Falling Oil Prices Force Long Beach City Council to Reevaluate Budget for Tidelands Projects

While the price of oil is unpredictable, for nearly the past three years, Long Beach and its Tidelands Capital Budget, which is funded entirely from oil revenue, has been sitting comfortably on barrels priced at about $100. This means the 2015 Tidelands Capital Budget and 5-Year capital plan, written under the optimistic assumption that the price of oil would continue to hover around at least $70 a barrel, must be reevaluated in order to handle the now-current situation of oil priced at only $50 a barrel.

While the price of oil is unpredictable, for nearly the past three years, Long Beach and its Tidelands Capital Budget, which is funded entirely from oil revenue, has been sitting comfortably on barrels priced at about $100. This means the 2015 Tidelands Capital Budget and 5-Year capital plan, written under the optimistic assumption that the price of oil would continue to hover around at least $70 a barrel, must be reevaluated in order to handle the now-current situation of oil priced at only $50 a barrel.

According to a city memo sent on December 31, 2014 from City Manager Patrick West to the mayor and members of City Council, the price of oil began to drop drastically after July 2014 and still shows no "current indication that the price of oil will increase in the foreseeable future to the budgeted $100 per barrel (per capital)." And while the price of oil could increase, stabilize or even continue to decline, the estimated $232 million that was once available for unconstructed and incomplete projects to be used over the next five years has shrunk to $95 million in available funding.

"The $95 million is cash on hand that was already received and set aside for specific projects, so it is not a projection," explained Tom Modica, Assistant City Manager. 

"It's a double edged sword, you know, hoping that gas prices will rise," said Mark Taylor, Long Beach Mayor Robert Garcia's Chief of Staff. "The falling price of oil is going to force the Council to look at its capital projects and reprioritize them. It's been around [$50 per barrel] for the last few days, that's a problem, we know it's a problem."

The memo proposes a new strategy that takes into account the extreme uncertainty of the oil funding by assuming that no additional oil revenues for capital projects will be available in the near future and that all available revenue may be needed to support the Tidelands Operating Budget, which will be reviewed for potential changes or a reduction in the first quarter of 2015.

The new strategy will require tidelands capital projects to be prioritized by the City Council, for all funding available to be assigned in priority order, that any work or any new phase of a project should continue only after full funding of said phase occurs and that funding projections and project prioritization are reviewed and updated during the annual budget process but also more often when deemed appropriate.

Currently, approximately $73 million in funding, of the aforementioned $95 million, has been committed to capital projects from oil revenue accumulated in 2014. $22 million of these funds have not been allocated yet, while $39 million is attached to the Belmont Plaza Olympic Pool.

While "oil prices are likely to be significantly higher at some point in the future," according to the memo, "it is not predictable that Tidelands oil revenue will substantially increase in the next few years" depending on multiple factors such as the price of oil, but also the amount of oil produced and production costs.

According to Modica, in 2008 oil prices changed even more dramatically than today's current drop. They fell from about $130 a barrel to $30 within the course of a year, causing the City to make mid year reductions to the operating budget to compensate. In 2008 the City had budgeted the price of oil at $85. Since that time the City Council has set the price of oil at a more conservative amount, resulting in a lessened exposure when oil prices drop.

The memo reads that the proposed process to determine what projects are put on hold and which projects are given the go ahead will be based on nine factors, including the extent to which the project impacts the maintenance and improvement of public health and safety, the number of users of the project and/or facility and the number of California residents effected, the urgency of the project and whether there will be ramifications if the project is not completed by a certain date and the extent to which the project adds to the quality of life for California residents.

Additionally, the condition of the building or the high demand for an unbuilt facility, the extent to which the project adds to quality of life for residents in accordance with the Coastal Act, whether the facility will generate funds for the economy, whether or not partial funding from Tidelands funds will result in the generation of more partial funding from non-City sources and, finally, whether the capital cost is low enough will all be taken into consideration.

For each project, city staff will evaluate and assign a score for each of the nine factors. The projects will then be placed in a preliminary ranking that will be reviewed and potentially modified by the City Council as they see fit. The reevaluated strategy for the Tidelands Capital Budget and 5-Year Capital Plan will be presented to the City Council on January 20, 2015.

"We expect the City Council to provide input on and formally adopt the criteria for prioritizing the projects. Then City staff will take those criteria and return to the City Council with a list of recommended projects in priority order for them to consider in the first quarter of 2015," said Modica.

MEMO: Strategy for the Tidelands Capital Budget and 5-Year Capital Plan



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