Loading...
HomeMy WebLinkAboutWorkshop Item 1 02/09/2015DATE: TO: FROM: SUBJECT: Workshop Agenda Item #1 February 9, 2015 Honorable Mayor and Members of the City Council through City Manager William Mushallo, Finance Director Mid -Year General Fund Financial Forecast Update RECOMMENDATION It is recommended that the City Council receive the fiscal year 2014-15 Mid -Year Financial Forecast Update report. No action is requested at this time. I:C41"V011)901 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 numerous budget balancing strategies were recommended and implemented 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 budget balancing strategies along with updates of all critical forecast assumptions. The most recent forecast update was included in the 2015 budget that was adopted by the City Council in June, 2014. At that time the ending General Fund Undesignated Reserve balance at June 30, 2014 was projected to be $.9 million. That balance was projected to decline to ($2.6) million by June 30, 2018. I-0041iI.Y.y[1NI Updatiaa the Five -Year Financial Forecast 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. The forecasting process/model is constantly in a state of development and improvement, and in developing the forecast updates the following items are considered: • Year-end results from the prior fiscal year are updated and included in the forecast. • An economic update is included. • Current year revenues and expenditures are updated. As actual amounts are realized during the year projected amounts are analyzed and validated or revised. • Model assumptions for revenues and expenditures are analyzed and revised as necessary. • Any ongoing structural deficit is identified. • The City Council's direction regarding the establishment of reserves is benchmarked against actual results. The five year forecast has been updated as of mid -year 2014-15. The update includes multiple adjustments that will be discussed later in this report, and are also included in the Mid -Year Budget Adjustments Council item also presented this evening. Those adjustments provide revised FY 2014-15 year-end projections of revenues, expenditures and fund balance. This helps provide a base for calculation of the forecasted amounts over the next four years. The Economv Sonoma County's economy continues to grow and outpace the state, particularly in the area of job growth. The County has seen a steady decrease in the unemployment rate over the past 3 years, with the most recent rate showing signs of achieving pre -recession levels. From August 2013 to August 2014, Sonoma County experienced 1.1 percentage points increase in its job growth. Hotel occupancy rates have increased 6.2% year to date. TOT revenues began increasing in the first quarter of 2010, and saw yet another record high first quarter in 2014. TOT revenues have expanded beyond pre -recession levels, increasing 13% over a year ago. Over the past 5 years, Sonoma County has seen increases in median earnings across all education levels, with the exception of high school graduates. Average earnings also saw an increase from 2012, rising from $40,152 to $42,095. General Fund Revenues 2014-15 fiscal year to date General Fund revenues have been analyzed and projected amounts for the remainder of the current fiscal year have been developed. As can be seen in the table below, total revenues during FY 14-15 are projected to be up $748,763 from budgeted amounts. Property Taxes Sales Taxes Bus Licenses & Property Transfer Taxes Franchise Fees Licenses & Permits Fines & Forfeitures Investment Earnings & Rent Intergovernmental Revenue Charges for Services Other Revenues TOT Transfer Other Transfers Totals Budget Revised Change FY 14-15 FY 14-15 $ 7,508,059 $ 8,164,396 $ 656,337 $12,447,727 12,231,075 $ (216,652) 1,900,000 2,065,000 $ 165,000 2,612,000 2,654,500 $ 42,500 1,065,050 1,035,050 $ (30,000) 660,366 525,366 $ (135,000) 434,597 459,597 $ 25,000 4,452,776 4,789,212 $ 336,435 5,916,866 5,821,010 $ (95,856) 134,356 103,356 $ (31,000) 1,430,512 1,430,512 $ - 186,500 218,500 $ 32,000 $38,748,810 $39,497,573 $ 748,763 IN The following revenue adjustments are recommended for FY 2014-15: • Property Taxes - Property taxes are expected to be $656,337 higher than budgeted. This is due to a higher than anticipated increase in assessed valuations. • Sales Tax - Muni -Services is the City's sales tax consultant and has provided an updated long term revenue forecast. Actual revenues received through December are down slightly vs. what was budgeted. Total annual FY 14-15 sales tax revenues have been adjusted down by $216,652. This is based on lower revenue in the transportation category because of reduced fuel prices and an updated revenue forecast for the construction and general retail categories. • Business License and Property Transfer Tax - These revenues are anticipated to be $165,000 more than budget due to very strong property transfer volume during the first half of the fiscal year, along with higher projected business license receipts. • Franchise Fees Licenses and Permits - These revenues are projected to be very close to budget this fiscal year. • Fines and Forfeitures — This revenue category is projected to be down $135,000 vs. budgeted amounts due to lower parldng fines and vehicle code fine revenues. • Investment Earnings and Rent - Revenues are anticipated to be up slightly by $25,000 over budget. • Intergovernmental Revenue — This is projected to be up $336,435 due primarily to higher than anticipated vehicle license in -lieu fee revenues. This increase was also due to the increase in assessed property valuations year over year. • Charges for Services — Revenue is projected to be down $95,856 due mainly to lower ambulance and Fire operating revenues. • Other Revenues — This category decreased by $31,000 due to the timing of revenues received between fiscal years. • Other Transfers - Increasing by $32,000 due to partial funding of the HR Specialist position along with a $9,000 transfer in of SLESF funds. General Fund Expenditures Total Expenditures are projected to be $59,000 higher than the adopted budget during the current fiscal year. This is due to a few minor factors as described below. • Salary and wages expenditures have been increased by $59,000 due to Fire overtime costs that will be reimbursed, along with the partial funding of the HR Specialist position. More information on the details of the mid -year budget adjustments can be found in the staff report for that item. Revenue and Expense Summary The chart that follows projects revenue and expenditures as of mid -year FY 2014-15. W Revenue Categories Property Taxes Sales and Use Taxes Business Lic & Prop Trf Taxes Franchise Fees Licenses and Permits Fines & Forfeitures & Penalties Investment Earnings and Rent Intergovernmental Revenues Charges for Services Other Revenues Transient Occupancy Tax Trf Other Transfers and Sources Total Revenues Expenditure Categories Salaries and Wages Benefits Services & Supplies Intragovemn-ental Fixed Assets & Cap. Outlay Storm w ater transfer Transfers Out Total Expenditures Rev. Over (Under) Exp. Unassigned Bal. Beg. of Yr Unassigned Bal. End of Yr Budget Revised 2015 2015 $ 7,508,059 $ 8,164,396 12,447,727Y 12,231,075 1,900,000 2,065,000 2,612,000 2,654,500 1,065,050 1,035,050 660,366 525,366 434,597 459,597 4,452,776 4,789,212 5,916,866 5,821,010 134,356 103,356 1,430,512 1,430,512 186,500 218,500 $ 38,748,809 $ 39,497,574 Budget Mid -Year P 2015 ` 2015 $20,605,180 $ 20,664,180w 10,935,641 $ 10,935,641 5,728,850 $ 5,728,850 1,593,842 $ 1,593,842 531,000 $ 531,000 144,000 $ 144,000 $ 39,538,513 $ 39,597,513 $ (789,704) _ $ (99,939) $ 910,194 $ 1,633,298 $ 120,490 $ 1,533,359 As previously mentioned, revenues are anticipated to be up $748,763 and expenditures are expected to be up $59,000. That has an overall positive impact to projected unassigned fund balance of $689,763. This change, in addition to a higher beginning unassigned fund balance, results in a projected unassigned General Fund balance of $1.5 million at June 30, 2015. This balance represents 3.9% of expenditures. When combined with the designated fund balance of $4.1 million, the total fund balance represents 14.4% of expenditures. While a significant improvement from prior years, this amount remains slightly less than Council's direction of maintaining between 15% and 17% of expenditures in reserve. Methodoloev used to Revise Five -Year Financial Forecast The five-year 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 implemented 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 component of the forecasting exercise. This new model allows the results of each forecast year 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. Revenue Assumptions • Property taxes — Property Taxes are projected to increase 3.5% during FY 15-16 and 2% each year thereafter. Collaboration with the Sonoma County Tax Collector's office was critical during the formulation of this projection. • Sales Tax — Sales taxes are projected to increase significantly (8.4%) next fiscal year due mainly to the payment of the final triple flip amount. Moderate to strong construction, transportation and business to business sector growth is also being forecasted. 2016-17 sales tax revenue is projected to be virtually flat, due again to the big one-time triple flip payment in 2015-16. Overall sales tax revenue growth is projected at about 4% annually for the remaining years of the forecast. • Other Revenue Categories — With the exception of Intergovernmental Revenues, other revenue categories are growing between 2% and 3% annually throughout the life of the forecast. These small increases are mainly driven by anticipated inflation increases over time. Intergovernmental Revenues are made up predominantly of Motor Vehicle In -Lieu fees and revenue growth is tied to changes in assessed property valuation. Expenditure Assumptions 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 and retirement expenses were also verified and calculations were reconciled with the payroll module. Salaries and benefits for full time equivalent positions were also reconciled with the budgeted authorized positions. There have been several salary and benefit assumptions incorporated into the updated forecast. They are as follows: • There is no allowance for cost of living adjustments. • Employee step increases continue to be included. • It is assumed that there are no additional employees, other than the currently authorized and funded positions. • Comp time payout estimates have been updated and are included. • PERS contribution rates have been updated based on Ca1PERS actuarial study information received. • Worker's Compensation costs are projected to increase at 5% annually. • Health care insurance cost increases are capped at 9% annually. As mentioned previously, PERS retirement rates have been adjusted based on updated actuarial studies received in October, 2014. The 2014 rates include adopted changes in the asset smoothing methodology in order to dampen the effect of short term market fluctuations on employer contribution rates. Recommended changes in post-retirement mortality rates were also included in the updated actuarial studies. The net impact of the new rates was a slight reduction of retirement cost vs. the assumption used during the FY 14-15 budget process. Other expenditure assumptions have also been included in the forecast. They are included in the appropriate expenditure category and are as follows: • Transfers out to the Storm Water fund are being increased by $50,000 in order to begin to more adequately fund storm water related operations. This is in addition to the current transfer of $400,000 that funds annual storm water maintenance costs. Also included in the storm water transfer line are transfers to pay back a loan from the Storm Drainage Impact fees fund, along with a transfer to the Wastewater Utility to pay settlement costs related to a recent lawsuit. ® $100,000 has been included as a minimum annual General Fund transfer out to the Vehicle Replacement Fund. This amount has been insufficient and it is being recommended that the amount be increased to $400,000, given the significant need for fleet updates. O $100,000 has been included annually as a payment to reduce the City's Other Post Employee Benefit (OPEB) liability. The City's OPEB liability is increasing by approximately $1 million annually. This amount, like the contribution to vehicle replacement represented a place -holder, and is insufficient to have a significant impact on reducing the unfunded liability. It is recommended that the amount be increased by $200,000 beginning next fiscal year. ® There has been significant discussion in recent months regarding the City's unfunded pension liability. A recent presentation by the City's actuary discussed these liabilities along with a projection of future costs. A workshop has been scheduled in late March to further discuss the liabilities and recommend funding mechanisms. In the meantime, $250,000 annually beginning in 2015-16 has been earmarked as a transfer out to begin the funding process. The assumptions previously noted have all been included in the five year forecasting model and the results are illustrated in the General Fund Long Terni Operating Forecast on the next page. N General Fund Long Term Operating Forecast Total Revenues $ 39,497,574 $ 41,148,100 $ 41,783,439 $ 42,982,787 $ 44,221,660 Revised Forecast Forecast Forecast Forecast Revenue Categories 2015 2016 2017 2018 2019 Property Taxes $ 8,164,396 $ 8,450,150 $ 8,703,654 $ 8,921,246 $ 9,144,277 Sales and Use Taxes 12,231,075 13,256,765' 13,216,228 13,763,787 14,333,269 Business Lic & Prop Trf Taxes 2,065,000 2,126,950 2,190,759 2,256,481 2,324,176 Franchise Fees 2,654,500 2,734,135 2,816,159 2,900,644 2,987,663 Licenses and Permits 1,035,050 1,066,102 1,098,085 1,131,027 1,164,958 Fines & Forfeitures & Penalties 525,366 535,873 546,591 557,523 568,673 Investment Earnings and Rent 459,597 473,385' 487,586 502,214 517,280 Intergovernmental Revenues 4,789,212 4,858,942' 5,004,711 5,154,852 5,309,497 Charges for Services 5,821,010 5,893,430' 5,967,299 6,042,645 6,119,498 Other Revenues 103,356 103,356 103,356 103,356 103,356 Transient Occupancy Tax Trf 1,430,512 1,430,512 1,430,512 1,430,512 1,430,512 Other Transfers and Sources 218,500' 218,500 218,500 218,500 218,500 Total Revenues $ 39,497,574 $ 41,148,100 $ 41,783,439 $ 42,982,787 $ 44,221,660 Unassigned Bal. Beg. of Yr $ 1,633,298 $ 1,533,359 $ 1,212,184 $ 321,375 $ (479,082) Unassigned Bal, End of Yr $ 1,533,359 $ 1,212,184 $ 321,375 $ (479,082) $ (1,194,045) The Mid -Year revised unassigned general fund balance is projected to be $1,533,359 at the end of FY 2014-15. The balance is projected to decline to $1,212,184 in FY 2015-16, $321,375 in FY 2016-17, $(479,082) in FY 2017-18 and $(1,194,045) in FY 2018-19. Designated reserves are projected to remain at $4.1 million from 2014-15 through 2018-19. Total fund balance as a percent of expenditures is projected to go from 14.4% at June 30, 2015 down to 6.6% at June 30, 2019. Mid -Year Forecast Forecast Forecast Forecast Expenditure Categories r 2015 r 2016 r 2017 2018 2019 Salaries and Wages $ 20,664,180' $ 20,809,211 $ 21,017,307 $ 21,227,477 $ 21,439,752 Benefits $ 10,935,641 11,747,795 12,627,803 13,407,423 14,226,936 Services & Supplies $ 5,728,850' 5,843,427 5,960,296 6,079,501 6,201,091 Intragovernnental $ 1,593,842 1,593,842 1,593,842 1,593,842 1,593,842 Fixed Assets & Cap. Outlay $ - - - - - Storm watertransfer $ 531,000 w 581,000 581,000 581,000 581,000 Transfers Out $ 144,000 894,000 894,000 894,000 894,000 (Total Expenditures $ 39,597,513 $ 41,469,275 $ 42,674,248 $ 43,783,243 $ 44,936,622 Rev. Over (Under) Exp. $ (99,939) $ (321,175) $ (890,808) $ (800,457) $ (714,963), Unassigned Bal. Beg. of Yr $ 1,633,298 $ 1,533,359 $ 1,212,184 $ 321,375 $ (479,082) Unassigned Bal, End of Yr $ 1,533,359 $ 1,212,184 $ 321,375 $ (479,082) $ (1,194,045) The Mid -Year revised unassigned general fund balance is projected to be $1,533,359 at the end of FY 2014-15. The balance is projected to decline to $1,212,184 in FY 2015-16, $321,375 in FY 2016-17, $(479,082) in FY 2017-18 and $(1,194,045) in FY 2018-19. Designated reserves are projected to remain at $4.1 million from 2014-15 through 2018-19. Total fund balance as a percent of expenditures is projected to go from 14.4% at June 30, 2015 down to 6.6% at June 30, 2019. Conclusion/Cautionary Remarks It is important to note that the amounts contained in the forecast are 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 15-16 budget process. There are multiple risks associated with the forecast, such as: • PERS rates could increase more than forecasted from factors including, but not limited to, underperforming investments. • The costs associated with annual turnover could surpass the forecasted payouts for retirement and separation expenses. • The health care cost growth assumption is reasonable at 9% annually and reflects recent negotiation with the labor groups; however, it is not yet fully known what the ultimate impact of the universal health care bill will be. It is important to note that the average annual cost increase in the single Kaiser health care plan has been 10% each year over the past 15 years. There are also opportunities associated with the forecast, such as: • An economy that steadily continues its slow recovery is currently in place. • The on-going recovery in the tourism industry continues. • The Regency and Deer Creek projects are underway and will continue to generate jobs and tax revenue. • Absorption of vacant office and industrial warehouse space that is occurring will continue. • Sonoma County will hopefully continue as one of the fastest growing areas for job growth. There is much work that needs to be done to resolve the projected deficits and to begin to rebuild reserves. While some funding is being included for vehicle replacement, the OPEB liability reduction, and a reduction in the CaIPERS unfunded liability, more resources are needed in all of these 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 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. N