Form revised April 10, 2006

 

2007 BUDGET LEGISLATION FISCAL NOTE

 

Department:

Contact Person/Phone:

DOF Analyst/Phone:

Department of Finance

Jan Oscherwitz 4-8510

Jan Oscherwitz 4-8510

 

Legislation Title:

 

A RESOLUTION adopting revised financial policies for the Cumulative Reserve Subfund of the General Subfund, and superseding Section 3 of Resolution 30379.

 

 

·        Summary of the Legislation:  The proposed resolution adopts updated financial policies for the Cumulative Reserve Subfund (CRF) and supercedes Section 3 of Resolution 30379 .  The CRF policies are updated in seven ways:

 

a)                  Policy 5c. is added regarding the Fleets and Facilities Department’s asset preservation financial policies adopted by Resolution 30812.

 

b)                  Policy 6a is added regarding asset preservation spending from the Capital Projects Account.  This policy relates to an annual target of at least $30M for asset preservation projects. 

 

c)                  Policy 6b is added regarding transportation spending from the Capital Projects Account.  This policy relates to annual targets for allocating funds for transportation projects. 

 

d)                  Policy 6c is added regarding use of Capital Project Account revenues for funding shortfalls in the Fire Facilities and Emergency Response Levy.

 

e)                  Policy 7 is added regarding use of Real Estate Excise Tax (REET) revenues for new debt service for new facilities.  Beginning in 2007 and except for fire facilities projects described in Policy 6c, no new debt service for new facilities would be charged to REET revenues. 

 

f)                    Policy 8 is added regarding use of REET revenues for future Levy matches.  Beginning in 2007 and except for transportation projects described in Policy 6b, REET revenues would not be used for future voter-approved projects or levy programs. 

 

g)                  Policy 9 is added regarding use of REET revenues above revenue forecast.  In keeping with the City’s commitment to maintaining its existing infrastructure, the highest priority use for any revenues received above forecast would be enhanced asset preservation. 

 

·        Background:  During the 2006 Budget process, the City Council adopted a Statement of Legislative Intent (SLI) that directed the Department of Finance to develop financial policies, including debt policies, for the use of Real Estate Excise Tax (REET) revenues on a City-wide basis, and guidelines regarding projecting future levels of REET revenues.  Specifically, these policies are to address how available REET funds will be allocated among departments to support minimum levels of basic maintenance investments and determine what share of future REET revenues can be prudently allocated toward debt service, City-wide.

 

The proposed Resolution and its attached revised policies constitute a response to the Council’s 2006 SLI.   The Executive’s 2007-2008 Proposed Budget and 2007-2012 Proposed Capital Improvement Program (CIP) reflect these proposed policies. 

 

Previous City Policies Regarding Use of CRF

 

·        Use of CRF for Debt Service:  While the City previously did not have a debt policy regarding use of CRF, recent practice has been to use this fund source for debt service on large asset preservation projects that would otherwise be too costly for upfront cash financing.  Examples include work on Pier 59 and the roofs at Seattle Center.  The City has also been using REET revenues to cover the cost of debt service for some transportation projects and costly new initiatives (e.g., Northgate Park & Ride acquisition).

 

·        Use of REET for Asset Preservation:  Although State law allows REET to be used for new and expanded facilities, the City’s highest priority for many years has been to use REET for asset preservation.  The City’s Capital and Major Maintenance Planning and Funding Policies, updated by Resolution 30365 (adopted in August 2001), state that the City is committed to investing at least $18.7M per year (2001 dollars) to maintain and make non-expansion improvements to existing infrastructure (excluding utility and transportation infrastructure).  In 2006, this amounted to a $23M commitment to asset preservation.  REET is the typical funding source for this investment. 

 

In 2002, DOF sponsored an Asset Preservation (AP) Study that recommended 1% replacement value for buildings and 0.5% replacement for non-buildings as a proxy for our annual general government, asset preservation target.  This target, in 2002 dollars, was $38M.  This target is a guideline and has not been adopted as City policy. 

 

The following table shows AP target to actuals:

 

 

 

 

2002

2006

2007/08 (annually)

Annual Target per Resolution 30365

$19M

$23M

$24M

Annual Target per 2002 Asset Preservation Study

$38M

$44M

$44M (revised to include FFD’s AP requirement and exclude fire facilities)

Department of Parks and Recreation (Parks), Seattle Center, Seattle Public Library Actual AP, and Debt Service

$25M

$26M

TBD

Fleet and Facilities Department (FFD) Actual AP

$2.7M

$2.9M

TBD

Gap Between 2002 AP Target and Actual Spending

($10.3M)

($15.1M)

TBD

Actual Spending Above Policy Target

$8.7M

$5.9M

TBD

 

·        Use of REET for New and Expanded Facilities:  In the absence of a formal policy regarding use of CRF for asset preservation beyond the minimum investment target, in recent years this fund source has been used to cover shortfalls in a growing number of new and expanded facilities, including the Fire Station 10, Civic Center, and Northgate Community Center projects. 

 

·        REET Allocations by Department:  Departments that have historically received REET are Fleets and Facilities Department (FFD), Seattle Center, Library, Department of Parks and Recreation (Parks), and Seattle Department of Transportation (SDOT).  Although permitted by state law, the City generally has not used REET for utility projects.  Approximate historical annual allocations for departments are as follows: $9M for Parks, $1.5M for Library, $1.7M for Seattle Center, and $1M for FFD (before FFD developed its AP program through space rent). 

 

Given the historical use of REET as described above, the Executive proposes a set of revised CRF policies that support the following funding priorities:

 

Commitment to Asset Preservation.  Beginning in 2007, at least $30 million per year of Capital Projects Account revenues shall be allocated for asset preservation (formerly known as “major maintenance” as defined by Resolution 30365).  This amount shall be adjusted for the effects of inflation on the buying power of the dollar.  Although far from a revised annual target of $44M as recommended by the 2002 Asset Preservation Study, funding at this level is in keeping with the City’s major maintenance policies, adopted by Resolution 30365.

 

Transportation Priorities.  In recent years, SDOT has received an increasingly large amount of CRF, averaging about $9M annually, except for a large spike in 2006.  Starting with the Mayor’s 2007-2008 Proposed Budget, SDOT would receive at least $9M in 2007 and $5M annually thereafter, in addition to level funding for the NSF/CRF program and existing debt service. 

 

Supplemental Funding for the Fire Levy Neighborhood Stations Program.  A CRF funding commitment was made in the original levy package, but new shortfalls due to construction inflation make the need for supplemental funding clear.  Starting with the 2007-2008 Proposed Budget, CRF will cover the gap between actual costs and originally committed funds.  Some debt will be needed to match the timing of expenditures to the available CRF.  The term of the debt will match the term of the original Levy.

 

Use of CRF to Repay Debt.  Through 2006, debt service paid by CRF ties up approximately $8.5M (or 20% of projected CRF revenues) each year.  Beginning in 2007 and except for fire facilities projects described above, no new debt service for new facilities shall be charged to Real Estate Excise Tax revenues. 

 

Fund Balance.  In order to protect the City from downside risk in years when REET revenues do not meet forecast, the Executive proposes continuing the City’s practice of maintaining a projected fund balance of about $5 million in each of the REET I and REET II Subaccounts. 

 

·        Please check one of the following:

 

____    This legislation does not have any financial implications.  

 

__X__ This legislation has financial implications.  See background information above.

 

Anticipated Revenue/Reimbursement:  Not applicable.

Notes: 

 

·        What is the financial cost of not implementing this legislation?  Not applicable.

 

·        What are the possible alternatives to the legislation that could achieve the same or similar objectives?  Not applicable.

 

·        Is the legislation subject to public hearing requirements?  No.

 

·        Other Issues:  None.