SR - - SECOND STUDY SESSION PROPOSED FY 2016-17 BUDGETAGENDA ITEM
May 10, 2016
TO: Honorable Mayor and
Members of the City Council
FROM: Rick Otto
City Manager
Reviewed/Verified
-
City Manager
Finance Direc r
To Be Presented By: Will Kolbow
_Cons. Calendar X
City Mgr. Reports
_Council Reports _Legal
Affairs
_Boards /Cmtes. _Public
Hearings
_Admin Reports _Plan/Environ.
1. SUBJECT
Second Study Session for the Proposed Fiscal Year 2016 -17 Budget
2. SUMMARY
This is the second study session in support of the preparation of the FY 16 -17 budget (FY 17).
This study session provides an updated analysis of the projected General Fund revenues and
expenditures for FY 17, as well as a status and analysis of the Special Revenue, Internal Service,
and Water Funds for FY 17.
3. RECOMMENDED 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
ITEM-8,1 1 5/10/16
7. DISCUSSION and BACKGROUND
This is the second 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 an updated status of the current year budget;
• Providing an updated analysis of the projected General Fund revenues and expenditures
for FY 17; and
• Presenting a status and analysis of the Special Revenue, Internal Service, and Water Funds
for FY 17.
This report also provides information on specific issues as requested by the City Council at the
March 22 Study Session. At this point, we are on target to present a proposed FY 17 budget to
the City Council for review and adoption at the June 2016 meeting.
Status of FY 16 General Fund Budget
As the end of FY 16 quickly approaches, FY 16 General Fund revenues are expected to increase
to $107.4 million, 4.9% over budget. This amount is almost $200,000 more than the revenue
estimate presented at the March 22 n Study Session. Sales tax revenue from our auto dealerships,
building and construction, and restaurants continue to trend upward. However, the significant drop
in gas prices is expected to have a negative impact on fuel gas tax receipts. Sales tax estimate for
FY 16 is anticipated to be $455,000 less than the budget of $43.0 million. This amount is offset by
higher than budgeted receipts in other revenue sources such as property tax, transient occupancy
tax, licenses and fees, and motor vehicle license fees all the result of a strong economy.
Miscellaneous revenues are expected to be over budget mainly due to one -time receipts for the
Yorba Park and Hambarian settlements and reimbursements from the Office of Emergency
Services. With an early estimate of $1.5 million in expected departmental savings, General Fund
expenditures are anticipated to close at $104.1 million. Should year -end revenues and
expenditures hold steady, staff expects to end the fiscal year with just over $3.2 million in revenues
over expenditures. As such, the ending General Fund balance for FY 16 is expected to be
approximately $5.7 million.
Projected General Fund Revenues for FY 17
Total General Fund revenues for FY 17 are projected to be $106.4 million. This represents a
decrease of $0.9 million or 0.9% below the estimated revenue for FY 16. However, this amount
is a 3.9% increase over the original budget for FY 16. Compared to the revenue estimate presented
at the March 22nd Study Session, the estimated revenue amount has increased by approximately
$92,000. Provided below is a summary of the General Fund revenue highlights for FY 17.
• Sales Tax is the largest source of General Fund revenue. In FY 17 the City anticipates
receiving $43.3 million, $755,000 (1.8 %) above the FY 16 estimate. We expect to see
strong performance by local automotive dealerships and the business -to- business sector. In
addition, we anticipate receiving more receipts as a result of a strengthening job market,
and strong building and construction activity. The performance of The Outlets at Orange
has been trending upward as they continue to enhance the quality of stares as well as add
new stores. We anticipate their sale tax collections will remain strong in FY 17. Revenue
from fuel sales is expected to remain flat in FY 17 due to the continued drop in fuel prices.
ITEM 2 5/10/16
• Property Tax is the second largest source of General Fund revenue and is expected to be
$25.8 million, generating an additional $936,000, an increase of 3.8 %. Reassessments for
homes and commercial properties sold at higher property values are anticipated to generate
more property tax receipts.
• Motor Vehicle in Lieu is anticipated to increase $475,000 (4.0 %) to $12.3 million in FY
17. We expect continued growth in auto sales in FY 17 which results in increased motor
vehicle in lieu fees.
• Transient Occupancy Tax receipts are projected to be $5.2 million, 3% above the FY 16
estimate, based on current trends of increase in travel /tourism industry.
• Miscellaneous Revenues are estimated at $768,000, a decrease of $2.4 million under FY
16 estimates. Miscellaneous receipts include unanticipated, non - repetitive revenues that
are difficult to project and that vary significantly from year to year. One -time revenue of
$122,000 from the Irvine Company is included in FY 17 as expense reimbursements for
backfilling City staff working on the Santiago Hills II project.
Proiected General Fund Revenues for FY 17
Misc. Revenues
$768,644
0.72%
Use of Money &
Property
$1,194,184
1.12% \
Transient Occupancy
Tax $5,253,000
—4.95%
Sales Tax
$43,300,000
40.70%
Revenue from Other
Agencies
$1,205,968
1.13%
Charges to Other—/
Funds $2,101,000
1.97% /
Franchises J
$2,819,726
2.65%
Fees for Services
$4,701,879
4.42%
Fines & ForfeituresJLicen1 &Permits
$1,921,200 Motor Vehicle In -Lieu
1.81% $4,308,000 $12,370,547
4.05% 11.63%
Other Taxes
$600,000
—0.56%
Property Taxes
$25,845,012
24.29%
Many of the key economic indicators continue to show signs of improvement, and our local
economy mirrors the effects of an upward growth trend. Job market conditions have improved.
Hourly wages continue to rise which should boost personal income growth and consumer
spending. The domestic economic outlook is positive and is anticipated to offset the slow global
economic recovery. 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.
ITEM 3 5/10/16
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 17
For the past eight years, the City has relied on its conservative spending practices to ride out the
effects of the Great Recession. This was aided by the City's quick response 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 continues to maintain 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 17 budget, the City will still have
approximately 42 full -time equivalent frozen positions, saving over $4.6 million annually,
including $4.5 million in the General Fund alone. 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 17 are $106.3 million, representing a 4.6% increase
over FY 16 adopted budgeted expenditures. This increase is primarily due to the continued growth
in employee retirement (PERS) costs, negotiated salary and benefit increases, contractual
obligations, the continued impact from the wind down of the Orange Redevelopment Agency
(ORA), and a limited amount of department operating budget increases, primarily related to
enhancing levels of service and meeting community needs. This estimated expenditure amount is
consistent with the amount presented at the March 22 Study Session. Provided below are the
significant conditions that are impacting the General Fund budget for FY 17:
1. Ca1PERS (PERS) Cost Increase: Retirement costs continue to escalate due to CalPERS'
(PERS) attempts to reduce the system's unfunded liability. The FY 17 PERS rates for
miscellaneous and safety plans will be 27.6% and 40.7 %, respectively, resulting in an
overall increase in retirement costs to the General Fund of approximately $2.7 million, of
which $859,000 is the result of negotiated salary increases. Costs are expected to climb at
a similar pace through FY 20, when rate increases will flatten to about 0.5 -1% per year.
2. Impact of Negotiated Salary and Benefit Increases: The proposed FY 17 budget reflects
a $2.9 million increase to salaries and benefits (excluding PERS retirement costs discussed
above) over the FY 16 budgeted amount as a result of the negotiated and approved two
year contract Memorandum of Understanding (MOUs) with all employee bargaining
groups.
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 17, the
General Fund operating budget will contribute $210,000 towards payments to Volkswagen
of Orange and Stadium Nissan. This a net decrease to the General Fund of $140,000 from
FY 16 as a result of the sunset of the agreement with Ford of Orange in FY 16. The
Business Investment Fund (115), which currently has a fund balance of $3.4 million, will
cover the anticipated payments of $3.1 million in FY 17. However, staff will return to City
Council with a mid -year budget adjustment from the General Fund into the Business
Investment Fund in FY 17 to cover payments in 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
ITEM 4 5/10/16
such, we utilized unreserved General Fund balance, generated through prior year savings,
as an essential funding source to ISFs during that time. Staff is proposing a total net FY
17 allocation of $8.6 million (up from $8.5 million in FY 16) to the Worker's
Compensation, Accrued Liability (normal retirement costs), Vehicle Maintenance,
Information Technology, and the Liability Funds to cover 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 funding the majority of these allocations within the
General Fund operating budget. Of the remaining ISFs not included as part of operating
costs, staff is requesting a transfer of $1.6 million from the General Fund unreserved fund
balance to the Equipment Replacement ($800,000) and Computer Replacement ($800,000)
Funds. A more detailed analysis of the ISFs is provided later in this report.
5. Contractual Obligations: While departments continue to manage contract agreements as
cost effectively as possible, recent legislation related to health care and minimum wage has
resulted in increases to standard maintenance and operating contracts. In addition, the City
has contract obligations with outside agencies whose costs continue to rise on an annual
basis. These contracts include tree trimming and custodial services, Orange County
Animal Control, North Net Fire Training, and Metro Cities Fire for a combined FY 17
General Fund impact of approximately $576,000.
6. Department Operating Budgets: As addressed at the Study Session on March 22 " there
are a very limited number of budget increases that result in the enhancement in the levels
of service and programs that are included in the FY 17 proposed budget. These include an
increase to the library book budget, funds to amend the Zoning Ordinance to support
economic development and streamline the building process, an adjustment of certain
positions to allow for more efficient operating controls, the addition of a fourth summer
day camp site at Grijalva Park, an increase of off -hours park security, an establishment of
a budget for supplies associated with the Community Emergency Response Team (CERT)
program, and an increase to general maintenance costs. In total, FY 17 operation and
maintenance increases approximate $500,000. Unless otherwise noted above, this
preliminary budget does not reflect any other increases in service levels or new programs.
7. Operating Requests Not Included in the Budget: Each year as part of the budget
process, the Budget Team works with the Departments in reviewing departmental budget
requests. As it is a priority to adopt a balanced General Fund budget, many worthy
departmental budget requests are not able to be included in the proposed budget as General
Fund revenues are limited. Departmental requests not included in the proposed FY 17
budget include: consultant costs related to revisions to traffic analysis models and certain
zoning code changes; additional funds for repairs to equipment; and additional funds for
supplies and equipment. Also not included in the proposed FY 17 budget are additional
funds related to the Senior Center contract with Orange Elderly Services, Inc. (OES). OES
is requesting an additional $18,000 per year as part of a new agreement that will be
presented to the City Council for consideration at the June 14 meeting. Should additional
funds not be included in the FY 17 budget, the new agreement will reflect the current
funding level of $224,100 per year. Finally the proposed FY 17 budget reflects 640 full -
time positions which is the current budgeted amount. In addition, the City's full -time
equivalent (FTE) positions, which is inclusive of all full -time and part -time positions, will
be 714 positions for FY 17. This is a slight decrease when compared to FY 16 primarily
due to thirteen 19 -hour part -time positions in the Parks Maintenance Division being
converted into four 30 -hour part -time positions in response to minimum wage and health
benefit changes and the difficulty in recruiting and retaining 19 -hour positions.
ITEM 5 5/10/16
Provided below is the proposed FY 17 General Fund departmental budgets compared to the FY 16
adopted budget.
General Fund Expenditures — Comparison of FY 16 and FY 17
Department
FY 16 Adopted
FY 17 Proposed
% Inc /(Dec)
City Attorney
$966,315
1,043,289
8.0%
City Clerk
785,502
812,455
3.4%
City Council
9,615
9,326
(3.0 %)
City Manager
1,245,554
1,378,840
10.7%
City Treasurer
93,289
95,910
2.8%
Community Development
4,208,845
4,532,047
7.7%
Community Services
8,235,348
8,946,299
8.6%
Finance
3,144,380
3,218,695
2.4%
Fire
25,796,322
27,069,602
5.0%
Human Resources
1,388,291
1,428,482
2.9%
Library
4,504,834
4,627,897
2.7%
Non - Departmental
1,982,422
1,783,496
(10.0 %)
Police
41,441,101
43,620,269
5.3%
Public Works
7,774,929
7,707,780
(1.0)%
Totals:
$101,558,048
$106,274,387
4.6%
The negotiated salaries and PERS increase account for the most significant increases to department
budgets. The only noteworthy department variance is in the City Manager's office, with a 10.7%
increase, the result of staff costs disallowed by the Department of Finance (DOF) as related to the
Recognized Obligation Payment Schedule (ROPS) for Fiscal Year 16 -17. In the past these salaries
have been covered by the ROPS under project costs however, the DOF has determined this is no
longer justifiable, therefore, the salaries have been absorbed by the General Fund.
Summarizing the financial picture, the current proposed FY 17 expenditure budget is $106.3
million. With the projected FY 17 revenue amount projected to be at $106.4 million, the General
Fund budget will be balanced and our revenues are expected to exceed expenditures by just over
$115,000.
Estimated General Fund Balance for FY 17
As mentioned earlier in this report, the FY 17 projected beginning General Fund unreserved fund
balance is $5.7 million. With revenues exceeding expenditures in our FY 17 budget, the ending
General Fund unreserved fund balance is estimated to be $5.8 million.
Therefore, staff recommends the transfer of $2.6 million from the unreserved fund balance:
$800,000 to the Equipment Replacement Fund, $800,000 to the Computer Equipment
Replacement Fund, and $1.0 million to the Capital Projects Fund. In addition, to continue with
City Council's previous direction, staff proposes the FY 17 budget include an additional transfer
of $500,000 to the Catastrophic Reserve, increasing the total amount to just over $19.5 million.
With this addition, the Catastrophic Reserve would increase to slightly over 18.0% of the General
Fund budget. While this reserve amount does not meet the target of 25.0 %, the transfer of $500,000
is consistent with Council's previous direction to increase the reserve in concurrence with the
increase in expenditures. The result of the transfers and reserves is a FY 17 estimated ending
General Fund unreserved fund balance of $2.7 million.
ITEM 6 5/10/16
FY 17 Estimated Available General Fund Balance
Unreserved Fund Balance Available @ 6/30/16
$ 5,701,335
FY 17 Estimated Revenues 106,389,537
FY 17 Estimated Expenditures (106,274,387)
Excess Revenues over Expenditures 115,150
Unreserved Fund Balance Available @ 6/30/17 5,816,485
Transfers Out
Transfer to Equipment Replacement Fund (800,000)
Transfer to Computer Equipment Replacement Fund (800,000)
Transfer to Capital Projects Fund (1,000,000)
Total Transfers Out (2,600,000)
Increase to General Fund Catastrophic Reserve (500,000)
Unreserved Fund Balance Available @ 6/30/17 2,716,485
General Fund Catastrophic Reserve 19,567,960
Est. Reserved & Unreserved General Fund Balance @ 6/30/17 S22,284
Review of Other Funds
Water Fund:
The FY 17 beginning fund balance for the Water Enterprise Fund is $5.4 million. With estimated
revenues of $26.4 million and expenses of $29.0 million, FY 17 is expected to end with a fund
balance of $2.6 million. This fund balance, however, does not reflect any capital projects for FY
17 which are currently budgeted in the 7 -Year Capital Projects Plan at $2.0 million. Facilitating
the approved $2.0 million capital program for FY 17 would reduce the FY 17 fund balance to
approximately $700,000. Given the negative impact to revenue as a result of the State's mandate
to reduce water consumption, staff is requesting direction from the City Council as to how much,
if any, capital projects should be included as part of the FY 17 budget.
It is important to note the reduction in the State mandated water conservation rate from 28% to
21% is not included in the revenue projections for FY 17. This has the potential to increase
revenue by approximately 3 -5 %. In addition, the FY 17 revenue estimate does not include the
potential pass thru revenue which will be calculated in September 2016 and applied in January
2017. The expenditures identified in this report reflect a small increase in the cost of water due to
significant increases imposed by Municipal Water District of Orange County and Orange County
Water District. Typically expenditures would reflect a decrease in conjunction with the reduced
water sales, however purchased water unit cost increases from these agencies have combined to
result in the proposed FY 17 expenditures to remain flat.
Sanitation Fund:
The Sanitation Fund began FY 16 with an available fund balance of $4.5 million. The Sanitation
Fund's budget for FY 16 shows expected revenues of $4.1 million, expenses of $5.3 million, and
new capital projects of $700,000, resulting in an expected year end available fund balance of $2.7
million.
With FY 17 revenues projected at $4.1 million, expenditures at $5.1 million, and new capital
projects of $650,000, the estimated FY 17 ending fund balance is $1.1 million. The current
ITEM 7 5/10/16
structure of the sanitation fee only allows for approximately $400,000 for sewer line replacements,
which is included in the FY 17 Seven -Year Capital Improvement Plan budget proposal.
Due to the direct relation between water consumption and Sanitation revenues, we expect the
State's reduced water conservation mandate (from 28% to 21 %) will result in slightly higher
revenue estimates. As it is too soon to determine this number, we recommend the FY 17 Sanitation
budget remain as proposed. Staff is closely monitoring these developments and will continue to
keep the City Council updated as information is made available.
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 replaced 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. In FY 16, City Council approved $3.0 million to fund equipment replacements.
In addition, due to lengthy delivery times, an additional $3.4 million was carried over from the
previous year for a total FY 16 expenditure budget of $6.4 million. The FY 16 approximate year-
end fund balance will be $6.1 million. The FY 17 budget includes proposed revenue of $1.2
million, which includes an $800,000 General Fund transfer. However, staff is also proposing
vehicle replacements of $1.8 million which drops the FY 17 ending fund balance to $5.4 million.
Included in the replacement schedule are: three vehicles for Fire ($125,000), one vehicle for
Finance ($30,000), one vehicle for Human Resources ($30,000), one vehicle for Community
Development ($28,000), fourteen vehicles for Police ($600,000), seven vehicles for Public Works
($490,000), five vehicles for Community Services ($224,000), and three vehicles for Water
($296,000).
Workers' Compensation Fund:
The Workers' Compensation Fund began FY 16 with an available fund balance of $367,000. With
the continued successful pro- active approach to managing claims, staff is projecting an ending FY
16 fund balance of $695,043. As we continue to close old claims and seek out alternative programs
to mitigate new ones, we anticipate the Workers' Compensation Fund will end FY 17 with a fund
balance of $646,000 based on revenues and expenditures of $3.7 million each. Recently, the
Workers' Compensation Fund has faced increasing actuarial valuations for estimating 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 $7.9 million at the beginning of FY
16.
Liability Fund:
The Liability Fund began FY 16 with an available fund balance of $2.0 million, which contained
an IBNR reserve component of $840,000. As with the Equipment Replacement Fund, prior years'
allocations to the Liability Fund have not kept up with operating expenditures. For several years,
the existing significant fund balance absorbed the decrease in allocation. The estimated ending
FY 16 available fund balance is just over $2.0 million. In FY 17, staff is proposing to allocate
$1.3 million in revenue to cover proposed expenditures of $2.0 million, resulting in an estimated
FY 17 ending fund balance of $650,000.
Employee Accrued Liability (PERS) Fund:
The Employee Accrued Liability Fund primarily accounts for accrued leave payouts to employees
upon their termination or retirement. Its secondary function is to hold funds in anticipation of
increases to future PERS retirement costs, which comprise the majority of the reserves in this fund.
ITEM 8 5/10/16
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 over $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. This fund is estimated to end FY 17 with an available fund balance
of $5.5 million, including the reserve for future PERS cost of $5.2 million.
As mentioned at the Study Session on March 22 " staff is planning to participate in the CAPERS
Pre - Payment program, which allows the City to pre -pay its entire year contributions at a discounted
fixed cost. For FY 17, the lump sum payment is approximately $18.9 million ($7.2 million for
Miscellaneous and $11.7 million for Safety). The pre - payment is calculated based on a number of
actuarial assumptions, including projected payroll figures from actual FY 14 data which is then
projected to FY 17. 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.
Capital Projects Fund:
As is well known, 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 16, with prior year's General Fund savings, the City Council approved a transfer of $1.5
million to the Capital Projects Fund, resulting in an estimated ending FY 16 fund balance of $9.2,
of which $8.5 million has been set aside by Council for future needs. Staff continues to make
every effort to prolong much needed repairs and improvements to City facilities and infrastructure;
those repairs which cannot be postponed and have been included in the Seven -Year Capital
Improvement Plan. With a total of $1.9 million in capital projects proposed in FY 17, the ending
FY 17 fund balance is estimated at $8.3 million. As we close the books on FY 16, should there be
additional savings beyond the estimated $1.5 million, it is recommended such funds be transferred
into the Capital Improvement Fund. As in past years, an end -of -year budget report will presented
to the City Council in October 2016.
Conclusion
With additional direction provided by City Council at the March 22 Study Session, staff has
further refined the budget projections for FY 17. Although 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 17 exceed our
expenditures and we anticipate ending FY 17 with an estimated $2.8 million ending fund
balance. As we look forward to FY 18, budget projections remain consistent with FY 17
numbers. Revenues are expected to grow modestly with an increase of 2.0 %, projected to be
$108.5 million. With a conservative increase of 1.0%, FY 18 expenditures are estimated at
approximately $107.3 million. Staff will continue to monitor trends and search out cost saving
measures to minimize budgetary impact.
ITEM 9 5/10/16