HomeMy WebLinkAboutStaff Report 1.A 03/11/2019DATE:
TO:
FROM:
SUBJECT:
March 11, 2019
Honorable Mayor and Members of the City Council through City Manager
Corey Garberolio, Finance Director
Mid -Year General Fund Financial Forecast Update
RECOMMENDATION
It is recommended that the City Council receive the fiscal year 2018-19 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 2019 budget that was adopted
by the City Council in June of 2018. At that time the ending General Fund Unassigned Reserve
balance at June 30, 2018 was projected to be $2.8 million. That balance was projected to decline
to negative $13.5 million by June 30, 2024.
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.
• Current year revenues and expenditures are updated. As actual amounts are realized during
the year projected amounts are analyzed and validated or revised.
• An economic update is included.
• 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 2018-19. All budget adjustments that
have been approved by Council since the 2018-19 budget was adopted have been included.
Those adjustments provide revised FY 2018-19 year-end projections of revenues, expenditures
and fund balance. This helps provide a base for calculation of the forecasted amounts over the
next five years.
The Economv
Sonoma County is expected to remain a strong performer in the diverse California economy, despite a
brief pause following the Tubbs fire. Job growth has remained stable and in line with the California
average even as the labor market grows increasingly tight. The jobless rate is the state's fifth lowest
and and at 2.6% as of December, ranks among the lowest in California. Petaluma's seasonally
unadjusted unemployment rate was 2.3% in December 2018, lower than Sonoma County (2.6%),
California (4.1%) and the nation (3.9%) for the same month. The housing market is challenged
with supply constraints. Housing shortages have kept house prices rising at a double-digit rate.
The median home price continues to trend upward since recovery began in 2011 with the current
median home price in Petaluma at $699,000, up from $687,000 last year. Median household
income is expected to grow around 10.6%, from a level of $79,129 in 2017 to $87,500 in 2022.
Occupancy rates continue to remain strong, at or near record highs. According to the Sonoma
County Economic Development Board the long-term outlook for Sonoma County tourism will
remain strong with consumer confidence at a multi-year high. San Francisco day and weekend
trippers will continue to form the core contingent of vacationers. According to Smith Travel
Research, average daily rates grew 5% in 2017 on the heels of a slightly greater hike the year
prior. As a result, growth in visitor spending on accommodations in Sonoma County remains
strong and did not decline substantially despite the impact of the October fires. Annual
occupancy rates have been steadily increasing since 2009, reaching an average occupancy rate in
Sonoma County of 76.2 % in 2017, one of the highest average annual occupancy rates in
Sonoma County in the past 10 years. Transient Occupancy Tax revenues in Petaluma have risen
year over year since 2011, an indication of a strong local tourism sector.
Petaluma's commercial vacancy rates remained flat with retail and industrial hovering around
5% to 6% and office holding steady at 13%. Petaluma has the second-highest number of
businesses of all cities in Sonoma County at 2,991. The total number of business establishments
operating in Petaluma has continuously increased over the past several years and when compared
to the immediate prior year has remained unchanged.
Sonoma County's diverse economic drivers, wineries, breweries, food manufacturing, travel and
tourism were largely unscathed by the fall blazes and continue to be met with rising demand.
Tech related services also provide support. Petaluma continues to have a strong food and
beverage cluster that is expected to continue to push nondurable goods manufacturing and
service sector employment higher. All these drivers will continue to make a large contribution to
job and income growth in the county as well as in Petaluma.
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General Fund Revenues
Fiscal year 2018-19 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 18-19 are projected to be up $1,081,215 from budgeted amounts.
Revenue Category
Property Taxes
Sales and Use Taxes
Business License Taxes
Property Transfer Taxes
Franchise Fees
Permits and Fees
Fines and Penalties
Investment Earnings and Rent
Intergovernmental Revenue
Charges for Services
Other Revenues
TOT Transfer
Other Transfers
Funds from Designated Reserves
Total Revenues
Budget
Revised
Change
Change
FY 18-19
FY 18-19
$ 10,146, 993 $
10, 576, 993
$
430,000
4.2%
13, 725,100
13, 725,100
$
-
0.0%
1,327,020
1,327,020
$
-
0.0%
1,196,000
1,196,000
$
-
0.0%
3,071,091
3,071,091
$
-
0.0%
1,117, 300
1,117, 300
$
-
0.0%
945,000
945,000
$
-
0.0%
434,201
434,201
$
-
0.0%
6,145, 271
6,145, 271
$
-
0.0%
6,347,919
6,347,919
$
-
0.0%
14,000
14,000
$
-
0.0%
1,701,012
1,701,012
$
-
0.0%
236,500
283,000
$
46,500
19.7%
300,000
904,715
$
604,715
201.6%
$ 46,707,407 $
47,788,622
$
1,081,215
2.3%
The following are revenue adjustments for FY 2018-19:
• Property Tax — Property taxes are expected to be $430,000 higher than budgeted. This is due
to higher than anticipated increase in assessed valuations, along with higher ongoing residual
revenues to be received associated with the redevelopment dissolution.
• Other Transfers — This category is increasing by $6,500 due to funds transferred in from the
Transient Occupancy Tax (TOT) fund for Host Compliance and increased transfers in of
$40,000 from Risk for updating the exhaust system in Fire Station 1. This is directly offset
by increased expenditures.
• Funds from Designated Reserves — This category is increasing $460,000 due to transfers in
related to compensation and FY 18 encumbrances of $144,715 used in FY 19 for the painting
of the police headquarters, the cost of replacing a damaged police vehicle and the Police
Department radio upgrade project. This is directly offset by increased expenditures.
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General Fund Expenditures
Fiscal year 2018-19 expenditures are projected to be $1,193,711 higher than the adopted budget
during the current fiscal year.
Budget Revised o
Change Change
Expenditure Category FY 18-19 FY 18-19
Salaries and Wages $ 22,975,695 $ 23,579,418 $ 603,724
2.6%
Benefits 14,070,588 14,210,839 $ 140,251
1.0%
Services&Supplies 6,642,988 6,824,669 $ 181,681
2.7%
Intragovernmental 1,876,843 1,876,843 $ -
0.0%
Fixed Assets and Capital Outlay - 233,055 $ 233,055 100.0%
Transfers Out 1,140,053 1,175,053 $ 35,000
3.1%
Total Expenditures $ 46,706,167 $ 47,899,877 $ 1,193,711
2.6%
The following are expenditure adjustments for FY 2018-19:
• Salary and wage expenditures have been increased by $603,724 mainly due to negotiated
adjustments for several bargaining units and an increase in Human Resource staffing of 0.6
FTE due to the rise in recruitments and the need to manage and complete recruitments timely
and successfully.
• Benefits have been increased by $140,251 also due to the impact of negotiated adjustments
for several bargaining units.
• Services and supplies are increasing $181,681 due to increased costs of $80,000 associated
with a classification and compensations study for the miscellaneous bargaining units,
painting of the police station costing $49,000 and funded by prior year encumbrances,
increased costs of $40,000 for upgrading the exhaust system at Fire Station 1 and increased
costs for professional services related to host compliance and zoning updates. This is
partially offset by increased revenues.
• Fixed Assets and Capital Outlay are increasing $233,055 due to increased appropriations for
Police and Fire Department emergency vehicles funded by prior year encumbrances/fund
balance.
• Transfers out are increasing by $35,000 due to a transfer to the Vehicle Replacement Fund
for the purchase of a Demo Ambulance.
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Revenue and Expenditure Summary
The following 2018-19 summary shows the impacts of the above-mentioned changes:
As previously mentioned, revenues are anticipated to be up $1,081,215 and expenditures are
expected to be up $1,193,711. Those adjustments, in addition to a higher beginning unassigned
fund balance, result in an overall positive impact on the projected operating deficit. As of the
end of FY 17-18, the unassigned fund balance (working capital carryover) was $401,701 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 $3.1
million at June 30, 2019.
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Budget
Revised
Revenue Categories
2019
2099
Property Taxes
$
10,146,993
$
10,576,993
Sales and Use Taxes
13,725,100
13,725,100
Business License Tax
1,327,020
1,327,020
Property Transfer Tax
1,196,000
1,196,000
Franchise Fees
3,071,091
3,071,091
Perrrruts and Fees
1,117,300
1,117,300
Fines and Penalties
945,000
945,000
Investment Earnings and Rent
434,201
434,201
Intergovernmental Revenues
6,145,271
6,145,271
Charges for Services
6,347,919
6,347,919
Other Revenues
14,000
14,000
Transient Occupancy Tax Trf
1,701,012
1,701,012
Other Transfers and Sources
536,500
1,187,715
Total Revenues
$
46,707,407
$
47,788,622
Budget
Revised
Expenditure Categories
2019
2019
Salaries and Wages
$
22,975,694
$
23,579,418
Benefits
14,070,588
14,210,839
Services & Supplies
6,642,988
6,824,669
Intragovern mental
1,876,843
1,876,843
Fixed Assets & Cap. Outlay
-
233,055
Storm w atertransfer
592,053
592,053
Transfers Out
548,000
583,000
Total Expenditures
$
46,706,167
$
47,899,877
Rev. Over (Under) Exp.
$
1,240
$
(111,255)
Unassigned Bal. Beg. of Yr
$
2,761,120
$
3,162,821
Unassigned Bal. End of Yr
$
2,762,360
$
3,051,566
As previously mentioned, revenues are anticipated to be up $1,081,215 and expenditures are
expected to be up $1,193,711. Those adjustments, in addition to a higher beginning unassigned
fund balance, result in an overall positive impact on the projected operating deficit. As of the
end of FY 17-18, the unassigned fund balance (working capital carryover) was $401,701 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 $3.1
million at June 30, 2019.
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Methodolo,-v 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. An integrated salary and benefit forecasting model continue to be utilized and updated
in conjunction with the annual 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. The new model provides for increasingly
accurate forecasting.
Revenue Assumptions
Property taxes — Property Taxes are projected to increase 3.5% during FY 19-20; 3.0%
during FY 20-21; 2.5% during FY 21-22 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 few months we will be refining the projections
based on anticipated residential and commercial development.
Sales Tax — Sales taxes are projected to decrease slightly by 2.8% next fiscal year and
continue their slow growth into the out years of the forecast. The City's sales tax consultant
has revised their forecast to include a slight slowdown in the construction category next year
due to slightly slower growth related to rebuilding efforts than forecasted prior. This
reduction also reflects business changes in Petaluma impacting sales tax revenues. Moderate
food products, and construction sector growth is being forecasted in the out years. Overall
sales tax revenue growth is projected at about 2.6% 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- One new hotel is currently in the development stage and
is in the process of obtaining permits. This hotel is expected to generate approximately $400k
annually in Transient Occupancy Tax when fully operational. This new revenue has been
budgeted for beginning in FY 19-20 in the amount of $200k, increasing to $400k in FY 20-
21 and projected at this level annually for the remaining years of the forecast.
Transfers in — One-time transfers in during FY 18-19 have been removed in subsequent
years. A transfer in from committed reserves related to compensation is included from FY
19-20 through FY 21-22 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 provide for increasingly accurate forecasting. 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
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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 adjustments have been included in the forecast beginning in FY 18-19 and
anticipated future salary adjustments are included as well.
• Employee step increases continue to be included.
• Future Cost of Living Increases are included.
• It is assumed that there are no additional employees, other than the funded and authorized
positions that currently exist.
• Comp time payout and Separation cost estimates have been updated and are included.
• PERS contribution rates have been updated based on Ca1PERS actuarial study information
recently received which includes the CalPERS discount rate reduction reflecting the full
impact of this reduction as well as savings from the partial paydown of the PERS Unfunded
Liability.
• Worker's Compensation costs are projected to increase at a minimum of 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 2018. The estimated rates include legislated changes to the discount
rate adopted by the CalPERS Board of Directors 2016. 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. Those costs are expected to remain at an elevated
level through FY 32. It's also important to mention that beginning in FY 18-19 savings due to
the partial pay down of the Unfunded Liability are also included and provide the General Fund
approximately $145k in annual savings over the next 14 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 19-20 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 18-19. 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.
FY 19-20 Transfers Out are projected to be down slightly from the current year. This is due
to non-recurring expenditures that were included in FY 18-19. 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 (OPER) liability. This amount, like the
contribution to vehicle replacement represents a place -holder and are insufficient to have a
significant impact on reducing the accrued liability.
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 below.
General Fund Long Term Operating Forecast
The Mid -Year revised unassigned general fund balance is projected to be $3,051,566 at the end
of FY 2018-19. Without correction, the balance is projected to decline to $814,490 in FY 2019-
20, $(2,268,105) in FY 2020-21 and $(18,285,602) by the end of the forecasting period FY 23-
24. In anticipation of the deficit that is forecasted for FY 21, and to produce a balanced FY 20
budget, the FY 19-20 budget proposal will likely include budget balancing measures for the City
Council's consideration.
Risks and Opportunities
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 19-20 budget process. There are
multiple risks associated with the forecast, such as:
n.
Revised
Forecast
Forecast
Forecast
Forecast
Forecast
Revenue Categories
2019
2020
2021
2022
2023
2024
Property Taxes
$
10,576,993
$ 10,947,187.76
$ 11,275,603
$ 11,557,493
$ 11,788,643
$
12,024,416
Sales and Use Taxes
13,725,100
13,336,003
13,697,562
14,072,559
14,447,557
14,822,554
Business License Tax
1,327.020
1,366,831
1,407,836
1,450,071
1,493,573
1,538,380
Property Transfer Tax
1,196,000
1,219,920
1,244,318.40
1,269,205
1,294,588.86
1,320,480.64
Franchise Fees
3,071,091
3,163,223.73
3,258,120
3,355,864
3,456,540
3,560,236
Pernwts and Fees
1,117,300
1,150,819
1,185,344
1,220,904
1,257,531
1,295.257
Fines and Penalties
945,000
963,900
983,178
1,002,842
1.022.898
1,043,356
Investment Earnings and Rent
434,201
447,227.03
460,644
474,463
488,697
503.358
Intergovernmental Revenues
6,145,271
6,360,355.49
6,551,166
6,747,701
6,950.132
7,158,636
Charges for Services
6,347,919
6,474,877
6,604,375
6,736,462
6,871,192
7.008,616
Other Revenues
14,000
14,280
14,566
14,857
15.154
15,457
Transient Occupancy Tax Trf
1,701,012
1,789,012
1,989,012
1,989,012
1,989,012
1,989.012
Other Transfers and Sources
1,187,715
1,236,500
1,176,500
1,036,500
486.500
486.500
Total Revenues
$
47,788,622
$ 48,470,136
$ 49,848,224
$ 50,927,933
$ 51,562,018
$
52,766,259
Revised
Forecast
Forecast
Forecast
Forecast
Forecast
Expenditure Categories
2019
2020
2021
2022
2023
2024
Salaries and Wages
$
23,579,418
$ 24,957,708
$ 25,614,561
$ 26,186,504
$ 26.771,312
$
27,369,282
Benefits
14,210.839
16,004,758
17,435,994
18,811,817
20,157,653
21,495,871
Services & Supplies
6,824,669
6,775,849
6,911,366
7,049,593
7,190,585
7,334,397
Intragovernmental
1,876,843
1,876,843
1,876,843
1,876,843
1,876,843
1,876.843
Fixed Assets & Cap. Outlay
233,055
-
-
-
-
-
Storm water transfer
592,053
592,053
592,053
592,053
592,053
592,053
Transfers Out
583,000
500,000
500,000
500,000
500.000
500.000
Total Expenditures
$
47,899,877
$ 50,707,212
$ 52,930,819
$ 55,016,812
$ 57,088,448
$
59,168,448
Rev. Over (Under) Exp.
$
(111,255)
$ (2,237,076)
$ (3,082,595)
$ (4,088,879)
$ (5,526,430)
$
(6,402,189)
Unassigned Bal. Beg. of Yr
$
3,162,821
$ 3,051,566
$ 814,490
$ (2,268,105)
$ (6,356,984)
$
(11,883,414)
Unassigned Bal. End of Yr
$
3,051,566
$ 814,490
$ (2,268,105)
$ (6,356,984)
$ (11,883,414)
$
(18,285,602)
The Mid -Year revised unassigned general fund balance is projected to be $3,051,566 at the end
of FY 2018-19. Without correction, the balance is projected to decline to $814,490 in FY 2019-
20, $(2,268,105) in FY 2020-21 and $(18,285,602) by the end of the forecasting period FY 23-
24. In anticipation of the deficit that is forecasted for FY 21, and to produce a balanced FY 20
budget, the FY 19-20 budget proposal will likely include budget balancing measures for the City
Council's consideration.
Risks and Opportunities
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 19-20 budget process. There are
multiple risks associated with the forecast, such as:
n.
• PERS rates have been revised to reflect the most up to date actuarial report dated August
2018 but could increase more than forecasted from factors including, but not limited to,
underperforming investments and assumption changes. Due to the recent change in the
discount rate, upcoming fiscal years will require significantly more in the way of PERS
contributions.
• Workers Compensation costs could be greater than forecasted amounts due to an increase in
claims
• The designated reserve for compensation had a balance of $1.6 million as of June 30, 2018.
This reserve will be exhausted by FY 21-22.
• The costs associated with storm water maintenance could surpass the forecasted estimates.
• There is no provision for General Fund capital or infrastructure costs built into the forecast.
• Economists warn of the possibility of a recession in the near term which is not built into the
forecast.
There are also opportunities associated with the forecast, such as:
• Revenues will be analyzed over the next two months to determine any available ongoing
WIRTI 1MOMII1
• Growth in the tourism industry continues with one additional hotel project in the
development stage and another in the preliminary planning stages.
• Some new housing development is occurring which will result in increased property tax
revenues into the future.
• Sonoma County will hopefully continue as one of the fastest growing areas for job growth.
Conclusion
The City continues the struggle to maintain current service levels with the current revenues
which have been for years, inadequate. There is much work that needs to be done to resolve the
structural deficit. Looking into the future, and specifically over the next 18-24 months, it is
critical for the City to identify a new revenue source to maintain current service levels and to
avoid the need for further budget reductions. While some funding is being included for vehicle
replacement, no funding is available or programmed for infrastructure projects and more
resources are needed in all of these areas.
Although the forecast provides a look ahead to plan for the financial challenges facing the City
over the next five years, the immediate focus is producing a balanced and fiscally responsible
budget for Fiscal Year 2019-20. Over the next few months next year's budget will be developed,
budget balancing strategies will be explored, and budget reductions will be implemented, all
necessary steps for producing a balanced FY 19-20 budget. Budget balancing strategies
implemented in the FY 2019-20 budget are short-term and are unsustainable in the long term.
Revenue generation options will continue to be evaluated and economic development
opportunities will progress. The forecast presented here, along with future updates, will provide
financial perspective as we progress into the future.
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