06-07-2011 - 2011-12 Fiscal Year Preliminary Budget Preview - Item 21 (2).doc
TO: Andrew G. Pasmant, City Manager
and City Council
FROM: Tom Bachman, Assistant City Manager/Finance Director
SUBJECT: 2011-12 FISCAL YEAR PRELIMINARY BUDGET PREVIEW
RECOMMENDATION:
1. It is recommended that the City Council review and discuss the 2011-12 Preliminary Budget, and take action as appropriate.
2. It is recommended that the City Council adopt the following resolution:
RESOLUTION NO. __________ A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF WEST COVINA, CALIFORNIA, ADOPTING THE CITY OF WEST COVINA OPERATING BUDGET, COMMUNITY DEVELOPMENT COMMISSION
BUDGET, WEST COVINA COMMUNITY SERVICES FOUNDATION, INCORPORATED CAPITAL IMPROVEMENT PROGRAM AND LOCAL ENFORCEMENT AGENCY BUDGET AND APPROVING THE APPROPRIATIONS FOR THE FISCAL YEAR
COMMENCING JULY 1, 2011 AND ENDING JUNE 30, 2012.
DISCUSSION:
This report will provide the City Council with an overview of the proposed 2011-12 fiscal year budget. While the entire Citywide budget for both the City and Community Development Commission
(Attachments 5 and 6) is to be considered, the main focus of this report will be on the General Fund. The General Fund contains all unrestricted funds received by the City and provides
funding for the majority of the discretionary services provided by the City including public safety services. The General Fund is also the fund that faces the most significant fiscal
challenge in being able to continue to provide basic services in the future.
General Fund Financial Condition/Budget Overview
Back in 2009 during the preparation of the 2009-10 budget it was projected that the City, like most other cities, would face three major waves of financial challenges over the next several
years: a sharp decline in sales tax revenues, followed by a decline in property tax revenues, and finally a sharp increase in pension contribution costs.
Sales tax revenues had already started to slow down in 2007-08, decreased further in 2008-09 and finally experienced a major collapse in 2009-10. Overall the City’s sales tax revenues
dropped 23% over this three-year period of time. The second calendar quarter of 2010 was the first quarter in three years that sales tax showed positive year-over-year growth after
twelve quarters of declining revenues. Despite the positive growth, it is projected that sales tax revenues will not reach their prior peak of 2006-07 until at least 2013-14.
Property tax revenues started to decline in 2009-10 and declined further in current 2010-11 fiscal year. The drop in property taxes was not as severe as sales tax, as they dropped a
total of 5% over the two-year period. Property taxes are projected to remain flat in the 2011-12 fiscal year before we start to see slow growth in the future years.
Rising pension costs is the most severe and long lasting of the three financial challenges. The large increases in pension costs will begin in the 2011-12 fiscal year and they are expected
to rise sharply over a three-year period, before the growth moderates in future years. This rise in
pension costs is due in large part to the collapse of the stock market during which CalPERS lost significant investment value in the 2007-08 and 2008-09 fiscal years. Those investment
losses have helped create a $62 million unfunded liability in the City’s pension fund that must be funded with increased contributions in future years. It is projected that the City’s
pension costs will increase by 46% over the next three years and consume approximately 25% of the City’s General Fund budget at that time. Because of this outlook, mitigating the rising
pension costs has become a priority for the City. The City has already begun this process by creating a second tier pension plan for new hires and negotiating with various bargaining
groups to pay the employee share of the pension contribution.
Where this chain of economic events leaves the City now is, instead of being poised to rebound as the economy starts its recovery, the City will continue to struggle to provide basic
services due to the large increases it faces in the cost of providing those services. In past years, the City has had the luxury of having a large reserve that has allowed it to reduce
the budget without making drastic cuts to services. The City’s cash reserve is now projected to be approximately $6.4 million at the end of the current fiscal year and will be completely
depleted if significant changes to the budget structure are not made. Faced with rising costs that are projected to outpace increases in revenues, the City must continue to look at
restructuring its service model and lowering its cost of services.
The City took the same approach for the 2011-12 fiscal year as it did last year and prepared a status quo budget that includes the same level of service as the 2010-11 fiscal year, but
with 2011-12 costs. That status quo budget saw expenditures increase from $52.7 million in 2010-11 to $57.3 million in 2011-12 and produced a deficit of $7.3 million.
This $7.3 deficit was used as a starting point for internal budget discussions and staff began the task of whittling down the deficit with the goal of restructuring services in a manner
that would significantly reduce the deficit in the 2011-12 budget and work towards a balanced budget in the 2012-13. A balanced budget by 2012-13 will require further cuts to services
and concessions from all employee groups, but would allow the City to move forward in a fiscally responsible manner by maintaining a minimum level of reserves and the ability to provide
basic core services. The City is currently in negotiations with all five miscellaneous employees groups whose contracts expire on June 30, 2011 and the City is seeking to continue
monetary concessions from the groups. Although the public safety groups’ contracts run through June 30, 2012, the City has also requested that they consider concessions as a way to
help with the budget deficit. Those discussions are ongoing.
Staff is not recommending a budget with a $7.3 million deficit, but rather will present proposed reductions at the City Council meeting that will reduce the deficit down to $1.8.
Other Funds Budget Overview
Many of the other restricted funds have also been affected by economic conditions. Special revenue sources that fund specific types of services, are also experiencing declines. Prop
A Transit, Prop C Transit, Measure R Transit, Prop 172 Public Safety Augmentation, and Prop 42 transportation funds are also based on sales tax revenues but are distributed to cities
using different allocation methods. They have experienced declines that have not been as large as those in the General Fund in past years and are expected to grow a little faster than
General Fund sales tax. Gas Tax revenue is based on a flat 18 cent per gallon tax and is allocated to cities based on population. Gas Tax revenue declined sharply in recent years
with the drop in demand for gasoline as a result of high fuel prices and the poor economy. It appears that this revenue source, which provides funding for the City’s street maintenance
program, has stabilized
Community Development Commission Budget Overview
The Community Development Commission (CDC) faces a number of budgetary issues that will limit its ability to perform projects in the future. Assessed valuations increased during fiscal
year 2010-11 decreased by 0.3% in the Merged Project Area while it increased by 1.5% in the Citywide Area. These project areas also are facing a number of pending assessment appeals
on commercial properties and to date have paid out $800,471 in taxpayer refunds in the 2010-11 fiscal year, compared to $185,337 for the entire 2009-10 fiscal year. While there are
still pending appeals, there are also a number of new or refurbished developments currently underway such as the Fairfield Inn, shops and restaurants at the Westfield mall, the Country
Club shopping center and at the old Circuit City building at the Eastland shopping center.
The state mandated that the CDC shift $6.5 million to the ERAF fund as part of their 2009-10 budget and another $1.3 million in 2010-11. The CDC was able to borrow the funds from Housing
Set-Aside Fund to make that payment, but those funds must be repaid to the Housing fund within five years. This is just another example of the state taking money away from cities in
an attempt to solve their own budget problems and will severely hamper the CDC’s ability to do projects in the future. The California Redevelopment Association brought suit against
this taking, however, a court decision ruled in favor of the state and has allowed this takeaway.
There is also pending legislation in Sacramento that would limit the amount of housing set-aside funds that can be used for administration. If this legislation is successful, this would
have a negative impact on the CDC staffing and would either cause the elimination or reallocation of personnel within that department. It would also affect other City staff that is
allocated to housing for the support roles they perform for that function and those costs would revert back to the General Fund. There is also pending legislation for reform or the
complete elimination of redevelopment agencies that would further impact the CDC.
The last redevelopment item is Eastland Amendment #1 Project Area deferral issue. When this project was established in 1990, the county agreed to defer 50% of its tax increment allocations
and allow the CDC to receive those payments instead. Fiscal year 2009-10 was the last year of that deferral by the county and as a result, the CDC now receives approximately $1.2 million
less in annual tax increment revenues. Additionally, the CDC must repay the county an estimated $9.6 million that the county deferred over that 20-year period. It remains staff’s
intent to issue bonds to pay the loan back to the county and stretch the debt service out over the life of the project area, thereby smoothing out the impact on the CDC’s cash flow.
The tax allocation bond market has been hampered by the governor’s proposal to completely eliminate redevelopment agencies and this has caused an increase in interest rates for such
financings. The market has somewhat improved recently and staff will review the financing over the summer.
2011-12 Budget Overview
The operating budget for 2011-12 (General and special revenue funds) as presented, totals $71,082,943. The balance of the budget is for proprietary type, capital project, debt service,
and redevelopment funds. The total City budget is $106,934,434, while the General Fund budget is $57,341,130. The CIP budget, which is funded predominately from special revenue funds,
totals $3,343,900. Below is a summary of the total 2011-12 City/CDC budget broken down by type of fund. A more detailed listing of the budget by individual fund is included in Attachments
5 and 6 to this report.
General Fund $ 57,341,130
Less: General Fund transfers out $ (986,050)
Special Revenue Funds $ 14,427,863
Debt Service Funds $ 4,626,096
Proprietary Funds $ 6,354,285
Community Development Commission $ 21,827,210
Capital Improvement Program $ 3,343,900
Total City/CDC Budget $106,934,434
A summary of the General Fund status quo budget is presented below:
Adopted
2010-11
Estimated
2010-11
Preliminary
2011-12
Beginning Total Fund Balance
$31,567,950
$31,567,950
$27,873,082
Revenues and Transfers In
48,911,320
48,764,250
49,998,728
Operating Expenditures/Transfers Out
52,744,592
52,455,718
57,341,130
Capital Improvement Projects:
-
3,400
-
Projected Deficit
-3,833,272
-3,694,868
-7,342,402
Estimated Ending Total Fund Balance
$27,734,678
$27,873,082
$20,530,680
Estimated Ending Available Fund Balance
$ 6,324,100
$ 6,410,107
$ -
General Fund revenues are estimated to be 2.5% higher than the adopted 2010-11 budget and reflect a slow turn towards a recovering economy. Most revenues are projected to be flat or
have minimal growth, while it expected that sales tax and transient occupancy taxes will show a somewhat stronger growth. Property tax, the General Fund’s largest revenue source, is
expected to be flat in the 2011-12 fiscal year.
Expenditures on the other hand are expected to grow by $4.6 million, or 8.7%. The increase in costs is due to the following items:
•Pension rate increases: $1.6 million
•Public Safety salary increases $1.3 million
•End Miscellaneous furloughs $404,000
•Reinstate ALS ambulance $315,000
•Medical premium increases $313,000
•City Council election $132,000
•Retiree medical increases $ 95,000
•Miscellaneous salary/benefits $241,000
•Increase Liability/WC charges $200,000
In order to reduce the $7.3 million in the 2011-12 fiscal year, staff will be presenting $5.5 million in deficit reducing measures. These proposed cuts will further reduce service levels
and include an assumption of a proposal that miscellaneous employees will pay the employee contribution to CalPERS, reductions in all non-safety departments, fire department cuts totaling
$284,000 along with a grant to provide additional firefighter staffing and the return of Engine 4 while saving the City an additional $825,000, and police department cuts totaling
$2.8 million. The reductions will continue the downsizing of the City’s workforce and will result in the elimination of 23 full time and 5 part-time positions, including fourteen sworn
police positions and nine non-sworn positions. The City was awarded a FEMA hiring grant that will provide for the increase of 6 firefighter positions and return Engine 4 back into
service. The grant is for a two-year period and those firefighter positions are only guaranteed employment for the period of the grant. It is the intent of these proposals to avoid
layoffs and that all eliminated positions will be absorbed through currently funded vacant positions and future retirements.
Capital Improvement Program (CIP)
The City’s proposed CIP is also included in the Preliminary Budget. The proposed CIP provides for $3.3 million for new projects and does not include any General Fund monies. This is
the same level of funding as the prior. Of the $3.3 million, $3.2 million is from various City funding sources and $133,600 is to be funded from grants. Below is a summary of the
proposed projects grouped by type of improvement.
Buildings $ 70,000
Parks $ 99,400
Street Improvements $ 2,778,000
Traffic $ 208,500
Utilities $ 25,000
Vehicles $ 158,000
Youth Sports $ 0
Total CIP $ 3,338,900
The detailed listing of CIP projects is Attachment 7 to this report.
ADDITIONAL ISSUES:
Other Retirement Benefits Funding
The City, as well as other cities throughout California, also faces an additional issue in funding retirement benefits. The City had an biennial actuarial valuation performed as of
June 30, 2009, in compliance with GASB 45 that determined the City has a $45 million unfunded liability for retiree medical benefits. Due to the fact that medical costs consistently
rise faster than normal CPI, keeping up with these cost increases in the future will be increasingly challenging and if limits are not put in place on this benefit, this will start
to consume an increasingly larger portion of the budget. Although the City currently funds this benefit on a pay-as-you-go basis, it would
be prudent to consider pre-funding this liability, which will ultimately reduce the long-term cost of the benefit but will also result in higher expenditures in the near term. The City
is exploring cost-sharing methods of funding with the various bargaining groups that receive this benefit.
Cash Flow Financing
The City’s cash position at the end of the current fiscal year is projected to be $6.4 million. The City annually runs a negative cash flow for the first five months of each fiscal
year to the tune of approximately $12 million. This is due to the fact that the City’s largest revenue source, property tax, does not start flowing into the City until December. Additionally,
due to actions by the state such as the Triple Flip and the exchange of VLF for property taxes, these two large revenue sources do not start flowing into the City until January of each
fiscal year.
In the past the City has been able to rely on internal borrowing from the Liability and Workers’ Comp internal service funds to cover the negative cash flow, but due to lower reserves
in those funds as a result of increased litigation and workers’ comp costs combined with transfers to the General Fund two years ago to reduce the budget deficit, those funds can no
longer cover the negative cash flow. Additionally, the City must provide cash flow financing for some of its maintenance districts such as the Citywide Maintenance District and the
Sewer Maintenance District because those districts do not have sufficient reserve funds to cover their negative cash flow.
The City issued $10 million in short-term revenue anticipation notes (TRANS) during the current year. The City will again issue TRANS for the 2011-12 fiscal year in order to meet its
cash flow needs. Short-term borrowing will become much more difficult and more expensive in the future unless the City balances it budget, as investors become wary of cities with a
history of deficit spending and dwindling reserves.
Capital Requirements
As the City has struggled to produce balanced budgets in recent years, many of the City’s capital needs have been deferred. General Fund spending on capital items has not occurred for
several years and reserves that otherwise could have been used for onetime capital needs, have instead been used for operating purposes. While much of the focus is on balancing the
budget, provisions for funding capital needs must also be considered when developing a plan for the future. The City needs an ongoing replacement plan for its fleet of aging police
vehicles, fire apparatus, public works vehicles, and city facilities to keep up with extensive usage.
Structural Imbalance
The structural imbalance in the General Fund existed before the recession hit and has only been made worse by the recession. The City, like the state and many other agencies in the
state, built up large expenditure budgets coming off two significant economic booms, the technology boom of the late 1990’s and the housing boom during the middle of the past decade.
Due to the long-term damage done to the economy and the pension systems as a result of the recession, these costs, both current and projected, are not sustainable with projected current
revenues. While the reductions that are being proposed will significantly reduce the deficit in the current year, that deficit is projected to grow further in future years.
The City must remain committed to a restructuring plan that will eliminate the structural deficit and bring operating expenditures in line with current revenues. This plan will evaluate
the services provided by the City, potential new revenues to fund those services, funding for large capital items such as equipment, facilities and infrastructure, and methods to control
and fund long-term liabilities such as pensions and retiree medical costs.
FISCAL IMPACT:
The Preliminary Budget for fiscal year 2011-12 as presented here contains an operating deficit of $7.3 million. This is not staff’s recommendation for adoption and is only presented
to show the magnitude of the financial problem if no action is taken. At the end of the 2011-12 fiscal year under the status quo scenario and if no action is taken, the City is projected
to have a “total” fund balance of approximately $20.6 million, none of which will be available as all cash reserves will have been spent as a result of the $7.3 million deficit. Staff
will present deficit-reducing measures of $5.5 million for the City Council to consider that will reduce the deficit down to $1.8 million. Staff will also bring back additional measures
to further reduce the deficit to the City Council in the next few months.
Attachments:
Adoption Resolution
Combined Fund Summary
Full Time Position Listing
Revenue Summary
Expenditure Detail – General Fund
Expenditure Summary – All Other Funds
Capital Improvement Program Budget