HomeMy WebLinkAboutSR - - SECOND STUDY SESSION PROPOSED FY 2015-16 BUDGETF °�� AGENDA ITEM
:4 April 28, 2015 Meeting
cop
TO: Honorable Mayor and
Members of the City Council
FROM: Rick Otto
Interim City Manager
ReviewedNerified By:
City Manager
Finance Director
To Be Presented By:
Rick Otto
Calendar X
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1. SUBJECT
Second Study Session for the Proposed Fiscal Year 2015 -16 Budget
2. SUMMARY
This is the second study session in support of the preparation of the FY 15 -16 budget (FY 16).
This study session provides an updated analysis of the projected General Fund revenues and
expenditures for FY 16, as well as a status and analysis of the Special Revenue, Internal Service,
and Water Funds for FY 16.
3. ACTION
Receive report and provide policy direction.
4. FISCAL IMPACT
Fiscal impact will be determined with final budget adoption.
5. STRATEGIC PLAN GOALS
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. GENERAL PLAN IMPLEMENTATION
N/A
ITE 1 4/28/15
7. DISCUSSION and BACKGROUND
This is the second 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 an updated status of the current year budget;
• Providing an updated analysis of the projected General Fund revenues and expenditures
for FY 16; and
• Presenting a status and analysis of the Special Revenue, Internal Service, and Water Funds
for FY 16.
This report also provides information on specific issues as requested by the City Council at the
April 1 st Study Session. At this point, we are on target to present a proposed FY 16 budget to the
City Council for review and adoption at the June 2015 meeting.
Status of FY 15 General Fund Budget
As the end of FY 15 quickly approaches, FY 15 General Fund revenues are expected to increase
to $99.0 million, 2.9% over budget. Sales tax and property taxes continue to trend upward, further
indicating that the economy is improving. With an early estimate of $1.5 million in expected
departmental savings, General Fund expenditures are anticipated to close at $97.3 million. Should
year -end revenues and expenditures hold steady, staff expects to end the fiscal year with slightly
more than $1.6 million in revenues over expenditures. As such, the ending General Fund balance
for FY 15 is expected to be approximately $4.7 million.
Projected General Fund Revenues for FY 16
Total General Fund revenues for FY 16 are projected to be $102.3 million. This represents an
increase of $3.3 million or 3.3% over the estimated revenue for FY 15. Compared to the revenue
estimate presented at the April 1S Study Session, the estimated revenue amount has increased by
approximately $292,000, mostly reflected in Property Tax and Motor Vehicle in Lieu. Provided
below is a summary of the General Fund revenue highlights for FY 16.
• Sales Tax is the largest source of General Fund revenue. In FY 16 the City anticipates
receiving $43 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 is the second largest source of General Fund revenue and is expected to be
$24.1million, generating an additional $922,000, an increase of 4.0 %. 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 estimated 3% increase
in assessed home values.
• Motor Vehicle in Lieu is expected to increase $337,000 (3.0 %) to $11.6 million in FY 16.
We anticipate continued growth in auto sales in FY 16 which results in increased motor
vehicle in lieu fees.
ITEM 2 4/28/15
• Transient Occupancy Tax receipts are projected to be $4.2 million, 3.0% above the FY
15 estimate.
Projected General Fund Revenues for FY 16
Misc. Revenues Transient Occupancy
$755,045 Tax $4,223,000
0.74 %_ r- 4.13%
Use of Money &
Property
$842,768
0.82%_
Revenue from Other \
Agencies
$1,299,526
1.27%
Charges to Other Funds
$2,101,000
2.05%
Franchises,
$2,797,280
2.73%
Fees for Services
$4,522,155
4.42%
Fines & Forfeitures J
$2,213,700 Licenses & Permits
2.16% $4,263,000
4.17%
Sales Tax
$43,000,000
42.03%
Property Taxes
$24,149,260
23.60%
Motor Vehicle In -Lieu
$11,592,487
11.34%
Other Taxes
$550,000
—0.54%
Many of the key economic indicators continue to show signs of improvement, and our local
economy mirrors the effects of an upward growth trend. However, we expect only modest future
growth in General Fund revenue. For this reason, it is essential we continue an aggressive
approach with economic development programs to attract and retain major retailers and significant
revenue generators to the City. Maintaining and enhancing the tax base is critical to our ability to
provide the highest level of services and programs to our residents and businesses.
Estimated General Fund Expenditures for FY 16
For the past seven years, the City has relied on its conservative spending practices to ride out the
Great Recession. This was aided by the City's quick response to the pending economic downturn
with the implementation of. significant departmental operating budget reductions, underfunding
internal service fund allocations, implementing a 5.0% furlough for non - safety employees (ended
7/1/14), and freezing vacant positions. The City maintains substantial savings with tight controls
on operating expenses. While we continue the policy to freeze certain positions, when this policy
reached a tipping point in our ability to deliver services, in FY 13 we began to fill critical positions
as they became vacant. With the proposed FY 16 budget, the City will still have approximately
40 full -time equivalent frozen positions saving over $4.4 million annually. As we progress through
this budget process and into next fiscal year, we will continue to evaluate vacant and frozen
positions.
The current projected expenditures for FY 16 are $101.5 million, representing a 5.8% increase
over FY 15 adopted budgeted expenditures. This increase is primarily due to the continued growth
ITEM 3 4/28/15
in employee retirement (PERS) costs, full year funding of succession planning efforts, sales tax
cost sharing, an increase to internal service fund allocations, and a limited amount of department
operating budget increases, primarily with contract obligations. This estimated expenditure
amount is consistent with the amount presented at the April 1S Study Session. Provided below are
the significant conditions that are impacting the General Fund budget for FY 16:
1. Ca1PERS (PERS) Cost Increase: Retirement costs continue to escalate due to Ca1PERS'
(PERS) attempts to reduce the system's unfunded liability. The FY 16 PERS rates for
miscellaneous and safety plans will be 24.9% and 36.3 %, respectively, resulting in an
overall increase in retirement costs to the General Fund of approximately $1.5 million.
Costs are expected to continue to climb at a similar pace through FY 20.
2. Succession Planning: As per City Council direction, we continue our succession planning
efforts in FY 16 by funding the third Police Captain, and the Assistant Director positions
in Library Services, Community Development, and Finance. The net fiscal impact for FY
16 is $664,000.
3. 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. In FY 16, the
General Fund operating budget will contribute $420,000 towards payments to Ford of
Orange, Volkswagen of Orange, and Stadium Nissan. The net increase to the General Fund
in FY 16 is $75,000. The Business Investment Fund (115), which currently has a fund
balance of $2.5 million, will cover the remaining anticipated payments of $3.1 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 payments for FY 16 and
future years.
4. Internal Service Fund (ISF) Allocations: Due to the slow growth in revenues in prior
years, we were unable to fund many of the ISFs out of General Fund operating costs. As
such, we utilized unreserved General Fund balance generated through prior year savings
as an essential funding source to ISFs during the past several years. In an effort to reflect
our true operating cost of the General Fund, staff is proposing to increase General Fund
allocations to the ISFs in FY 16.
Staff is proposing a total net FY 16 allocation increase of $2.7 million to the Worker's
Compensation, Accrued Liability (normal retirement costs), Vehicle Maintenance,
Information Technology, and the Liability Funds to cover rising costs within those
programs. While the funding levels of the ISFs are still well below meeting our long -term
needs, the City is heading in the right direction by starting to fund the majority of these
allocations within the General Fund operating budget. Of the remaining ISFs not included
as part of operational costs, staff is requesting a transfer of $1.4 million from the General
Fund unreserved fund balance to the Equipment Replacement Fund. A more detailed
analysis of the ISFs is provided later in this report.
5. Department Operating Budgets: As addressed at the Study Session on April 1, 2015,
only necessary increases to department operating budgets are included in the FY 16
proposed budget. These increases include contract obligations such as Metro Cities Fire
and Orange County Animal Control and maintenance costs related to enhancing service
levels (primarily in Old Towne Plaza area). In total, operation and maintenance increases
approximate $688,000 for FY 16.
ITEM 4 4/28/15
Provided below is the proposed FY 16 General Fund departmental budgets compared to the FY 15
adopted budget.
General Fund Expenditures — Comparison of FY 15 and FY 16
Department
FY 15 Adopted
FY 16 Proposed
% Inc /(Dec)
City Attorney
$960,777
$966,315
1.0%
City Clerk
769,915
785,502
2.0%
City Council
44,965
9,615
(7.9 %)
City Manager
1,198,535
1,245,554
3.9%
City Treasurer
106,697
93,289
(12.6 %)
Community Development
3,782,943
4,208,845
11.3%
Community Services
7,883,288
8,235,348
4.5%
Finance
3,021,354
3,144,380
4.1%
Fire
24,759,335
25,769,322
4.1%
Human Resources
1,316,399
1,388,291
5.5%
Library
4,237,362
4,504,834
6.3%
Non - Departmental
1,731,245
1,982,422
14.5%
Police
38,731,360
41,441,101
7.0%
Public Works
7,444,723
7,774,929
4.4%
Totals:
$95,988,898
$101,549,747
5.8%
The PERS increase accounts for the most significant increase to department budgets. Other
noteworthy department variances are primarily due to:
• City Council and City Treasurer: The decrease of 7.9% and 12.6% respectively is a result
of no longer needing to budget salaries for elected officials.
• Community Development: The increase of 11.3% is due to unfreezing the Assistant
Director position and adding an Administrative Analyst position.
• Library: The increase of 6.3% is due to unfreezing the Assistant Director position.
• Police: The increase of 7.0% is due to unfreezing the third Captain position and funding
the City's share of county -wide finger printing service. As mentioned above, the Workers'
Compensation Fund had been underfunded for several years. Upon closer review, staff
proposes an adjustment to the allocation from Police for workers' compensation to
commensurate with staffing levels and number of claims.
• Non - Departmental: The increase of 14.5% is due to the increase in the animal control
contract and sales tax cost sharing agreements.
Summarizing the financial picture, the current proposed FY 16 expenditure budget is $101.5
million. With the projected FY 16 revenue amount projected to be at $102.3 million, the General
Fund budget will be balanced and our revenues are expected to exceed expenditures by $759,000.
As labor negotiations for all eight labor bargaining groups have recently started, any impacts of
these negotiations are not reflected in the FY 16 proposed budget. Unless otherwise noted above,
this preliminary budget does not reflect any other increases in service levels or new programs.
ITEM 5 4/28/15
Estimated General Fund Balance for FY 16
As mentioned earlier in this report, the FY 16 projected beginning General Fund unreserved fund
balance is $4.7 million. With revenues exceeding expenditures in our FY 16 budget, the ending
General Fund unreserved fund balance is estimated to be $5.4 million.
Therefore, staff recommends the transfer of $3.0 million from the unreserved fund balance: $1.6
million to the Business Investment Fund to provide future funding to attract new businesses to the
City, and $1.4 million to the Equipment Replacement Fund. In addition, in response to City
Council's feedback at the April 1st Study Session, staff proposes the FY 16 budget include an
additional transfer of $500,000 to the Catastrophic Reserve, increasing the total amount to just
over $19.0 million. With this addition, the Catastrophic Reserve would increase to slightly under
19.0% of the General Fund budget. While this reserve amount does not meet the target of 25.0 %,
the transfer of $500,000 does allow the reserve to keep pace with the increase in expenditures for
FY 16. The result of the transfers and reserves is a FY 16 estimated ending General Fund
unreserved fund balance of $1.9 million.
FY 16 Estimated Available General Fund Balance
Unreserved Fund Balance Available @ 6/30/15
FY 16 Estimated Revenues 102,309,221
FY 16 Estimated Expenditures (101,549,747)
Excess Revenues over Expenditures
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
Increase to General Fund Catastrophic Reserve
Unreserved Fund Balance Available @ 6/30/16
General Fund Catastrophic Reserve
Est. Reserved & Unreserved General Fund Balance @ 6/30/16
$ 4,665,200
759,474
5,424,674
(3,000,000)
(500,000)
1,924,674
19,067,960
$20,992,634
Review of Other Funds
Water Fund:
The FY 15 beginning fund balance for the Water Enterprise Fund is $7.6 million. With estimated
revenues of $32.3 million, expenses of $29.7 million and new capital projects of $2.6 million, FY
15 is expected to end with a fund balance of $7.6 million. With the recent State mandate to attain
a 28.0% reduction in water consumption, staff is closely monitoring the details of the restrictions
and the implementation. As it is too early to assess the impacts of the State mandate, staff
recommends the FY 16 budget reflect normal water consumption and expenses. Therefore, with
FY 16 proposed revenues of $31.4 million, expenditures of $31.1 million, and new capital projects
and expenditures of $4.1 million, the estimated ending fund balance is $3.8 million. As more
material related to the conservation mandate is presented and the full implications are determined,
ITEM 6 4/28/15
staff will return to City Council with any necessary mid -year budget adjustments. Staff will
continue to keep Council updated as further information is obtained.
Sanitation Fund:
The Sanitation Fund began FY 15 with an available fund balance of $5.5 million. The Sanitation
Fund's budget for FY 15 shows expected revenues of $4.9 million, expenses of $5.3 million, and
new capital projects of $850,000, resulting in an expected year end available fund balance of $4.3
million. Due to the direct relation between water consumption and Sanitation revenues, it is
expected that the State's mandated 28.0% water conservation will affect the Sanitation fund in a
negative way. However, we recommend the FY 16 Sanitation budget remain intact as proposed.
Since there are many unknown variables, staff cannot predict the full implications of the water
reduction on the Sanitation Fund. Staff is closely monitoring these developments, including the
possibility of a mid -year budget adjustment to the Sanitation budget. We will continue to keep the
City Council updated as further information is made available.
With FY 16 revenues projected at $4.5 million, expenditures at $5.2 million, and new capital
projects of $1.3 million, the estimated FY 16 ending fund balance is $2.3 million. The current
structure of the sanitation fee typically only allows for approximately $400,000 for sewer line
replacements. However, the FY 16 budget proposes $1.0 million for sewer line replacement to
help address known trouble spots.
Equipment Replacement Fund:
During the height of the recession, yearly allocations to the Equipment Replacement Fund were
either reduced or excluded and vehicle replacements were deferred. As the economy has
improved, we have been able to replace more vehicles that are well past their useful lives. The
City currently owns over 500 vehicles and full replacement funding would require an available
fund balance of over $13.0 million. With FY 15 Equipment Replacement expenditures estimated
at $4.1 million, the approximate year -end fund balance will be $7.7 million. The FY 16 budget
includes proposed revenue of $1.8 million, which includes a $1.4 million General Fund transfer.
However, staff is also proposing vehicle replacements of $2.9 million which drops the FY 16
ending fund balance to $6.5 million. Included in the replacement schedule are: three vehicles for
Fire ($1.5 million), fifteen vehicles for Police ($600,000), four vehicles for Public Works
($590,000), two vehicles for Community Services ($80,000), and four vehicles for Water
($156,000).
Workers' Compensation Fund:
The Workers' Compensation Fund began FY 15 with an available fund balance of $199,000. After
our new third -party administrator's success in decreasing our reserves for all known and unknown
claims to date, staff is projecting an ending FY 15 fund balance of $539,000. As we continue to
close old claims and proactively seek out alternative programs to mitigate claims, we anticipate
the Workers' Compensation Fund will end FY 16 with a fund balance of $900,000 based on
revenue of $3.6 million and expenditures of $3.2 million. The Workers' Compensation Fund has
struggled recently with increasing actuarial valuations for unanticipated claims incurred but not
yet reported (IBNR) resulting in higher than anticipated expenditures. The IBNR expense is an
actual reserve for IBNRs and had a balance of $7.1 million at the beginning of FY 15. The third -
party administrator continues to make strides in reducing this reserve.
ITEM 7 4/28/15
Liability Fund:
The Liability Fund began FY 15 with an available fund balance of $1.8 million; however, within
the Liability Fund is an IBNR reserve component of $783,000 at the beginning of FY 15. As with
the Equipment Replacement Fund, allocations to the Liability Fund have not kept up with
operating expenditures. For several years, the Liability Fund had a significant fund balance which
absorbed the decrease in allocation. The estimated ending FY 15 available fund balance is $1.6
million. In FY 16, staff is proposing to allocate $1.4 million in operating costs ($800,000 from
the General Fund) to cover proposed expenditures of $1.9 million, and resulting in an estimated
FY 16 ending fund balance of $1.1 million.
Employee Accrued Liability (PERS) Fund:
The Employee Accrued Liability Fund primarily accounts for costs associated with payouts to
employees for accrued leave, upon termination or retirement. Its secondary function is to hold
reserve funds in anticipation of rising future PERS retirement costs which comprise the majority
of the reserves in this fund. Over the past four years, transfers have been made into this fund using
year -to -year savings in the General Fund. This reserve is currently just under $5.2 million.
To cover employee payouts, revenue to this fund is allocated through the payroll process.
Expenditures are based on estimated costs for potential retirements in the upcoming budget year,
making it difficult to calculate. In FY 16, staff proposes increasing the allocation to the Accrued
Liability Fund from 0.9% to 2.1 % to cover expenditures related to anticipated retirement payouts
for accrued leave. This fund is estimated to end FY 16 with an available fund balance of $5.4
million, including the reserve for future PERS cost of $5.2 million.
In response to the inquiry related to an alternative PERS payment schedule, in reviewing our most
recent actuarial valuation, Ca1PERS provided two alternative amortization schedules to pay down
the City's unfunded liability within either 25 or 20 years. The decision to establish an alternative
amortization schedule is both one -time and irrevocable. Under the 25 -year amortization schedule,
the City's FY 16 payment would increase by $3.3 million over the estimated FY 16 payment of
$17.6 million for a total budget increase of $4.9 million over FY 15. Over the course of 30 years,
this payment schedule would save the City approximately $50 million with a present value savings
of $18.8 million.
Under the 20 -year amortization schedule, the City's FY 16 payment would increase by $5.1
million over the estimated FY 16 payment of $17.6 million for a total budget increase of $6.7
million over FY 15. Again, over the course of 30 years, it would save the City approximately $74
million (present value savings of $27.6 million). While the expedited payment schedule would be
desirable in reducing our unfunded liability, current General Fund revenues cannot support such
an aggressive schedule. Staff will further explore strategies to maximize the $5.2 million Council
has set aside for future PERS costs, and bring additional information to you in the near future.
Capital Projects Fund:
As mentioned at the April 1S Budget Study Session, the City lost a significant resource for
improvements to City infrastructure with the FY 12 dissolution of the Redevelopment Agency
(RDA). In response, the City Council began to set -aside monies from the General Fund unreserved
fund balance in the Capital Projects Fund to prepare for future improvements to City facilities and
infrastructure.
In FY 15, with prior year's General Fund savings, the City Council approved a transfer of $2.0
million to the Capital Projects Fund, resulting in an ending FY 15 fund balance of $7.4 million.
ITEM 8 4/28/15
Staff continues to make every effort to prolong much needed repairs and improvements to City
facilities and infrastructure; however, some repairs cannot be postponed and have been included
in the Seven -Year Capital Improvement Plan. With a total of $275,000 in capital projects proposed
in FY 16, the ending FY 16 fund balance is estimated at $7.1 million.
Among the City facilities requiring improvements in the near future is the Fire Headquarters (Fire
HQ). As the City Council is aware, approximately 10 years ago, the City purchased the Water
Street property from the Orange County Fire Authority with the intent of possibly relocating the
Fire HQ facility to that site. While initial planning for the project began in 2007, it was
discontinued in 2008 due to the recession and the lack of available funds to build a new facility.
Nevertheless, the existing Fire HQ facility is over 50 years old and is in need of various
improvements. Therefore, staff has established a committee to look at future options with regards
to location and funding sources, as well as alternatives such as a renovation of the existing location.
The committee consists of personnel from Fire, Public Works, Finance, Community Development,
and the City Manager's office. Staff will return to City Council with progress updates as plans
develop.
Conclusion
With additional direction provided by City Council at the April 1 st Study Session, staff has further
refined our budget projections for FY 16. While the future looks encouraging with revenues on a
slow but steady upswing, the City still faces some challenges. A growing economy also means
growth in expenses. Nevertheless, our revenues for FY 16 exceed our expenditures and with an
estimated $1.9 million FY 16 ending fund balance, City Council may want to transfer a portion of
these "one- time" funds to one of the reserve funds including the Capital Projects, Vehicle
Replacement, or Business Investment Funds.
As we look forward to FY 17, budget projections remain consistent with FY 16 numbers. Revenues
are expected to grow modestly with an increase of 2.0 %, projected to be $104.4 million. As
mentioned at the last Study Session, we expect another increase in PERS costs of $1.6 million.
With a conservative increase of 1.0 %, FY 17 expenditures are estimated at approximately $104.2
million. Staff will continue to monitor trends and search out cost saving measures to minimize
budgetary impact.
8. ATTACHMENTS
None
ITEM 9 4/28/15