1. Purpose of Report

The purpose of this supplemental report to the Local Agency Formation Commission for Los Angeles County (LAFCO) is to provide an evaluation of the impact of the following factors, which were not addressed in the Harbor Proposal for Special Reorganization Comprehensive Fiscal Analysis (CFA):

· The Harbor City levies a documentary transfer tax of $.55 per $1,000 as opposed to the current City of Los Angeles tax of $4.50 per $1,000.

· The Harbor City does not reimburse the City of Los Angeles for "general overhead costs" during the transition period.

· The effective date of the new city is January 1, 2003, instead of December 16, 2002.

This report also provides additional information regarding municipal revenues generated at the Port of Los Angeles.

Findings of the Report

This supplemental report has made the following findings regarding the fiscal impact of the Harbor special reorganization:

· If the Harbor City levied a $.55 per $1,000 documentary transfer tax, its revenue base would decrease by $3.1 million, and would require additional reductions in expenditures.

· A new Harbor City would face substantial challenges in adequately reducing its expenditures to meet available revenues, and the loss of an additional $3.1 million in annual revenue would worsen this problem.

· If the new city did not reimburse the City of Los Angeles for certain "general overhead costs," the new city's payment for the net cost of services would decrease by $850,000 during the transition period.

· A change in the effective date of the new city to January 1, 2003 would have no substantive fiscal impact on the new city or the City of Los Angeles.

· The exclusion of Port of Los Angeles property from the boundary of the new city would significantly reduce its revenues, including a $13.9 million loss in property tax revenue and losses in other revenues.

Financial Viability of the Harbor City

The CFA made the finding that the City of Los Angeles spends more in the Harbor area than the amount of revenue generated in the area, and a new Harbor City would need to significantly reduce the cost of its services to achieve a reasonable reserve during its first three years of incorporation. The factors considered in this report result in a further loss of tax revenue, but do not materially change the findings made in the CFA. The CFA found that cities in the region with comparable populations are able to provide services to their respective communities with the same amount of revenue or less revenue than that generated in the Harbor area. This implies that a new Harbor City could reduce its expenditures over time to a level comparable to neighboring cities, and within the revenues generated in the Harbor area. The factors addressed in this report increase the expenditure reductions required to achieve financial viability for a new Harbor City, but only to a marginal extent.

A Harbor City budget for fiscal year 2002-03 through 2005-06 is projected below, based on the following changes to the CFA:

1. The new city would collect $3.1 million less in documentary transfer tax revenue.

2. The Harbor City would not reimburse the City of Los Angeles for general overhead costs during the 18-month transition period.

The budget projection for the Harbor City under the "base scenario" assumptions used in the CFA continues to show that the new city would not achieve positive fund balances for the first three years after incorporation and would not maintain a reasonable level of reserves.

HARBOR CITY PROJECTED BUDGET FISCAL YEAR 2002-03 THROUGH 2005-06 (Unadjusted for Inflation)
	2002-03*	2003-04	2004-05	2005-06
Revenue:
General Fund	49,502,027	99,004,054	99,004,054	99,004,054
Special Purpose Funds	10,935,151	21,870,303	21,870,303	21,870,303
	___________	____________	____________	____________
Total Revenue:	60,437,179	120,874,357	120,874,357	120,874,357

Expenditures:
Harbor City Personnel	758,311	1,277,147	1,277,147	1,277,147
Harbor City Non-Departmental Costs	364,011	444,467	444,467	444,467
City of Los Angeles Purchased Services	78,911,434	157,822,869	157,822,869	157,822,869
Less: General Overhead Costs	(285,365)	(570,730)	-	-
City of Los Angeles Administrative Costs	315,646	315,646	315,646	315,646
City of Los Angeles Redistricting Costs	1,000,000	-	-	-
City of Los Angeles Election Costs	-	-	-	-
Mitigation Payment	-	-	-	-
	___________	____________	____________	____________
Total Expenditures	81,064,038	159,289,398	159,860,128	159,860,128

Revenue Less Expenditures	(20,626,859)	(38,415,041)	(38,985,771)	(38,985,771)

Available Balance	(20,626,859)	(59,041,901)	(98,027,672)	(137,013,443)

* January 1, 2003 effective date for new city.

The CFA also evaluated an alternative scenario for the new city that assumed the new city would achieve a significant amount of cost reductions and would be able to repay the City of Los Angeles for the net cost of providing services over a 10-year period. This target budget required that the new city reduce its expenditures by $47.8 million annually in order to meet its available revenues, and that the City of Los Angeles would be repaid (with interest) over a ten year period for $55.3 million in the net costs of providing services during the transition period.

In consideration of the loss of documentary transfer tax revenue and the exclusion of general overhead costs during the transition period, the new city would now require annual cost reductions of $51.3 million, and would need to reimburse the City for $59.0 million for the net costs of providing service. The projected target budget for the alternative scenario is provided in the table below.

HARBOR CITY BUDGET TARGET FISCAL YEAR 2003-04 THROUGH 2005-06 (Unadjusted for Inflation)
	2002-03	2003-04	2004-05	2005-06
Revenue:
General Fund	49,502,027	99,004,054	99,004,054	99,004,054
Special Purpose Funds	10,935,151	21,870,303	21,870,303	21,870,303
	___________	____________	____________	____________
Total Revenue:	60,437,179	120,874,357	120,874,357	120,874,357

Expenditures:
Harbor City Personnel	758,311	1,277,147	1,277,147	1,277,147
Harbor City Non-Departmental Costs	364,011	444,467	444,467	444,467
Cost of Services – Purchased & Provided	58,284,575	119,407,827	106,500,000	106,500,000
Less: General Overhead Costs	(285,365)	(570,730)	-	-
City of Los Angeles Administrative Costs	315,646	315,646	315,646	315,646
City of Los Angeles Redistricting Costs	1,000,000	-	-	-
City of Los Angeles Election Costs	-	-	-	-
Mitigation Payment	-	-	-	-
Repayment of Transition Period Services*	-	-	7,832,957	7,832,957
	___________	____________	____________	____________
Total Expenditures	60,437,179	120,874,357	116,370,217	116,370,217

Revenue Less Expenditures	-	-	4,504,140	4,504,140

Available Balance	-	-	4,504,140	9,008,280

* Repayment of $59.0 million over 10 years, assuming a 5.5% interest rate.

If the repayment of the $59.0 million in net costs of services were made over a 5-year period instead of a 10-year period, the annual repayment amount to the City of Los Angeles would increase by $6.0 million to $13.8 million, and would require that the new city achieve additional costs savings of $6.0 million to offset this increase.

Additional Fiscal Impact on City

Under the alternative scenario presented in the CFA and updated for this report, the City of Los Angeles would need to support the new city during the transition period (January 2003 through June 2004). This could require that the City identify additional funding sources to fund a portion of the estimated $59.0 million shortfall. It is assumed that the City is reimbursed for the estimated $59.0 million in the net costs of service over a ten-year period.

2. Reduction in Documentary Transfer Tax

The City of Los Angeles currently levies a documentary transfer tax at a rate of $4.50 per $1,000 on taxable conveyances of real property within the City. The Office of the County Counsel has determined that the new Harbor City would not be able to levy the same rate as the City, but would be restricted to a $.55 per $1,000 tax.

The imposition of a documentary transfer tax of $.55 would, based on the City's fiscal year 2000-01 budgeted amount for the tax, reduce the amount collected in the Harbor area by $3.1 million. The potential loss in revenue is significant in that both the Harbor and the City would be impacted by the loss in revenue. The City of Los Angeles would lose $3.5 million, as this is the amount generated in the Harbor, yet the Harbor City would only receive $400,000, given it cannot assess the existing City tax rate. This implies that any mitigation payment made to the City could not be offset by the revenue in an equal amount that accrues to the new city.

The loss of $3.1 million in documentary transfer tax revenue would require that the new city further reduce its expenditures in order to meet its revenue constraint. It is estimated that the new city would need to reduce expenditures by $51.3 million annually, which is $3.5 million greater than the amount estimated in the CFA.

3. General Overhead Costs

In the computation of the estimated cost for purchased services, the CFA allocated various indirect costs of the City, including staffing cost of City Council and the Mayor's office and a portion of the cost of various City department managers. These costs are arguably "general overhead costs," and are defined as costs that may be incurred regardless of whether the service is provided to the new city. California counties are prohibited from charging general overhead costs when providing service under contract. Section 51350 of the Government Code states that:

A county shall not charge a city contracting for a particular service, either as a direct or an indirect overhead charge, any portion of those costs which are attributable to services made available to all portions of the county, as determined by resolution of the board of supervisors, or which are general overhead costs of operation of the county government. General overhead costs, for the purpose of this section, are those costs which a county would incur regardless of whether or not it provided a service under contract to a city.

If the City of Los Angeles were prohibited from allocating general overhead costs to the Harbor City during the transition period, certain costs would be excluded from the cost of purchased services estimated in the CFA. This section estimates the fiscal impact of excluding the City's general overhead cost as part of the payment for services during the transition period.

City Overhead Costs

For the purposes of this report, it is assumed that the following personnel costs are general overhead costs, using the standard that these positions (and thus the resultant cost) would exist regardless of providing service under contract to the Harbor City.

· City Councilmembers

· City Councilmembers' Chief of Staff

· Mayor

· Mayor's Chief of Staff

· Chief Legislative Analyst

· Department General Managers (including elected officials)

· One assistant position to the General Managers

To estimate the allocated cost of these positions, the allocation percentage determined in the CFA for each City department is applied to the salary and fringe benefit amount of each position. The table below shows that 103 positions and a total allocated cost of $570,000 are related to general overhead.

CITY OF LOS ANGELES ESTIMATED GENERAL OVERHEAD COSTS FISCAL YEAR 2000-01 BUDGET
Position	Number	Harbor Allocation
City Councilmembers	15	$ 100,593
City Councilmembers' Chief of Staff	15	53,983
Mayor	1	8,398
Mayor Chief of Staff	1	5,791
Chief Legislative Analyst	1	12,331
General Managers	35	292,439
Assistant position to the General Manager	35	97,193
	___	________
Total	103	$ 570,730

Fiscal Impact on City of Los Angeles

In the event the City did not recover the estimated general overhead costs, the amount it would receive for services furnished on behalf of the new city would decrease by $570,000 on an annual basis, or a total of $850,000 during an 18-month transition period.

4. Port Revenues

The Comprehensive Fiscal Analysis (CFA) prepared for the Harbor area provides a brief discussion of the general fund revenues attributable to the Port of Los Angeles, stating that these revenues are assumed to transfer to a new Harbor City but that this transfer is ultimately dependent upon the Port being included within the boundaries of the new city. The CFA did not quantify Port revenues separately from other general fund revenues generated in the Harbor area, as this information is not available from the City of Los Angeles.[1]

In the event the Port was excluded from the boundary of the new city and remained a part of the territory of the City of Los Angeles, a significant amount of revenue that was assumed in the CFA to accrue to the new city would be retained by the City of Los Angeles.

Although detailed revenue data is not available from the City, property tax data is available from the County of Los Angeles and can be used to estimate the amount of property tax revenues collected at the Port. Based on County information, it is estimated that of the $20.8 million in property tax revenue generated in the Harbor area during fiscal year 1999-00, approximately $13.9 million, or 67%, is attributable to Port-controlled property.

FY99-00 PROPERTY TAX REVENUE HARBOR AREA
	Property Tax Revenue (in millions)
Port Controlled Property (estimated) *	$ 13.9
Remaining Harbor Area	6.9
	____
Total, Harbor Area	$ 20.8

* Property tax revenue within tax rate area 0014, which is predominately comprised of Port-controlled property.

In addition to property tax revenue, a significant amount of utility users tax revenue would also be lost if the Port were to remain in the territory of the City of Los Angeles. Certain Port tenants are large users of electricity and natural gas and likely accrue a large tax liability relative to other commercial and residential utility users in the Harbor area.

[1] LAFCO has requested detailed information from the City of Los Angeles on the revenue generated in the Harbor area; however the City has only provided data by zip codes. This does not allow for a distinction between Port property and other property within the boundaries of the new city. More detailed tax revenue information may require that individual taxpayer information is made public, which would violate confidentiality restrictions.