e.g., additional cuts will be triggered due to revenue targets not being reached). Additionally, the State eliminated the Citys VLF payment as of July 1, 2011. The cut in 2011-12 was partially offset from prior year payments and additional grant funds. However, the Citys loss in 2012-13 and beyond will be $15 million. More recently, the LAO has pegged the States deficit at nearly $13 billion as opposed to the more optimistic forecast used by the Governor of $9.2 billion.

Photo: CA State Capitol Building

Actions by the Federal government to reduce

the deficit may result in reductions to Federal grants received by City departments including the HOME Investment Partnerships program, the Community Development Block Grant (CDBG) program, and proprietary departments.
Photo: US Capitol Building

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Issues of Concern and Challenges: Labor Costs

Labor Cost: Over the course of the next five years, labor costs as represented by 1) Employee

Compensation, 2) Health Benefits, 3) Pension Contributions, and 4) Workers Compensation will significantly increase from the current base level of $4,077 million for 2011-12. However, General Fund Revenue during this same period is not expected to increase at the same rate.
Five Year Projections of Cumulative Labor Cost Increases Compared to Cumulative General Fund Revenue Increase for Same Period (Base Year FY 2011-12)
$1,000

$943 $828

$800

$683
Millions $600

$675 $504 $341

$479
$400

$208
$200

$205 $73

$2012-13 2013-14 2014-15 Fiscal Year 2015-16 2016-17

4 Key Labor Cost Drivers - Cumulative Increase Above FY12 Base of $4,077 million General Fund Revenue - Cumulative Increase Above FY12 Base of $4,386 million
Revenue Growth: 1.7% for FY13; 3% for FY14; 3% for FY15; 3.5% for FY16; 3.5% for FY17 Pension Returns: 0% Market Value of Assets for FY12; 7.75% per year thereafter Authorized City Staffing in FY12: 32,274

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Issues of Concern and Challenges: Labor Costs

Breakdown of Labor Cost

Five Year Projections of Cumulative Labor Cost Increases from Current Level (Base Year FY 2011-12)
$943 $900 $700
Millions

$828 $683 $479

$38 $34 $67 $37 $217 $33 $137 $192 $72 $143 $207 $97 $43 $266

$127 $53

$311

$500 $208 $300

$25 $59 $13 $32

$98 $137

$137 $113 $167 $(8)

$100 $(100)
20

$218

$125 $(47)

-1 3

-1 4

-1 5

-1 6

12

13

14

15

20

20

20

Fiscal Year

Civilian Compensation Adjustments Fire and Police Pensions

Sworn Compensation Adjustments Workers Compensation Benefits

City Employees Retirement System Health, Dental and Other Benefits

Pension Returns: 0% Market Value of Assets for FY12; 7.75% per year thereafter

20

16

-1 7

19

Issues of Concern and Challenges: Labor Costs

Cumulative Bargaining Unit Base Wage Movement FY2006-07 to FY2013-14
30%

25%

20%

15%

10%

5%

0% FY2006-07 FY2007-08 FY2008-09 City Attorney (29) FY2009-10 Coalition FY2010-11 EAA FY2011-12 Sworn FY2012-13 FY2013-14

SEIU (8 & 17)

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Issues of Concern and Challenges: Pension Costs Tied to Stock Market

Projected City General Fund Contribution Amounts to LACERS & LAFPP Pension and Health (Contributions made July 15) FY 2012-13 to FY 2016-17
$1,400 $1,313 $1,300 $1,246 $1,200 Millions $1,217 $1,163 $1,130 $1,100 $1,074 $1,007 $1,000 $948 $900 $867 $800
Adopted Budget 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18

$1,288
$107

$1,281
$130

$80

$1,181

$1,137

$1,151

$52

$1,078
$19

$988

$858

Fiscal Year Combined Total: April 2011 Combined Total: Jan & Feb 2012 (0%) Combined Total: Jan & Feb 2012 (7.75%)

April 2011: 8% Return on Market Value of Assets for 2010-11 and 8% per year thereafter. Jan & Feb 2012 (0%): 0% Return on Market Value of Assets for 2011-12 and 7.75% per year thereafter. Jan & Feb 2012 (7.75%): 7.75% Return on Market Value of Assets for 2011-12 and 7.75% per year

thereafter.
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Issues of Concern and Challenges: Ongoing Deficit for Years to Come

Estimates in July 2011 showed the deficit for FY2012-13 at around $200 million. However, revised estimates are being developed and may move the deficit closer to $220 million.

$5,400

$5,307
$5,200

$5,131

$5,000 ($Millions)

$4,937

$4,951

$4,800

$4,723

$4,775 $4,627 $4,484

$(220)
$4,600

$4,400 $4,375 $4,200 2010-11 2011-12 2012-13 2013-14

June 2011 Revenue Dec 2010 Revenue

$4,386

2014-15

2015-16

June 2011 Expenditures Dec 2010 Expenditures

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Issues of Concern and Challenges: Order of Magnitude Deficit

Closing a $220 million budget deficit with cuts alone, with departments such as Police, Fire, Library,

and Recreation and Parks exempted from cuts due to their priority status, would equate to eliminating the entire General Fund budgets of the following departments:
Illustration of the Equivalent of $220 Million In Expenditures

DEPARTMENT Animal Services City Attorney Finance Board of Public Works Board of Contract Administration Bureau of Engineering Bureau of Street Services Total

2011-12 ADOPTED GENERAL FUND (In Millions) $20 $92 $37 $10 $19 $26 $16 $220

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Budget Development for Fiscal Year 2012-13

Controllers Message: Mayor and City Council should focus on structural budgetary changes instead of

continued reliance on one-time revenues and expenditure deferrals.

CAO in agreement. Our structural deficit requires a Balanced Approach solution which is

focused on:
Ongoing Expenditure Reductions Ongoing Revenue Enhancements Over the last several years, the City has been focused on expenditure reductions and

relying on one-time revenue enhancements to close the annual budget gap:

Workforce reduction through Early Retirement, layoffs, and hiring freezes Special Fund Transfers (i.e. Special Parking Revenue Fund) The City must remain committed to the four pillars it has established to help guide it through

this uncertainty.
Responsible Fiscal Management Focus on Core Services Alternative Service Delivery Models Sustainable Workforce

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Four Pillars

I
Responsible Fiscal Management Stable Reserve Fund Reduce or Eliminate General Fund Subsidies Maximize Flexible Funding Strengthen & Streamline Central Administration Functions & Contracting Process Pursue New Revenue

II
Focus on Core Services Re-evaluate Discretionary Programs Consolidate Services Evaluate and Redesign Core Services

III
Alternative Service Delivery Models Partner with Nonprofits, Foundations and Private Sector Maximize City Assets Strengthen Core Functions

IV
Sustainable Workforce Reduce the Size of the Workforce Reduce Healthcare and Workers Compensation Costs Control Pensions and Retiree Health Costs Align Compensation Eliminate Furloughs through Concessions

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Pursuing a Balanced Approach - Budget Reductions

City is pursuing public private partnerships to reduce General Fund

subsidies for services:

Private operators for the Los Angeles Zoo RFP released Bids received and being reviewed Private non-profit operators for Animal Services Department animal care

centers
Completed transfer of Northeast Valley Animal Care Center to Best Friends in January 2012 RFP for other care centers released

City is pursuing changes to the current compensation and human resource

structure which require negotiations with unions.

For FY 2012-13, the Mayor has called for 6% and 12% reduction proposals

from departments with General Fund appropriations.

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Actions Taken by the City

Eliminated Departments: Commission on the Status of Women Commission on Children, Youth, and Families Human Relations Commission Environmental Affairs Department (functions partially absorbed by Building and

Safety Department and Bureau of Sanitation)

Office of the Treasurer (functions consolidated with Office of Finance) Improved billing and collections procedures Explored fees for services Refinanced Debt for Lower Interest Rates Sought state and federal assistance Deferred and/or canceled Capital Projects Maximized other special funds Instituted furloughs

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Actions Taken by the City

Renegotiated most labor contracts with cost savings provisions including: Salary Reductions Salary Restructuring Healthcare plan design changes for Active Members (e.g. increased co-

pays)
Unpaid holidays Reductions in the cash-payment of overtime Salary-step freezes No cash-payment of excess sick leave accumulations

Adopted pension and retiree health reform for current and future

employees:
Active Member contributions towards retiree healthcare Medical subsidy freeze for Active Members that do not make an

additional contribution towards retiree healthcare

New retirement tier for new sworn hires
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Actions Taken by the City

Civilian workforce reduced to its lowest point in more than 3 decades 2,400 through Early Retirement Incentive Program (ERIP) Approximately 930 employees transferred to special funded/proprietary

departments
Close to 470 employees laid off since March 2010 Normal attrition without backfilling

Comparison of Civilian General Fund Positions 1990-91 to 2011-12

(Excludes Grant and Special Funded positions except for Police and Fire departments.)

Fiscal Year 1990-91 Fire and Police Departments All Other Departments 2,751 11,569 2011-12 3,515 5,388

Percent Change 28% -53%

General Fund Civilian Positions

14,320

8,903

-38%
29

Actions Taken by the City

AUTHORIZED CITY STAFFING

Positions
40,000 35,234 35,000 35,657 35,752 35,415 35,934 36,667 37,173 36,971 35,864 32,965 Not including Proprietary Departments

(13)%
32,274

30,000 13,758 25,000 13,799

13,807

13,805

13,832

13,944

14,244

14,253 14,012 13,740 13,677

20,000

15,000 21,701 10,000 22,080 22,167 21,610 22,324 22,723 22,929 22,718 21,852 19,225 18,597

5,000
01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12

Fiscal Years
All Others Police (sworn and civilian) Series1

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Further Actions to Consider

Ongoing Reductions 1. Reduce Salaries by 10% (sworn and civilian employees)

$230 million in GF savings in 2012-13

2. Freeze Salaries at current level (sworn and civilian employees)

$53 million in GF salary savings in 2012-13 Additional $73 million in GF salary savings in 2013-14 Additional $37 million in GF salary savings in 2014-15 $75 million in GF savings on pensions from 2012-13 to 2014-15

3. Freezing Police Hiring in 2012-13 and only hire to attrition in 2013-14

$10 million in GF savings for direct and related costs in 2012-13 $27 million in GF savings for direct and related costs in 2013-14
4. Require 10% Employee Contribution to Healthcare (civilian employees only)

$20 million in GF savings for a full enrollment year

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Further Actions to Consider

Ongoing Revenues 1. Documentary Transfer Tax Increase: Increase to $9 per $1,000 of

property sale value, double the current tax of $4.50. Requires 50+1 approval in a General Election or in a Special Election if Emergency Resolution is passed. Approximately $100 million in additional General Fund revenue
2. Parking Occupancy Tax Increase: Increase tax to 15% (from 10%) on

parking fees collected from patrons at parking facilities. Requires 50+1 approval in a General Election or in a Special Election if Emergency Resolution is passed. Approximately $40 million in additional General Fund revenue

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Next Steps in the Budget Development Process

2011 October 24 October 25 October 29

Mayor releases his Budget Policy Letter to departments CAO releases budget instructions to departments based on Mayors policy direction Community Budget Day

December 9 Department budgets due to Mayor and CAO

2012 Jan./Feb. Feb./March March 1 March April 20 April/May May June 1

Budget meetings with Mayors Office and CAO Budget meetings with Mayors Office and departments Controllers revenue projections Final budget decisions for Mayors Proposed Budget Mayors Budget due to City Council Budget and Finance Committee reviews budget City Council considers budget Charter deadline for Council to consider budget
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For additional budget information and online budget documents please visit: cao.lacity.org budget.lacity.org controller.lacity.org/AdoptedBudget/index.htm

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