SR - - STAFF REPORT FY 2016-17 PROPOSED BUDGET �oF OR9 AGENDA ITEM
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�2 Date: March 22 2016
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TO: Honorable Mayor and Members ReviewedNerifie
of the City Council Ciry Manager ��
Finance Director �i
FROM: Rick Otto To Be Presented By:
City Manager Will Kolbow
1. SUBJECT
First Study Session for the Proposed Fiscal Year 2016-17 Budget
2. SUMMARY
This is the first study session in support of the preparation of the FY 2016-17 Budget (FY 17).
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 17, the proposed Annual
Departmental Work Plans for FY 17, and the draft of the Seven-Year Capital Improvement Plan
for the period of FY 16-17 through FY 22-23.
3. RECOMMENDATION
Receive and file the report and provide direction to staff.
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 17 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 17;
• Presenting the proposed Annual Departmental Work Plans for FY 17; and
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• Presenting the draft Seven-Year Capital Improvement Plan for the period of FY 16-17
through FY 22-23.
This and past City Councils have been extremely proactive in responding to the economic
challenges the City faced over the past decade. Throughout the Great Recession,the City Council
took decisive actions to reduce our operating costs, while preserving 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. With the adoption of the FY 16 Budget, the City achieved 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. At this point in the
budget process, I am pleased to project a preliminary General Fund budget for FY 17 that is both
responsive to the priorities set by the City Council and allows for the continued improvement of
our fiscal foundation. While we are refining the revenue and expenditure amounts for FY 17, I am
very optimistic about our future but recognize that there are still challenges facing our City.
Status of Current Year Budget (FY 16)
Review of General Fund Revenues for FY 16
We are truly blessed to have a strong and diverse tax base in Orange,reflected through the positive
signs in our revenue receipts. Our largest General Fund revenue source, Sales Tax, is expected to
be$43.1 million, slightly higher than the budget of$43 million. We anticipate the strong sales tax
revenue receipts from our auto dealerships and consumer goods will offset the decrease in fuel
sales tax due to the recent significant decline in gas prices. Property Taxes are projected to end
the fiscal year at $24.9 million, a $760,000 (3.1%) increase over budget, due to higher assessed
property values and more property tax increment distributed from the County of Orange for the
Successor Agency. Transient Occupancy Tax has been trending upward and is anticipated to be
$770,000 (18.4%) over the budgeted amount of$4.2 million. Licenses and fees are expected to
reach $5.0 million, $680,000 (16%) over budget, primarily a result of an increase in building
related permits (building, electrical, plumbing, etc.) Based on current trends, other revenue
sources such as motor vehicle license fees, fees for services, and franchises are also expected to
increase over budgeted amounts. Miscellaneous revenues are projected at $2.8 million, $2.0
million higher than budget, mainly due to the Yorba Park and Hambarian settlements, as well as
reimbursements from the Office of Emergency Services. Overall,our year end estimate for FY 16
General Fund revenues will be $107.2 million, $4.9 million (4.7%) over budget. Again, the
diversity of our tax base allows us to sustain a significant decrease in one segment of our sales tax
revenue.
Review of General Fund Expenditures and Ending Fund Balance for FY 16
General Fund expenditures are tracking at budgeted amounts. Typically, the fiscal year ends with
expenditure savings from departments being especially diligent in managing costs. It is too soon
to determine what that final savings amount will be, but we will provide a better assessment at the
next Budget Study Session. While we continue to maintain approximately 44 frozen full-time
positions during FY 16, we are generally filling funded positions when they become vacant. That
said, we scrutinize every vacancy and only fill positions necessary to maintain expected service
levels and to provide for critical succession planning. Nevertheless, departments continue to do
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an excellent job of holding the line on expenditures and being creative in meeting the City's service
delivery goals.
With our adjusted budgeted expenditures of$105.6 million, we expect to end the fiscal yeax with
a surplus of $1.6 million in revenues over expenditures, resulting in an ending General Fund
balance for FY 16 of approximately $4.0 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. Note the adjusted expenditure amount of $105.6 million includes approximately $1.5
million in labor costs due to the new bargaining agreements approved during FY 16.
Initial Review of the Proposed Budget for FY 17
Estimated General Fund Revenues for FY 17
The economy continues to move forward in a slow growth mode. Consumer spending has been
driven by a rebound in household wealth and gradual recovery in employment and income
prospects. While the housing market continues to recover, sluggish global economic growth and
the stronger dollar will keep inflation at a low level. The overall economic outlook is positive, and
domestic demand is expected to remain strong to weather the global economic slowdown.
Locally, Orange County continues to experience positive economic growth. According to
Chapman University, Orange County will see employment growth in the services sector such as
education and health, professional and business, and leisure and hospitality. Outside of the
services sector, the construction, retail, and wholesale sectors are also projected to add new jobs.
Hourly wages continue to climb which should boost personal income growth and consumer
spending. Here in Orange,nearly all segments of our economy are trending in a positive direction.
The one exception is fuel sales which represents a significant percentage of sales tax revenue. Just
two years ago, wholesale oil prices were $101 per barrel; today they have dropped to $37 per
barrel. In spite of our aggressive economic development efforts to attract and retain fuel sales
generators, revenue from fuel sales is expected to remain flat in FY 17. Our initial analysis
suggests FY 17 General Fund revenues will be $106.3 million, a $860,000 (0.8%) decrease or
below our estimated revenue for FY 16. However, this amount is 3.8% increase over the original
budget for FY 16. General Fund revenue highlights include:
Sales tax revenue is projected to be $43.4 million, $300,000 (0.7%) above the FY 16
estimate. We expect to see strong performances by our automotive dealerships and the
business-to-business sector. Building and construction activity continue to rise and sale
projections from home improvement retailers are optimistic. An improving job market,
lower gas prices, and a robust travel/tourism industry are expected to contribute to solid
gains in sales tax receipts from general consumer goods and restaurants.
• Property tax revenue is estimated to be $25.9 million, an increase of $935,000 (3.8%).
With the sale of homes and commercial properties and their resulting reassessments at
higher property values, property tax receipts are expected to grow in FY 17.
• Motor vehicle license fees are estimated to increase $475,000 (4%) to $12.3 million. We
anticipate auto sales will continue to exhibit upward growth.
• Transient Occupancy Tax receipts are projected at $5.2 million, 2% above the FY 16
estimate, based on current trends of increase in travel and tourism.
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• Miscellaneous Revenues include unanticipated non-recurring revenues which vary
significantly from year to year. Estimated miscellaneous revenues are projected at
$768,000, a decrease of $2.0 million compared to the FY 16 estimate. Expense
reimbursements of$122,000 from the Irvine Company are included in FY 17 as one-time
revenue. These reimbursements are to cover the costs of backfilling City staff working on
the Santiago Hills II project.
A mare detailed analysis of projected revenue will be provided at the next Study Session.
Estimated General Fund Expenditures for FY 17
Our initial estimate for General Fund expenditures is$106.4 million. This reflects a 4.8%increase
in expenditures over the original adopted FY 16 budget. As we continue to refine our estimates
this estimate of the proposed FY 17 General Fund budget includes the following:
1. Impact of Negotiated Salary and Benefit Increases: As a result of successful
negotiations in FY 16, the City Council approved new two year contract MOUs for most
employee bargaining groups. The proposed FY 17 budget reflects a $2.8 million increase
to salaries and benefits (excluding PERS retirement costs, discussed below) over the FY
16 budgeted amount. However, we continue to realize a substantial savings from
maintaining frozen positions. With the proposed FY 17 budget, the City will continue to
have 44 full-time frozen positions.
2. 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
Ca1PERS members on or before December 31, 2012) pay their fu118% contribution, while
classic safety employees pay their required 9%. In FY 17, employees hired under the new
California Public Employees' Pension Reform Act (PEPRA) formulas will pay 6% (down
from 6.75% in FY 16) and 11% (down from 12%) contributions for miscellaneous and
safety,respectively, while receiving a reduced level of retirement benefits. The reason for
the decrease in the rate is the result of lower normal costs related to PEPRA. The City's
proportional share for normal costs related to PEPRA are also lower. The City has 60
miscellaneous PEPRA members (17.2% of active miscellaneous PERS members) and 44
safety PEPRA members (17.3% of active safety PERS members). The employee rates for
PEPRA members represent half of the normal cost of the benefit. As such,the City's PERS
rates will be positively affected as the number of PEPRA employees increase.
PERS Costs Paid by Employee and City—Past and Future
Employee City PERS Rates
' Fiscal Year Status paid Ci Paid Misc. Safe
2013-14 Actual $ 4,420,917 $ 13,185,239 20.1% 30.1%
2014-15 Actual 4,598,747 15,218,147 22.6% 33.3%
I 2015-16 Projected 4,891,000 17,613,000 24.9% 36.3% '�
2016-17 Prelim Budget 5,141,000 20,576,000 27.6% 40.7%
2017-18 Forecast 5,193,000 22,248,000 29.7°l0 43.5%
� 2018-19 Forecast 5,245,000 23,973,000 31.8% 46.3%
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FY 14 represented the low point for recent historical salaries. In FY 15, the City
experienced the first of a multi-year increase in PERS rates, as well as the end of furloughs
and salary increases for most employee groups. The PERS rate increases are aimed at
reducing the City's unfunded liability.
FY 17 reflects additional negotiated salary increases. The impact of negotiations on
General Fund PERS costs for FY 17 is approximately $859,000 (in addition to the $2.8
million increase in salaries and other benefits discussed above). The rates for FY 17 for
the Miscellaneous and Safety plans will be 27.6% and 40.7%, respectively. These rate
increases and salaries increases will result in an overall increase in PERS costs of
approximately $3.0 million, or 17%, with$2.7 million of the increase in the General Fund.
Rates are expected to climb at a similar pace until FY 20, when rate increases will flatten
to about 0.5-1.0%per year.
3. PERS Pre-Payment: At the October 13, 2015 City Council meeting, staff communicated
several strategies to address the City's unfunded PERS liability. Based on Council
feedback we propose participating in the CaIPERS Pre-Payment program, which allows to
the City to pre-pay its contributions for the entire year at a discounted fixed cost.
For FY 17,the lump sum payments for the Miscellaneous and Safety plans are $7,172,203
and$11,731,154,respectively,totaling $18,903,357. The pre-payment is calculated based
on a number of actuarial assumptions, including projected payroll figures based on actual
data from FY 14 that is then projected to FY 17. As mentioned previously, FY 14 was the
low point for salaries before they began increasing. The difference between the pre-
payment amount and the budgeted contributions is approximately$1.7 million,with a$1.4
million difference reflected in the General Fund.
4. Contractual Obligations: The departments continue to manage contract agreements as
efficiently and cost effectively as possible; however, recent legislation related to health
care and the minimum wage has resulted in increases to standard maintenance and
operating contracts. In FY 16, the City Council approved contracts for tree trimming and
custodial services which reflected increases associated with the new legislation. These
increases are included as part of the FY 17 budget. In addition, the City has contract
agreements with Orange County Animal Control, North Net Fire Training, and Metro
Cities Fire that also are expected to rise in FY 17. These increases are examples of costs
which are climbing as the economy rebounds, resulting in an additional General Fund cost
of$576,000.
5. Wind Down of Orange Redevelopment Agency (ORA): The dissolution of the ORA
continues to impact the City as staff oversees its final wind down. Over the past several
years, as a result of the dissolution and the reduction of available resources, the General
Fund has assumed a portion of its remaining expenses. Starting in FY 15, the Successor
Agency to the ORA transferred several properties to the City; their maintenance and
utilities costs were absorbed by the General Fund for a total cost of$318,330. In FY 16
the remaining properties were transferred to the City, resulting in additional costs of
$18,550 to the FY 17 budget. Cumulative costs absorbed by the General Fund since the
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inception of the property transfers is just under $337,000. Offsetting rental revenues
associated with these properties approximate $309,000.
6. Department Operating Budgets: As the City strives to recover, departments continue to
hold the line with their budgets. Only increases that enhance the levels of service and
programs to the community are included in the FY 17 proposed budget. These include an
increase to the library book budget, cost to amend the Zoning Ordinance to support
economic development and streamline the building process, the addition of a fourth
summer day camp site at the Sports Center at Grijalva Park, increasing off-hours park
security, establishing a budget for supplies associated with the Community Emergency
Response Team(CERT)Program,and an increase to general maintenance cost. Otherwise,
departments have done an exemplary job of managing operating costs while maintaining
services levels. All told, department operation and maintenance increases approximate
$487,000 for FY 17.
7. Internal Service Funds: With the continued stabilization of the economy, staff is slowly
restoring the annual funding levels of Internal Services Funds(ISFs). FY 17 allocations to
the Worker's Compensation, Accrued Liability (for retirement costs), Information
Technology, Liability, and Equipment Maintenance funds total $8.6 million,just slightly
more than FY 16, primarily as a result of negotiated salary increases. For the first time in
several years, most ISFs were budgeted as part of FY 16 operational costs, as opposed to
being funded by unreserved General Fund balance generated through prior year savings.
Of the remaining ISFs not included as part of operational costs, staff is requesting a transfer
of $500,000 to the Equipment Replacement Fund (720), $500,000 to the Computer
Equipment Replacement Fund (790), and $1,000,000 to the Capital Projects Fund (500)
from General Fund Unreserved Fund Balance.
Agreements for two bargaining groups are still being negotiated, therefore the FY 17 budget is
anticipated to change pending resolution. Except as noted above,this preliminary budget does not
reflect any significant increases in the level of service or new programs.
At this point in the budget process, expenditures for FY 17 are slightly outpacing projected
revenues by approximately $100,000. As we continue to refine the revenue and expenditure
amounts, we anticipate City Council will be able to adopt a balanced FY 17 budget.
Preliminary Estimate of the General Fund Balance for FY 17
The beginning fund balance for FY 17 is projected to be $4.0 million. As FY 17 revenues and
expenditures are expected to be close to balanced, the estimated ending unreserved fund balance
for the General Fund for FY 17 is $1.4 million following four transfers from the unreserved fund
balance: $500,000 to the Computer Equipment Replacement Fund, $500,000 to the Equipment
Replacement Fund, $1,000,000 to the Capital Projects Fund, and $500,000 to the Catastrophic
Reserve. Should the FY 17 projected beginning fund balance increase due to year-end FY 16
savings, we recommend transferring additional funds to the Business Investment Fund to support
future business incentive obligations.
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Estimated Available General Fund Balance
Unreserved Fund Balance Available @ 6/30/16 $4,003,556
FY 17 Estimated Revenues 106,297,921
FY 17 Estimated Expenditures (106,394,061)
Expenditures over Revenues (96,140)
Unreserved Fund Balance Available @ 6/30/17 $3,907,416
Transfers Out
Transfer to Computer Equipment Replacement (500,000)
Transfer to Equipment Replacement Fund (500,000)
Transfer to Capital Projects Fund (1,000,000)
Transfer to Catastrophic Reserve (500,000)
Total Transfers Out �2,500,000)
Unreserved Fund Balance Available @ 6/30/17 1,407,416
General Fund Catastrophic Reserve 19,567,960
Est. Reserved & Unreserved General Fund Balance @ 6/30/17 �20.975.376
Proposed Annual Work Pla�s for FY 17
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 Citywide
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 17 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. The FY 17 Seven-Year Capital Improvement Plan(CIP)identifies 142 proposed projects.
For FY 17 alone, there are 26 newly budgeted projects and 95 projects that are a continuation of
previously approved plans. With these projects the City Council is investing nearly $28.6 million
in the upcoming fiscal year and $94.2 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. We do, however, anticipate challenges in funding certain infrastructure
projects.
Despite steady growth in the General Fund, some Special Revenue Funds are seeing a decline in
revenues. While FY 16 estimated Gas Tax revenues of$3.1 million are $100,000 above budget,
Gas Tax collections for FY 17 are anticipated to decrease by 8% to $2.9 million due to falling
gasoline prices and a decrease in overall consumption. After the dissolution of the RDA, this
program relies more heavily on Gas Tax funds and the reduction in revenue greatly impacts the
Pavement Management Program(PMP). The FY 17 funding allocated from Gas Tax to pavement
management projects is projected at $700,000, a significant decrease from the FY 16 budget of
$2.0 million, which included the use of Gas Tax fund balance. While pavement management also
receives monies from M2 funds, staff is proposing the Capital Projects Fund supplement $1.3
million in FY 17, as a one-time resolution for this loss of funds, to maintain the quality and
condition of City streets. It is important to note that the last time General Funds were used for
road improvements was in FY 08.
The RDA's dissolution has impacted the City by reducing resources for improvements to City
infrastructure. Consequently, through FY 16, City Council has set-aside $9.0 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 17 Seven-Year CIP.
FY 17 infrastructure improvements using the Capital Projects Fund include replacement of the air
conditioner units at Civic Center ($100,000), fiber optic cable installation at Grijalva Park
($240,000), rehabilitation of the roof at main Library ($90,000), contribution towards the
Pavement Management Program ($1.3 million), infrastructure maintenance ($95,000), and
ongoing City facility improvements ($100,000), totaling $1.8 million. Projects proposed using
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other funds include upgrading the audio and video equipment in the City Council Chambers
($400,000) using the PEG Fund (130), the video surveillance system at Police Headquarters
($165,000) using the Computer Replacement Fund (790), replacement of the air conditioner units
at the Fire Station ($190,000) using the Fire Facilities Fund (560), and refurbishing the Library
fountain ($15,000) from the Library Facilities Fund (573). Total FY 17 costs for Citywide
infrastructure improvements is $3.0 million. Staff has begun 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 17 Seven-Year Capital Improvement Plan projects:
• Ground-breaking for construction of the Metrolink Parking Structure, located at the 100
block of North Lemon Street.
• Installation of a video surveillance system at Hark Park and Grijalva Park Sports Center
and the continued installation of irrigation management systems at several park sites.
• Re-design and re-landscaping of the Handy Creek corridor (paseo) in the Santiago Hills
Landscape Maintenance District.
• Construction of renovations at Shaffer Park.
• Replacement and addition of self-service checkout machines at Main, El Modena,and Taft
Libraries.
• Replacement of video surveillance system at Police Headquarters.
• Commitment of$4.0 million to the Pavement Management Program and an additional$1.3
million for street maintenance and rehabilitation efforts at various locations throughout the
City.
• Commitment of $2.0 million towards four projects intended to maintain or improve the
City's water production and distribution, including $1.5 million for pipeline replacement.
• 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.
Conclusion
Despite the challenges the City faces in FY 17, 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
services and enhance our infrastructure,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,
the City Council works hard to be able to allocate the necessary resources to allow the City to
provide 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 to refine FY 17 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 tentatively planned
for April 26, 2016. However at a later date, staff may recommend delaying the study session to
coincide with the May 10�' Council Meeting.
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7. ATTACHMENTS
FY 17 Proposed Annual Work Plans
FY 17 Draft Seven-Year Capital Improvement Plan
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