Loading...
HomeMy WebLinkAboutStaff Report 2.A 02/13/2017Agenda Item #2.A vy4�x\ DATE: February 13, 2017 TO: Honorable Mayor and Members of the City Council through City Manager FROM: William Mushallo, Finance Director6L SUBJECT: Mid -Year General Fund Financial Forecast Update RECOMMENDATION It is recommended that the City Council receive the fiscal year 2016-17 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 2017 budget that was adopted by the City Council in June, 2016. At that time the ending General Fund Undesignated Reserve balance at June 30, 2016 was projected to be $1.5 million. That balance was projected to decline to negative $3.3 million by June 30, 2020. The City Council has provided direction to maintain a reserve of between 15% and 17% of General Fund expenditures as available for contingencies. As of June 30, 2016 total General Fund balance was $10.2 million. Of that amount, $3.4 million was committed for various uses; $2.0 million was undesignated, and $4.9 million was assigned/designated for contingencies. The total undesignated and designated for contingencies reserve was $6.9 million, or 16.2% of General Fund expenditures. 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 2016-17. The update includes multiple adjustments that will be discussed later in this report, and are also included in the Mid -Year Budget Adjustments Council report. Those adjustments provide revised FY 2016-17 year-end projections of revenues, expenditures and fund balance. This helps provide abase for calculation of the forecasted amounts over the next four years. The Economy Business confidence has reached its highest level since surveys began in 2001. Sonoma County's labor market is fast approaching full employment, and greater competition for workers is beginning to lift wages. The jobless rate is falling more quickly than the U.S. average even amid steady labor force growth, and at 3.8% as of March, ranks among the lowest in California. Petaluma's seasonally unadjusted unemployment rate was 3.3% in June 2015, lower than Sonoma County (4.3%), California (6.2%) and the nation (5.5%) for the same month. Petaluma's current unemployment figures show a 2.8% unemployment rate. Other economic indicators, such as the housing market, median household income, hotel occupancy and commercial vacancy rates, illustrate continued recovery and growth. The housing market in Petaluma is strong with a median price of $617,000, up from $585,000 last year. Between 2000 and 2015, the median household income in Petaluma grew by 22% to $75,655. Looking into 2020, this growth is expected to continue, with median income rising to $85,773, an increase of around 13% from 2015. Additionally, according to Smith Travel Research, hotel occupancy rates rose just 1.6% from 2014 to 2015, but at 76% they have returned to their long -run average. Further, the average daily room rate in county hotels rose 9% in 2015, reflecting firming pricing power. Finally, Petaluma's commercial vacancy rates remained flat last year absorbing 250,000 new square feet of industrial space currently under construction and fully leased. Sonoma County's basic industries such as its wineries and craft breweries, specialty food makers, travel and tourism, and technology production hold considerable long-term growth potential. These industries build on the comparative advantages that are inherent in the county's resources—its workforce, its natural resources, and its capital. Petaluma has a strong food and beverage cluster that is expected to continue to push nondurable goods manufacturing 2 employment higher. This area of manufacturing will continue to make a large contribution to job and income growth in the county as well as in Petaluma. General Fund Revenues Fiscal year 2016-17 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 that follows, total revenues during FY 16-17 are projected to be up $1,510,960 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 Funds from Designated Reserves Totals Budget Revised Change Change % FY 16-17 FY 16-17 9,204,157 9,624,157 420,000 ' 4.6% 12,570,134 ' 12,350,134 (220,000) -1.8%' 2,266,950 2,546,950 280,000 12.4%, 2,896,187 2,976,187 80,000 2.8%' 903,520 1,110,520 207,000 22.9%' 535,500 575,500 40,000 7.5%. 443,800 443,800 - 0.0%" 5,449,912 5,627,912 178,000 3.3% 5,966,148 5,966,148 - 0.0% 17,000 17,000 - 0.0%' 1,404,012 1,404,012 - 0.0% 330,240 ! 392,200 ' 61,960 18.8% 300,000 764,000 464,000 154.7% 42,287,560 ; 43,798,520 1,510,960 3.6% The following revenue adjustments are recommended for FY 2016-17: • Property Taxes - Property taxes are expected to be $420,000 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 16-17 sales tax revenues have been adjusted down by $220,000. This is based mainly on lower actual and projected business to business revenues. • Business License and Property Transfer Tax - These revenues are anticipated to be $280,000 more than budget due mainly to non-recurring Real Property Transfer Tax received for the sale of a large apartment complex during the first half of the fiscal year. N • Franchise Fees — This category is expected to be about $80,000 over budget due to higher anticipated refuse and utility franchise fees. • Licenses and Permits -These revenues are projected to be about $207,000 higher than budget this fiscal year. Building permits, Fire fees and Public Works permits are all tracking much higher over the first half of the year. • Fines and Forfeitures — Revenue in this category is projected to be about $40,000 over budget due mainly to one-time revenue that is anticipated to be received from items placed on the current year's tax roll. • Investment Earnings and Rent — This category is expected to achieve the approximate budgeted amounts. • Intergovernmental Revenue — This category is projected to be up $178,000 due primarily to higher than anticipated State Motor Vehicle License Fee revenues. • Charges for Services, Other Revenues, and TOT Transfer— These categories are projected to perform as was budgeted earlier this year. • Other Transfers — This category is increasing by $61,960 due mainly to funds transferred in from Risk Management to fund legal expenditures, offset by reduced transfers in for projects and Police Department funding. • Funds from Designated Reserves — This category is increasing $464,000 due to transfers in related to compensation, along with an amount used to fund the Payran underground storage tank removal project. General Fund Expenditures Fiscal year 2016-17 expenditures are projected to be $1,119,448 higher than the adopted budget during the current fiscal year. Salaries and Wages Benefits Services and Supplies Intragovenunental Transfers Out Totals Budget Revised Change Change % FY 16-17 FY 16-17 $21,498,043 $22,343,933 $845,890, 12,489,230 12,505,788' 16,558, 6,549,878 6,642,878: 93,000. 1,958,638 1,958,638 0 1,242,053 1,406,053 164,000' $43,737,842 $44,857,290 $1,119,448 3.9% 0.1%j 1.4%' 0.0% 13.2%' 2.6% 0 • Salary and wages expenditures have been increased by $845,890 mainly due to negotiated cost of living adjustments for most bargaining units. • Benefits expenditures have been increased by $16,558 also mainly due to the impact of COLAs. • Services and supplies are increasing $93,000 due to the addition at mid -year of a consultant for record retention, along with costs of attaining CALEA accreditation in the Police Department. • Transfers out are increasing by $164,000 due to a transfer to the Capital Improvement Program to partially fund the Payran Underground Storage Tank removal project. Revenue and Expense Summary The following 2016-17 summary shows the impacts of the above mentioned changes: Revenue Categories $ Budget 2017 Revised 2017 Property Taxes $ 9,204,156 $ 9,624,156 Sales and Use Taxes 12,570,134 12,350,134 Business Lic & Prop Trf Taxes $ 2,266,950 2,546,950 Franchise Fees ' 8,701 2,896,187 2,976,187 Licenses and Permits 903,520 1,110,520 Fines & Forfeitures & Penalties 535,500 575,500 Investment Earnings and Rent 443,800 443,800 Intergovernmental Revenues 5,449,912 5,627,912 Charges for Services 5,966,149 5,966,149 Other Revenues 17,000 17,000 Transient Occupancy Tax Trf 1,404,012 1,404,012 Other Transfers and Sources 630,240 1,156,200 Total Revenues $ 42,287,560 $ 43,798,520 Expenditure Categories r Budget 2017 Revised 2017 Salaries and Wages $ 21,498,043 $ 22,343,933 Benefits 12,489,230 12,505,788 Services & Supplies 6,549,878 6,642,878 Intragovernmental 1,958,638 1,958,638 Fixed Assets & Cap. Outlay - Storm water transfer 592,053 592,053 Transfers Out 650,000 814,000 Total Expenditures $ 43,737,842 $ 44,857,290 Rev. Over (Under) Exp. $ (1,450,282) $ (1,058,770); Unassigned Bal. Beg. of Yr $ 1,458,983 $ 1,998,762 Unassigned Bal. End of Yr ` $ ' 8,701 $ 939,992 As previously mentioned, revenues are anticipated to be up $1,510,960 and expenditures are expected to be up $1,119,448. Those adjustments, in addition to generating a higher beginning unassigned fund balance, have a positive impact on the projected operating deficit. As of the end of FY 15-16, unassigned fund balance (working capital carryover) was $539,779 higher than forecasted. This was due to higher revenues than anticipated, along with lower expenditures than budgeted 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 $.9 million at June 30, 2017. 0 Methodology Used to Revise Five -Year Financial Forecast The five-year financial forecast has also been revised in conjunction with the mid -year update. Revenue Assumptions Property Taxes — Property taxes are projected to increase 3.5% during FY 17-18; 3.0% during FY 18-19; 2.5% during FY 19-20 and 1.5% during FY 20-21. Collaboration with the Sonoma County Tax Collector's office was critical during the formulation of this projection. This forecast is currently slightly higher than the Sonoma County forecast in the out -years, as ours takes into consideration anticipated development in the City, and the County does not. Over the next two months we will be refining the projections based on anticipated residential and commercial development. • Sales Tax — Sales taxes are projected to grow 2.8% next fiscal year. Moderate food products, construction, and transportation sector growth is being forecasted. Overall sales tax revenue growth is projected at between 2.6% and 3.8% 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 16-17 have been removed in subsequent years. A transfer in from committed reserves related to compensation is included in all remaining years of the forecast. Expenditure Assumptions Expenditure assumptions have also been evaluated and revised. 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 16- 17. There is no allowance for any additional cost of living adjustments later in the forecast. • Employee step increases continue to be included. 7 • It is assumed that there are no additional employees, other than the two Police Officer positions being considered at mid -year, and the part time positions added to staff an EMT ambulance. • Comp time payout estimates have been updated and are included. • PERS contribution rates have been updated based on the most recent Ca1PERS actuarial study information. Estimates of the Ca1PERS discount rate reductions impacts have also been included. • Workers' Compensation costs are projected to increase at 5% annually. • Health care insurance cost increases are capped at 9% annually for safety employees. As mentioned previously, PERS retirement rates have been adjusted based on updated actuarial studies received in October, 2016. The estimated rates include recently legislated changes to the discount rate adopted by the Ca1PERS Board of Directors. At the December 21, 2016 CalPERS meeting the Board of Administration approved lowering the Ca1PERS discount rate assumption (the long-term rate of return) from 7.5% to 7.0% over the next three years. This will increase public agency employer contribution costs beginning in FY 18-19. In FY 18-19 the discount rate will be reduced from 7.5% to 7.375% and the impact will be implemented over 5 years. In FY 19-20 the rate will be further reduced to 7.25 and the impact will also be implemented over 5 years. Finally, in FY 20-21 the discount rate will be further reduced to 7.0%, also implemented over 5 years. The impact of this change is significant. In FY 18-19 the impact is projected to be $.2 million in higher retirement costs, in FY 19-20 the impact is $.6 million, and in FY 20-21 the impact grows to $1.3 million. These impacts have been included in the forecast. It should also be mentioned that the impact will continue to grow during the 4 subsequent years not included in the forecast, given that the impacts of the three discount rate reductions will not be fully implemented until 2025. We will be analyzing the future year impacts and will report back to the City Council with that information. Other expenditure assumptions have also been included in the forecast. They are included in the appropriate expenditure category and are as follows: • FY 17-18 Services and Supplies expenditures are projected to be down slightly from the current year. This is due to non-recurring expenditures and carryover encumbrances that were included in FY 16-17. • Transfers out include $300,000 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. An ongoing transfer to the Capital Improvement Program of $150,000 is also projected beginning in FY 18-19. 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 that follows. General Fund Long Term Operating Forecast Revenue Categories Revised 2017 Forecast 2018 Forecast 2019 Forecast 2020 Forecast 2021 Property Taxes $ 9,624,156 $ 9,961,001 $ 10,259,832 $ 10,516,327 $ 10,726,654 Sales and Use Taxes 12,350,134 12,704,700 13,194,000 13,556,500 13,917,900 Business Lic & Prop Trf Taxes 2,546,950 2,373,359 2,444,559 2,517,896 2,593,433 Franchise Fees 2,976,187 3,065,473 3,157,437 3,252,160 3,349,725 Licenses and Permits 1,110,520 1,041,836 1,073,091 1,105,283 1,138,442 Fines & Forfeitures & Penalties 575,500 897,010 914,950 933,249 951,914 Investment Earnings and Rent 443,800 457,114 470,827 484,952 499,501 Intergovernmental Revenues 5,627,912 5,783,749 5,957,262 6,135,980 6,320,059 Charges for Services 5,966,149 6,085,472 6,207,181 6,331,325 6,457,952 Other Revenues 17,000 17,000 17,000 17,000 17,000 Transient Occupancy Tax Trf 1,404,012 1,404,012 1,404,012 1,404,012 1,404,012 Other Transfers and Sources 1,156,200 986,500 986,500 986,500 986,500 Total Revenues $ 43,798,520 $ 44,777,226.' $ 46,086,651 $ 47,241,185 $ 48,363,091 Expenditure Categories Revised 2017 Forecast 2018 Forecast 2019 Forecast 2020 Forecast 2021 Salaries and Wages $ 22,343,933 $ 22,585,368 $ 22,812,221 $ 23,041,344 $ 23,272,757 Benefits 12,505, 788 13,322,223 14, 581,313 15,972,782 17,401,284 Services & Supplies 6,642,878 6,622,436 6,754,884 6,889,982 6,889,982 Intragovernmental 1,958,638 1,958,638 1,958,638 1,958,638 1,958,638 Fixed Assets & Cap. Outlay _ - _ _ Storm w ater transfer 592,053 592,053 ! 592,053 592,053 592,053 Transfers Out 814,000 568,000 650,000 650,000 650,000 Total Expenditures $ 44,857,290 $ 45,648,718 $ ,47,349,110 $ 49,104,800 $ 50,764,716 Unassigned Bal. Beg. of Yr $ 1,998,762 $ 939,992 $ 68,500 $ (1,193,959) $ (3,057,574) The Mid -Year revised unassigned General Fund balance is projected to be $939,992 at the end of FY 2016-17. The balance is projected to decline to $68,500 in FY 2017-18, $(1,193,959) in FY 2018-19, $(3,057,574) in FY 2019-20 and $(5,459,199) in FY 2020-21. 9 Conclusion/Cautionary Remarks It is important to note that the amounts contained in the forecast are estimates. While a "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 17-18 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. There may also be additional reductions to the discount rate assumption in the future. • As mentioned earlier, FY 21-22 through FY 24-25 will require significantly more in the way of PERS contributions. • The designated reserve for compensation had a balance of $1.9 million as of June 30, 2016. This reserve will be exhausted by the last year of the forecast. • The costs associated with storm water maintenance could surpass the forecasted estimates. • There has been no significant provision for General Fund capital or infrastructure costs built into the forecast, other than the nominal $150,000 transfer each year. There are also opportunities associated with the forecast, such as: • Revenues will be analyzed over the next two months to determine any available ongoing resources. • An economy that steadily continues its slow recovery is currently in place. • The on-going recovery in the tourism industry continues. • Two significant hotel projects are on the horizon. • Absorption of vacant office and industrial warehouse space that is occurring will continue. • Sonoma County will 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. The forecast presented here, along with future updates, will provide financial perspective as we progress into the future. In summary, given the significant deficits in the out -years of the forecast, unless there is a dramatic positive change in the forecast during FY 17-18, significant ongoing revenues or expenditure reductions will need to be identified during FY 17-18 in order to balance future budgets and maintain reserves. 10