SR - - PROPOSED 2014-15 FISCAL YEAR BUDGET°F °R AGENDAITEM
Date: March 25, 2014
CIO' T CP
TO: Honorable Mayor and Members
of the City Council
FROM: John Sibley
City Manager
ReviewedN ied By:
City Manager
Finance Dir ctor
To Be Presen y:
John Sibley
1. SUBJECT
First Study Session for the Proposed Fiscal Year 2014 -15 Budget
2. SUMMARY
This is the first study session in support of the preparation of the FY 2014 -15 budget (FY 15).
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 15, and present the draft of the
Seven -Year Capital Improvement Plan
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 15 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 15; and
• Presenting the FY 15 Seven -Year Capital Improvement Plan.
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Status of Current Year Budget (FY 14)
Review of General Fund Revenues for FY 14
As the economy continues to transition into a slow but steady recovery mode, we are continuing
to see positive signs in our revenue receipts. As such, our overall revenue projections are
tracking according to our estimates. Our largest General Fund revenue source, sales tax
continues to trend upward. Based on that trend, we anticipate collecting $37.4 million this fiscal
year, which is slightly over the budgeted amount of $37.0 million. We are encouraged by reports
from our local retailers regarding the Christmas quarter sales and we are fortunate that we are
continuing to see several retailers open new stores in Orange.
Property Taxes for the current year are projected to be at $22.1 million, a 6.2% increase or $1.3
million above budget. This increase is partly due to the higher assessed values resulting from the
recovering economy. In addition, one -time revenues generated by the dissolution of the
Redevelopment Agency are more than originally budgeted.
As a result of the above noted changes, we are projecting that our FY 14 General Fund revenues
will end the fiscal year at $93.0 million, which is 3.1% over budget.
Review of General Fund Expenditures and Ending Fund Balance for FY 14
General Fund expenditures are tracking at budgeted amounts. As such, we are not anticipating
realizing any substantial savings by year -end. This is primarily due to department budgets being
extremely tight due to several years of budget reductions. While we have recently begun to fill
specific funded positions that become vacant, we continue to carry approximately 43 frozen full -
time positions during FY 14. We continue to scrutinize every position vacancy and will only fill
certain critical positions in order to maintain expected service levels. Nevertheless, departments
continue to do an excellent job of holding the line on expenditures and being creative in meeting
our service delivery goals.
With our projected year -end expenditures to be $91.5 million, we expect to end the fiscal year
with $1.5 million in revenues over expenditures. Our ending General Fund balance for FY 14 is
expected to be approximately $9.0 million.
Initial Review of the Proposed Budget for FY 15
Estimated General Fund Revenues for FY 15
Although the economy is in a slow recovery mode, there still is no clear sign that the economy is
on solid footing. We continue to experience mixed signals of a full economic recovery. While
the local housing market appears to finally be rebounding and the stock market has been stronger
in the last 18 months, job creation is still stagnant and international economies continue to
experience instability. Further, challenges with the federal budget as well as fiscal policies at the
state level continue to slow down any momentum we see in the local economy.
Despite these mixed signals, recurring revenues are expected to increase. It appears the City is
heading toward a FY 14 General Fund budget in which revenues would be exceeding
expenditures for the second year in a row however, presenting a balanced budget for FY 15 will
be a significant challenge.
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Our initial analysis suggests that General Fund revenues for FY 15 will be $95.1 million, which
represents a 2.2% increase compared to our estimated revenue of FY 14. This increase reflects a
5% increase in sales tax revenue, generating an additional $1.8 million. Based on current trends,
we expect to see strong performance by the Outlets at Orange, our automotive dealerships and
the business to business sector. Property tax revenue is anticipated to increase 3.2% or $700,000
as homes will continue to be assessed with annual increases in their property taxes. Licenses and
permits are projected at $4.3 million, a 2.4% increase over the FY 14 estimate. Business licenses
and building related permits (building, electrical, mechanical, etc.) are anticipated to increase
resulting from the recovering economy. As interest rates slowly go up, we expect a 7.2%
increase or $45,000 in additional investment portfolio earnings. Motor vehicle in lieu fees are
projected to generate an additional $200,000 or 2% more in revenue due to an increase in new
car sales. A more detailed analysis of projected revenue will be provided at the next study
session.
Estimated General Fund Expenditures for FY 15
Our initial estimate for General Fund expenditures is $95.0 million. This reflects a 3.8%
increase in expenditures over FY 14. Therefore, our initial projection reflects revenues over
expenditures by $72,000. This is good news as we continue to face a number of pressures on our
expenditure budget and we are working to further refine our estimates by the next study session.
This initial look at the proposed FY 15 General Fund budget includes the following assumptions:
1. Frozen Positions:
The proposed FY 15 budget reflects maintaining the current list of frozen positions. As
noted above, we continue to realize a substantial savings from maintaining frozen
positions. With the proposed FY 15 budget, it is estimated that the City will continue to
have approximately 43 full -time vacant positions saving over $4.9 million annually.
2. Department Budgets:
As the City strives to recover, departments continue to hold the line with their budgets.
Only increases absolutely necessary, such as contract obligations, are included in the FY
15 proposed budget. Departments have done an exemplary job of managing operating
costs while maintaining service levels.
3. 3% Salary Increase and 5% Furlough:
As a part of a two -year labor contract, the City Council approved a 3% across the board
salary increase for most of the City's bargaining groups effective 7/1/14 which results in
an increase to the General Fund of $635,000. This is the first cost -of- living increase for
many of our staff members in four years. Further the proposed budget reflects the
elimination of the 5% furlough program also effective 7/1/14 for non - safety employees.
The end of the furlough results in a $1.1 million increase to the General Fund.
4. Successor Agency Costs:
The proposed FY 15 budget reflects $500,000 in additional expenses previously funded
by the Successor Agency to the General Fund. The Department of Finance has
determined that certain salary and benefits costs are disallowed and it is necessary to
reallocate appropriate staff funding in the amount of $222,000 to the General Fund
effective 7/1/14. In addition, the transfer of certain properties from the Successor
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Agency to the City was approved by the State therefore, maintenance costs associated
with these properties must be incorporated within the General Fund budget ($278,000)
beginning FY 15.
5. PERS Increase:
The proposed FY 15 budget includes a PERS cost increase in the amount of $2.2 million
in FY 15. Original estimates of $1.0 million were calculated prior to recent actuarials
provided by PERS as part of their plan to dramatically increase rates over the next five
years in order to fully fund all retirement plans within the next 30 years. Changes in
actuarial assumptions have dramatically increased retirement costs for all agencies.
Provided below is additional analysis related to future PERS costs.
6. Sales Tax Cost Sharing:
As part of ongoing economic development strategies, the City has entered into sales tax
cost sharing agreements with several car dealerships. Staff is estimating a FY 15 total
cost of $350,000 for agreements with Ford of Orange ($235,000), Stadium Nissan
($60,000) and Volkswagon of Orange ($55,000).
Status of PERS Retirement Costs
Managing our retirement costs has been a high priority of this and past City Councils. Based on
agreements forged with the City's bargaining groups, currently all bargaining groups are paying
their full employee rate of 8% for Miscellaneous and 9% for Safety employees. Further, the
"PERS on PERS" benefit has been removed from all employee bargaining group agreements. As
a result, the City's share of PERS costs has actually remained steady from FY 13 to FY 14.
However, future PERS costs are expected to increase substantially. Although investment returns
for FY 12 -13 were 12.5 %, surpassing the actuarial assumption of 7.50 %, new actuary figures
include a formula that will ramp up rates over the next five years, level off for 20 years which
would enable PERS to be 100% fully funded, and then reduce rates in years 26 -30.
It should be noted over the last few years the City Council has set -aside $3.0 million for future
retirement (PERS) cost increases. Those funds reside in the Employee Accrued Liability Fund
(760) and could be used at any time to aid in balancing the General Fund.
Eight Year Look at PERS Costs Paid By City
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Misc
Safety
Fiscal Year
City Paid
Rate
Rate
2013
13,383,776
19.41%
29.51%
2014 (projected)
13,319,424
20.06%
30.11%
2015 (estimated)
15,547,601
22.60%
33.30%
2016 (estimated)
16,655,001
24.40%
35.50%
2017 (estimated)
18,573,824
27.20%
39.60%
2018 (estimated)
20,492,646
30.00%
43.70%
2019 (estimated)
22,414,275
32.70%
47.90%
2020 estimated
24,071,678
34.50%
52.00%
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Review of Other Funds
Water Fund:
The Water Enterprise Fund ended FY 13 with a fund balance of $14.8 million. The adopted FY
14 budget calls for revenues of $30.2 million, expenses of $29.3 million and capital projects of
$9.6 million. The Water Fund is estimated to end FY 14 with a fund balance of $6.1 million.
With the five year rate adjustments previously approved, it appears that the FY 15, 3% rate,
adjustment will be sufficient to meet the on -going needs of the Water fund with proposed
revenues of $32.0 million, expenditures of $28.0 million and capital projects of $2.6 million.
Sewer Fund
The Sewer Fund ended FY 13 with a fund balance available of $7.4 million. The Sewer Fund's
adopted budget for FY 14 shows expected revenues of $4.7 million and expenditures of $8.0
million, including $2.9 million in capital projects. Thus the Sewer Fund should end FY 14 with
an available fund balance of $4.2 million. For FY 15, revenues are projected at $4.7 million,
expenditures at $5.0 million and capital projects of $550,000 resulting in an estimated FY 15
ending fund balance of $3.3 million
Equipment Replacement Fund
The Equipment Replacement Fund ended FY 13 with an available fund balance of $9.7 million.
After several years of deferring vehicle replacements due to the recession, staff has recently
made progress in replacing vehicles well past their useful life. The City currently owns over 500
vehicles and full replacement funding would have an available fund balance of over $13.0
million. Staff is proposing vehicle replacements in the amount of $2.9 million in FY 15 and a
$1.0 million transfer into this fund to begin the fully funding process.
Worker's Compensation Fund
The Worker's Compensation Fund ended FY 13 with a negative fund balance of $782,000. In an
effort to address this shortfall the FY 14 budget included a $750,000 increase for claims that
have been incurred but not yet reported (IBNR). We are projecting a $0 ending FY 14 fund
balance which includes reserves for all known and unknown claims to date. Earlier in FY 14, the
City entered into an agreement with a new third -party administrator, Keenan Municipal Team. It
is anticipated that Keenan will make a recommendation to reduce the reserves for IBNR claims,
thus allowing the Worker's Comp Fund to have a positive fund balance in FY 15.
Liability Fund
The Liability Fund ended FY 13 with an available fund balance of $2.1 million. The FY 14
budget is estimated to end with an available fund balance is $1.1 million. This too is after a set -
aside has been made for all known claims that have been filed as of June 30, 2013. Staff is
currently reviewing this fund to determine the needs for FY 15. This fund balance was held in
reserve in the event that the City had to pay damages for the gang injunction. It now appears the
City will not be required to pay.
Computer Replacement Fund
The Computer Replacement Fund ended FY 13 with an available fund balance of $2.0 million.
This has dropped from $5.2 million in FY 07. It is estimated that this fund will end FY 14 with
an available fund balance of $1.2 million. Similar to the equipment replacement program, we
have deferred information technology purchases over the last five years as we have weathered
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the recession. However, we have reached a point where several critical technology components
are at end -of -life and need to be replaced. As such, it is necessary to provide additional
resources to this fund to address our technology needs. If fully funded this fund would have over
$6.0 million available to replace obsolete computer hardware and software throughout the City.
Employee Accrued Liability Fund
This fund is used to set aside funds for separating and retiring employees who are entitled to
final payouts of vacation time, and in some cases sick time accrued. This fund ended FY 13 with
an available fund balance of $4.0 million. This fund is estimated to end FY 14 with an available
fund balance of $3.5 million. Note that $3.0 million of this balance has been earmarked for
future PERS / retirement cost increases. With very little change in the FY 15 budget, this Fund
is estimated to end FY 15 with a $3.9 million fund balance.
Seven -Year Capital Improvement Plan
Over the past several years, we have seen an unprecedented level of capital improvement activity
in Orange. Looking forward, the Seven -Year Capital Improvement Plan (CIP) identifies 147
projects that are being proposed for the seven -year period. For the upcoming fiscal year, there
are 47 new projects budgeted and 82 projects that are a continuation of previously approved
projects. With these projects, the City Council is investing about $30.0 million in the upcoming
fiscal year and $105.0 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.
The following are highlights of the FY 15 Seven -Year Capital Improvement Program projects:
• Installation of outdoor exercise stations along the walking path at Grijalva Park,
replacement of the tot lots at Handy Park, installation of a shade sail at Belmont Park, and
installation of an irrigation management system at several park sites.
• Commitment of $6.0 million to the Pavement Management Program and an additional
$430,000 for street maintenance and rehabilitation efforts at various locations throughout
the City.
• Completion of the design and preparation of construction documents for the Metrolink
Parking Structure to be located at the 100 block of North Lemon Street.
• Commitment of $2.6 million towards ten projects intended to maintain or improve the
City's water production and distribution.
• Completion of the replacement of the Mobile Data Computers in both the Police and Fire
vehicles as well as complete the installation of an in -car video system in the Police patrol
vehicles.
• Completion of several critical information technology projects including replacement of
the City's 26 year old telephone system.
• Replacement of the audio /video technology in the City Council Chambers.
• Begin funding the replacement of the 800 MHz safety radio system as part of a county-
wide effort.
With the dissolution of the Redevelopment Agency, the City is limited to using only bond
proceeds for capital improvement projects upon receipt of the Finding of Completion (FOC)
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from the California State Department of Finance (DOF). Staff continues to work closely with
DOF on utilizing the remaining bond proceeds for the parking structure and fire headquarters.
Only a small portion of CIP projects are funded through the General Fund. These projects are
generally to address facility infrastructure upgrades that have no other funding source. These
will be funded through the fund balance available in the General Fund Capital Improvement
Fund (500) that has received a total of $4.5 million in transfers to set funds aside for future
capital needs as part of the FY 12 and FY 13 budgets. These projects include Civic Center
Buildings' HVAC Replacement, Fire Headquarters and Senior Center Roof Coating and Fiber
Optic Cable Installation.
7. ATTACHMENTS
Seven -Year Capital Improvement Plan
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