CITY COUNCIL: DISCUSSION REGARDING PRIORITIES FOR CITY FINANCING OF CAPITAL IMPROVEMENTS

Attachment-A
Discussion regarding priorities for City financing of capital improvements
The City Council has broad discretion to determine the appropriate public purposes for which to allocate
City funds, whether annual funds or reserve funds. Because funding will always be limited, it is not
practical or possible to fund all desirable capital projects. To set priorities, the City Council annually
reviews and accepts public input on a “Work Plan”. A 5-year Capital Improvement and Outlay Budget
is included in the Work Plan document. The City Council uses this as a tool for programming
expenditures on a triennial basis and limits projects to those that are financially achievable in a 5-year
time period. The approval of a project on the Work Plan only occurs after the normal operating
expenses of the City are deducted from the projected revenue sources and after careful consideration of
the available reserve funds in the City coffers.
Reserves and Capital Spending Priorities
The City’s reserve accounts serve three primary purposes. Some serve as a “bank” where funds are
accumulated for specific projects or project types. Other reserve accounts serve as a buffer to draw on
when there are significant shortfalls in projected revenues or costs that occur during a fiscal year.
Without such a buffer, the City would need to stop capital spending and/or lay off staff to reduce costs.
The reserve amounts are also considered by credit-rating companies in assessing the City's ability to
repay credit, financial soundness, and general creditworthiness. A reduction of reserves could
negatively impact credit rating, making the cost of credit higher, including interest rates and amounts to
be paid by the City.
Municipal revenues and costs vary over time in response to macro-economic and other factors and some
fiscal years require mid-year adjustments involving cost-cutting, delaying capital improvements and/or
transferring from reserve accounts to meet funding shortfalls. Carmel-by-the-Sea derives much of its
income from visitors through sales taxes and motel taxes (transient occupancy tax or “TOT”). This
results in annual revenues that can fluctuate strongly in response to the health of the national economy.
A large buffer of reserve funds enables the City to absorb such fluctuations and maintain a smooth
delivery of services. By way of example, the City is drawing on reserve funds to meet fiscal year 2008-
09 needs and anticipates doing the same for fiscal year 2009-10. This is evident in the table below
which shows the City’s annual operating budget and reserve balances for the current fiscal year and the
two prior years. This table also shows the effect of mid-year budget adjustments (totaling about
$700,000) for fiscal year 2008-2009 that were needed, in part, to respond to the current recession:
Fiscal Year* Operating Budget Reserve Balance
2006-2007 $ 12,837,222 $ 10,253,872
2007-2008 $ 14,088,800 $ 10,986,953
2008-2009 (adopted) 6/08 $ 14,300,000 $ 10,600,000
2008-2009 (adjusted 2/09) $ 14,100,000 $ 10,100,000
* All figures are for “end of year”, either actual or estimated.
6
When allocating funds, either from current revenue, (e.g., sales tax, property tax, TOT, fees) or from
reserves, the City must make choices regarding priorities. Not all capital improvements and needs can
receive funding. Often, worthy capital improvements must be delayed or go unfunded.
The City allocates its capital expenditures by using a three-year capital improvements program, updated
annually. The capital improvements that are programmed for fiscal year 2008-2009 and 2009-2010 are
shown below:
Capital Improvement (City Funded) FY 2008-2009 FY 2009-2010
Fire protection system @ Park Branch Library $ 45,000
Forest Theater Master Plan $ 65,000
4th Ave. Riparian Habitat Project $ 170,000
Storm Drain Improvements $ 80,000
City Hall carpeting $ 25,000
Beach Restrooms $ 65,000
Mission Trails Nature Preserve Footbridge $ 11,800
Carmel Forest Implementation $ 20,000
Street and Road Projects $ 255,000 $ 160,000
Carmel Beach sand replenishment $ 24,500 $ 25,235
Underground Water tank @ Del Mar Ave. $ 18,000 $ 68,425
Police Dept. HVAC and re-roof $ 190,000
Carmel beach stairs improvements $ 24,000
Re-pave Junipero Ave. btw. Ocean & 8th Ave $ 300,000
Storm drain improvements $ 50,000
Totals $ 778,800 $ 817,660
The City anticipates ongoing expenses for street repairs, as documented in the 2008 Nichols Report, plus
numerous storm drainage projects already appearing in the Capital Improvement Program. Each year,
City Departments identify additional capital improvements that will be needed in short-term or longterm
time frames. Those related to health or safety, take the highest priority. Those related to capital
assets that must provide continuing service are typically next in line for funding. Funding for new
facilities such as the Forest Theater upgrade or implementation of the Del Mar and North Dunes Master
Plan also must compete for funds.
Ultimately, it is up to the City Council to weigh the costs and benefits of each project and make funding
decisions accordingly. Within this context, a decision to divest the City of the Flanders Mansion
property does not imply that the City lacks funds to rehabilitate and maintain the property; it reflects a
determination that the funds would serve public purposes and needs within the City better if
programmed for other facilities.