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HomeMy WebLinkAboutStaff Report 2.A 02/08/2016DATE: February 8, 2016 Agenda Item #2.A TO: Honorable Mayor and Members of the City Council through City Manager FROM: William Mushallo, Finance Director � SUBJECT: Mid -Year General Fund Financial Forecast Update RECOMMENDATION It is recommended that the City Council receive the fiscal year 2015 -16 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 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 2016 budget that was adopted by the City Council in June, 2015. At that time the ending General Fund Undesignated Reserve balance at June 30, 2015 was projected to be $1.6 million. That balance was projected to decline to negative $1.4 million by June 30, 2019. DISCUSSION Updating 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 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 2015 -16. 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 2015 -16 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 Economy 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. The County's tourism related industries continue to rebound. Hotel occupancy rates are up, and tax revenues generated have also increased. TOT revenues began increasing in the first quarter of 2010, and saw yet another record high first quarter in 2014. TOT revenues received by the City in fiscal year 2015 were $2.1 million, an 8% increase from the prior year. Petaluma's overall economic outlook has improved over the past year, particularly in the areas of home price stability and real estate vacancies. The City's median home price rose from $440,000 to $585,000 last year. Real estate vacancies have also decreased over the past year in both the office and industrial space categories. General Fund Revenues Fiscal year 2015 -16 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 15 -16 are projected to be up $1,342,119 from budgeted amounts. Budget Revised Change Change % j FY 15 -16 FY 15 -16 Property Taxes $ 8,450,150 $ 8,850,150 $ 400,000 4.7% ;Sales Taxes 13,352,747 13,127,991 (224,756); - 1.7 % °1 Bus Licenses & Property Transfer Taxes 2,099,500 ! 2,249,500 150,000 7.1 %'j' .Franchise Fees 2,736,600 2,761,600 25,000 0.9 %i Licenses & Permits 899,169 ! 919,169 20,000 2.2 %. Fines & Forfeitures 542,500 542,500 ! 0 ! 0.0 %' Investment Earnings & Rent 443,800 443,800 0 ' 0.0% Intergovernmental Revenue ; 5,004,503 j 5,124,503 120,000 2.4% Charges for Services 5,941,785 5,996,785 55,000 0.9 %! Other Revenues 28,680 28,680 0 ` 0.0% TOT Transfer 1,430,512 1,449,112 18,600 1.3% Other Transfers 186,500 964,775 $ 778,275 417.3% Totals $41,116,446 $42,458,565 $ 1,342,119 3.3 %! The following revenue adjustments are recommended for FY 2015 -16: • Property Taxes - Property taxes are expected to be $400,000 higher than budgeted. This is due to a higher than anticipated increase in assessed valuations, along with higher ongoing residual revenues to be received from the redevelopment dissolution. • 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 15 -16 sales tax revenues have been adjusted down by $224,756. This is based on lower actual and projected business to business revenues. • Business License and Property Transfer Tax - These revenues are anticipated to be $150,000 more than budget due to very strong property transfer volume during the first half of the fiscal year. • Franchise Fees Licenses and Permits - These revenues are projected to be slightly higher than budget this fiscal year. • Fines and Forfeitures and Investment Earnings and Rent — Revenue in these categories is not projected to change vs. budgeted amounts. • Intergovermnental Revenue — This category is projected to be up $120,000 due primarily to higher than anticipated State Mandated Cost reimbursements. • Charges for Services — This category is projected to be up $55,000 due mainly to higher ambulance and Fire operating revenues. The recent fee update is a contributor to the projected increases • Other Revenues — This category is not changing from budgeted amounts. • TOT Transfer — This category is projected to be up $18,600 due to a transfer to cover operational costs at the Petaluma Community Sports Field. • Other Transfers — This category is increasing by $778,275 due to carryover encumbrances from the prior fiscal year, a transfer in of committed funds related to salary adjustments, and transfers in from Asset Seizure and the SLESF funds. General Fund Expenditures Fiscal year 2015 -16 expenditures are projected to be $1,400,490 higher than the adopted budget during the current fiscal year. Budget Revised FY 15 -16 FY 15 -16 Salaries and Wages i Benefits Services and Supplies Intragovernmental ;Fixed Assets & Capital Outlay Storm Water Transfer Transfers Out Totals $20,614,017 $21,128,424'. 11,485,983i 11,653,431 6,034,276, 6,304,096'' 1,958,638,' 1,958,638; 0 326,800, 692,053', 675,000; $41,459,967; 692,053 797,015 Change .Change %! 1 $514,407 167,448' 269,820! 0 326,800 0' 122,015 2.5%: 1.5% 4.5% 0.0% 100.0%: 0.0% 18.1 %i $42,860,457, $1,400,490 3.4% • Salary and wages expenditures have been increased by $514,407 mainly due to negotiated cost of living adjustments for most bargaining units. • Benefits expenditures have been increased by $167,448 also mainly due to the impact of COLAs. • Services and supplies are increasing $269,820 due to unspent amounts carried over from the prior year, along with several one -time mid -year budget adjustments. This is partially offset by a reduction in expenditures that are being transferred out to the ADA sidewalk project. • Fixed assets and Capital outlay costs are increasing by $326,800 due mainly to amounts carried over from last fiscal year for Police Vehicles • Transfers out are increasing by $122,015 due to a transfer out to partially fund an ADA sidewalk project, along with additional funding needed to complete the Police Department roof project. Revenue and Expense Summary The following 2015 -16 summary shows the impacts of the above mentioned changes: Revenue Categories $ Budget 2016 Revised r 2016 Property Taxes $ 8,450,150 $ 8,850,150 Sales and Use Taxes $ 13,352,747 13,127,991 Business Lic & Prop Trf Taxes 2,099,500 2,249,500 Franchise Fees 2,736,600 2,761,600 Licenses and Permits 899,169 919,169 Fines & Forfeitures & Penalties 542,500 542,500 Investment Earnings and Rent 443,800 443,800 Intergovernmental Revenues 5,004,503 5,124,503 Charges for Services 5,941,785 5,996,785 Other Revenues 28,680 28,680 Transient Occupancy Tax Trf 1,430,512 1,449,112 Other Transfers and Sources 186,500 964,775 Total Revenues $ 41,116,446 $ 42,458,565 ' Expenditure Categories Budget 2016 Revised " 2016 Salaries and Wages $ 20,614,017 $ 21,128,424 Benefits $ 11,485,983 11,653,431 Services & Supplies $ 6,034,276 6,304,096 Intragovernmental $ 1,958,638 1,958,638 Fixed Assets & Cap. Outlay $ - 326,800 .Storm water transfer $ 692,053 692,0531 Transfers Out $ 675,000 797,015 Rev. Over (Under) Exp. $ (343,521) $ (401,892); Unassigned Bal. Beg. of Yr $ 1,533,359 $ 1,872,875 As previously mentioned, revenues are anticipated to be up $1,342,119 and expenditures are expected to be up $1,400,490. Those adjustments have a nominal impact on the projected operating deficit. As of the end of FY 14 -15, unassigned fund balance (working capital carryover) was $339,516 higher than forecasted. This was due to higher revenues than anticipated received last fiscal year. This change, in addition to the revenue and expenditure changes mentioned above, results in a projected estimated unassigned General Fund balance of $1.5 million at June 30, 2016. This unassigned balance represents 3.4% of expenditures. Designated fund balance of $4.7 million represents 11.0% of expenditures. Methodology 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 4.0% during FY 16 -17; 3.5% during FY 17 -18; 2.0% during FY 18 -19 and 1.5% during FY 19 -20. Collaboration with the Sonoma County Tax Collector's office was critical during the formulation of this projection. • Sales Tax — Sales taxes are projected to decrease next fiscal year due mainly to the payment of the final triple flip amount being received in FY 15 -16. Moderate food products, construction, and transportation sector growth is also being forecasted. Overall sales tax revenue growth is projected at between 4% and 5% 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. • Transfers in — One -time transfers in during FY 15 -16 have been removed in subsequent years. A transfer in from committed reserves related to compensation is included in FY 16- 17 and FY 17 -18. 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: • Negotiated cost of living adjustments have been included in the forecast beginning in FY 15- 16. An estimate for the impact of open contracts is included beginning in FY 16 -17. There is no allowance for any additional cost of living adjustments later in the forecast. • 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 recently 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, 2015. The 2015 rates include recently legislated changes adopted by the Ca1PERS Board of Directors. The net impact of the new rates was a slight reduction of retirement rates for Miscellaneous employees and an increase in cost for Safety employees vs. the assumption used during the FY 15 -16 budget process. Other expenditure assumptions have also been included in the forecast. They are included in the appropriate expenditure category and are as follows: FY 16 -17 Services and Supplies expenditures are projected to be down $210,691 from the current year. This is due to non - recurring expenditures and carryover encumbrances that were included in FY 15- 16.Transfers out to the Storm Water fund are remaining the same during the out -years of the forecast. They were increased during the FY 15 -16 budget in order to begin to more adequately fund storm water related operations. 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. Transfers out include $400,000 to the Vehicle Replacement Fund, along with $200,000 annually as a mechanism 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 represents a place - holder, and is insufficient to have a significant impact on reducing the unfunded liability. A one -time transfer to the Capital Improvement Program of $100,000 is also projected in FY 16 -17. This transfer is not recurring in subsequent years of the forecast. The assumptions previously noted have all been included in the five year forecasting model and the results are illustrated in the General Fund Long Term Operating Forecast on the next page. General Fund Long Term Operating Forecast Revised Forecast Forecast Revenue Categories r 2016 ® 2017 2018 Forecast 2019 Forecast 2020 Property Taxes $ 8,850,150 $ 9,204,156 $ 9,526,301 $ 9,716,827 $ 9,862,580 Sales and Use Taxes 13,127,991 12,642,115 13,130,901 13,840,199 14,390,913 Business Lic & Prop Trf Taxes 2,249,500 2,316,985 2,386,495 2,458,089 2,531,832 Franchise Fees 2,761,600 2,844,448 2,929,781 3,017,675 3,108,205 Licenses and Permits 919,169 946,744 975,146 1,004,401 1,034,533 Fines & Forfeitures & Penalties 542,500 553,350 564,417 575,705 587,219 Investment Earnings and Rent 443,800 457,114 470,827 484,952 499,501 Intergovernmental Revenues 5,124,503 5,278,238 5,436,585 5,599,683 5,767,673 Charges for Services 5,996,785 6,116,721 6,239,055 6,363,836 6,491,113 Other Revenues 28,680 28,680 28,680 28,680 28,680 Transient Occupancy Tax Trf 1,449,112 1,430,512 1,430,512 1,430,512 1,430,512 Other Transfers and Sources 964,775 486,500 586,500 186,500 186,500 Total Revenues $ 42,458,565; $ 42,305,563 $ 43,705,202 $ 44,707,060 $ 45,919,261 Expenditure Categories Revised 2016 Forecast 2017 Forecast 2018 Forecast 2019 Forecast 2020 Salaries and Wages $ 21,128,424 $ 21,636,240 $ 21,803,415 $ 22,022,762 $ 22,244,302 Benefits 11,653,431 12,717,207 13,473,812 14,297,771 15,152,732 Services & Supplies 6,304,096 6,093,405 6,215,273 6,339,578 6,`466,370 Intragovernmental 1,958,638 1,958,638 1,958,638 1,958,638 1,958,638 Fixed Assets & Cap. Outlay 326,800 - - - - Stormwatertransfer 692,0531 692,053 692,053 692,053 i 692,053 Transfers Out 797,015 700,000 600,000 600,000 600,000 Unassigned Bal. Beg. of Yr $ 1,872,875 $ 1,470,983 $ (20,997) $ (1,058,986) $ (2,262,729) The Mid -Year revised unassigned general fund balance is projected to be $1,470,983 at the end of FY 2015 -16. The balance is projected to decline to $(20,997) in FY 2016 -17, $(1,058,986) in FY 2017 -18, $(2,262,729) in FY 2018 -19 and $(3,457,563) in FY 2019 -20. Designated reserves are projected to remain at $4.7 million from 2015 -16 through 2019 -20. 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 16 -17 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 storm water maintenance could surpass the forecasted estimates. • Vehicle replacement needs could easily surpass the $400,000 annual estimate included in the forecast • There has been no provision for General Fund capital or infrastructure costs built into the forecast, other than the $100,000 transfer in FY 16 -17 • 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 complete or nearly complete and will continue to generate jobs and tax revenue. There is additional space available in the Deer Creek center that, once rented, could generate additional sales 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 continue rebuilding reserves. While some funding is being included for vehicle replacement and the OPEB liability reduction, 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 year. The forecast presented here, along with future updates, will provide financial perspective as that plan is developed and implemented.