2021-22 Proposed Budget
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2021-22 Proposed Budget SUPPORTING INFORMATION FOR THE BUDGET AND FINANCE COMMITTEE THIS PAGE INTENTIONALLY LEFT BLANK CITY OF LOS ANGELES Richard H. Llewellyn, Jr. CALIFORNIA ASSISTANT CITY ADMINISTRATIVE OFFICERS CITY ADMINISTRATIVE OFFICER PATRICIA J. HUBER BEN CEJA YOLANDA CHAVEZ ERIC GARCETTI MAYOR April 20, 2021 Honorable Members of the City Council: The 2021-22 Proposed Budget is a historic budget. Following a year of uncertainty and economic upheaval caused by the global COVID-19 pandemic, the City of Los Angeles is poised to make large and impactful investments in areas of equity and justice, homelessness, economic opportunities, and capital and technology improvements, all while preserving critical City services and achieving the largest Reserve Fund in the City’s history. This budget demonstrates the City’s resiliency and recognizes that its ongoing challenges require bold actions, creativity and innovation, and an ongoing commitment to fiscal responsibility. The hope and optimism personified in the Proposed Budget is attributed to the improvements the City has seen with COVID-19 case rates and vaccine distributions, and especially the unprecedented federal response in relief funding through the American Rescue Plan (ARP). We also thank our labor partners who came to the table to help the City and the City’s poorest residents in this time of need. Still, there is no question that without the ARP, the Proposed Budget would have necessitated the City to rely on austerity measures beyond those anyone of us has experienced since the Great Recession. In fact, before the ARP was passed, the balancing plans recommended by this Office called on the City to deplete its reserves, debt finance ongoing operations, and continue down a path of reducing its workforce and, with it, the services the City provides. The ARP will allow the City to emerge from a year of COVID malaise, ready to take on its most daunting problems. There continues to be no greater challenge than addressing homelessness and this Proposed Budget makes the largest investment the City has ever made to address homelessness. Including Proposition HHH bond proceeds, ARP funds, state funds dedicated for homeless services, and the General Fund, the City’s commitment to ending homelessness has never been stronger. Despite the mostly positive news, the City budget future remains extremely challenging, and the Proposed Budget’s increase in the City’s reserves is necessary. First the Proposed Budget’s reliance on the federal ARP funds is not without risk. The U.S. Department of Treasury is responsible for distributing ARP funds to cities and it is currently developing methods and guidance for the allocation and oversight process. If the Department of Treasury guidance restricts the ARP funds in a way that is inconsistent with the appropriation provided in the Proposed Budget, the City will need to reassess the proposed funding. In some cases, reductions to programs and services may be required if alternative funding sources are unavailable. Even if programs are eligible for ARP funds, since ARP funds are one-time revenues, increased services and new 473-7500 programs supported by ARP may need to be curtailed after one year. Without a recovery of the City’s own revenues to backfill these lost federal dollars, the austerity measures that City relied on and considered over the last year may need to be revisited. A strong Reserve Fund alleviates the burden on the City to make such a drastic about face on new commitments. Furthermore, even when we have moved past the immediate COVID-19 pandemic, the distress left in too many of our communities, particularly our communities of color, will take years of investment to begin the healing process. Finally, the Proposed Budget assumes robust recovery in many areas of the local economy that have struggled over the last year: tourism, parking related revenues, and retail. These revenue estimates assume the end of pandemic restrictions and the recovery in receipts with widespread vaccination and herd immunity reached by the end of July. No additional closures are assumed. If vaccination efforts stall, or if variants prove to be vaccine resistant, there is risk of new outbreaks prompting renewed restrictions which ultimately will impact revenues. Financial Policies The Proposed Budget meets most of the City’s basic financial obligations. As noted earlier, the ARP funds have greatly increased one-time revenues although they are not being exclusively used on one-time expenditures, including many for homeless support services. The following is a review of the City’s compliance with several of the key financial policies as provided in the Proposed Budget. Reserve Fund The Reserve Fund Policy requires the Fund to have a minimum balance of 5 percent of all General Fund revenues. In 2020-21, the Reserve Fund levels fell below 5 percent for the first time in seven years. This drop was due to unbudgeted COVID-19 related spending in 2019-20. Furthermore, revenue losses associated with the response to the pandemic in 2020-21 kept the Reserve Fund below 5 percent throughout the year. The Proposed Budget significantly improves the Reserve Fund’s position. The Reserve Fund will begin the year at $696.1 million, or 9.49 percent of General Fund revenues. This amount includes a $50.0 million transfer to the Reserve Fund from the General Fund. The City’s experience in managing through the pandemic has magnified the importance of having healthy reserves. Even if projected revenues were falling short, the City’s response required immediate access to cash and resources beyond what departments were budgeted. Maintaining healthy General Fund reserves will also mitigate the pressure on the budget as the City both begins to pay for deferred employee compensation adjustments beginning in 2022-23 and considers continuing the one-time spending added in this budget. In this way, reserves can provide a buffer as revenues gradually grow into the new service levels. Consistent with the General Fund Reserves policy, the Proposed Budget also includes an appropriation to the Unappropriated Balance - Reserve for Mid-Year Adjustments of $12.5 million. Taken together with the Reserve Fund, this account increases our cumulative reserves to $708.6 million, or 9.66 percent of the General Fund. Budget Stabilization Fund Pursuant to the Budget Stabilization Fund (BSF) policy, the Proposed Budget could include a $2.4 million transfer from the BSF to the Budget. As this transfer is discretionary, the Proposed Budget complies with the policy. The BSF will begin the year with a fund balance of $118.0 million. The Reserve Fund, the UB/Reserve for Mid-Year Adjustments, and the BSF, cumulatively, bring the City’s total General Fund reserves in 2021-22 to $826.6 million or 11.27 percent of the General Fund. For the first time, this achieves the goal set in the City’s Financial Polices of maintaining reserves at 10 percent of General Fund Reserves. Capital and Infrastructure Funding The City’s Financial Policies state that the City shall make adequate investments to maintain real property and equipment at appropriate levels. Further, the Capital and Technology Infrastructure Funding Policy establishes a target spending level of 1.5 percent of General Fund revenues on capital and technology investments. Pursuant to the 1.5 percent standard, the Proposed Budget should include $110.1 million for infrastructure expenditures. The Proposed Budget exceeds this target by $42.0 million, appropriating $152.1 million. The total represents 2.07 percent of General Fund revenues. One-time Revenue It is the City’s policy to use one-time revenues for one-time, rather than ongoing, expenditures. The Proposed Budget does not meet this policy. The Proposed Budget recognizes $714.8 million in one-time revenues while appropriating $581.2 million for one-time expenditures. Thus, $133.6 million of one-time revenues were used for ongoing expenditures. This gap exacerbates the structural budget gap discussed below. The City could use its healthy reserves in 2022-23 to offset the gap between ongoing expenditures and ongoing revenues if it maintains them both in the Adopted Budget and throughout 2021-22. Debt Policy The City’s Debt Policy requires that the non voter-approved debt service level remain below six percent of general revenues and that the combined non voter-approved and voter- approved debt service level remain below 15 percent of general revenues. The Proposed Budget complies with this policy with a non-voter approved debt service level of 3.45 percent and a voter approved debt service level of 5.04 percent. Structural Balance The City’s Financial Policies include a goal of achieving and maintaining a structurally balanced budget in which future costs are projected to be fully paid by future revenues. In order to assess structural balance, my Office prepares the Four-Year Budget Outlook (Outlook) that compares projected revenues to projected expenditures through 2025-26. The Outlook projects budget gaps of $138.3 million in 2022-23, and $2.6 million in 2023-24, and then surpluses of $95.8 million in 2024-25, and $308.6 million in 2025-26. By Charter, the City will close any budget gaps as part of that year’s annual budget process. Nonetheless, at this time the Outlook does not demonstrate structural balance. Preserving the current healthy level of General Fund reserves could make it available in the next two years if the City chooses to maintain service levels while revenues naturally grow in order to sustain them on an ongoing basis. The Outlook makes several assumptions that, if not met, would change future year projections. The Outlook assumes that the pandemic conditions will lessen by the end of July 2021, and the economy will begin to strengthen at that time.