HomeMy WebLinkAboutStaff Report 1.A - 2/11/2013 w� `° Agenda/ n. 1 .A
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DATE: February 11, 2013
TO: Honorable Mayor and Members of the City Council through City Manager
FROM: Bill Mushallo, Finance Director
SUBJECT: Mid-Year General Fund Financial Forecast Update
RECOMMENDATION
It is recommended that the Council,receive the fiscal year 2012-13 Mid-Year Financial Forecast
Update report. No action is requested at this time.
BACKGROUND
In January, 2011 the City Council reviewed a five year General Fund financial forecast. The
forecast at that time was based on assumptions regarding cost escalation for the period, and the
best information then available regarding revenues. The forecast predicted a shortfall of $2.3
million in FY 2011-12 which, if left uncorrected, increased to a deficit of$14.1 million in 2014-
15. At that time the Council was advised of numerous budget balancing strategies that would be
implemented over the next several months in order to reduce the projected deficit.
The Forecast has been revised multiple times since the initial presentation in January, 2011. The
revisions included the implementation of the budget balancing strategies mentioned above, along
with updates of all critical forecast assumptions. The most recent forecast update was included
in the 2013 budget that was adopted by the City Council in,June,2012. At that time the ending
General'. Fund balance at June 30, 2013 was projected to be $.4 million. That balance was
projected to grow to $1.4 million by June 30, 2016.
DISCUSSION
The five-year financial forecast is periodically updated to provide the Council with a long-term
financial planning-tool. It has been the practice that updates occur twice annually; at mid-year
and year-end.. As a:parf of the forecast updates the following items are considered:
1. The forecasting process/model is constantly in,a state of development and improvement..
2. Year-end results from the prior fiscal year are updated and included in the forecast.
3. An economic update is included.
4. Current year revenues and expenditures are updated. As actual amounts are realized
during the year projected amounts are analyzed and validated or revised.
5. Model assumptions for revenues and expenditures are'analyzed'and revised as necessary.
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Agenda Review:
City Attorney Finance Dir ctor Maa
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6. Any ongoing structural deficit is identified.
The five year forecast has been updated as of mid-year 2012-13. The update includes multiple
adjustments that will be included in the Mid-Year Budget Adjustments Council item presented
later this evening. Those adjustments provide al revised FY 2012-13 year-end projection of
revenues, expenditures and fund balance. This provides a base for calculation of the forecasted
amounts over the next four years.
Most forecasters are looking at 2013 being another mediocre year for economic growth. It is
anticipated, however, that the growth will accelerate as the year progresses. The US economy is
projected to grow about 2.1 percent this year and the unemployment rate is not projected to
change significantly. That would put the 2013 jobless rate at about 7.7%; little changed from
where it is now. California:unemployment is projected to drop to about 9.7%this year and 8.4%
in 2014.
The housing market is a brightspof.in the economy. Home construction and building permits are
trending upward. Locally, the median price of a home continues to rebound and foreclosures are
declining to the lowest level in several years.
2012-13 fiscal year-to-date General Fund revenues have been analyzed and projected amounts
for the remainder of the current fiscal year have been developed. Based on that analysis the
following revenue adjustments have been madefor FY 2012-13:
Budget Mid Year Change
I SIM FY 12-13 FY 12-13
MIN
Property Taxes _ $ 6,996,048 $ 7,207,871 $ 211,823
Sales Taxes 9,900,000 9,810,000 $ (90,000)
Bus Licenses & Property Transfer Taxes 1,666,200 1,746,000 I $ 79,800 _
'Franchise Fees 2,264,853 2,752,715 $ 487,862
[Licenses & Permits j 886,990 966,816 $ 79,826
Fines &Forfeitures 539,100 612,100 $ 73,000
Investment Earnings & Rent 298;050 298,050 $ -
Intergovernmental Revenue 4,273,589 4,189,191 $ (84,399)
Charges for Services 4,145,739 4,315,984 $ 170,245
Other Revenues 31,906 28,356 $ (3,550)
TOT Transfer 1,190,189 1,190,189 $
Other Transfers 285,375 272,375 $ (13,000)
Totals 032,478;039 $ 33,389,647 $ 911,608
Total revenues during FY 12-13 are projected to be up $911,608 from budgeted amounts.
Property Taxes are expected to be $211,823 higher than budgeted. The receipt of property taxes
due to the dissolution of Redevelopment, along:with a one-tim:amount received due to the
payback of$672,528 in Housing funds, make up the expected surplus. Muni-Services is the
City's sales tax consultant and has provided us an updated forecast. Actual revenues received
through December are up 4.1%0 over the prior year. Total.annual FY 12=13 Sales Tax revenues
have been adjusted down slightly by$90,000. This is based on a slight lowering of anticipated
CPI increases in the forecastlto,reflect a reduction in the State Department of Finance's inflation
projection. Business license:and Property Transfer Tax revenues are anticipated to be $79,800
more than budget due to very strong property transfer volume during the first half of the fiscal
year Overall, franchise fee revenues are being increased by $487;862 due mainly to a planned
receipt of$500,000 from the refuse hauler. This amount was,generated based on the recently
revised refuse franchise agreement, and is recommended to be placed in Reserve. If that amount
is taken out of fund balance and put into reserves in the Current fiscal year, ending fund balance
would be $500,000 lower-in each'year of theforecast. Licenses and permits are projected to be
up by $79,826 due to strong revenues received for fire plan check.and CDD building permit fees.
Fines and Forfeitures are projected to be up by$73,000 over budget based on year-to-date
receipts for parking and Police vehicle code fines. Intergovernmental revenue is projected to be
down $84,300 due to lower anticipated vehicle license in-lieu fee revenues. Charges for Services
are projected to be up $170,245 due mainly to higher revenues received for CDD cost recovery
services. Overall transfers in are being reduced by $13,000. $12,000 of remaining SLESF funds
are being transferred into the General Fund. Asset Seizure funds of$155,000 are being
transferred in to cover Police;overtime, and $180,000 of transfers,in from the Wastewater Utility
for Ellis Creek landscape maintenance are being reversed since the costs are directly charged.
Total Expenditures are projected to be $756,347 over budget during the current fiscal year. This
is due to several factors. Retirement payouts of$77,400 are anticipated during the fiscal year
Police overtime and comp time payout budgetslare being increased by $155,000 each. Half of
that increase is being reimbursed by Asset Seizure funds. The Police,Department equipment
budget is being increased by $84,000 to pay for an updated parking;enforcement hardware and
software system. CDD cost recovery expenditures are increasing by$150,000. This amount is
being offset by increased revenue. In the1Fire Department, $22;300 is being added for
Battalion Chief overtime and $70,000 is being added to FLSA Max Overtime. These amounts
were.not included-in..salary and benefit calculations when the 2012-13 budget was prepared.
$40,000 is being added to the Parks Maintenance cost center to cover increased water usage costs
at City parks. $16,450 is being included in the:non-departmental budget to pay for the League of
California Cities membership. This amount will be offset by one or more transfers from defunct
trust funds:: It appears, based on an analysis of trust fund'activity that is currently being
conducted, additional opportunity for one-time transfers may exist. Such monies may be
available to build reserves. Finally,the Animal''Services budget has been trued up to reflect the
outsourcing of the function.
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Year End Budget Forecast
Revenue Categories 2012 2013 ' 2013
Roperty Taxes $6;814,419 $6996,048 $7;207,871
Sales end Use Taxes 9,383,601 9,900,000 9;810,000
Regency/Deer Creek hpact
Business Lic&Prop Trf Taxes 1;766,375 1,666200 1,746;000
Franchise Fees 2;287,581 2,264;853 7,752715
Licenses and Permits 932,734. 886,990 966,816
Fines&Forfeitures&Ftnatties 632,758 539,100 612,100
Investment Earnings and Rent 380,589 298,050 298,050
Intergovernmental Revenues 4,353,212 4,273;589 4,189;191
Charges for Services 4,498,117 4,145,739 4,315;984.
Other Revenues 67,214 31,906 28;356
Transient Occupancy Tax Trf 1,150,000• 1,190,189 1,190,189
Other Transfers:and.Sources 321,000 285;375 272,375
Total"Reve BS e ,; tine 132;587 6004 $.32 478"7039,rr y '$33`34;64
Year End Budget Forecast
Expenditure Categories .2012 2013, r , 2013
I Salaries and Wages $18;135;191 $18,13.5,982 $18,219,154
IStormwaterinpact I I I I
Benefits 7,712,046 8,397,408 8,442,233
Services&Supplies 4,688,281 4,514;238 5,090,838f
Budget reductions
Intragovernmental 1,161,960 1,1619960 1,129,710
Fixed Assets&Cap. Outlay 56,624 8;200 92,200
Trarisfers;Out 33,928 259;545 259;545
Total Expenditures • $31,788 ;030• $32,477,333 $33,233,680
.e._ r
,Prey: OverNnder1Ex1ka "0'_6 . t t it06 $166567
Fund Bal Beg:+ fiYeai.1 i '$461 418 '$1 26o'98a'1 $1;26-6;918 I
FUntiiBal End{,OAdas •$1;260988 .` ,til, sB4, $1xa16;9s5I
The chart above shows a summary of revenues and expenditures as of mid-year FY 2012-13. As
mentioned above,revenues are anticipated to be•up•$911,608 and expenditures are expected to
be.up $756,347. That has an overall positive'impact to projected fund balance of$155,261.
There are some risks associated with themid-year budget update. They are as follows:
1. The City's fund balance remains precariously low at approximately 4% of expenditures
in the General Fund. Council policy calls for reserves.equal to 15% of expenditures.
2. An unexpected revenue shortfall or expendituretincrease could deplete fund balance.
3. All budgets, especially salaries and benefits, remain very tight.
There are also some positives associated with the update. They include:
1. A surplus in the FY 1142 fiscal year has increased,the current fund balance from $.5
million to $1.3 million.
2. Revenues have been analyzed and trued'up, and, as of mid-year are slightly out pacing
expenditures.
3. The FY 12-13 budget remains in balance.
The long term financial forecast has also been revised in conjunction with the mid-year update.
As mentioned earlier in this report,the forecasting model and process are both constantly
evolving. A new, integrated salary and benefit forecasting module was integrated last spring in
conjunction with the FY 12-13 budgeting process. Salaries and benefits represent approximately
80% of total General Fund expenditures so it is extremely important to focus significant energy
• on this process. This new model-allows the results of each foreeastyear to roll forward to the
subsequent year In the past a separate forecast was created for each year The new model
provides for increasingly accurate forecasting.
Another key component of a forecast update is the evaluation of all assumptions associated with
revenues and expenditures. Below is a table indicating revenue assumptions that are used in the
long term forecast:
4 ;y a Forecast'
Revenue Categorie t°,
IS? tt� 05 *, 91 40.1:7:*
Property Taxes 0.5% 1.5% 2.5% 3.0%
Sales and Use Taxes 4.0% 3.0% 3.0% 4.0%
Business Luc&Prop Trf Taxes 3:0% 3.0% 3.0% 3.0%
Franchise Fees 3.0% 3.0% 3.0% 10%
Licenses and Fermits 3:0% 3.0% 3.0% 3.0%
Fines&Forfeitures&Penalties 2.0% 2.0% 2.0%. 2.0%
Investment Earnings and Rent 3.0%. 13.0% 3:0% 3.0%
Intergovernmental Revenues 0.5% 1.5% 2.5% 3.0%
Charges for Services 2:0%: 2.0% 2.0% 2,0%
Other Revenues 2.0% 2.0% 2.0% 2.0%
Transient Occupancy Tax Trf 0.O% 0.0% 0.0% 0.0%
Other Transfers and Sources 0.0%n 0.0% 0.0% 00%
Property taxe's are projected to increase only slightly during FY 13-14, increase 1.5% during FY
14-15, increase 2.5% in FY 1546, and 3% annually thereafter. Collaboration with the Sonoma
County Tax Collector's,office was critical during the formulation of this projection.
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Sales taxes are projected to increase between 3% and 4% over the duration of the forecast.
Muni-services provides the City with estimated:sales tax revenues out several years. Nominal
growth is anticipated in the major sectors over the duration of the forecast. General Retail is
expected to grow between,1.5% and 2.0%; Food Products are anticipated torgrow about 1.0%
each year; Transportation related,sales tax is expected to grow between 2.9% and 3.9%; and
Construction related sales tax is-projected to grow about 2.5% over the duration of the modeling
period. An inflation adjustment makes up the difference between the categorical growth and the
total revenue growth projections. Growth projections also vary due to the sales tax in-lieu true up
that occurs annually.
Other revenue categories except Intergovernmental Revenues are growing between 2% and 3%
annually throughout the life of the.forecast. These small increases are mainly driven by
anticipated inflation increases over Intergovernmental Revenues are made up
predominantly of Motor Vehicle In-Lieu fees and revenue growth is tied to changes in assessed
property valuation.
Sales Tax revenues have been calculated for the recently approved Regency and Deer Creek
projects. It is anticipated that several of the stores in the Regency Project will begin to open in
mid-calendar year 2013. The anchor store in the Deer Creek project is projected to open in the
fall of calendar year 2014.. Sales tax returns are filed on a-quarterly basis and revenue is received
by the City in the subsequent quarter. This analysis does not reflect other miscellaneous
revenues or revenues from small retail outlets that may also open in the Regency and Deer Creek
Centers. It is estimated that revenues will begin to come into the,Cityin mid FY 13-14. The
impact that year is projected to be about $259,000 with revenues increasing to about $842,000 in
FY 2017. It should be noted that, because projections regarding these'sources is conservative,
the Council retains the ability to analyze and allocate some portion of the total revenues that will
be generated from these projects into Reserves, consistent with discussions at this year's goal
setting workshop.
There are also other revenue:assumptions included in the revised five-year General fund forecast.
They are as follows:
1. The one-time Property Tax amount received in FY 12-13 for Housing funds sent back to
the County is backed out of ongoing revenues in FY 13-14-and beyond.
2. A placeholder has been included for half of the ongoing refuse franchise fee payment
from the recently negotiated franchise agreement beginning in FY 13-14. That amount is
$25,0,000:annually. It should be noted that this amount would change based on Council
direction, and affect either positively or negatively, as-the case may be, current and future
balances.
3. The one-time permitting fees related to the Regency project received in FY 12-13 are
backed out of ongoing revenues in FY 13-14
4. Transient Occupancy Tax revenue growth has been strong over the past two years and
$100,000 in additional TOT revenue,is projected to be transferred in to the General Fund
in FY 13-14 and beyond. This amount would offset a minimal General Fund
contribution to the Vehicle Replacement Fund that is resumed in FY 13-14 and beyond.
Expenditure assumptions.have also been evaluated and revised. As mentioned earlier, the salary
and benefit model update has provided for much more accurate forecast information. In
conjunction with that update positions,payroll rates, allocations, and current benefits for each
employee were verified. Benefits andhretirementexpenses.were also verified and calculations
were reconciled with the payroll module: Sal-ben full time equivalent positions were also
reconciled with the budgeted authorized positions.
There have been several salary and benefit assumptions that have been incorporated into the
updated forecast. They are as follows:
1. No provision for employee cost of living adjustments have been included
2. Employee step increases are included
3. No provisions for additional employees are included at this time
4. Salary and benefits for the,Sth Lieutenant in the Police Department are included
5. Comp time payout estimates have been included
6. Fire FLSA over-max costs are included
7. PERS rates have been updated based on actuarial study information received
8. Health care insurance!:costs are projected to increase at;9%o,annually
9. Animal Services costs have been transferred from salaries,and benefits to services and
supplies
As mentioned above, PERS retirement rates have been updated based on updated actuarial
studies received in October, 2012. Those employer contribution rates have been included based
on the following table:
1.CalPERS retirement rate assumptions:
FY 12-13 FY 13-14 FY 14-15 FY 15-16 FY 16-17
Actual Actual PERS prof PERS prof Projected
Safety PERS rate 34.48% '37.74% 39.70% 40.40% 42.40%
Miscellaneous PERS rate 13.30% 14.48% 15.80% 16.20% 17.20%
Other expenditure assumptions have also been included in the forecast. They are included in the
Intragovernmental expenditure,category and are as follows:
1. $150,000 annually has been included.asta contribution to the Employee Benefits-internal
service fund. This-fund has been providing a rate holiday, but will be exhausted as of
June 30, 2013.
2. $100,000 annually is included for retiree payout costs. These amounts,vary year over
year depending°on employee turnover and retirements.
3. $100,000 is included as a minimum annual General Fund contribution to the Vehicle
Replacement Fund. The balance in thisfund is down to approximately$150,000 as of
June 30, 2012, and will need,to be replenished consistent with planning effort that has
been made part of the Council's goals for.2013 and 2014.
4. $100,000 is included:annually as a payment:to:reduce the City's Other Post Employee
Benefit (OPEB) liability. The City's OPEB liability increased from$1,975,778 as of
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June 30, 2011 to $2;667,349 as of June 30, 2012. This amount, like the contribution to
vehicle replacement,represents a place-holder, and recognizes the need to reduce liability.
More appropriate contribution levels will be determined as part of a five-year financial
plan called for in,the Council's goals, as well assources for these payments.
5. The General Services Fund has also been providing a rate holiday to the General
Fund for some time.. This fund will run out of money by mid-FY 14-15. To cover
normal operating,costs of the functions in General Services, a payment of$75,000 has
been included in FY 14-15 and another$75,000 is included in FY 15-16 and thereafter.
An analysis was completed last fiscal year regarding storm water costs were removed from
utility rates beginning January2012. In order to fund these costs until a permanent funding
source can be secured, a loan from the Drainage ImpacfFee fund in the amount of$.8 million
was secured. This loan will pay for storm water maintenance costs incurred from January, 2012
through June, 2013. It is anticipated that an additional loan will be required until a permanent
funding source is secured. That'loan is also estimated to be in the $.7 to $.8 million dollar range.
Both of those loans would be paid back from the General fund. Further, there is the issue of
funds which have been paid from Wastewater for Stormwater maintenance. These funds must
also be repaid over time and are estimated at approximately $2 million. Payment of the $3.5
million total is anticipated to be repaid and the General Fund is the only funding source
available. $200,000 annually has been forecasted beginning in 2014-15 to make that payment.
The above assumptions have been compiled into the five year forecasting model. The chart on
the next page below shows the results of the updates mentioned above.
General Fund Long Term Forecast
Mid Year Forecast Forecast Forecast Forecast
Revenue Categories 2013 ' 2014 ' 2015 ' 2016 2017
Property Taxes $7,207,871 $7,169,910 97277,459 $7,459,395 $7,683,177
Sales and1llse Taxes 9,810,000 10,202;400 10;508;472 10,823;726 11256,675
Regency/Deer Creek Impact 259,000 536,000 ;802;800 842,940
Business Lic&Prop Trf Taxes 1,748000 1,798;380 1,852,331 1,907,901 1,965,138
Franchise Fees 2,752,715 2,585;296 2,662,855 2,742,741 2,825,023
Licenses and Permits 966;816 920,820 948,445 976,898 1,006,205
Fines&Forfeitures&Penalties 612,100 624,342 636,829 '649;565 662,557
Investment Earnings and Rent 298;050 306,992 316,201 325,687 335,458
Intergovernmental Revenues 4,189;191 4,210,;137 4,273,289 4,380;121 4,511;525
Charges for Services 4,315,984 4,402,304 4,490,350 4,580;157 4,671,760
Other Revenues 28,356 28;923 29,502 29,502 29,502
Transient Occupancy Tax Trf 1,190189 1,290;189 1,290,189 1;290,189 1,290,189
Other Transfers and Sources 272,375 198,500. 198,500 19 000 198,500
iT-91-5 041111,64,':"1 F ,$33,389 647` ,533 997,1.9,4,,;$35`0204221',&$36 167`184 , $37 27,8;650]
Mid Year Forecast Forecast Forecast Forecast
Expenditure Categories, ' 2013 r 2014 r 2015 r .2016 r 2017
Salaries'and Wages .$18,219;154 $18,209,918 $18;394;018 $18,579958 .$18;767,757
Stormwater intact 1 1 I 200,0001 '200,000.1 200,000
Benefits 8,442,233 9,360,584 9;995;612 10,465,082 11,153,318
Services&Supplies 5,090,838 5,192;655 5,296;508 5,402,438 5,510,487
Intragovernmental 1,129,710 1,579;710' 1,654,710 1,729,710 1,729,710
Fixed Assets&Cap.Outlay 92;200 8,200 8,200 8,200 8,200
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Transfers Out 259,545 215,545 215;545 215,545 215,545
Total Expenditures $33,233,680 $34,566,612 $35;764593 $36,600,933 $37,565,017
[in�Over/,Under,Expc .ar,$,155,96 _ ($569,418) ($7aa 171)x. ($433;749351,,;,(5306,367jj
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Fund Bal Be g of Yeah ; 14a0 98-1 . $1 416;955', 4$8471,537, :$103;366) ;($330,383)1
V . . :t. $0, '- '$u ..". t$01s $01 $01.
(F.un'd,gal` E6d 61,,Year , $1;416955. - !$847;537- :16103;366`$ 4 ($330;383)y ($636750)1.
The ending General Fund balance is projected at $1.4 million at June 30, 2013.. That balance is
projected to be virtually eliminated by the end of the FY 14-15 fiscal year, and, without revenue
growth or further expense reductions;-fund balance is expected to+be negative $.6 million by the
end of the fiscal year ducting.June 30, 2017.
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It isimportant to note that the above amounts are all estimates. While a conservative "most
likely" estimate has been presented, the amounts will change. Most immediately, they will be
refined over the next few months in conjunction with the FY 13-14 budget process.
There are multiple risks associated with the long term forecast presented herein. They are as
follows:
1. PERS rates could increase more than projected if their earnings assumption is further
reduced from the current rate 7.5%.
2. PERS rates could increase more than forecasted from other factors including
demographic changes,underperformingiinvestments, etc.
3. While the forecast includes $100,000 annually to pay for retirement and separation
expenses, the costs,associated with annual turnover could easily surpass this amount.
4. While it is felt the health care cost growth assumption is reasonable at 9% annually it is
not known what the ultimate impact of the universal health care bill will be
5. Any delays in the Regency.and Deer Creek projects would ultimately affect projected
revenues.
6. An updated cost allocation plan, along with internal service fund cost allocation studies
are planned in the upcoming,fiscal year The forecast does not contain any provision for
impacts realized as a result of those studies.
7. The City's Liability Insurance Fund has recently incurred significant expenses for claims
paid. This fund may need a contribution from all funds, including the General Fund, in
order to pay for future'claims.
There are also positives and opportunities associated with the forecast. They are:
1. The economy continues its slow recovery.
2. A recovery in the tourism industry is underway and continuing.
3. The Regency and Deer Creek projects are underway and will generate jobs and
significant tax revenue in the future
4. Continued absorption'of vacant office and industrial warehouse space is occurring.
5. Sonoma County was one of the fastest growing counties in the Country for job growth
over the past year
There is much work that needs to be done to resolve the projected deficits and begin to rebuild
reserves. While some funding'is being included for vehicle replacement and the OPEB liability
reduction more resources are needed in both of those areas. Over the next few months next
year's budget will be developed, economic development opportunities will progress, and revenue
generation options will continue to be evaluated.
Based on the recently established City Council Goals, A five year General Fund financial plan
will be developed over the next two Years. The'forecast presented here, along with future
updates, will provide financial perspective as that plan is developed and implemented.
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