10-19-2010 - 2009-10 and 2010-11 Fiscal Years Budget Update - Budget Update report (2).doc
TO: Andrew G. Pasmant, City Manager
and City Council
FROM: Tom Bachman,
Assistant City Manager/Finance Director
SUBJECT: 2009-10 AND 2010-11 FISCAL YEARS BUDGET UPDATE
RECOMMENDATION:
It is recommended that the City Council take the following action.
Receive and file the budget update.
Appropriate $38,000 of CDBG funds to the Street Barrier Removal Project (131.81.8025.7200.
Un-appropriate $324,594 from the Community Development Commission budget to reflect the elimination of two Senior Project Manager and one Project Coordinator positions.
DISCUSSION:
This report contains a review of the 2009-10 fiscal year, the first quarter financial report for the 2010-11 fiscal year, and finally a look forward to the 2011-12 fiscal year and the
significant fiscal challenges that still lie ahead for the City.
FY 2009-10 – PRIOR FISCAL YEAR REVIEW
General Fund
For the year that just ended on June 30, 2010, the 2009-10 General Fund preliminary budget, as first presented to the City Council contained a $9.5 million deficit. The deficit was
the result of expenditure growth far outpacing revenue growth in previous fiscal years and that situation was compounded by a significant downturn in the economy, which negatively affected
most of the City’s revenue sources. The City Council approved a number of actions during that budget process that reduced the deficit in the General Fund by almost $5 million. Many
of those actions were one-time measures that would not be available to the City in future years including prepayment of the PERS contribution which saved $750,000, and transfers totaling
$1.9 million from the self-insurance, park dedication fees, and vehicle replacement funds. The City ultimately adopted a General Fund Budget for fiscal year 2009-10 with a $4.6 million
deficit.
During the fiscal year, most of the City revenue sources continued to decline including the top four revenue sources: property tax, sales tax, franchise fees, and interest income. Property
taxes decreased $957,312 (5.2%) from the 2008-09 total and sales tax decreased $1.5 million (12.2%) from the previous year. Franchise fees decreased by $419,293 (11.9%), while interest
income decreased by $215,800 (7.4%). Additional double-digit decreases were experienced in licenses and permits, down $180,666 (16.6%), and transient occupancy taxes, down $140,163
(17.8%). The lone bright spot on the revenue side was business licenses, which increased by $247,072 (13.5%) due to more aggressive enforcement efforts. In all, total revenues were
down by $2.9 million (5.5%) from the previous year. Revenues for the year fell short of their budget estimates by almost $1.45 million with $1 million of that coming from sales tax
and the sales tax reimbursement agreement with the Community Development Commission (CDC).
While revenues fell short of their budget estimate, this shortfall was more than offset by savings on the expenditure side of the budget. All departments came in under budget. Most
notably, the Police Department came in $1.1 million under budget and another $675,000 was saved in transfers from the General Fund to the debt service fund due to extremely low interest
rates on
the City’s outstanding variable rate debt. Additionally, Public Works came in $327,137 under budget, while Finance came in $169,142 under budget. Much of the savings in the operating
departments was due to freezing vacant budgeted positions. This freeze was put in place with the knowledge that many positions would need to be eliminated in the 2010-11 fiscal year
and in an effort to avoid layoffs. Total expenditures were $2.6 million under budget.
Below is a summary of the General Fund results for the 2009-10 fiscal year. These amounts are unaudited, but are not expected to change materially. This available, or cash, fund balance
is insufficient to meet the City’s ongoing cash flow needs and necessitated short-term borrowing in the 2010-11 fiscal year.
2009-10 Fiscal Year Budget Summary
Original
Amended
YTD
Balance
%
Budget
Budget
Actual
Remaining
Received
Total Revenues
51,172,400
51,187,540
49,736,462
1,451,078
97.2%
Total Expenditures
55,818,070
56,119,884
53,560,890
2,558,994
95.4%
Budget Surplus/(Deficit)
(4,645,670)
(4,932,344)
(3,824,428)
Available
Fund Balance
9,868,026
Total
Fund Balance
31,672,893
Other Funds
Other funds that provide funding for ongoing operations have also been affected by economic conditions, specifically those special revenue funds that are sales tax based such as Prop
A Transit, Prop C Transit, and Prop 172 Public Safety Augmentation. These funds were all down 8 – 10 percent below their budget estimates. The transit funding has been helped, however,
by the addition of Measure R funds, which generated $716,946 in its first year of funding. Gas Tax is another revenue that has struggled over the last couple of years. This revenue
is based on a flat 18 cent per gallon tax and is allocated to cities based on population. Gas Tax revenue showed a slight increase in the current year after dropping 12 percent over
the previous two years. This is another revenue source that provides ongoing operational funding for the City’s street maintenance program and while not a General Fund revenue, any
reduction in this revenue means either a cut in services or the costs must be absorbed by the General Fund.
The CDC was also impacted by state actions during 2009-10 as the state seized $6.5 million of tax increment funds from the CDC to be placed into the Supplemental Educational Revenue
Augmentation Fund. The California Redevelopment Association filed suit on behalf of all redevelopment agencies to block this seizure of redevelopment funds, but lost this court battle.
This court decision has been appealed. The CDC borrowed the funds to make the SERAF payment and will have to repay the Housing Fund in five years, further placing a strain on the
CDC’s cash flow.
The audited financial statements containing comprehensive results for all funds of the City will be presented to the City Council and the CDC Board at the second meeting in December.
FY 2010-11 - CURRENT FISCAL YEAR FIRST QUARTER BUDGET UPDATE
Due to the severe financial situation facing the City, a different approach was taken to preparing the 2010-11 Fiscal Year Budget. The Finance Department created a rollover budget that
contained the same level of authorized personnel as was in the 2009-10 Budget but using 2010-11 costing, and the same dollar amount for supplies and services (non-personnel) budgets.
The City had previously reduced service levels in the non-safety departments by 10-20 percent, and in safety departments by 5 percent, over the previous two years. This rollover budget
carried forward those reduced service levels, which then served as the baseline for the 2010-11 Budget. This rollover approach was used for all funds in the City and the CDC budgets.
This rollover approach produced an $8.7 million deficit in the City’s General Fund and was used as a starting point for discussions on how to reduce the deficit. All departments were
directed to prepare recommendations for three levels of further budget cuts, each equal to 5 percent, for a
total of 15 percent in reductions. Again, this approach was used for most funds within the City and the CDC. A 15 percent cut in expenditures across all departments would eliminate
the General Fund budget deficit, but would have resulted in dramatic service reductions and employee layoffs.
During the budget adoption process, the City Council reduced service levels that included a 5 percent salary reduction for all non-sworn personnel, 5 percent service reductions in non-safety
departments, fire department service cuts totaling almost $2 million and police department service cuts totaling $1.7 million. Prior year cuts were mainly done in non-safety departments,
but with almost 80 percent of the General Fund budget being allocated to public safety, these levels of cuts to the police and fire budgets needed to occur to have any sort of impact
on the deficit. Despite these cuts, front line public safety has remained a priority of the City Council. These reductions resulted in the elimination of an additional 30 full time
positions, including seven vacant sworn police positions, fifteen sworn fire positions, and eight vacant non-sworn positions. Six of the sworn fire positions are firefighter/paramedics
that are assigned to one of the ambulance squads and as proposed will be replaced with part-time emergency medical technicians. Reduction of the ambulance squad requires the City to
meet and confer with the Fire Association. If the association does not agree to this reduction, the City will be forced to look elsewhere in the Fire Department to achieve those savings.
The Adopted General Fund Budget includes $48.9 million of estimated revenues and $52.7 million of appropriations, resulting in a $3.8 million deficit. Revenues in 2010-11 are projected
to decrease by 1.6 percent below the 2009-10 estimates while expenditures are projected to decrease by 4.2 percent. Since adoption of the budget, the City has identified an additional
Prop A exchange that resulted in additional General Fund revenue of $270,000. This has reduced the gap to $3.56 million. There will also be a limited amount of operating carryovers
from the 2009-10 fiscal year that will increase the gap to approximately $3.7 million.
Many of the major revenues such as property taxes, franchise taxes, sales tax compensation fund (triple flip), and business licenses are not received until later in the fiscal year so
it is difficult to determine whether any major fluctuations are occurring at this early date. Some of those revenues that do come in monthly appear to have bottomed out and we are
starting to see slow growth. Sales tax experienced growth over the same quarter last year for the first time in three years. The hotel occupancy tax, which was down 37 percent from
two years ago, has shown double-digit increases in the first two months of the fiscal year. Building related revenues, however, do continue to perform at depressed levels. We are
cautiously optimistic that we have bottomed out and that we now will start to see slow growth as the economy slowly rebounds. It is important to remember, however, how far revenues
have fallen in the last few years; i.e., sales tax has decreased 22 percent and property taxes will decrease 10 percent. It is also predicted that this will be a slow climb back from
these lows as high unemployment rates and continued uncertainty in the housing market will continue to be a drag on the economy.
The chart below shows revenues at 26.3 percent through the first three months of the year. However, this includes the proceeds from the short-term borrowing the City had to do to meet
its cash flow needs. When the $10 million in Tax Revenue Anticipation Notes (TRANS) proceeds is removed, revenues to date are at 9.9 percent for the year. This is due to fact that
many of the City’s major revenues are not received until December and January. Expenditures are at 18.0 percent through the same period and again, this amount is somewhat distorted
by the $10.1 million repayment of the TRANS that will occur later in the fiscal year. Most departments are in line with their budgets with the exception of the Fire Department, due
to the fact that some of its budget cuts were not scheduled to take place until the second half of the fiscal year. Community Services is also running ahead of budget at this time
due to a higher level of programming in the summer, including the 4th of July special event. This is a normal historical trend and the department will be within budget at the end of
the fiscal year. Through the first three months of the year the City has experienced a negative cash flow of $5.7 million. This negative cash flow is expected to double by the end
of November before property taxes and other major revenues start to flow into the City.
The following chart is a summary of the 2010-11 adopted budget with revenues and expenditures through the month of September (25.0 percent of the year).
REVENUE SOURCE
% of
Original
Amended
YTD
Balance
%
Total
Budget
Budget
Actual
Remaining
Received
Property Tax
34.0%
16,644,000
16,644,000
249,712
16,394,288
1.5%
Sales Tax
24.5%
12,000,000
12,000,000
2,025,395
9,974,605
16.9%
Interest
4.9%
2,375,000
2,375,000
581,544
1,793,456
24.5%
Franchise Tax
6.7%
3,300,000
3,300,000
0
3,300,000
0.0%
Overhead Chargebacks
4.1%
2,000,000
2,000,000
469,852
1,530,148
23.5%
Ambulance Service
3.8%
1,850,000
1,850,000
266,453
1,583,547
14.4%
Business License Tax
4.0%
1,950,000
1,950,000
253,716
1,696,284
13.0%
Sales Tax Reimbursement
2.3%
1,115,000
1,115,000
0
1,115,000
0.0%
Transient Occupancy Tax
1.5%
750,000
750,000
110,685
639,315
14.8%
Other Revenues
10.9%
5,322,670
5,592,670
1,154,883
4,437,787
20.6%
Transfers In
3.3%
1,604,650
11,620,580
10,477,097
1,143,483
90.2%
Total Revenues
100.0%
48,911,320
59,197,250
15,589,335
43,607,915
26.3%
EXPENDITURES
% of
Original
Amended
YTD
Balance
%
Total
Budget
Budget
Actual
Remaining
Expended
City Council
0.5%
268,164
268,164
51,250
216,913
19.1%
General Administration
1.9%
1,014,267
1,014,267
171,815
842,452
16.9%
City Clerk
1.3%
678,910
680,428
143,402
537,026
21.1%
Finance
4.5%
2,379,208
2,379,208
392,280
1,986,928
16.5%
Human Resources
1.1%
558,612
558,612
103,558
455,054
18.5%
Planning
0.9%
449,534
449,916
88,274
361,642
19.6%
Police
50.3%
26,540,575
26,562,900
5,565,471
20,997,429
21.0%
Fire
27.3%
14,421,136
14,428,329
3,299,020
11,129,309
22.9%
Public Works
8.9%
4,674,403
4,682,215
1,039,418
3,642,797
22.2%
Community Services
1.4%
739,488
739,488
194,973
544,515
26.4%
Transfers Out
1.9%
1,020,266
11,203,599
255,066
10,948,533
2.3%
Total Operating Budget
52,744,563
62,967,128
11,304,529
51,662,599
18.0%
Net Operating Budget Surplus/(Deficit)
(3,833,243)
(3,769,878)
4,284,806
(8,054,684)
Capital Projects Total
0.0%
0
3,400
3,400
0
100.0%
General Fund Budget Total
100.0%
52,744,563
62,970,528
11,307,929
51,662,599
18.0%
Budget Surplus/(Deficit)
(3,833,243)
(3,773,278)
4,281,406
LOOKING AHEAD
While the City has made substantial cuts and eliminated 60 full-time positions without layoffs over the last three years, the General Fund budget gap is projected to grow in the next
couple of years. While it appears that the recession has ended, revenue growth is expected to be slow and the City will still face a drop in property taxes revenues that have lagged
the other declines in revenue the City has already experienced. Unemployment is expected to remain at elevated levels and the housing market remains uncertain. The impacts of the
stock market losses in the PERS investment portfolio will cause large increases in the City’s pension costs over the next three years. Absent a new revenue source, which is unlikely
at this time given the state of the economy and the negative public sentiment towards government which has only been made worse in the wake of the City of Bell scandal, the City will
need to make even deeper cuts to service in the upcoming year. These further service reductions will be necessary due to the City’s use of reserve funds in recent years, which will
no longer be available in the near future to fund operations. Some of the major issues are discussed further below.
2011-12 Fiscal Budget Outlook
The City’s budget deficit for the 2011-12 fiscal is projected to be in the $6 - $7 million range. This increase in the deficit over the current year deficit is due to salary increases
due to sworn public safety employees under existing MOUs that do not expire until June 2012, and the increases in pension costs that will occur over the next three years. In order
to reduce the deficit to a more manageable level and preserve the City’s cash reserve, deeper cuts in fiscal year 2011-12 will need to be made to service levels. Moving forward, the
City will need to also reduce the cost structure for its services, a great deal of which is tied up for another year due to those existing public safety MOUs.
Increased Pension Costs
CalPERS experienced a significant loss in its investment portfolio as a result of the downturn in the stock market during the last two fiscal years. The losses of 4.9 percent in 2007-08
followed by a loss of approximately 24 percent in 2008-09, will cause rates to increase drastically in the future. CalPERS has instituted a policy change whereby the large increases
that were originally scheduled to take effect in 2011-12 will now be phased in over a period of three years beginning in 2011-12 and extending through 2013-14. Based on the information
provided by CalPERS, projections are that over that three-year period the City’s rate will increase from 36 percent of pay for safety members to 49 percent, and the miscellaneous rates
will increase from 17 percent of pay to 25 percent. By the end of the three-year period in 2013-14, the City will have to absorb an additional $4 million in pension costs and because
of the 15-year smoothing method used by CalPERS, those higher rates will remain in place for 15 years.
The City took the first step towards pension reform by instituting a two-tier pension for miscellaneous employees whereby new employees will be enrolled in the 2% @ 60 formula vs. 2.5%
@ 55 formula for current employees. New hires in the miscellaneous category will also pay the employee share of pension contributions. While this will reduce pension costs over the
long term, the City will need to take the next step and curb the cost increases it will experience in the next three years by having all employees pay for the employee contribution.
This approach, including the two-tier system and employees paying the employee contribution, will also need to be implemented with the public safety bargaining groups when their contracts
expire, as that is where the majority of the pension costs exist.
Retirement Benefits Funding
Another area where the City has seen rapid cost increases is retiree medical premiums. The City currently provides medical premiums at the Kaiser two-party rate for all public safety
retirees and minimal coverage at the PERS minimum for all miscellaneous retirees. The City has a $45 million unfunded liability for retiree medical benefits. It would be prudent to
consider pre-funding this liability, which will ultimately reduce the long-term cost of the benefit and will also result in higher expenditures in the near term. It would also be prudent
to consider reducing level of benefits in the future and/or having the employees contribute to the pre-funding of this costly benefit.
Retirement Incentives
The City has been able to avoid layoffs as it has downsized the organization by 60 full time positions (15%) over the last three years. However, the reduction in staffing will need
to continue in the upcoming year. Staff will be evaluating the 2011-12 budget in the upcoming months and an efficient method of reducing staff may include the use of retirement incentives
as an alternative to layoffs. Staff will bring forward a staffing reduction plan for the City Council’s consideration in the upcoming months.
Fire Department
The City has made substantial reductions to the Fire Department budget over the last couple of years, reducing the number of sworn personnel from 80 members down to 62. While these
reductions were necessary due to budgetary needs, it will only become more difficult in the future for the City to retain its own fire department, even in its reduced capacity, due
to increasing costs of public safety personnel and equipment and the City’s lack of funding resources. The City is the only city in Los Angeles County with a population over 80,000
that does not have a locally dedicated tax such as a utility users tax, and has its own police and fire departments. Simply stated, the City does not have the funding resources to
continue providing the same level of fire protection and suppression services to the community and should consider all options to providing these services. Some of these options include
contracting with Los
Angeles County which completely surrounds the City for fire suppression services; different staffing models such as using firefighters vs. firefighter/paramedics on certain apparatus
or ambulance operators vs. firefighter/paramedics in ambulances; and the addition of a reserve firefighter program.
Economic Development Goals
The City has suffered significant sales tax losses in its retail base as a result of the downturn in the economy and the closure of several stores. The primary focus of staff will be
to continue to work with existing property owners to assist in filling the vacancies caused by the store closures, especially the major centers, as well as assisting local businesses
and developers in their remodeling and expansion projects. The success of these projects is a critical component to the City’s tax base and ability to fund public services. Some of
those projects currently underway include the expansion of the Westfield Mall, the Country Club shopping center, the Penske dealership, and the Lakes commercial area.
The City’s business model for funding government services is not sustainable in the long run and must be changed. West Covina does not have the revenue structure to continue to operate
as a full service city of this size and will need to restructure its revenue stream, its cost structure, or both. Part of this restructuring will be the result of decisions on what
level of services are expected in the community, who will provide those services, and what price people are willing to pay for those services. This restructuring will require a collaborative
effort among all stakeholders – City Council, City management, employees, the businesses community, and residents. The use of a well-developed community survey could prove to be a
valuable tool to gather information from the community as to how they feel on many of these issues and assist in the decision-making process.
Appropriation Actions
The Community Development Block Grant (CDBG) annually funds a variety of operating and capital projects. One of those projects is handicap-ramps at sidewalk locations throughout the
City. The project was originally budgeted using $200,000 of CDBG funds, but due to an increase in the scope of the project, an additional $38,000 is needed to fund this increase.
There are sufficient CDBG funds available to fund this increase.
The Community Development Commission Department (CDC) has thirteen budgeted positions, with five of those positions currently vacant. The vacant positions include three Senior Project
Manager, one Project Coordinator, and one Management Analyst positions. Due to the reduced redevelopment activity and the cash flow needs of the CDC, staff is proposing to eliminate
two of the Senior Project Manager positions and the Project Coordinator position. The third Senior Project Manager position will remain vacant at this time, while the Management Analyst
position will be filled on a part-time basis. Eliminating these three positions will free up $324,594 from the CDC budget.
FISCAL IMPACT:
None.
_____________________________
Prepared by: Tom Bachman
Assistant City Manager/Director of Finance
Attachments: 1. 2009-10 General Fund Revenues and Expenditures
2. 2009-10 Non-General Fund Revenues and Expenditures
3. 2010-11 Non-General Fund Revenues and Expenditures