HomeMy WebLinkAboutStaff Report 2.A 02/12/2018Agenda Item #2.A
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DATE: February 12, 2018
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TO: Honorable Mayor and Members of the City Council through City Manager
FROM: Corey Garberolio, Acting Finance Director
SUBJECT: Mid -Year General Fund Financial Forecast Update
RECOMMENDATION
It is recommended that the City Council receive the fiscal year 2017 -18 Mid -Year Financial
Forecast Update report. No action is requested at this time.
BACKGROUND
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 most recent forecast update was included in the 2018 budget that was adopted
by the City Council in June, 2017. At that time the ending General Fund Undesignated Reserve
balance at June 30, 2017 was projected to be $1 million. That balance was projected to decline
to negative $3.4 million by June 30, 2021.
DISCUSSION
Updating the Five -Year Financial Forecast
The forecasting process and model are 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 2017 -18. 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 2017 -18 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 has fully recovered from the Recession and is building momentum, with
output, employment and incomes rising at a faster pace than the U.S. average. The jobless rate is falling
more quickly than the U.S. average and at 3.5% as of October, ranks among the lowest in
California. Petaluma's seasonally unadjusted unemployment rate was 2.9% in September 2016,
lower than Sonoma County (3.8 %), California (5.3 %) and the nation (4.8 %) for the same month.
Petaluma's current unemployment figures show a 2.5% unemployment rate. The median home
price continues to trend upward since recovery began in 2011 with the current median home
price in Petaluma at $687,000, up from $617,000 last year. Median household income is
expected to grow around 12.3 %, from a level of $77,149 in 2016 to $86,666 in 2021.
With occupancy rates breaking records, hotels are exercising their pricing power. According to
Smith Travel Research, average daily rates grew 7% in 2016 on the heels of an 8% hike the year
prior. As a result, growth in visitor spending on accommodations in Sonoma has broken into
double digits in recent years, outperforming that in nearby counties. The annual occupancy rate
in Sonoma County was 77.6% for 2016. This is the highest average annual occupancy in Sonoma
County for the past 10 years.
Petaluma's commercial vacancy rates remained flat with retail and industrial hovering around
5% and office holding steady at 12 %. The value of residential and non residential building
permits increased over the past few years reflecting early trends in increased construction
activity. The total number of business establishments operating in Petaluma also increased from
the prior year, both of which are positive signs for economic activity.
Sonoma County's principal economic drivers, wine - making, food manufacturing, travel and
tourism, are fully engaged. Tech related services also provide support. Petaluma has a strong
food and beverage cluster that is expected to continue to push nondurable goods manufacturing
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 2017 -18 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 on the next
page, total revenues during FY 17 -18 are projected to be up $1,493,943 from budgeted amounts.
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Budget Revised
Revenue Category FY 17 -18 FY 17 -18 Change ;Change
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P ro pe rty Taxe s $10,009,123 $10,009,123 $ - 0.0%
Sales and Use Taxes
12,504,700
13,053,465
548,765
Business Licenses & Property Transfer Taxes
2,451,000
2,482,250
31,250
Franchise Fees
3,010,873:
3,060,873
50,000
Licenses and Permits
1,098,000 i
1,098,000
-
Fines & Forfeitures
942,000
893,250.
(48,750)'
Investment Earnings and Rent
Intergovernmental Revenue
Charges for Services
Other Revenues
TOT Tra nsfe r
OtherTransfers
Funds from Designated Reserves
Total Revenues
437,700
437, 700 !
-
5,884,988 s
5,941;238
56,250
6,117, 000 =
6,342,000
225,000
14,000
14,000
-
1,364,012 i
1,364,012
-
186,500
304,200
117,700 j
500,000
1,013,728
513,728
$44,519,896
$46,013,839
$1,493,943
The following revenue adjustments are recommended for FY 2017 -18:
4.4%
1.3%
1.7%
0.0%
-5.2%
0.0%
1.0%
3.7%
0.0%
0.0%
63.1%
102.7%
3.4%
• 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 up slightly vs. what
was budgeted. Total annual FY 17 -18 sales tax revenues have been adjusted up by $548,765.
This is mainly due to a one -time adjustment and slightly higher than anticipated food
products and projected business to business revenues.
• Business License and Property Transfer Tax - These revenues are anticipated to be $31,250
more than budget due mainly to non - recurring Real Property Transfer Tax received for the
sale of a large property during the first half of the fiscal year.
• Franchise Fees — This category is expected to be about $50,000 over budget due to higher
anticipated refuse and utility franchise fees.
• Fines and Forfeitures — Revenue in this category is projected to be about $48,750 less than
budget due mainly to a delay in filling the revenue and collection position and the associated
revenue collected by this position.
• Intergovernmental Revenue — This category is projected to be up $56,250 due to higher than
anticipated grant related revenues.
• Charges for Services— This category is projected to be up $225,000 due to a reimbursement
of disaster related overtime costs as well as increased planning revenue and activity directly
offset by increased expenditures.
• Other Transfers — This category is increasing by $117,700 due mainly to funds transferred in
fiom the SLESF fund for the Police Department radio system upgrade project. This is offset
by increased expenditures.
• Funds from Designated Reserves — This category is increasing $513,728 due to transfers in
related to compensation, along with $125,000 used to fund a small portion of the purchase of
a Ladder Truck for the Fire Department.
General Fund Expenditures
Fiscal year 2017 -18 expenditures are projected to be $704,271 higher than the adopted budget
during the current fiscal year.
The following expenditure adjustments are recommended for FY 2017 -18:
• Salary and wages expenditures have been increased by $181,077 mainly due to negotiated
adjustments for several bargaining units and an increase for disaster overtime related costs
for miscellaneous employees offset by a reduction due to the.delay of filling the revenue and
collection position.
• Benefit expenditures have been decreased by $26,671 also mainly due to the impact of
adjustments for some bargaining units offset by a reduction due to the delay of filling the
revenue and collection position.
• Services and supplies are increasing $189,865 due to increased planning related activity
directly offset by increased revenues as well as an increase in appropriations for FY 17
encumbrances used in FY 18.
• Fixed Assets and Capital Outlay are increasing $140,000 due to appropriations for the Police
Department radio system upgrade.
• Transfers out are increasing by $220,000 due to a transfer to the Vehicle Replacement Fund
of $125,000 for the purchase of a Fire Ladder Truck as well as $95,000 for the purchase of a
Fire Command Vehicle.
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Budget
Revised
Change Change
Expenditure Category
FY 17 -18
FY 17 -18
!Salaries and Wages
$ 22,290,927 $
22,472,004 ' $
181,077
0.8%
'Benefits
12,957,559
12,930,888
(26,671);
-0.2%
,Services &Supplies
6,284,434
6,474,299
189,865
3.0%
Intragovernmental
1,839,433
1,839,433
-
0.0%
Fixed Assets and Capital Outlay
40,000
180,000
140,000 !
350.0%
Transfers Out
1,160,053
1,380,053
220,000
19.0%
'Total Expenditures
$ 44,572,406 ! $
45,276,677 $
704,271 '-
1.6%
The following expenditure adjustments are recommended for FY 2017 -18:
• Salary and wages expenditures have been increased by $181,077 mainly due to negotiated
adjustments for several bargaining units and an increase for disaster overtime related costs
for miscellaneous employees offset by a reduction due to the.delay of filling the revenue and
collection position.
• Benefit expenditures have been decreased by $26,671 also mainly due to the impact of
adjustments for some bargaining units offset by a reduction due to the delay of filling the
revenue and collection position.
• Services and supplies are increasing $189,865 due to increased planning related activity
directly offset by increased revenues as well as an increase in appropriations for FY 17
encumbrances used in FY 18.
• Fixed Assets and Capital Outlay are increasing $140,000 due to appropriations for the Police
Department radio system upgrade.
• Transfers out are increasing by $220,000 due to a transfer to the Vehicle Replacement Fund
of $125,000 for the purchase of a Fire Ladder Truck as well as $95,000 for the purchase of a
Fire Command Vehicle.
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Revenue and Expenditure Summary
The following 2017 -18 summary, shows the impacts of the above mentioned changes:
Revenue Categories
Budget
2018
Revised
2018
Property Taxes
$, 10,009,123
$ 10,009,123
Sales and Use Taxes
12,504,700
13,053,465
Business Lic & Prop Trf Taxes
2,451,000
2,482,250
Franchise Fees
3,010,873
3,060,873
Licenses and Permits
1,098,000
1,098,000
Fines & Forfeitures & Penalties
942,000
893,250
Investment Earnings and Rent
437,700
437,700
Intergovernmental Revenues
5,884,988
5,941,238
Charges for Services
6,117,000
6,342,000
Other Revenues
14,000
14,000
Transient Occupancy Tax Trf
1,364,012
1,364,012
Other Transfers and Sources
686,500
1,317,928
Total Revenues
$ 44,519,896
$ 46,013,839 "
Expenditure Categories
Budget
2018
Revised
2018
Salaries and Wages
$ 22,290,927
$ 22,472,004
Benefits
12,957,559
12,930,888
Services & Supplies
6,284,434
6,474,299
Intragovernmental
1,839,433
1,839,433
Fixed Assets & Cap. Outlay
40,000
180,000
Storm w ater transfer
592,053
592,053
Transfers Out
568,000
788,000
Unassigned Bal. Beg. of Yr $ 1,006,891 $ 2,040,912
As previously mentioned, revenues are anticipated to be up $1,493,943 and expenditures are
expected to be up $704,271. Those adjustments, in addition to a higher beginning undesignated
fund balance, have a positive impact on the projected operating deficit. As of the end of FY 16-
17, unassigned fund balance (working capital carryover) was $1,034,021 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 $2.8 million at June
30, 2018.
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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 3.5% during FY 17 -18; 3.0%
during FY 18 -19; 2.5% during FY 19 -20 and 2.0% through the remainder of the forecast
period. Collaboration with the Sonoma County Tax Collector's office was critical during the
formulation of this projection. 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 2.0% next fiscal year. Moderate food
products, construction, and transportation sector growth is being forecasted. Overall sales
tax revenue growth is projected at about 1.8% 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.
• Transient Occupancy Tax Transfer- Several new hotels are currently in different phases of
development. The two new hotels that have pulled permits and /or are under construction are
expected to generate approximately $700k annually in Transient Occupancy Tax when fully
operational. Beginning in FY 18 -19 $300k has been included in the forecast, increasing to
$500k in FY 19 -20 and to $700k by FY 20 -21.
• Transfers in — One -time transfers in during FY 17 -18 have been removed in subsequent
years. A transfer in from committed reserves related to compensation is included through FY
20 -21 at which time the current committed reserve balance is fully expended.
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:
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• Negotiated adjustments have been included in the forecast beginning in FY 17 -18 and
anticipated future salary adjustments are included as well.
• Employee step increases continue to be included.
• It is assumed that there are no additional employees, other than the funded and authorized
positions that currently exist.
• Comp time payout estimates have been updated and are included.
• PERS contribution rates have been updated based on Ca1PERS actuarial study information
recently received which include the Ca1PERS discount rate reduction reflecting the full
impact of this reduction. Also included is the savings in the contribution rate due to the pay
down of the Unfunded Liability.
• Worker's Compensation costs are projected to increase at 5% annually.
• Health care insurance cost increases are included at 9% annually for most miscellaneous and
safety employees.
As mentioned previously, PERS retirement rates have been adjusted based on updated actuarial
studies received in August, 2017. The estimated rates include legislated changes to the discount
rate adopted by the Ca1PERS Board of Directors during last fiscal year. There will be three rate
changes. In FY 18 -19 the 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 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 and will continue to grow during the 2 subsequent years not included in the forecast.
It's also important to mention that beginning in FY 18 -19 savings due to the partial pay down of
the Unfunded Liability is also included and provides the General Fund approximately $145k in
annual savings over the next 15 years helping to offset anticipated PERS increases.
Other expenditure assumptions have also been included in the forecast. They are included in the
appropriate expenditure category and are as follows:
FY 18 -19 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 17 -18. Services and Supplies are projected to increase 2% annually.
Storm Water Transfer continues to be included at $592,053 annually to fund Storm Water
operations until a funding source is identified
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 accrued 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 on the next page.
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General Fund Long Term Operating Forecast
Revised
Forecast
Forecast
Forecast
Forecast
Forecast
Revenue Categories 2018
2019
2020
2021
2022
2023
Property Taxes $ 10,009,123
$ 10,309,397
$ 10,567,132
$ 10,778,474
$ 10,994,044
$ 11,213,925
Sales and Use Taxes 13,053,465
13,212,700
13,430,300
13,661,700
13,894,800
14,128,100
Business Lic & Prop Trf Taxes 2,482,250 2,524,530 2,600,266 2,678,274 2,758,622 2,841,381
Franchise Fees 3,060,873 3,101,199 3,194,235 3,290,062 3,388,764 3,490,427
Licenses and Permits
1,098,000
1,130,940
1,164,868
1,199,814
1,235,809
1,272,883
Fines & Forfeitures & Penalties
893,250
960,840
980,057
999,658
1,019,651
1,040,044
Investment Earnings and Rent
437,700
450,831
464,356
478,287
492,635
507,414
Intergovernmental Revenues
5,941,238
6,061,538
6,243,384
6,430,685
6,623,606
6,822,314
Charges for Services
6,342,000
6,239,340
6,364,127
6,491,409
6,621,238
6,753,662
Other Revenues
14,000
14,000
14,000
14,000
14,000
14,000
Transient Occupancy Tax Trf
1,364,012
1,589,012
1,789,012
1,989,012
1,989,012
1,989,012
Other Transfers and Sources
1,317,928
886,500
886,500
886,500
486,500
486,500
Total Revenues
$ 46,013,839 $
46,480,827
', $ 47,698,236 $!
48,897,876 $
49,518,680 $
50,559,662
Benefits 12,930,888 14,101,860 15,684,749 17,179,377 18,651,470 20,336,845
Services & Supplies 6,474,299 6,410,123 6,538,325 6,669,092 6,802,473 6,938,523
Intragovernmental 1,839,433 1,839,433 1,839,433 1,839,433 1,839,433 1,839,433
Fixed Assets & Cap. Outlay 180,000 - - - - -
Storm water transfer
Revised
Forecast
Forecast
Forecast
Forecast
Forecast
Expenditure Categories
2018
2019
2020
2021
2022
2023
Salaries and Wages
$ 22,472,004
$ 23,455,384
$ 23,978,264
$ 24,512,916
$ 25,059,599
$ 25,698,440
Benefits 12,930,888 14,101,860 15,684,749 17,179,377 18,651,470 20,336,845
Services & Supplies 6,474,299 6,410,123 6,538,325 6,669,092 6,802,473 6,938,523
Intragovernmental 1,839,433 1,839,433 1,839,433 1,839,433 1,839,433 1,839,433
Fixed Assets & Cap. Outlay 180,000 - - - - -
Storm water transfer
592,053
592,053
592,053
592,053
592,053
592,053
Transfers Out
788,000
650,000
650,000
650,000
650,000
650,000
Total Expenditures
$ 45,276,677
$ 47,048,854
, $ 49,282,825 $
51,442,873 $
53,595,030 $
56,055,296
Rev. Over (Under) Exp. $ 737,162 $ (568,027) $ (1,584,589) $' (2,544,997) $' (4,07$,350) $ (5,495,634)'
Unassigned Bal. Beg. of Yr $ 2,040,912 $ 2,778,074 $ 2,210,046 $ 625,457 $ (1,919,540) $ (5,995,890)
Unassigned Bal. End ofYr', $ 2,778,074! $ 2,210,046 i$ 625,457 $ (1,91$,540) $ (5,995,890) $(11,491,524);
The Mid -Year revised unassigned general fund balance is projected to be $2,778,074 at the end
of FY 2017 -18. The balance is projected to decline to $(1,919,540) in FY 2020 -21, $(5,995,890)
in FY 201 -22 and $(11,491,524) by the end of the forecasting period FY 22 -23.
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 18 -19 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 well as changing actuarial assumptions.
• 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 $1.6 million as of June 30, 2017.
This reserve will be exhausted by FY 20 -21.
• 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 is currently healthy and recovering.
• 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 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. The forecast presented here, along
with future updates, will provide financial perspective as we progress into the future.
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