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. The revenue impact remains the same as presented.
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����°��Q DA ITEM
G: .� AGEN
*: �:*
��� :� Apri124, 2018
��8������
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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