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08.01 Proposed FY 18-19 Budget Staff Report MARY E. MURPHY CO UNCIL LATE A GENDA ITEMS Council Meeting April 24, 2018 CITY OF ORANGE Finance Department Memo — Hot F ile To: Honorable Mayar and Members of the City Council From: Will Kolbow, Finance Director ! N� Through: Rick Otto, City Manager Date: Apri124, 2018 Re: Agenda Item 8.1 —Budget Study Session Staff discovered an error in a formula in the Fire Department's recommended fee schedule. This is included as part of the Fee Study —Recommended Fees attachment. The attached revised schedule corrects the formula to reflect the proposed increases to fees for the Fire Department. 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W a � � � � � � ����°��Q DA ITEM G: .� AGEN *: �:* ��� :� Apri124, 2018 ��8������ � TO: Honorable Mayor and Reviewed/Verified By: Members of the City Council City Manager � Finance Directo FROM' R1CIC �tt0 To Be Presented By: Will Kolbow • City Manager 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 2018-19 Budget 2. SUMMARY This is the second study session in support of the preparation of the FY 18-19 budget (FY 19). This study session provides an updated analysis of the projected General Fund revenues and expenditures for FY 19, the results from the Master Fee Schedule study, an update on the City's Reserve Policy,as well as a status and analysis of the Special Revenue,Internal Service, and Water Funds for FY 19. 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 � • � 1 4/24/18 7. DISCUSSION and BACKGROUND This is the second study session in support of the preparation of the City's FY 19 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 19; • Presenting the results from the Master Fee Schedule; • Providing an update on the City's Reserve Policy, and; • Presenting a status and analysis of the Special Revenue, Internal Service, and Water Funds for FY 19. At this point, we are on target to present a proposed FY 19 budget to the City Council for review and adoption at the June 2018 meeting. Status of FY 18 General Fund Budget As the end of FY 18 quickly approaches,General Fund revenues are expected to increase to$109.2 million, 1.3% over budget. This amount is $648,000 above the revenue estimate presented at the March 27 Study Session due to an increase in sales tax projections, mainly in building and construction. Sales tax revenue estimate for FY 18 is anticipated to be $187,000 less than the budget of $42.3 million primarily due to the timing of a one-time county pool adjustment. Removing this anomaly, sales tax receipts are above target for FY 18. We also anticipate an increase in fuel sales, as well as strong performances in building and construction, business and industry, and restaurants which will continue to bring in revenue. Property taxes are expected to be $40.1 million, $314,000 over budget, related to increased property tax increment distributed by the County of Orange for the Successor Agency. Use of Money and Property is anticipated to be $300,000 over budget, resulting from higher interest rates generating more interest earnings, as well as additional revenue from new rentals. Based on current trends, other revenue sources such as real property transfer tax, licenses and permits, and property tax in lieu of motor vehicle fees, are also expected to have higher than budgeted receipts. Finally, Miscellaneous Revenues are anticipated to be $1.7 million, $1 million over budget. The majority of this increase is contributed by reimbursements from the Office of Emergency Services for our Fire Department's assistance with wildfires throughout the state.With an early estimate of$3.0 million in expected departmental savings, General Fund expenditures are anticipated to close at $108.4 million. Should year-end revenues and expenditures hold steady, staff expects to end the fiscal year with $855,000 in revenues over expenditures. As such, the estimated ending General Fund balance for FY 18 is expected to be $8.2 million. Projected General Fund Revenues for FY 19 Total General Fund revenues for FY 19 are projected to be $111.8 million. This represents an increase of$2.6 million or 2.4% over the estimated revenue for FY 18. The estimated FY 19 revenue amount is $276,000 over the revenue projections presented at the March 27th Study Session based on updated current and projected activity levels. Provided below is a summary of the General Fund revenue highlights for FY 19: ITEM 2 4/24/18 • Sales Tax is the largest source of General Fund revenue. In FY 19 the City anticipates receiving$43.9 million, $1.7 million(4.1%)above the FY 18 estimate. We expect revenue from fuel sales will continue to trend upward. The rebranded Kia dealership, the new Target store, and new stores at the Outlets of Orange will bring in additional auto and retail sales. In addition, we expect strong performances in building and construction activity, restaurants, and the business-to-business sector. • Property Tax is the second largest source of General Fund revenue and is expected to be $41.7 million, generating an additional $1.6 million, an increase of 4.1%. Reassessments for homes and commercial properties sold at higher property values are anticipated to generate more property tax receipts. • Use of Money and Property is projected to be $2.0 million, 11.7% above the FY 18 estimate, based on higher interest earnings and additional rental revenue. Proiected General Fund Revenues for FY 19 Transient Occupancy Tax Sales Tax $5,100,500 $43,880,000 4.57% 39.25% OtherTaxes Miscellaneous $750,000 Revenues 0.67% $590,469 0.53% Use of Money& Property $1,989,920 1.78% Revenue from Other Agencies$1,491,808 1.33°/a Charges to Other Funds $2,451,116 2•19��ranchises $2,609,432 2.33% Fees for Services $4,842,471 Licences and Permits Property Taxes 4.33% Fines&Forfeitures $4,692,600 $41,739,040 $1,658,000 4.20% 37.34% 1.48% Many of the key economic indicators continue to show signs of improvement, and our local economy mirrors the effects of a steady growth trend. Job market conditions have improved, and hourly wages continue to rise which should boost personal income growth and consumer spending. According to many economists, the overall economic outlook is positive. However, 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 ITEM 3 4/24/18 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 19 The City continues to rely on its conservative spending practices which are responsive to the priorities set by the City Council. This includes past implementation of significant departmental operating budget reductions, underfunding internal service fund allocations, effecting a 5.0% furlough for non-safety employees (ended 7/1/14), and freezing vacant positions. As our early projections for the proposed FY 19 budget reflected expenditures over expenditures by $2.5 million,we implemented budget reductions in salaries and benefits by 2.5% and maintenance and operations by 5%to "close the gap". This budget balancing measure will attain a sufficient target reduction of$2.5 million in General Fund Expenditures. This will mitigate the anticipated budget deficit without compromising service levels from departments. The City also realizes substantial savings with tight controls on operating expenses, as we continue to maintain approximately 43 full-time equivalent frozen positions, saving over$4.3 million annually, including $4.1 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 General Fund expenditures for FY 19 are $111.8 million. This reflects an increase of 3.7%in expenditures over the original adopted FY 18 budget.This increase is primarily due to the continued growth in employee retirement (PERS) costs, an increase in negotiated pay and benefits, an increase in contractual obligations, and a limited amount of department operating budget increases related to maintaining levels of service to meet community needs. This estimated expenditure amount is more than the amount presented at the March 27 Study Session due to adjustments made to internal service fund allocations, approval of additional necessary departmental operating expenditures,and adjustments to salaries and benefits. Provided below are the significant conditions that are impacting the General Fund budget for FY 19: 1. Ca1PERS (PERS) Cost Increase: Retirement costs continue to escalate due to PERS' attempts to reduce the system's unfunded liability. The normal cost rates for the miscellaneous and safety plans will be 10.875%and 18.572%respectively. These rates are similar to the prior year. The City's unfunded liability contributions for the miscellaneous and safety plans will be $6,052,685 and $8,837,377, respectively, for a total of $14,880,578. Of this unfunded liability payment, $12,897,424 will be paid by the General Fund. In total, PERS costs will increase approximately $2.4 million Citywide, and $2.0 million in the General Fund. 2. Labor Costs: In FY 18,the City negotiated two-year or two and one-half year agreements with all eight of their bargaining groups. As a result, the FY 19 budget reflects the applicable negotiated pay and benefits increases of$2.4 million for the second year of the agreements. 3. Sales Tax Cost Sharing: In the past,the City entered into sales tax cost sharing agreements with certain enterprises to attract and retain their business in the City. In FY 19,the General Fund operating budget will continue to maintain its contribution of $125,000 towards payments to Stadium Nissan. The Business Investment Fund (115) will cover other anticipated payments of $2.4 million in FY 19. As part of the annual budget, staff is requesting a transfer of$1,500,000 to the Business Investment Fund from General Fund Unreserved Fund Balance to cover payments in future years. ITEM 4 4/24/18 4. Internal Service Fund(ISF)Allocations: Staff is proposing a total of$11.2 million in FY 19 allocations, $2.2 million more than the $9.0 million FY18 budget. This is primarily due to the $1.3 million allocation to the Vehicle Maintenance Fund (710); only $175,000 was allocated in FY 18 since the fund sustained a sufficient balance at that time. Allocations will be distributed to the following programs: Worker's Compensation, Accrued Liability (for retirement costs), Vehicle Maintenance, and Information Technology. The total Liability Fund(740)allocation of$1.4 million will be funded by a current appropriation of $1.0 million in General Fund expenditures, and $350,000 transfer from the General Fund Unreserved Fund Balance. As in FY 18, most ISFs are budgeted as part of FY 19 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 $1.0 million to the Equipment Replacement Fund (720), $900,000 to the Computer Equipment Replacement Fund(790), $500,000 to the Capital Projects Fund (500), and $1.5 million to the Business Investment Fund(115) from the General Fund Unreserved Fund Balance. 5. Contractual Obligations: The departments continue to manage contract agreements as efficiently and cost effectively as possible. However, in FY 19, we expect an additional General Fund cost of $146,000 for contract agreements with Orange County Animal Control, North Net Fire Training, Metro Cities Fire Authority, power washing and steam cleaning services for several City facilities, and additional security to City parks and libraries. 6. Department Operating Budgets: As addressed during the March 27 Study Session, departments continue to hold the line with their budgets without making any significant changes to their budgeted amounts from FY 18. However, this continues to get more difficult each year as there are programs and services that warrant budgetary increases,but the City is not in a position to devote funds to these programs. Nevertheless, other than the contractual obligations noted above, as well as the budget reductions discussed during the last budget session, departments are holding the line with their expenditures without making any significant changes to their budgeted amounts from FY 18. 7. Staffing Levels: The proposed FY 19 budget does not include the addition of any new full- time positions in spite of increased services levels being provided by nearly every department. Orange remains committed to doing more with less, as calls for service continue to be at their highest levels for the Police and Fire Departments, planning and building applications continue to come in at high levels, parks and libraries are being utilized more frequently, and Public Works is managing an increased number of both capital and infrastructure projects. The number of funded Full Time Equivalent (FTE) positions has dropped significantly from 796 FTEs in FY 09 to 719 FTEs in FY 19. Further, we continue to implement an extended"hiring chill"to hold certain positions vacant for an extended period of time, as a cost saving measure for FY 19. ITEM 5 4/24/18 Provided below is the proposed FY 19 General Fund departmental budgets compared to the FY 18 adopted budget. General Fund Expenditures—Comparison of FY 18 and FY 19 Department FY 18 Adopted FY 19 Proposed % Inc/(Dec) City Attorney $1,030,821 1,027,807 (0.3%) City Clerk 592,908 681,225 13.0% City Council 9,196 7,696 (16.3%) City Manager 1,405,295 1,431,999 1.9% City Treasurer 90,572 92,336 1.9% Community Development 4,346,433 4,525,055 3.9% Community Services 9,124,816 9,492,766 3.9% Finance 3,026,675 3,073,641 1.5% Fire 27,559,607 28,342,116 2.8% Human Resources 1,465,443 1,461,605 (0.3%) Library 4,877,929 4,988,956 2.2% Non-Departmental 2,113,146 2,080,100 (1.6%) Police 43,790,290 46,150,640 5.1% Public Works 8,317,057 8,428,456 1.3% Totals: $107,750,188 $111,834,398 3.7% Despite the implementation of the proposed operating budget reduction policy, most departments reflect slight increases to their respective budgets, mostly due to PERS retirement costs, labor costs, contractual obligations, and the allocation of internal service costs. There is a decrease of 16.3%in the City Council's budget as certain line items in their maintenance and operation budget have been removed. The variance in the City Clerk's office reflects the $80,000 (13%) increase for the 2018 General Municipal Election. Summarizing the financial picture, the current proposed FY 19 expenditure budget is $111.8 million. With the FY 19 revenue amount projected to be a little under$111.8 million,the General Fund budget will have a surplus of$11,000. Budget Balancing Strategies As staff continues to analyze options for proposing a balanced budget for FY 19,we have identified a number of strategies in order to achieve this goal which will have overarching long-term benefits. It should be noted that none of the anticipated budget savings in these below strategies are currently reflected in the proposed FY 19 budget. However, implementing one or more of the strategies is critical to our long-term fiscal health, including adopting a balanced budget for FY 20. 1. Fee Study: In the General Fund, revenues from fees and services are based on the City's Master Fee Schedule. The last comprehensive user fee study resulted in an update to the Master Fee Schedule in January 2008. In the years following, fees were reviewed by staff, with some being updated in February 2010. Since that time other fees were raised only periodically, based on a review of a specific fee, or by state mandate. In December 2017, the City engaged Matrix Consulting Group to perform a comprehensive review of the Master Fee Schedule. After in-depth meetings with each department,their study concluded the City is recovering approximately 59% of costs associated with the services provided. ITEM G 4/24/18 Matrix's complete report, as well as a detailed listing of recommended fees for FY 19, is attached to this staff report. As part of the study, Matrix will provide a model to update the fees on an annual basis. Any future increases will be analyzed through the model and brought to Council for adoption. These increases will be tied to the City's increased costs, so CPI will not necessarily be a factor. While full cost recovery is not practical in all situations, staff has recommended fees to increase overall cost recovery to 79%, resulting in an increase in General Fund revenue of approximately $1.5 million. 2. Staff Labor Cost Distribution: As a result of the fee study, we determined staff can do a better job at capturing their time invested in projects which are paid far by private development or by capital improvement funds. As such, we are reviewing how staff charges its time for development related services and capital projects in our payroll software, and identifying efficient ways to capture that time to accurately charge the cost, resulting in a lower salary burden on the General Fund. 3. Organizational Efficiencies Review: As mentioned earlier, with every position vacancy, we address whether the position can be eliminated, consolidated, or downgraded. Further, we are consistently assessing our organizational structure to determine where efficiencies exist or if there is a better way of doing things. As we currently have a few key top management vacancies, we are in the process of assessing different organizational efficiencies. 4. Monetization of Street Lights: The City recently acquired approximately 4,400 street lights,bringing its overall total to 7,600. Advances in mobile technology require more cell sites to provide high-speed data connections. Staff has begun negotiations with several mobile providers to provide space on our street lights for their wireless infrastructure needs. We anticipate the City will realize revenue for these sites, or free or reduced-price services from these providers. For example, in November 2017,the City entered into an agreement with Mobilitie to install cell facilities on twelve light poles,and it is expected that additional agreements with wireless carriers will be presented to the City Council in the near future. Estimated General Fund Balance for FY 19 As mentioned, the FY 19 projected beginning General Fund unreserved fund balance is $8.2 million. With a surplus of about $11,000, the ending General Fund unreserved fund balance is estimated to be slightly under $8.2 million. Staff recommends the transfer of$4.3 million from the unreserved fund balance to the following funds: $1.0 million to the Equipment Replacement Fund; $900,000 to the Computer Equipment Replacement Fund; $350,000 to the Liability Fund, $500,000 to the Capital Projects Fund, and $1.5 million to the Business Investment Fund. Due to budget reductions, and in anticipation for potential deficits in future budget years, staff proposes the FY 19 budget not include an additional transfer of General Fund monies to the Catastrophic Reserve. Since FY 15, the City Council has prudently set aside $2.0 million to this reserve, ensuing in a total reserve amount of$20.1 million. The transfers and reserves result in a FY 19 estimated ending General Fund unreserved fund balance of$3.8 million. ITEM 7 4/24/18 FY 19 Estimated Available General Fund Balance Unreserved Fund Balance Available @ 6/30/18 $8,186,360 FY 18 Estimated Revenues $111,795,356 FY 18 Estimated Expenditures 111,784,398 Revenues over Expenditures 10,958 Unreserved Fund Balance Available @ 6/30/19 8,197,318 Transfers Out Transfer to Computer Equipment Replacement (900,000) Transfer to Equipment Replacement Fund (1,000,000) Transfer to Capital Projects Fund (500,000) Transfer to Business Investment Fund (1,500,000) Transfer to Liability Fund (350,000) Total Transfers Out (4,250,000) Reserve for Employee Lump Sum Payments in FY 20 (149,650) Estimate Available Fund Balance @ 6/30/19 3,797,668 General Fund Catastrophic Reserve 20,067,960 Est. Reserved & Unreserved General Fund Balance @ 6/30/19 ��g65,62g FY 19 Reserve and Unreserved Fund Balances Estimated Available Reserves @ 6/30/19 Accrued Liability/PERS set-aside (Fund 760) $6,243,000 Business Investment Fund (Fund 115) 1,704,380 Capital Projects (Fund 500) 9,113,707 All Other Internal Service Funds (various) 12,040,890 Total Est. Available Reserves @ 6/30/19 $29,101,977 General Fund Catastrophic Reserve $20 067,960 Total Est. Available Reserves @ 6/30/19 $49,169,937 Unreserved General Fund Balance 3,797,668 Total Est. Available Reserved and Unreserved @ 6/30/18 �5 ., 69 7,605 ITEM 8 4/24/18 Early Look at FY 20 General Fund As a result of changes to sales tax projections, our analysis suggests revenues will be $113.8 million, $300,000 more than what was reported at the March 27 budget session. For expenditures, our initial estimate remains at $116.1 million, a 3.8% increase over the current FY 19 proposed expenditures. This amount assumes the following: (1) Departments continue to maintain their budget reductions from FY 19; (2) An increase in PERS costs of $2.2 million, and; (3) An estimated 2%increase from last year's expenditures which includes negotiated salary and benefits, as well as possible increases to contract obligations. Based on our estimates, we are currently projecting a shortfall of$2.3 million. We will continue to assess various cost saving and budget balancing strategies, including renegotiating the street sweeping contract with CR&R, updating and analyzing the Master Fee Schedule, and reviewing the organizational structure to increase operational efficiencies. Review of Other Funds Water Enterprise Fund (600): The Water Enterprise Fund started FY 18 with a fund balance of$16.6 million. As a result of the City Council's approved rate adjustment in calendar year 2017, which provides needed capital dollars to replace the City's aging water infrastructure, the revised estimated revenue is $30.5 million, $2.9 million over the adopted budget. Expenses remain at $39.5 million, which includes $6.8 million in carryovers, and $2.4 million in new capital improvement projects. The result is an anticipated FY 18 ending fund balance of approximately $7.6 million. FY 19 revenue and expenditures are estimated at $33.4 and $35.6 million, respectively, which includes $3.5 million in water capital projects. As a result, FY 19 is expected to end with an estimated fund balance of $5.5 million. With the new rate model approved by the City Council in December 2017, it is expected that the fund balance will increase slightly by FY 20 and beyond. Sanitation Fund (220/520): The Sanitation Fund (220) began FY 18 with an available fund balance of $3.7 million. With adjusted revenue estimates of$4.2 million, expenses of$6.2 million, and new capital projects of $825,000,the expected year end available fund balance is $874,000. FY 19 revenues are projected at $5.6 million and expenditures at $5.0 million resulting in an estimated ending fund balance of $1.4 million. It should be noted the City Council recently approved a rate adjustment to provide needed capital dollars to replace aging sewer infrastructure throughout the City's 312 miles of sewer pipe line. As a result,the estimated FY 18 revenue for the Sewer Capital Projects Fund(520)is $1.9 million. Along with a beginning fund balance of $295,513 and mid-year expenditure adjustments of $600,000 for sewer improvement within Palmyra Avenue and Waverly Street, the ending fund balance is estimated at$1.6 million. The FY 19 revenue estimate is $2.3 million, and$2.0 million in capital improvement expenditures are allocated towards sewer line replacement and maintenance. The estimated FY 19 ending fund balance is $1.9 million. Gas Tax Fund (270/271/272/274): The Gas Tax Fund began FY 18 with an available fund balance of$2.5 million, with expected adjusted revenues of$3.2 million and expenses of$5.3 million. This includes operating and capital ITEM 9 4/24/18 improvement carryovers of$1.2 million and new capital projects of$2.2 million. The result is an expected year end available fund balance of$374,000. With the approval of SB-1 Transportation Funding and the creation of the Road Maintenance and Rehabilitation Account(RMRA),the City's expected FY18 receipts of$803,000 will be allocated towards the Pavement Management Program (PMP) for the maintenance needs of the City's roadway system. In FY 19, the City is estimated to receive about$2.3 million from the State, also to be fully allocated towards PMP expenses. Equipment Replacement Fund (720): We continue to be prudent when replacing vehicles in our fleet. In FY 18, City Council approved $2.1 million to fund equipment replacements. Due to lengthy delivery times, an additional $3.2 million was carried over from the previous year, along with other purchase order carryovers, for a total FY 18 expenditure budget of$5.5 million. The FY 18 estimated year-end fund balance will be $3.4 million. The FY 19 budget includes proposed revenue of $1.5 million, which includes a $1 A million General Fund transfer. Staff is proposing vehicle replacements of $2.0 million in this fund, resulting in an estimated $2.9 million FY 19 ending fund balance. Included in the replacement schedule are: three vehicles for Fire ($1.2 million), thirteen vehicles for Police ($719,000), two vehicles for Public Works($82,000), and one vehicle for Community Services ($40,000). Staff is also proposing additional vehicle replacement of one electrical vehicles for the Fire department in the amount of$39,000, funded by the Air Pollution Reduction (AQMD) Fund (245). In addition, Public Works will utilize a combination of Sanitation (220) and AQMD funds to purchase a $275,000 replacement VacCon Truck, along with using Water Utility Operations (600) funds to purchase two vehicles totaling $170,000. Lastly, the Police department will utilize Federal Asset Forfeiture Fund(355)to purchase a Lenco BearCat rescue vehicle. Workers' Compensation Fund (730): The Workers' Compensation Fund began FY 18 with an available budgetary fund balance of$7.8 million. With the continued successful pro-active approach to managing claims, staff is projecting an ending fund balance of $7.2 million. With FY 19 revenues projected at $3.8 million and expenditures of$4.0 million,the estimated ending budgetary fund balance is $7.0 million. Please note this does not include a provision of incurred but not reported (IBNR) liabilities, which can fluctuate greatly each year and has a current balance of$5.5 million. Liability Fund (740): The Liability Fund began FY 18 with an available budgetary fund balance of$1.5 million. The estimated ending FY 18 available fund balance is projected to be $788,000. In FY 19, staff is proposing to allocate $2.5 million in revenue to cover proposed expenditures of $2.2 million, resulting in an estimated FY 19 ending budgetary fund balance of $1.1 million. This does not include a provision for IBNR liabilities, which can fluctuate greatly each year and has a current balance of$915,000. Employee Accrued Liability (PERS) Fund (760): The Employee Accrued Liability Fund primarily accounts far 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. ITEM 10 4/24/18 To cover employee leave payouts,fund revenue is allocated through the payroll process. Budgeted expenditures are based on estimated costs of potential FY 19 retirements, making it difficult to calculate. However, we estimate accrued leave payouts using an average amount over the past five years. Transfers for PERS costs have been made into this fund using year-to-year savings from the General Fund, bringing the PERS reserve to a current balance of$6.2 million, also the estimated ending fund balance for FY 19. Capital Projects Fund (500): Due to lack of other resources for renovations and future improvements to City facilities and infrastructure, several years ago the City Council began to set-aside monies from the General Fund unreserved fund balance in the Capital Projects Fund. This fund began FY 18 with an available budgetary fund balance of$12.5 million. The estimated ending FY 18 available fund balance is projected to be $8.6 million. In FY 19, staff is proposing to allocate $500,000 to cover proposed expenditures of $470,000 in new capital improvement projects. Also, due to a FY 17 inter-fund loan of$2.8 million to the Proposition 172 Fund (120), this fund is projected to receive a $473,000 payment, resulting in an estimated FY 19 ending budgetary fund balance of$9.1 million. Staff continues to make every effort to prolong much needed repairs and improvements to City facilities and infrastructure. Repairs that cannot be postponed have been included in the Five-Year Capital Improvement Plan. As the FY 18 accounting records are finalized, we will recommend additional General Fund savings be transferred to the Capital Improvement Fund. As in past years, an end-of-year budget report will be presented to the City Council in October 2018. Proposed Reserve Policy The only formal reserve policy the City currently has is the General Fund Catastrophic Reserve, established in May 1996 at a level of 25% of General Fund expenditures. This reserve was established by a vote of the City Council (not by Resolution). The City has not met its reserve target in the General Fund for several years. There was no formal action defining what steps the City should take should the reserve drop below its target. In February 2009, the Governmental Accounting Standards Board established its Statement No. 54 (GASB 54), which defines how fund balances should be reported and what standards must be met to establish various levels of reserves. Although the General Fund Catastrophic Reserve likely meets the definition of"assigned"under GASB 54,historically it has been defined as"unassigned" in the City's financial statements. In October 2016, staff first presented the idea of a comprehensive reserve policy to the City Council. Subsequently, staff studied reserve policies of other cities in the context of how those various cities operate. We also analyzed the City's fiscal health. We then determined a set of reserves based on the City's operations and presented these ideas at the FY 18 budget study session on May 2, 2017. The City Council provided feedback on the catastrophic reserve, capital reserve, and equipment replacement reserve. Attached to this staff report is a proposed reserve policy, based on recommendations and best practices from the Government Finance Officer Association and the California Society of Municipal Finance Officers. ITEM 11 4/24/18 Conclusion Staff has further refined the budget projections for FY 19 since the March 27 Study Session. Although the future looks encouraging, the current financial times remain unclear. The economy continues to improve and remains strong, but the City still faces some significant financial challenges. Nevertheless,our revenues slightly exceed expenditures,and we anticipate ending FY 19 with an estimated $3.7 million ending General Fund balance. We are confident that this City Council will adopt a balanced FY 19 budget in June. Staff will continue to monitor trends and search out cost saving measures to minimize budgetary impact. 8. ATTACHMENTS • DRAFT Report on the Citywide Cost of Services (User Fee) Study by Matrix Consulting • Fee Study—Recommended Fees • Proposed Financial Reserve Policy ITEM 12 4/24/18