Proposed Capital and Technology Improvement Policy

REPORT FROM OFFICE OF THE CITY ADMINISTRATIVE OFFICER Date: October 31, 2019 CAO File No. 0220-05623-0000 Council File No. Council District: All To: The Mayor The City Council ~ . From: Richard H. Llewellyn, Jr., c,f'~rative Offic r fl Subject: Proposed Capital and Technology Improvement Policy SUMMARY This report outlines the proposed Capital and Technology Improvement Policy for the City of Los Angeles (Attachment A), which would guide the City's process for planning, identifying, evaluating, and prioritizing funding for new capital and technology projects, along with the ongoing maintenance of its existing assets. The proposed policy framework leverages the City's existing practices and identifies the policies, processes, and information gaps that need to be integrated into existing practices in order to successfully develop citywide investment priorities. RECOMMENDATIONS That the City Council, subject to the approval of the Mayor: 1. Adopt the attached Capital and Technology Improvement Policy for the City of Los Angeles (Attachment A), which will replace the existing Capital Improvement Expenditure Program Funding Policy adopted as part of the City's Financial Policies in April 2005 (C.F. 04-1822-S3); 2. Approve a minimum investment target of one-and-a-half percent (1.5%) and a goal of two percent (2%) of General Fund revenue for capital and technology improvements starting in Fiscal Year 2021 -22, which will be adjusted periodically as additional metrics become available and allocated to: • capital maintenance and repair of the City's existing assets; • information technology (IT) projects; and • new capital projects. 3. Authorize the City Administrative Officer to develop and implement procedures based on the approved policy; and 4. Request the City Attorney, with the assistance of the City Administrative Officer, to prepare and present to the Council and Mayor, any necessary ordinances required to codify the Capital and Technology Improvement Policy within the City's Financial Policies for the City of Los Angeles. CAO File No. PAGE 0220-05623-0000 2 DISCUSSION The City of Los Angeles owns a vast and complex network of assets that are vital to the provision of City services and health of the local economy. As these assets continue to expand and age, and technology infrastructure continues to rapidly evolve, it is critical for the City to implement changes to the existing capital policies to guide its investments necessary to address the City's current and future needs. This report presents the proposed Capital and Technology Investment Expenditure Program (CTIEP), which includes a target annual investment, the addition of an information technology component, and an enhanced and coordinated approach in the planning, implementation and assessment of program outcomes. As defined within the City's existing Capital Improvement Expenditure Program Funding Policy (Capital Policy), the City currently budgets "to the extent possible, one percent of General Fund revenue to fund capital or infrastructure improvements" (C.F. 04-1822-S3). This investment of General Fund monies is budgeted each year in the Adopted Budget as part of the Capital Improvement Expenditure Program. Like other major municipalities, the City has typically set an annual target for General Fund investments (pay-as-you-go), while also leveraging available Special Fund monies, grant opportunities, and debt issued through the Municipal Improvement Corporation of Los Angeles (MICLA). Pursuant to the City's Administrative Code (Chapter 3, Article 1 ), the City Administrative Officer (CAO) is also responsible for maintaining and publishing a five-year Capital Investment Plan. The Fiscal Year(FY) 2019-20 Adopted Budget provides $72.45 million in General Fund monies for Municipal Facilities and Physical Plant programs, which factors to an investment rate of 1.1 percent of General Fund revenues totaling $6.57 billion. When factoring for an additional $25.58 million in General Fund monies budgeted for information technology projects, the aggregate General Fund investment level increases to $98.03 million, for an adjusted rate of 1.5 percent. The proportionate breakdown of the 2019-20 General Fund investment level is as follows: • 0. 7 percent - Capital Repair/ Deferred Maintenance ($44.1 million); • 0.4 percent - Information Technology ($25.6 million); and • 0.4 percent- New Capital Projects - Municipal Facilities/ Physical Plant ($28.3 million). Inclusive of all funding sources, the 2019-20 aggregate funding level for capital and information technology programs totals approximately $552.2 million, which includes the General Fund allocation of $98.03 million, along with Special Funds monies ($368.1 million) and MICLA Commercial Paper authority ($86.1 million). An estimated $1.17 billion in additional funding will be required in the three subsequent fiscal years (2020-21 through 2022-23) to meet the projected cash flow needs for capital projects currently authorized, as summarized in Attachments (B, C, D and E). On an interim basis, this Office recommends a minimum annual investment target of one-and-a half percent (1.5%) of General Fund revenues, and a goal of two percent (2%) to allow flexibility based on the City's prevailing economic conditions and future policy objectives. As part of this report, preliminary five-year funding plans are provided for Municipal Facilities (Attachment C), Physical Plant (Attachment D), and Information Technology Infrastructure and CAO File No. PAGE 0220-05623-0000 3 Systems (Attachment E). These plans reflect the projected capital needs for projects authorized through 2019-20 and summarized in Attachment B. Beginning in 2021-22, this Office would reinstitute the process for publishing the new five-year plan that would be known as the Capital Technology Investment Plan (CTIP). The last publication of a five-year capital plan was in 2008, but subsequently suspended due to staffing shortages and the need to develop an integrated, electronic system for maintaining and updating the various project data, ideally with interfaces to major project databases in use by the respective program managers and construction forces. Both the annual CTIEP and the five-year CTIP would encompass all elements of municipal facilities, physical plant, and major information technology infrastructure and systems, to include the following assets, as detailed in the proposed Policy (Attachment A): • Municipal Facilities: o Administrative Quarters o Recreational and Cultural Facilities o Library Infrastructure o Police, Fire and Animal Services Infrastructure o Yards and Shops Facilities • Physical Plant: o Stormwater Projects o Street Projects o Street Lighting Projects o Bicycle and Pedestrian Projects • Information Technology*: o Citywide Infrastructure o Major Projects and System Replacements * Information Technology projects would not include infrastructure or systems with an estimated cost less than $1,000,000, unless the project is determined to have a significant Citywide impact. CURRENT CAPITAL FUNDING POLICY As part of the City's Financial Policies (Policies) adopted in April 2005 (C.F. 04-1822-S3), Council established an annual investment target of one percent ( 1% ) of General Fund revenues for capital and infrastructure improvements. This one percent investment target is implemented through the City's annual Capital Improvement Expenditure Program (CIEP) budget that encompasses the acquisition, renovation or construction of new and existing Municipal Facilities and Physical Plant infrastructure. The adopted Policies also recognize "the importance of maintaining the City's capital assets on a regular basis to avoid major deferred maintenance and to extend the useful life of the asset." Other provisions of the existing CIEP Funding Policy are outlined below: a. Five Year Capital Improvement Plan - to be prepared and updated by the CAO on an annual basis, with the potential utilization of debt financing as allowable within applicable legal restrictions for the purchase or renovation of capital assets. CAO File No. PAGE 0220-05623-0000 4 b. Addition of New Projects -to receive specific approval prior to incorporation as part of the five year Capital Improvement Plan, with required information to include: the proposed scope of work, any relevant phasing options, Class C cost estimate adjusted for inflationary factors over the term of construction, recommended funding sources, and any significant changes subsequently proposed to the approved scope and budget. c. Operational and Maintenance Costs for New Assets - to be incorporated in the City's annual budget to fund costs associated with completion of new capital projects and maintenance of existing infrastructure, inclusive of: associated staffing requirements, furniture and fixtures, custodial services, equipment and materials, landscaping, and other costs of repairs and upkeep needed to maximize the lifecycle of new capital assets. d. Capital Financing Plan - to reflect the financing sources for facilities included in the Capital Budget, along with a proposed prioritization, options for non-debt sources and impact statement of all borrowing on the City's long-term debt affordability ratios. e. Depreciation of Existing Capital Assets - to be recognized as part of the City's annual operating budget, to address repair, renovation and maintenance needs, as needed to maximize the useful life of existing assets. PROPOSED POLICY REVISIONS As part of the proposed changes to the existing Capital Funding Policy,

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