HomeMy WebLinkAboutSR - - FIRST STUDY SESSION PROPOSED FY 2015-16 BUDGET°P ° AGENDA ITEM
Date: April 1, 2015
A sm ap! 1 • P y �
TO: Honorable Mayor and Members
of the City Council
ReviewedNerified Bv:—
City Manager
Finance Direc
FROM: Rick Otto
Interim City Manager
To Be Presented By:
Rick Otto
1. SUBJECT
First Study Session for the Proposed Fiscal Year 2015 -16 Budget
2. SUMMARY
This is the first study session in support of the preparation of the FY 2015 -16 Budget (FY 16).
This study session is intended to provide a status of the current year budget, an initial analysis of
the projected General Fund revenues and expenditures for FY 16, the proposed Annual
Departmental Work Plans for FY 16, and the draft of the Seven -Year Capital Improvement Plan
for the period of FY 15 -16 through FY 21 -22.
3. RECOMMENDATION
Receive report and file.
4. FISCAL IMPACT
Fiscal impact will be determined with final budget adoption.
5. STRATEGIC PLAN GOAL(s)
2. Be a fiscally healthy community: a) Expend fiscal resources responsibly; b) Analyze future
fiscal needs and potential revenue opportunities; and c) Provide appropriate reserves.
4. Provide outstanding public service: b) Provide facilities and services to meet customer
expectations.
6. DISCUSSION and BACKGROUND
This is the first study session in support of the preparation of the City's FY 16 Budget. This study
session is intended to focus on the following items:
• Providing a status of the current year budget;
• Providing an initial analysis of the projected revenues and expenditures for FY 16;
• Presenting the proposed Annual Departmental Work Plans for FY 16; and
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• Presenting the draft Seven -Year Capital Improvement Plan for the period of FY 15 -16
through FY 21 -22.
This and past City Councils have been extremely proactive in dealing with the economic
challenges that have faced the City over the past several years. At the outset and throughout the
Great Recession, the City Council took decisive actions to reduce our operating costs while making
every effort to preserve service levels. As the recession transitioned into a slow recovery mode,
the City Council maintained its conservative spending practices which enabled the City to enhance
its fiscal stability more quickly than most cities in the region. As a result, with the adoption of the
FY 15 Budget, the City was able to achieve a balanced budget for the third year in a row. In recent
years, the City Council has shown tremendous leadership in positioning the City to address a new
set of economic challenges including substantial increases in PERS retirement costs and the
dissolution of the Redevelopment Agency. With a new fiscal year soon before us, at this point in
the budget process, I am pleased that we are able to project a balanced preliminary General Fund
budget for FY 16. The proposed FY 16 Budget is responsive to the priorities set by the City Council
and allows for the continued improvement of our fiscal foundation. While we still have a few more
months to continue to refine the revenue and expenditure amounts for FY 16, I am very optimistic
about our future but recognize that there are still challenges facing our City.
Status of Current Year Budget (FY 15)
Review of General Fund Revenues for FY 15
As the economy continues to show signs of recovery, we are experiencing positive growth in our
revenue receipts. Our largest General Fund revenue source, Sales Tax, is expected to be $39.9
million, an increase of $300,000 (8 %) over budget. We are encouraged by the strong sales receipts
from our auto dealerships, as well as from the business -to- business sector. Property Taxes are
anticipated to end the fiscal year at $23.2 million, a $400,000 (2 %) increase over budget, due to
higher assessed property values. Based on current trends, we are projecting Transient Occupancy
Tax will be up $350,000 (9 %) from the budgeted amount. Revenue from Other Agencies is
expected to be $600,000 over the initial budget of $1.2 million, mainly related to increased grant
funding for both traffic enforcement programs and hazard mitigation projects. Miscellaneous
Revenue is estimated at $1.5 million, an increase of $675,000 over budget, primarily due to higher
than expected donations for special events and from the Library Foundation, payments for regional
narcotics program, and reimbursements from the Office of Emergency Services and the U.S. Forest
Service. We estimate our overall FY 15 General Fund revenues will end the year at $98.9 million,
which is $2.8 million (2.9 %) over budget.
Review of General Fund Expenditures and Ending Fund Balance for FY 15
General Fund expenditures are tracking at budgeted amounts. Typically, the fiscal year ends with
expenditure savings, primarily due to departments being especially diligent in managing costs. It
is too soon to determine what that final savings amount will be; however, we will have a better
assessment at the next Budget Study Session scheduled for April 28, 2015. While we continue to
carry approximately 45 frozen full -time positions during FY 15, we are generally filling funded
positions when they become vacant. Although we sustain our scrutiny of every vacancy, certain
critical positions have been filled in order to maintain expected service levels and to provide for
succession planning. Nevertheless, departments continue to do an excellent job of holding the line
on expenditures and being creative in meeting the City's service delivery goals.
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With our adjusted budgeted expenditures of $98.8 million, we should end the fiscal year with a
surplus of $100,000 in revenues over expenditures. Given these results, our ending General Fund
balance for FY 15 should approximate $3.1 million. Again, it is anticipated that the ending fund
balance will be somewhat higher by the close of the fiscal year due to expected departmental
savings.
Initial Review of the Proposed Budget for FY 16
Estimated General Fund Revenues for FY 16
The economy continues to show an upward growth trend. The job market keeps improving and
inflation is expected to remain low because of the decline in oil prices. However, the continued
weakness in global economies, coupled with the increasing value of the dollar, is of some concern
to the future vitality of the economy.
Despite this uncertainty, our recurring revenues are increasing. Our initial analysis suggests that
General Fund revenues for FY 16 will be $102 million, a 3.1% increase compared to our estimated
revenue for FY 15. General Fund revenue highlights include:
• Sales tax revenue is projected to be $43.0 million, $3.1 million (7.7 %) above the FY 15
estimate. We expect to see strong performance by the Outlets at Orange, local automotive
dealerships, and the business -to- business sector. In addition, we anticipate receiving more
receipts as a result of our business outreach efforts, primarily from fuel distribution sales.
Property tax revenue is estimated to be $23.9 million, an increase of 3.1 %, generating an
additional $711,000. The County of Orange allocates redevelopment agency proceeds from
the dissolution and wind down of activities of the former Redevelopment Agency (RDA).
This distribution is expected to increase $289,000 to slightly over $2.4 million. Excluding
redevelopment proceeds, property tax receipts are anticipated to grow commensurate with
the annual maximum 2% increase in assessed home values.
• Motor vehicle license fees are estimated to increase $225,000 (2 %) to $11.5 million. We
anticipate continued growth in auto sales in FY 16.
Transient Occupancy Tax receipts are projected at $4.2 million, 3% above the FY 15
estimate, based on current trends.
A more detailed analysis of projected revenue will be provided later during the budget process.
Estimated General Fund Expenditures for FY 16
Our initial estimate for General Fund expenditures is $101.5 million. This reflects a 5.8% increase
in expenditures over the original adopted FY 15 budget. We continue to realize a substantial
savings from maintaining frozen positions. With the proposed FY 16 budget, we estimate the City
will have 45 full -time frozen positions. As we continue to further refine our estimates by the next
study session, this preliminary look at the proposed FY 16 General Fund budget includes the
following assumptions:
1. Status of PERS Retirement Costs: Managing our retirement costs has been a high
priority of this and past City Councils. Classic miscellaneous employees (those who were
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CalPERS members on or before December 31, 2012) pay their full 8% contribution, while
classic safety employees pay their required 9 %. Employees hired under the new PEPRA
formulas pay 6.75% and 12% contributions for miscellaneous and safety, respectively,
while receiving a reduced level of retirement benefits. The City has 32 miscellaneous
PEPRA members (9.3% of active miscellaneous PERS members) and 37 safety PEPRA
members (14.2% of active safety PERS members). The employee rates for PEPRA
members represent half of the normal cost of the benefit. As such, as the number of PEPRA
employees increase, the City's PERS costs will decrease over time.
PERS Costs Paid by Employee and City — Past and Future
Fiscal
Employee
City Rates
Year
Status
Paid
Ci Paid
Misc. ( Safety
2012 -13
Actua
$ 4,602,108
$ 13,419,357
19.4%
29.5%
2013 -14
Actual
4,420,917
13,185,239
20
_
30.1%
2014 -15
Projected
4,847,000
15,953,000
22.6%
33.3%
2 015 -16
Forecast
4,885,000
17,582,000
24.9%
36.3%
2016 -17
Forecast
4,941,0
19,297,000
27.2%
39.4%
2
Forecast
5,000,000
_
20,495,000
28.8
I 41.3
The City saw PERS costs decrease between FY 2012 -13 and 2013 -14 as a result of the
furlough, frozen positions, and turnover due to retirements. In FY 2014 -15 however, the
City experienced the first of a multi -year increase in PERS rates. The increases are aimed
at reducing the City's unfunded liability. The rates for FY 2015 -16 for the Miscellaneous
and Safety plans will be 24.9% and 36.3 %, respectively. These rate increases will result
in an overall increase in PERS costs of approximately $1.6 million, or 10 %, with $1.5
million of the increase in the General Fund. Rates are expected to climb at a similar pace
until FY 2019 -20.
It should be noted the City Council has set -aside a total of $5.2 million for future retirement
(PERS) cost increases. Those funds reside in the Employee Accrued Liability Fund. Staff
is currently assessing strategies to maximize these funds in order to address the City's
unfunded liability.
2. Succession Planning: As per City Council direction, we expanded our succession
planning efforts in FY 15. At the February 10, 2015 Council meeting, City Council
approved unfreezing the Police Captain, Assistant Library Services Director, and the
Assistant Community Development Director positions all in an effort to prepare the
organization for future development and advancement of its departments. FY 16 continues
with this direction as the Assistant Finance Director position is included as part of this
overall plan. The net fiscal impact for FY 16 is $672,000.
3. Department Budgets: As the City strives to recover, departments continue to hold the
line with their budgets. Only necessary increases are included in the FY 16 proposed
budget, such as contract obligations for Orange County Animal Control, North Net Fire
Training, Metro Cities Fire, and the Cal -ID AFIS (fingerprinting) User Share program.
These services and programs are partnerships and /or agreements that the City has with
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other agencies. These increases are examples of costs that are rising as the economy
rebounds. Other operational cost increases include an enhanced level of cleaning in the
Old Towne Plaza area and increases in custodial and street striping costs. Otherwise,
departments have done an exemplary job of managing operating costs while maintaining
services levels. All told, operation and maintenance increases approximate $760,000 for
FY 16.
4. Internal Service Funds: With the continued stabilization of the economy, staff is slowly
restoring the annual funding levels of Internal Services Funds (ISFs). In response to rising
costs within the following programs, staff is proposing to increase FY 16 allocations to the
Worker's Compensation, Accrued Liability (for retirement costs), Information
Technology, and the Liability Funds. For the first time in several years, FY 16 allocations
for Fuel and the Computer Replacement Fund are included as part of operational costs, as
opposed to being funded through unreserved General Fund balance generated through prior
year savings. The net FY 16 increase to ISFs from the General Fund operating budget
totals $2.5 million. Of the remaining ISFs not included as part of operational costs, staff
is requesting a transfer of $1.4 million to the Equipment Replacement Fund (720) from
General Fund Unreserved Fund Balance.
5. Sales Tax Cost Sharing: In order to attract and retain businesses within the City, we have
entered into sales tax cost sharing agreements with certain businesses. Previously, these
agreements were funded through the former RDA; however, with the dissolution and wind
down process, new agreements must now be funded by the General Fund. FY 16 will be
the first year we will see the full impact of these agreements. The General Fund operating
budget will fund $420,000 in anticipated payments to Ford of Orange, Volkswagen of
Orange, and Stadium Nissan. Remaining anticipated payments of $3.1 million will be
covered by the Business Investment Fund (115) which currently has a Fund Balance of
$2.5 million. As part of the FY 16 budget adoption, we propose a transfer of an additional
$1.6 million from the General Fund into the Business Investment Fund to cover both FY
16 and future year payments.
It is important to note the impact of future labor negotiations are not included in these budget
assumptions. As agreements for all eight labor bargaining groups will expire effective June 30,
2015, we anticipate labor negotiations will begin in earnest in the coming weeks. In addition,
otherwise noted above, this preliminary budget does not reflect any significant increases in the
level of service or new programs.
While the economy continues to forecast positive signs of recovery, expenses continue to escalate
at a similar pace. Staff remains vigilant in seeking cost savings; however, certain expenses are
beyond our control, such as PERS costs and costs to support the Business Incentive Program.
Preliminary Estimate of the General Fund Balance for FY 16
For FY 16, initial projections reflect revenues over expenditures of $480,000. This is good news
as we continue to balance the pressures on our expenditure budget. The estimated ending
unreserved fund balance for the General Fund for FY 16 is $591,150. The FY 16 Budget currently
reflects two transfers from the unreserved fund balance: $1.6 million to the Business Investment
Fund and $1.4 million to the Equipment Replacement Fund. It is recommended that should the
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FY 16 projected beginning fund balance increase due to year -end savings in FY 15, additional
funds be transferred to the Business Investment Fund to support future year business incentive
obligations.
Estimated Available General Fund Balance
Unreserved Fund Balance Available @ 6/30/15
$3,110,979
FY 16 Estimated Revenues 102,017,443
FY 16 Estimated Expenditures (101,537,272)
Excess Revenues over Expenditures 480,171
Unreserved Fund Balance Available @ 6/30/16
Transfers Out
Transfer to Business Investment Fund (1,600,000)
Transfer to Equipment Replacement Fund (1,400,000)
Total Transfers Out
Unreserved Fund Balance Available @ 6/30/16
General Fund Catastrophic Reserve
Est. Reserved & Unreserved General Fund Balance @ 6/30/16
$3,591,150
591,150
18,567,960
$19,159,110
Proposed Annual Work Plans for FY 16
A draft set of departmental mission statements, goals, service objectives, and work plans for the
upcoming budget year are provided for your review. The work plans are prepared for each division
within each department and specifically identify actions to be completed by a certain date using
budgeted funds. The City Manager and each department monitor the progress of the adopted work
plans. As such, these work plans provide a mechanism for each department to be held accountable
for the delivery of specific programs and services funded in their budget.
In keeping with prior years' objectives and feedback, Staff has proposed work plans on behalf of
the City Council, which include the following highlights:
• Provide policy direction that ensures financial stability while preserving community
character and maintaining a positive organizational direction.
• Continue to provide the necessary resources to public safety to ensure the community
remains among the safest cities in California.
• Provide legislative leadership that ensures maximum accomplishment of the City's
Mission Statement.
• Evaluate options to assist businesses with processing City land use entitlements and other
business development activities.
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• Continue to assess methods for funding the maintenance and improvements of City -wide
infrastructure including roadways, water delivery systems, sewers, parks, and City
facilities.
• Enhance the City's economic base by continuing to attract quality businesses to the City's
commercial corridors and industrial areas.
As a reflection of the economy in Orange, the proposed work plans continue to remain very modest
and, for the most part, address core services and programs. Although provided to the City Council
as part of this agenda package, staff will not be formally presenting the proposed FY 16 work plans
at this study session. Rather, if the City Council has specific questions regarding particular
department work plans, please inquire prior to the conclusion of this study session.
Seven -Year Capital Improvement Plan
As in recent years, we continue to see an unprecedented level of capital improvement activity in
Orange. In FY 16, the Seven -Year Capital Improvement Plan (CIP) identifies 107 projects that
are being proposed for that period. For the upcoming year, there are 19 newly budgeted projects
and 88 projects that are a continuation of previously approved plans. With these projects the City
Council is investing nearly $27 million in the upcoming fiscal year and $100.7 million over the
seven -year planning horizon. This is a major investment in the City's infrastructure and represents
a significant commitment to our community's future; however, we anticipate some challenges in
funding certain infrastructure projects.
Although the General Fund maintains a steady growth, some Special Revenue Funds are seeing a
decline in revenues. Despite Gas Tax revenue nearing $4 million for FY 15 (versus a budget of
$3.6 million) Gas Tax collections for FY 16 are anticipated to decrease to $3 million, $1 million
below the FY 15 projection. Gas tax receipts are allocated by the State with a portion of these
allocations based on a per gallon rate that does not change. With increased fuel efficiency and the
increased use of alternative transportation, this allocation is projected to decline in FY 16. Another
portion of the allocations is based on a variable fuel tax rate to be adjusted by the State in February
of each year. When the actual amount of taxable sales are known for a year, the State calculates a
"true up" for any over- or under- collection of revenue in the subsequent year. This "true up" is
factored into the variable tax rate. This tax rate has been reduced for FY 16 to reflect a downward
"true up" resulting from falling gasoline prices and decreased consumption and accounts for the
majority of the decline of $1.0 million in Gas Tax revenue for FY 16. The reduction in revenue
greatly impacts the Pavement Management Program (PMP), since this program relies more heavily
on Gas Tax funds after the dissolution of the RDA. As such, the amount of FY 16 funding allocated
from Gas Tax to pavement management projects is projected to decrease to $2 million, or
approximately $1 million. The other funding source for pavement management projects is M2
Funds, proposed to be $2.0 million in FY 16.
The RDA's dissolution has also impacted the City by reducing resources for improvements to City
infrastructure. Consequently, through FY 15, City Council has set -aside $7.2 million from the
General Fund in the Capital Projects Fund (500) for this purpose. Staff has made every effort to
prolong much needed repairs and improvements to City facilities and infrastructure; however,
some critical areas have been identified in the proposed FY 16 Seven -Year CIP. Projects proposed
for FY 16 using the Capital Projects Fund include replacement of air conditioner units at the Civic
Center ($100,000), exterior wall sealing at Police headquarters ($75,000), and ongoing City
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facility improvements ($100,000), totaling $275,000. Projects proposed using other funds include
Fire headquarters improvements ($1.0 million) and painting at Fire stations ($25,000) using the
Fire Facilities Fund (560); painting Library buildings ($60,000), replacing Library HVAC System
($30,000), and improving Library security ($125,000) from the Library Facilities Fund (573); and
Water Security Improvements ($225,000) from the Water Fund (600). Total FY 16 costs for City-
wide infrastructure improvements is $1.74 million. Staff will be conducting a more comprehensive
study of City -wide infrastructure to better assess priorities, and determine costs and possible
funding sources.
The following are highlights of the FY 16 Seven -Year Capital Improvement Plan projects:
• Replacement of tot -lot shade sails in all City parks, replacement of the dance floor and pool
equipment at Hark Park, and the continued installation of irrigation management systems
at several park sites.
• Design of renovations at Shaffer Park.
• Commitment of $4 million to the Pavement Management Program and an additional $3.1
million for street maintenance and rehabilitation efforts at various locations throughout the
City.
• Commitment of $3.3 million towards five projects intended to maintain or improve the
City's water production and distribution, including $2.5 million for pipeline replacement,
a substantial increase from the $1.5 million budgeted in FY 15.
• Completion of the replacement of audio /video technology in the City Council Chambers.
• Multi -year funding of the replacement of Safety's 800 MHz radio system, as part of a
county -wide effort.
• Ground - breaking for construction of the Metrolink Parking Structure, to be located at the
100 block of North Lemon Street.
Conclusion
Despite the challenges the City will be facing in FY 16, prudent City Council policies have set the
stage for us to meet those demands. We are able to take advantage of the growing economy to
maintain and enhance services, while other cities are using this growth to make up for lost ground.
While it is important to continue on the path of caution to ensure long -term fiscal health, we are
able to do new things while providing the citizens and businesses of the City with the excellent
services they have come to expect.
As mentioned at the beginning of this report, we still have a few months of refinement of FY 16
revenue and expenditure amounts. In addition, feedback from the City Council received at this
study session will help further refine our projections. Again, the next study session is planned for
April 28, 2015.
7. ATTACHMENTS
FY 16 Proposed Annual Work Plans
FY 16 Draft Seven -Year Capital Improvement Plan
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