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Study SessionMEETING DATE: 1/22/13 STUDY SESSION gas Gatos COUNCIL AGENDA REPORT DATE: JANUARY 14, 2013 TO: MAYOR AND TOWN COUNCIL FROM: GREG LARSON, TOWN MANAGER SUBJECT: CAPITAL IMPROVEMENT PROGRAM STUDY SESSION DISCUSS AND PROVIDE INPUT REGARDING PRIORITIES FOR CAPITAL IMPROVEMENT FUNDING BACKGROUND: For over a decade, the Town's two primary sources of discretionary funding for one -time and capital projects have been 1) Redevelopment tax increment and debt financing; and 2) anticipated fiscal year end fund balance resulting from rapidly rising Netflix related sales tax revenues. In addition, the Town received significant dedicated streets related funding from State and regional allocations. However, all of these revenue sources are dropping dramatically for a variety of reasons, including: 1. The State's elimination of Redevelopment and reallocation of those local property tax revenues to education, the County and the State; 2. Netflix has changed its business model away from DVD's to streaming content, which is not taxable under current state and federal laws; and 3. The State has changed the formulas for allocating street funding disproportionately away from largely built out and affluent communities like Los Gatos and towards those communities able and willing to provide higher density housing along major transportation corridors. All of these changes, as well as the ongoing effects of the Great Recession, have all but eliminated the ongoing funding needed for significant one -time and capital projects, including infrastructure maintenance. In addition, every Town budget for at least six years has identified the lack of separate capital funding as a major challenge, especially given deteriorating infrastructure (e.g., retaining walls, old concrete streets) and rising requirements (e.g., NPDES storm water management and treatment). v PREPARED BY: Todd Capurso Director of Parks and Public Works Reviewed by: Town Manager Town Attorney PAGE JANUARY 14, 2013 MAYOR AND TOWN COUNCIL SUBJECT: CAPITAL IMPROVEMENT PROGRAM STUDY SESSION BACKGROUND (cont'd): Consequently, when adopting the current fiscal year budget last Spring, the Town Council requested and directed this Capital Improvement Program Study Session. For this Study Session, staff has identified and aggregated a significant amount of one -time funding that the Council could choose to make available for unmet capital needs, and is providing a listing of those unmet capital needs for Council consideration, ranked in tiers as was done for the operating budget strategy session a year ago. DISCUSSION: This report first summarizes, the one -time funding sources available for Council consideration at this time, and then the list of potential one -time capital project needs. Revenue Sources With the loss of Redevelopment and continuing year -end surpluses, staff identified a wide variety of one time resources to meet Council and community priorities. The additional and potential revenues can be broken down into three major categories — Available /Anticipated, Excess Reserves and Potential. The following sections explain how the Town obtained the revenue funds, and if there are any restrictions for use of these specific funds. Available Revenues 626 W. Parr Avenue Property Sale (AKA 612 W. Parr Avenue) - At the November 15, 2012, Town Council meeting, the Council approved the transfer of this property to Villa Vasona Limited. As a result of this transfer, the Town will receive a net $750,000'GGeneral Fund benefit. There are no restrictions for use of these funds. Redevelopment Agency Dissolution - Under AB 26 (the "Dissolution Act ") all California redevelopment agencies were dissolved effective February 1, 2012. As part of the close -out process, the Town will receive one -time payments totaling $12 million from redistributed Redevelopment Agency assets. There are no restrictions on use of these funds. Friends of the Library - It is anticipated that the Friends of the Library will be able to fulfill the balance of its $1.8 million contribution to the Town by the end of next fiscal year. Existing Capital Project Balances - As a result of the combination of lower than anticipated construction bids on capital projects and project expenditure savings, the Town has an unspent amount of approximately $250,000. This money has no restrictions for use and is a net to the General Fund. Redevelopment Origination Loan — The dissolution of Redevelopment permitted the Town to receive $1.5 million for repayment of the original Town loan required to establish and operate the Redevelopment Agency. There are no restrictions on the use of these funds. PAGE 3 JANUARY 14, 2013 MAYOR AND TOWN COUNCIL SUBJECT: CAPITAL IMPROVEMENT PROGRAM STUDY SESSION DISCUSSION (cont'd): Reserves Excess Budget Reserves (Above the Designated Amount) - The Town Council adopted a policy regarding the Budget Stabilization Reserve Fund and the Catastrophic Reserve Fund in FY 2011 /12. These reserves were originally established to set aside funds to offset reductions in general fund revenue and to respond to emergency events, respectively. The reserves policy requires that the Town maintain an amount equal to 25% of the total General Fund in Operating Budget reserves within these two reserve funds currently estimated at $8.6 million. Since FY 2011/12, the Town has set aside an "excess" in budget reserves that now exceeds the required $8.6 million. The combined balance of the Budget Stabilization Fund ($7.3 million) and the Catastrophic Reserve Fund ($3.6 million) totals $10.9 million. There is an "excess" balance of $2.3 million over the required reserves amount (subject to final audit). Upon Council approval, this "excess" balance in reserves could be allocated to capital projects with no restriction. Open Space Reserve Fund - The Town also has an Open Space Reserve Fund balance of $562,000. This funding was originally established in FY 1997/98, as a result of a General Plan policy to preserve the Town's open space. The purpose of these funds is to preserve the open space character of prominent visible hillside lands; to connect open space via trails; to define the Town's southern boundary by passive open space; and to use open space to protect unique natural features. The last transaction made for these funds was to purchase property in 2000. The Council may designate these funds for capital related projects; however, the uses are restricted as defined by the General Plan policy. Potential Future Revenues Property Surplus Proceeds - The Town could potentially receive $4 to $6 million as a result of property sales, possibly including the Winchester & Lark, Fire stations, the Venue, excess right of way, and other properties. The Town has recently had property appraisals conducted for many of these properties given strong interest expressed from potential third party buyers. The amount of total revenues received from these sales is estimated at approximately $4 to $6 million, pending Council direction and final sales prices. Tax Assessment Increases — Many jurisdictions have relied on a wide array of potential tax increases to fund municipal priorities, including sales tax, utility tax, parcel tax and/or assessment districts. The above identified revenues, reserves and potential future revenues are summarized by category in the table on the next page. The grand total for these new revenues combined is approximately $14.1 million dollars. PAGE JANUARY 14, 2013 MAYOR AND TOWN COUNCIL SUBJECT: CAPITAL IMPROVEMENT PROGRAM STUDY SESSION DISCUSSION (cont'd): FY 2012/13 REVENUE SOURCES Estimated Amounts Available Revenues 626W. Parr Avenue Property Sale $ 750,000 Redevelopment Agency Close -Out $ 1,000,000 Friends of the Library $ 1,800,000 Existing Capital Project Balances $ 250,000 Redevelopment Origination Loan $ 1,500,000 Subtotal $ 5,300,000 Reserves Budget Reserves- Funding Above the Required Amount $ 2,300,000 Open Space Reserve Fund $ 562,000 Subtotal $ 2,862,000 Potential Future Revenues Property Surplus Proceeds up to $6,000,000 Tax Increases unknown Subtotal up to $6,000,000+ GRANDTOTAL $ 14,162,000+ Capital Improvement Proeram — New and Existing Proiects With the additional revenue resources available, the Town Council has the ability to allocate these funds to existing or new capital improvement projects. In order to assist the Council in this process, staff has prepared a comprehensive list of potential capital projects by category and estimated project costs (attached). The projects on this list were developed by staff based on a variety of considerations, including the Council's core values and Town's current infrastructure and facility needs. Staff then ranked the projects using a priority level - ranging from one to three - based on the Council's core values as well as a staff assessment criteria. Projects ranked in priority level one are projects that staff is recommending for funding within the next two fiscal years (FY 13/14 or FY 14/15). The projects ranked in priority level two are projects that are should be considered for FY 14/15 to FY 15/16. Projects that have been ranked under the third category should be considered for funding in FY 16/17 or beyond as funding becomes available. The staff assessment criteria used includes key consideration factors such as: reductions in long- term maintenance costs, increased accessibility, heavily utilized Town facility, and/or the possibility of receiving grant funding. The first factor - reduces long -term maintenance costs — is critical to consider because projects identified under this category can help to reduce the Town's Operating Budget costs over the long -term, saving Town resources. Facilities that were identified as heavily utilized are projects that also ranked high in the Council's core value categories of Community Character and/or Good Governance. These projects preserve and PAGE 5 JANUARY 14, 2013 MAYOR AND TOWN COUNCIL SUBJECT: CAPITAL IMPROVEMENT PROGRAM STUDY SESSION DISCUSSION (cont'd): enhance the appearance and character of the Los Gatos community, while some projects ensure responsive, accountable and collaborative government. Also included in the maxtrix is staff's assessment of the potential for projects to be scalable and/or completed in portions. Staff is requesting that Council review the list of projects and either confirm the priority ranking of projects or make recommendations to change the priority or scale of the projects as appropriate. CONCLUSION: Staff is seeking Council comment and direction regarding use of the proposed revenue sources for allocation to capital projects. Staff is also seeking Council changes to and/or direction on the proposed tiering of capital projects. Staff will incorporate Council input into the preparation of the Town's FY 2013/14 to FY 2017/18 Capital Improvement Program. ENVIRONMENTAL ASSESSMENT: The recommended action is not a project defined under CEQA, and no further action is required at this time. Specific projects may require individual environmental review, once a scope and funding source have been identified. FISCAL IMPACT: The fiscal impact will be dependent upon the Council's direction of the allocation of these new revenues. 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