IOV Was Correct: There Appears To Be Serious Flaws In The Preliminary CFA

IOV Board Member Fred Ilfeld listens intently to municipal finance expert Tom Sinclair. In the background, Squaw Valley's paid consultant T May Duggan quietly takes notes.
IOV Chairman Fred Ilfeld listens intently to municipal finance expert Tom Sinclair. In the background, Squaw Valley’s (aka SOV) paid consultant T May Duggan quietly takes notes.
The battle over the incorporation of the town of Olympic Valley has now spanned just about two years. Two weeks ago, Squaw Valley CEO Andy Wirth proclaimed that the incorporation effort was essentially dead, after the Preliminary Draft Comprehesive Fiscal Analysis came to a conclusion that the town of Olympic Valley may not be financially viable. It was a conclusion that few people expected. The Incorporate Olympic Valley group, known as IOV, has remained steadfast in contending that the document is flawed, and they are making every attempt to make sure that the decision about incorporation is made based on accurate information.

We have already admitted that we are not experts at municipal finance and found it difficult to find the flaws in the CFA document ourselves. Fortunately, we had an opportunity to learn about the document, and the CFA process, at last night’s IOV meeting, where guest speaker Tom Sinclair was invited to address the concerns.

Municipal finance expert Tom Sinclair calmly and quietly explained the many flaws found in the Preliminary CFA to a crowd of about 25 people at last night's IOV meeting.
Municipal finance expert Tom Sinclair calmly and quietly explained the many flaws found in the Preliminary CFA to a crowd of about 25 people at last night’s IOV meeting.
Sinclair is no rookie when it comes to municipal finance. He is the former city Manager and was the first hired employee for Orinda, an East Bay city of 18,000 incorporated in 1985. To use Sinclair’s description, he literally “started the city from scratch.” Since leaving the town of Orinda, he has become a part of Municipal Resource Group, a consulting firm that offers assistance to public agencies. Sinclair knows his stuff, and before I knew it, nearly 90 minutes had passed and the flaws in the Preliminary CFA document were beginning to stick out like a sore thumb.

The TL;DR

The Preliminary CFA document, produced by consultant RSG, underestimates the income and overestimates the expenditures for the proposed town of Olympic Valley. Sinclair states that RSG did not use the state Office of Planning and Research (OPR) guidelines in conducting the CFA. The resulting CFA document  appears to show that the town would not be viable. Making the corrections to the document would likely show that the town is certainly viable, and not at the expense of the rest of the North Tahoe basin. It’s critical that there is a strong public showing at the Placer County LAFCO workshop on the CFA on Wednesday, June 10 at 5:30 at the Tahoe City PUD.

The Revenue Details

There’s a ton of detail to understand, and we will try to summarize them, in a simplified form, as easily as possible. Let’s look first at the revenue side of the equation:

• As stated in Fred Ilfeld’s letter last week, the CFA calls for the city to set aside 30% of the revenue from property taxes and the transient occupancy taxes (TOT) for a reserve. According to Sinclair, this number exceeds the state minimum, which is 10% and the Government Finance Officers Association suggestion of maintaining a 17% reserve.

• The CFA also sets aside 10% of revenues as a contingency fund as a line item in the budget. Sinclair states that the contingency should be taken from the reserve and replenished as needed, not included as an itemized expense year after year.

• The CFA calculates the 30% reserve based on expected revenues, when the reserve should be based on annual expenditures. This alone results in the CFA suggesting a reserve fund that is nearly twice as much as needed.

• The Transient Occupancy Tax (TOT) is a huge source of income for the entire Lake Tahoe community and a very significant source of support for the North Lake Tahoe Resort Association. NLTRA partners with Placer County in  planning and providing for the infrastructure that keeps the North Lake Tahoe region viable. The opposition frequently suggests that the incorporation could lead to the demise of NLTRA. The CFA suggests the 60% of the TOT should continue to go to NLTRA, leaving 40% to go to city. If 30% is then held in reserve, by the CFA calculations, only 10% of the TOT would be available for annual expenses. This illustrates the issue with basing the reserve fund on revenues versus expenses.

• Sinclair also suggested that there are issues with the property valuations used in the CFA. If properties are undervalued, it would also lead RSG to underestimate the potential for income from the Transfer Tax associated with the sale of properties. As an example the CFA estimates the sale prices of the new fractional units in the Valley to be around $ 1 million each, while other sources estimate the sales price to be nearer to $ 2.5 million each. Along the same lines, the rate of turnover of property within Olympic Valley is severely under-estimated. Turnover within the Valley actually exceeds state averages, resulting in a much higher amount of transfer tax income than estimated in the CFA.

It’s clear that there was some force at work that was hoping to show that there was only a potential for minimum revenues to fund the city of Olympic Valley. Sinclair added that the actual first copy of the CFA, the “administrative draft”, contained even more factual errors. He suggested that only 1/3 of the necessary corrections were made when requested by IOV legal counsel Michael Colantuono. IOV Chairman Fred Ilfeld suggested that LAFCO’s legal counsel Bill Wright had responded that the mandated OPR guidelines were simply “guidelines”, and that RSG and LAFCO were not obligated to make additional modifications.

The CFA itself however suggests that LAFCO has not made allowances for anything beyond the guidelines. Here’s the statement from page 4:

To supplement the Guidelines, LAFCOs may also adopt their own policies, procedures and regulations for incorporations, although no such incorporation policies, procedures and regulations have been adopted by Placer LAFCO.

The Expense Details

The story is no different when it comes to expenses. In order to come up with a rationale for the expected expenses of the new town, the CFA attempts to locate comparable towns in similar situations. The report compiled by RSG states that it was difficult to find comparable mountain towns that have seasonal fluctuations in population and contract out the majority of their services, as is planned for Olympic Valley. The list of towns used for comparison were Colfax, Truckee, Nevada City, Placerville, Auburn and Angels Camp.

According to Sinclair, only Colfax comes close to hitting the mark of being a town that is comparable to Olympic Valley and its approximately 1,300 year round residents (Truckee has over 16,000 residents). All of the others make for poor comparison as they are either much larger in size, or they are smaller towns that are relatively independent. They are also older cities that are more likely to be bound to union contracts and have long term obligations for debt, retirement benefits, etc. This results in many of the potential city expenses being over-estimated by RSG. Here’s some examples cited by Sinclair:

• Most of the comparable cities are “service cities” rather than “contract cities”; therefore they employ an average of 100-120 employees. His analysis suggests that Olympic Valley would begin with approximately 4 employees, while RSG suggests that at least 7 will be needed at startup. As an example, RSG suggests that Olympic Valley would need the equivalent of 3 full time employees (FTE) to cover the building and planning department – which is currently covered by Placer County with only 1.2 FTE.

• The CFA suggests that Olympic Valley will need to budget $100K per year for legal services. Sinclair notes that Colfax spends only $40K per year and Loomis spends only $60K per year. IOV attorney Michael Colantuono suggested that a $40-50K per year budget would be in line with similar “contract cities”.

• The CFA also seems to overstate the cost of insurance for the new city. The rates for insurance for the city are usually based on payroll. Using that basis, Sinclair estimates that Olympic Valley would need to spend around $30K per year. When RSG made calculations for insurance, they instead based the insurance on revenues, which according to Sinclair is unusual. This results in their estimated expense of $100K per year.

• The CFA numbers for law enforcement services seem overly inflated. Placer County estimates that in order to have an officer in the valley 24 hours a day, 7 days a week requires actually employing 5.2 officers. They also call for another 1.25 FTE of other enforcement personal, at an estimated expense of $1.5 million per year. For comparison, the city of Wheatland (approximately 4,000 people) pays $600K per year and Loomis (approximately 7,000 people) pays $1.3 million per year. As a side note, residents of Olympic Valley at last night’s meeting were very doubtful that the current level of law enforcement provided by Placer County was anywhere near the levels proposed by the CFA. Most residents said that the California Highway Patrol presence was far greater within the valley than the Placer County Sheriff.

• The largest questionable expense in the CFA is the inclusion of revenue neutrality payments, or “alimony” from the newly formed city back to Placer County. Since 1992, all newly formed cities are required to make these payments back to the counties, under the assumption that counties could lose revenues. These negotiations normally take place after the CFA process is complete, not before. According to Sinclair, the CFA consultant, RSG, stated that this was the way they completed all of their CFA studies. But a review of RSG’s past work by Sinclair shows that statement was not accurate. The CFA report puts the cart before the horse and contends that these payments will equal $2.7 million per year, before any negotiations have begun.

How Could They Get It So Wrong?

That was exactly the question posed by an audience member at last night’s meeting. Sinclair was careful in stating his opinions on the subject – but he offered a few concrete ideas. As a result of the 1992 Revenue Neutrality law, fewer incorporations are being done these days, so firms like RSG have little experience in arriving at appropriate conclusions. He also suggested that finance firms, like RSG, employ accountants that have little “boots on the ground experience” in city finance. Therefore, they just “use numbers rather than reality” in producing the CFA document.

While several audience members questioned whether or not someone was having an undue influence on the CFA process, Sinclair handed off those questions to IOV Chairman Fred Ilfeld. Dr. Ilfeld said that there was evidence that Squaw Valley representatives had been in touch with RSG during the process, but that he could say no more than that. This would not be surprising given that Squaw Valley has spent about a half of a million dollars fighting the incorporation effort. Certainly the questions raised by Sinclair suggest that Placer County would rather not lose the revenue from Olympic Valley.

“The community deserves a fair document at the very least.” IOV Board Member Fred Ilfeld, in regards to the flawed CFA

Let’s not forget, IOV was originally formed to give local residents, and not Placer County, control of the future land planning and use of tax dollars. We can’t help but wonder if Placer County and Squaw Valley Ski Holdings, who have spent a half million dollars fighting the incorporation effort (that has been reported), are working together? They both must feel threatened by the idea of a new town.

What Is The Next Step?

One theme that has been heard over and over the last few days is that it is important that Placer County LAFCO officials know that the public shares IOV’s concerns regarding the flaws in the Preliminary CFA document. Several IOV board members have asked that people must attend the Placer LAFCO workshop on the Preliminary CFA. That meeting is scheduled for Wednesday , June 10th at 5:30 pm at the Tahoe City PUD offices, immediately following the 4 pm regular LAFCO meeting. The PUD office is at 221 Fairway Drive in Tahoe City.

 

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