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HomeMy WebLinkAboutFiscal Impact Anlysis - Potential Annxation for North Areas of I-10REGULAR MEETING OF THE PALM DESERT REDEVELOPMENT AGENCY FEBRUARY 23, 2012 Staff has requested continuance of this matter to the next meeting, March 8, 2012. XV. CONTINUED BUSINESS A. FISCAL IMPACT ANALYSIS REPORT REGARDING POTENTIAL ANNEXATION BY THE CITY OF PALM DESERT FOR AREAS NORTH OF INTERSTATE 10 (Continued from the meeting of January 26, 2012). Rec: By Minute Motion, continue to the meeting of March 8, 2012. Action: CITY OF PALM DEPARTMENT OF COMMUNI STAFF REPORT k f$ wv! ;YI OPMENT a REQUEST: That the City Council receive and file a fiscal impact analysis and direct staff how to proceed regarding potential annexation of areas north of the Interstate 10 SUBMITTED BY: Lauri Aylaian, Director of Community Development DATE: 26 January 2012 CONTENTS: Fiscal Impact Analysis for Potential Annexation to the City of Palm Desert Recommendation That the City Council direct staff regarding further actions to take, if any, concerning annexation of areas north of Interstate 10. Executive Summary In September 2011, the City Council directed staff to obtain a feasibility study on territory north of Interstate 10 (1-10) for Sun City Palm Desert and the adjacent commercial -retail areas. They asked that the narrow strip of land between the current northern city limits and the centerline of 1-10 be included in the study, and later directed that the areas near the Classic Club and Xavier Preparatory High School, west of Palm Desert's current sphere of influence, be included in an alternative scenario. The City Council specifically excluded Bermuda Dunes from the areas to be studied, while acknowledging that LAFCO staff likely will not recommend to the LAFCO Commission annexation of Sun City without inclusion of Bermuda Dunes. This report provides the City Council with the results of the completed studies, and seeks direction on whether to further pursue potential annexation of any of the areas at this time. Discussion In response to direction from the City Council, staff retained Terra Nova Planning & Research to perform fiscal analyses of the potential annexation of territory to the city of Palm Desert. Such studies are generally undertaken by cities that are considering expansion to determine if -- and to what magnitude -- the area(s) under consideration will have a positive impact on the city's budget, or if they would require support'by the General Fund. In particular, these studies seek to establish the conditions once the area is built out, when one-time developer fees no longer provide short-term revenue enhancements. For the sake of this study, two different scenarios were considered. The first scenario analyzed revenues and expenditures for all of the Palm Desert sphere of influence land north of the current city limits. The boundaries of this option, called Scenario A, are as outlined in red on the following map. Potential Annexation Fiscal Impact Analysis 26 January 2012 Page 2 of 5 The Scenario B analysis adds territory that is currently in the Cathedral City sphere of influence. It includes the Classic Club, Xavier Preparatory High School, and vacant lands on both sides of Cook Street, but excludes Jack Ivey Ranch. Scenario B boundaries are as shown below. WL UtNAKIU b g:\planning\lauri aylaian\staff reports\sun city annexation fiscal impact analysis 1-26-12.docx Potential Annexation Fiscal Impact Analysis 26 January 2012 Page 3of5 The results of this analysis show that for both scenarios, the revenues fall far short of the City's cost of providing services. This holds true for the present, when large portions of the areas are undeveloped, and for the future when all areas are built out. One of the fundamental reasons for this shortfall is the high percentage of residential lands in the area, and the comparatively small percentage of commercial sales tax -generating development. For comparison sake, ten percent of the land within Palm Desert's existing boundaries is devoted to commercial development, which accounts for 34% of the revenue to the General Fund. However, in Scenarios A and B, the percentage of sales tax -generating commercial land is less than half of that. The conclusions of a fiscal impact analysis can change significantly by changing the assumptions regarding land use, general administrative costs, sales tax generation, and the costs of providing public safety. Consequently, staff worked closely with Terra Nova to identify and quantify the most likely impacts of annexing territory north of 1-10. Specifically, the following precepts were judged to be key for a valid calculation of fiscal impact: Undeveloped lands are assumed to be developed with land uses consistent with those designated in approved specific plans or, where no specific plans have been approved, with the City of Palm Desert General Plan. Because some of the land is already developed, the City will see immediate revenues and costs with either Scenario A or Scenario B annexation. Police services will be required at the same officer -to -resident ratio as is provided in the rest of the city. Although Sun City itself may require lesser policing because it is a gated community with its own security, the converse is likely to be true in the remaining annexation areas, which are largely planned as medium -to -high density residential developments; this is true in other parts of the City that have a mix of country clubs and apartments or open subdivisions. The City will receive only 7% of the total 1 % property tax assessed projects in the annexation areas. Property tax revenues will be further reduced due to the City's mandated contributions to the Education Revenue Augmentation Fund (ERAF). Approximately half of the 7% property tax revenue collected by Riverside County is assumed to continue to be contributed to ERAF or an equivalent "revenue sharing" program. Some line items associated with the cost of general government will increase perceptibly as a result of annexation, while others will not. For instance, staffing levels, benefits, and overhead costs should not change for the City Manager's office, the City Council, and departments such as Finance, Special Events, and Risk Management. However, annexation would result in proportionally greater need for services such as: maintenance of roads, parks, storm drain and landscaping; police and fire services; code enforcement and animal control; and permitting, plan check, and inspections. For years, the Redevelopment Agency and the General Fund have subsidized the Capital Reserve Fund by paying for major public works maintenance projects, such as drainage, paving, reroofing, and landscaping. The true cost of maintaining the City's infrastructure must be calculated using all funds spent on maintenance, not gAplanningllauri aylaian\staff reports\sun city annexation fiscal impact analysis 1-26-12.docx Potential Annexation Fiscal Impact Analysis 26 January 2012 Page 4of5 just those monies that were spent from the General Fund. These subsidies are not reflected in this study. It is therefore likely that the true cost of providing services to the annexation area will be greater than shown. Fiscal Analysis The findings of the fiscal impact analysis are briefly summarized here. Scenario A Annexation of Scenario A will add an estimated 15,144 residents to the City of Palm Desert. Build out of this area is projected to occur in ten years, at which time potentially $6.9 million annually in revenues would be generated. The largest single revenue generator is expected to be local Sales Tax ($2.3 million annually at 10-year build out), which is related to the second highest revenue source, Structural Fire Tax ($1.5 million annually at 10-year build out). These revenues are dependent upon commercial sales tax volume in the annexation area. The costs associated with serving this new area and its population are projected to be approximately $12.6 million annually at the end of the 10-year build out period. The most significant costs are those from Police Protection ($52 million annually at build out), closely followed by those from General Government operations ($4.2 million annually at build out). As such, development of the area is expected to result in an annual revenue shortfall of approximately $4.7 million at the end of the first five-year period. The shortfall is projected to grow to $5.6 million by build out at the end of the second five-year period. This is, in part, associated with the high percentage of residential development in the area and the costs of providing services to residents, and a comparatively small percentage of commercial sales tax - generating development. Residential lands comprise nearly 47% of the entire annexation area, and commercial lands account for 4%. Developer impact fee (DIF) revenues are projected to be $5.09 million at phase build out of each of the two phases. This assumes that development occurs evenly over the 10-year build out period. The highest sources of DIF revenue will be from the New Construction Tax and the Park & Recreation Facilities Fund, which will benefit from the future construction of new single-family and multi -family dwelling units in the annexation area, particularly those in the Mirasera Specific Plan. Scenario B Annexation of Scenario B will result in a population increase of approximately 15,779 to the City of Palm Desert. Build out of the undeveloped lands in Scenario B is expected to take 20 years. Revenues at the end of the 20-year build out period are projected to be approximately $9.86 million annually. As with Scenario A, the largest revenue source will be local Sales Tax ($3.9 million annually), followed by Structural Fire Tax ($1.8 million annually) and Transient Occupancy Tax ($1.5 million annually). At the end of the 20-year build out period, annual costs are projected to be $13.4 million. As with Scenario A, the highest costs are associated with providing police protection ($5.5 million) and general government services ($4.49 million) to existing and future residents. g:\planning\lauri aylaian\staff reports\sun city annexation fiscal impact analysis 1-26-12.docx Potential Annexation 26 January 2012 Page 5 of 5 Fiscal Impact Analysis Build out of Scenario B is expected to generate an annual revenue shortfall of approximately $3.9 million at the end of the first five-year build out period. However, the shortfall is projected to fall slightly to $3.5 million at the end of the fourth five-year period. Like Scenario A, residential development accounts for a much greater percentage of land in the annexation area (37%) than commercial development (5%), and sales tax -generating opportunities are limited. One-time revenues resulting from Developer Impact Fees in Scenario B are expected to be $4.3 million at build out of each phase, assuming development occurs evenly over the 20-year build out period. These revenues will constitute a significant revenue source to the City over the 20- year build out period, but they are one-time revenues that will be realized only as new development occurs. Submitted by: Lauri Aylaian Director of Community Development M. Wohlmuth, City Manager Revi by: P Gibson Director of Finance gAplanning\lauri aylaian\staff reports\sun city annexation fiscal impact analysis 1-26-12.docx U 45-025 Manitou Drive, Suite 3 - Indian Wells, (.A 92210 Phone 760.360.7666 Fax 76076.1760 RobCn)Robi3ernh"%ner.coni ui February 15, 2012 Hon. Robert A. Spiegel, Mayor City of Palm Desert 73510 Fred Waring Drive Palm Desert, CA 92260 Re: H.N. and Frances C. Berger Foundation ANNEXATION Dear Mayor Spiegel: at CA This firm has the privilege of representing the H.N. and Frances C. Berger Foundation. Last month, the City granted the Berger Foundation's request to continue its consideration of the fiscal study concerning the potential annexation for areas north of the I-10 so it could review the study. Our review showed that the fiscal study presented in January did not reflect the current approved Specific Plan for the Berger Foundation parcels. The revised fiscal plan (titled "Technical Addendum" by Terra Nova) now reflects the approved land uses for the Berger Foundation parcels. The revised report shows significantly more revenue from the Berger Foundation parcels compared to the January version. Unfortunately, it also shows additional expenses due to added residential units in the Specific Plan. The fiscal study clearly demonstrates that the Berger Foundation parcels standing alone create significant financial benefit to the City upon annexation. However, the net financial conclusions of the revised fiscal report considering all areas north of the I-10 are similar to the ones presented in January. The Berger Foundation believes that the assumptions used for the expenses in the fiscal study significantly overstate future costs. Most notably, the fiscal study presumes the City would nearly double police coverage for the area immediately after annexation compared to existing police coverage. The area is now patrolled by the Riverside County Sherriff s Department and would continue to be after annexation, although through the City's contract. This vast overstatement of cost is attributable to a different staffing ratio the City uses as its guide compared to the County. While that may be logical on paper, we do not believe staffing levels would nearly double just because a boundary line changes. This one cost item would change the results of the fiscal study. We understand the City may be hesitant to pursue annexation of all areas north of the I- 10 if the fiscal impact creates a financial burden. We would encourage the City to carefully review the likely true costs the City would incur before snaking any fiscal findings with regards to the contemplated annexation. ROBERT A. BERNHEIMER A ll/'Vf ?5601 l Lain C"orpor doO Hon. Robert A. Spiegel, Mayor February 15, 2012 Page 2 While the Berger Foundation believes the ultimate financial impact annexing all areas north of the I-10 could be neutral or positive for the City, a new law creates a more difficult fiscal challenge. If Sun City were annexed into Palm Desert, Bennuda Dunes would become a County "island," surrounded completely by Palm Desert, La Quinta and Indio. While LAFCO policy already discourages creating such islands, SB 244, signed into law late last year, prohibits annexation when an adjacent "disadvantaged unincorporated community" remains within its sphere. It may be too early to know exactly how this will be defined and applied. However, early indications are that Bermuda Dunes may fall into this category. Palm Desert would then be required by law to include Berniuda Dunes with any annexation of Sun City. There are numerous benefits to the City in annexing the Berger Foundation parcels, Sun City and Bermuda Dunes. However, in order to create revenue neutrality for this larger annexation, the City would need to fiscalize all land uses within the entire annexation areas and not simply apply existing Palm Desert formulas and standards. These opportunities would need to be carefully studied. The Berger Foundation's desire to be annexed into the City of Palm Desert remains strong, whether it is accomplished as a stand-alone annexation or in combination with Sun City or Bermuda Dunes. Should the City decide to continue this process, we will assist and cooperate in any way we can. Thank you for your consideration of this matter. cc: William Kroonen, Mayor Pro Tem Cindy Finerty, Council Member Jean Benson, Council Member Jan Harnik, Council Member John Wolmuth, City Manager Lauri Aylaian, Director of Community Development Ron Auen, H.N. and Frances C. Berger Foundation