Title
Recommendation to Authorize the City Manager to Fund the City Aquatic Center, Estimated to Cost $30 Million and Located on the West Side of Sweeney Park, with $15 Million from the Unassigned Residual General Fund Balance and Financing the Project Remainder from a Certificate of Participation. Consideration of funding sources without a commitment to a specific project is not an approval that requires environmental review under CEQA. (Recreation 10051400)
Body
To: Honorable Mayor and Members of the City Council
From: Jennifer Ott, City Manager
EXECUTIVE SUMMARY
A City Aquatic Center (Center) will provide critical additional pool space to meet the increasing and unmet community needs for competitive and recreational aquatic programs. Construction of this facility is estimated to cost $30 million based upon a City Council approved conceptual design with a 30-meter competition pool, a recreational pool, associated building with locker rooms, office space, restrooms, and community room as well as the associated parking lot and amenities to support the Center. On October 18, 2022, the City Council via a 5/0 affirmative vote approved the Center to be located at the west end of Sweeney Park. Additionally, at the same meeting via a 4/1 affirmative vote, the City Council approved funding construction of the Center project up to 50% from the Unassigned Residual General Fund Balance (GF Balance) and financing the remainder. A financial analysis with various funding levels from the GF Balance and financing options including a Certificate of Participation (COP) and a voter approved General Obligation (GO) bond are discussed. Staff is recommending a funding structure comprised of $15 million from the GF Balance and financing the remainder from a COP.
BACKGROUND
In the Fiscal Year (FY) 2019-20 budget, the City Council authorized funding for the City Aquatic Center conceptual design. Staff engaged ELS Architecture + Design, and in January and February 2020, the City held community workshops and solicited feedback on pool design options. This community feedback was incorporated into the final conceptual design. This design was recommended by the Recreation and Parks Commission on August 13, 2020. The project was paused due to the pandemic, shifting priorities, and lack of funding sources.
On February 15, 2022, City Council heard options to fund aquatic facilities in Alameda, including the rebuild of the Emma Hood Swim Center at Alameda High School and construction of a City Aquatic Center on a City-owned site. City Council provided general direction to staff to further pursue possible funding mechanisms for both facilities.
As part of the FY 2022-23 budget, City Council allocated $7.5 million of the GF Balance to fund 50% equal cost sharing with the Alameda Unified School District (AUSD) and rebuild the Emma Hood Swim Center at Alameda High School. City Council approved Resolution No. 15966 formally appropriating these funds on September 20, 2022. The project is underway and AUSD is currently conducting necessary investigative work such as soil sampling, which will inform the design options. A comprehensive public input process is scheduled to begin this winter and will include outreach to AUSD constituents and the broader Alameda community.
On October 18, 2022, the City Council approved the Center (separate and apart from Emma Hood Swim Center) to be constructed on the west side of Sweeney Park. At the same meeting, the City Council also approved funding up to 50% of the Center costs, including design and construction, with the GF Balance and funding the balance of project costs with a financing mechanism to be determined.
DISCUSSION
Staff considered all potential funding mechanisms and is presenting options and financial configurations for City Council consideration with the recommendation to fund the Center with $15 million from GF Balance and financing the remaining 50% with a COP. The estimate of $30 million is conservative and based on the previous City Center conceptual plan cost estimate with construction escalators as well as current costs of comparable Bay Area public aquatic centers from ELS, the architect that created the concept.
Building the Center will provide current and future residents of the city, both adults and children, access to recreational and competitive aquatic activities. Building the Center at Sweeney Park also provides opportunity to complete build-out of the entire park, which will provide alternative benefits for current and future residents, who elect not to use the Center. Visitors to Sweeney Park will enjoy tree filled outdoor space, walking trails and a new playground. Furthermore, the community garden and Alameda Free Library Tool Lending Library are proposed to be completed as part of the Center project construction. This approach presents economies of scale to do the site grading and infrastructure installation for the remainder of the park while doing that work for the Center. The remaining center phase of Sweeney Park is comprised of trees, landscape, decomposed granite trails for walkers, and a bike skills loop. All of these components can be installed at a later date with landscape installed by volunteers and contractors over time. If the remainder of the park is completed as part of this project, then it would also include moving the southern fence to the new City property line. The $30 million project estimate may be able to include funding completion of the park as described above but that is not certain and depends upon the economy and construction costs over the next few years.
The available financing mechanisms for the Aquatic Center include:
Certificates of Participation (COPs) - This financing technique provides long-term financing through a lease or installment agreement that does not require approval of the voters. Under financing using COPs, the City enters into a legal agreement with the Alameda Public Financing Authority (Authority) to lease specified City properties, such as the Recreation Administration Building, for an up-front, lump-sum lease payment. This lease would require at least four votes of the Council. The City uses the lease proceeds to fund the construction of the Center. Additionally, the City continues to make use of the leased facilities and in return agrees to pay the Authority regular lease payments. The Authority, via a Trustee, sells shares of the City’s lease payments to investors. The shares are called COPs. The City’s lease payments are made to the certificate holders through the Trustee over the term of the Agreement.
The following shows preliminary annual debt services estimates for a 30-year period, assuming an interest rate of 3.95%:
|
Financed Project Funds |
Estimated Annual General Fund Debt Service Payment |
|
$15 million |
$1.04 million |
|
$20 million |
$1.38 million |
|
$30 million |
$2.06 million |
General Obligation (GO) Bonds - This financing option spreads the cost of construction of the Center over current and future property owners and does not directly impact the General Fund. This funding option requires two-thirds voter approval. This is the most secure financing option and therefore obtains the lowest borrowing costs for the City of any comparable long-term debts and generates the highest bond ratings which translates into lower interest rates. The City, upon two-thirds voter approval, is authorized to levy an ad valorem tax on all taxable property within Alameda, at the rate necessary to collect enough funds each year to pay for the principal and interest (debt service) on the outstanding bonds.
The following table shows preliminary levy estimates per $100,000 of assessed valuation (AV). Different financed amounts are given to show the differences if a portion were funded by Reserves.
|
Finance Amount |
Levy Estimate per $100,000 AV |
Annual Levy for 30 Years Based on $558,170 Median Residential Property AV |
|
$30,000,000 |
$7.36 |
$41.08 |
|
$20,000,000 |
$4.31 |
$24.06 |
|
$15,000,000 |
$3.23 |
$18.03 |
Should the City Council direct staff to move forward with this option, the General Election of November 2024 is the earliest a bond would be on the ballot. To do so, the City would need to move quickly to begin the process as it usually takes one and a half to two years to appropriately survey the community, place the measure on the ballot and educate the community. If this timeline is not achieved, then the next opportunity would be at the November 2026 General Election.
|
Comparison of Financing Types |
|
Considerations |
Certificates of Participation (COPs) |
General Obligation Bond |
|
Requires voter approval |
No |
Yes, earliest date to ballot is Nov 2024 |
|
Creates new revenue to fund debt service |
No |
Yes, funds come from ad valorem property tax |
|
Shorter time to construction |
Yes, as this option does not require voter approval, COPs allow for construction to start sooner. |
No |
Use of Unassigned Residual General Fund Balance - As previously noted at the October 18, 2022 meeting, a majority of the City Council approved funding up to 50% of the project from the GF Balance. At the close of FY 2021-22 the City had a GF Balance of $40.22 million and, based on General Fund Revenue & Expenditure data through the second quarter of FY 2022-23, anticipates closing the current fiscal year with a GF Balance of $33.59 million. In the current fiscal year, FY 2022-23, the City Council appropriated $8.86 million from the GF Balance, including the aforementioned $7.5 million for the Emma Hood pool. Utilizing $15 million of these funds as a “down payment” on the Aquatic Center, would reduce the forecasted year-end balance to $18.59 million.
In order for the City Council to properly contemplate the funding mechanisms available to finance the Center it is important to understand the City’s General Fund is the primary proposed funding source. The City’s General Fund is the main operating fund of the City. It accounts for sources and uses of resources that are discretionary to the City Council in the provision of activities, programs, and services deemed necessary and desirable by the community. The General Fund accounts for all general revenues of the City not specifically levied or collected for other City funds, and the related expenditures. The major revenue sources for this fund are property taxes, sales taxes, transfer tax, utility user taxes, franchise fees, business license fees, transient occupancy tax, and unrestricted revenues from other government agencies, fines and forfeitures, and interest income. Expenditures are made for public safety (including police and fire), community development, recreation and parks, some public works, and other services.
At the end of each Fiscal Year, the City undergoes a comprehensive financial audit. Each year, the City’s financial statement identifies the value (if any) of the GF Balance. These funds are available for appropriation by the City Council. Table 1 reflects the amount of unassigned residual funds over the past 11 years.
Table 1
As can be seen in the above table, the City’s available residual funds can change dramatically from year to year. The dramatic increase in FYs 2020, 2021, and 2022 are due in large part to significant increases in General Fund revenues derived from property transfer taxes (PTT). For example, in FY 2021-22, the City received $21 million in PTT, while in the current fiscal year, the City is on track to receive approximately $14 million, a 33% decrease. The City imposes a PPT of $12 per $1,000 of property valuation on all real property sales that occur within City limits. This value is typically paid half by the property seller and half by the buyer. Thus, these additional tax revenues that are now considered unassigned residual fund balance come from current and former property owners, and they come from taxpayer transactions that occurred in the past.
As mortgage interest rate increases impact housing prices and mortgage affordability, layoffs in the Bay Area tech industry continue, and the possibility of an impending recession, it is uncertain when the City will benefit from another booming property market.
The proposed funding and financing options place a burden on city taxpayers in some manner. The City Council’s direction on funding and financing option will determine to what extent the costs are borne by current or future residents, and whether the City will need to prioritize General Fund dollars to pay required debt service on the Center over other General Fund obligations. Seeking approval from the voters to issue a GO Bond for the total cost of construction, would shift the taxpayer burden to existing and future property owners who will benefit from construction of and access to the Center, and all the planned park improvements that are part of the project. Furthermore, GO Bonds do not place an additional burden on the General Fund, thus in times of economic contractions or recessions that require the City to cut or reduce General Fund programs, such as recreation programming, community development, and/or police and fire services, the cuts will not be to such an extent that would be necessary if the City was required to prioritize General Fund dollars to pay debt service on a COPs. Currently, the General Fund, either directly or indirectly, pays annual debt service of $3.4 million for a variety of outstanding financed obligations, while the City’s obligations to CalPERS and insurance costs are anticipated to steeply increase over the next several budget cycles, placing more pressure on General Fund revenues.
Currently, aquatic programming and rentals is at 64% cost recovery even with limited and interrupted use of the AUSD swim centers. A new Aquatic Center will allow for year-round and full day programming of swim lessons, rentals, lap swim, camps, classes, and other new programs. This has the potential to increase the cost recovery to approximately 80% and possibly more. Staff overseeing aquatic coordination developed a detailed revenue budget of realistic current and new aquatic programming which yields $3 million annually, which would cover the full cost of Center operations.
The following details the estimated annual program and facility expenses:
|
|
Annual General Fund Expense |
|
Facility Operations |
$ 700,000 |
|
Staffing and supplies |
$ 1,330,000 |
|
Replacement (“sinking”) fund |
$ 250,000 |
|
Expense total |
$ 2,280,000 |
If $3 million of annual revenue is achieved, then the pool would make a net annual profit of $720,000 that would be allocated toward the annual debt service. The following table shows a conservative estimate of annual net costs based on different cost recovery models in the event full cost recovery is not achieved or it takes several years to ramp up programming.
|
Cost Recovery |
Total Annual Net General Fund Expense |
|
70% |
$ 684,000 |
|
80% |
$ 456,000 |
|
90% |
$ 228,000 |
ALTERNATIVE
• Fund the City Aquatic Center with $15 Million from the GF Balance and finance the remaining project costs from COPs.
• Fund the City Aquatic Center with a smaller amount from the GF Balance and finance the remaining project costs from COPs.
• Direct the City Manager to develop a plan for a GO bond on the November 2024 or November 2026 ballot and bring that plan to City Council for approval.
FINANCIAL IMPACT
Financing the construction of the Center with COPs is a viable option to expedite the construction, but it will place an additional annual burden on the General Fund that in times of economic downturns will need to be prioritized over other city services. Additionally, as noted above the annual costs of programing the Center may result in a net benefit to the General Fund or could increase General Fund net expenses up to $684,000 annually, depending on the level of cost recovery assumed for setting Center user fees.
Under the COP option, operation of the Center and COP debt service would add $1. million to annual General Fund net expenses at the low end, and $2.74 million at the high end for 30 years depending on the amount of funds needed and amount of operating costs subject to inflation.
Under the GO Bond option, debt service payments would have no net effect on the General Fund and the annual General Fund net expenses for operations would range from a net benefit to the General Fund to $684,000 depending on level of cost recovery and subject to inflation.
|
Funds Needed to Construct the Aquatic Center |
$15,000,000 |
$20,000,000 |
$30,000,000 |
|
Funding from Residual General Fund Balance |
$15,000,000 |
$10,000,000 |
$0 |
|
Certificate of Participation |
Est Annual Debt Service paid by General Fund |
$1,040,069 |
$1,379,648 |
$2,057,800 |
|
General Obligation Bond |
Est Annual Debt Service paid by Ad Valorem Property Tax |
$940,014 |
$1,253,352 |
$1,869,424 |
As noted above, using $15 million of GF Balance would reduce the City’s reserves, or “rainy day funds,” at a time when the start of the next economic downturn is closer than the end of the last one. As of February 2023, the current economic expansion, which has boosted the City’s General Fund reserves, totals 164 months and counting since the recession bottomed out in June 2009. Prior economic expansion cycles going back to 1854 have ranged from 10 to 120 months, with an average of 38.7 months. While we do not know when the next economic downturn will arrive, it is very likely that the City could experience a contraction of General Fund revenues while expense obligations continue to increase, requiring difficult budget decisions in the coming years.
MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE
This action is consistent with the Alameda Municipal Code.
ENVIRONMENTAL REVIEW
Consideration of funding sources permits the City to explore the possibility of using various potential funding sources for a future community pool project, but it does not commit the City to the construction of any particular community pool or any other definite course of action, and thus, this is not a project approval requiring environmental review under CEQA (City of Irvine v. County of Orange (2013) 221 Cal.App.4th 846, 852, 164 Cal.Rptr.3d 586 <https://1.next.westlaw.com/Link/Document/FullText?findType=Y&serNum=2032092099&pubNum=0007047&originatingDoc=I5d1b1130244011e59310dee353d566e2&refType=RP&originationContext=document&transitionType=DocumentItem&ppcid=20367f6573934ada98fd68fb7d400c59&contextData=(sc.Default)> (Musick II <https://1.next.westlaw.com/Link/Document/FullText?findType=Y&serNum=2032092099&originatingDoc=I5d1b1130244011e59310dee353d566e2&refType=RP&originationContext=document&transitionType=DocumentItem&ppcid=20367f6573934ada98fd68fb7d400c59&contextData=(sc.Default)>).
CLIMATE IMPACT
All buildings associated with the Center will meet a minimum LEED Silver certification pursuant to the City’s building ordinance. With additional funding, there are options that could be explored such as full electrification of the systems with solar or wind energy generation or raising the LEED certification to Gold or Platinum that would reduce the climate impacts of this facility.
RECOMMENDATION
Authorize the City Manager to fund the Center, estimated to cost $30 Million and located on the west side of Sweeney Park, with $15 Million from the GF Balance and financing the remainder from a COP.
Respectfully submitted,
Margaret L. O’Brien, Finance Director
Amy Wooldridge, Recreation and Parks Director
Financial Impact section reviewed,
Margaret L. O’Brien, Finance Director