02-01-2005 - 2004/05 Fiscal Year Mid-Year Budget Update•
TO: Andrew-G. Pasmant, City Manager
and City Council
FROM: Tom Bachman, Director
Finance Director
SUBJECT: 2004-05 FISCAL YEAR MID -YEAR
BUDGET UPDATE
RECOMMENDATION:
It is recommended that:
City of West Covina
MEMORANDUM
AGENDA
Item No.: G-5
Date: February 1, 2005
1. The City Council receive and file the budget update report, and provide direction
as appropriate on the balance of the recommendations.
2. The City Council grant authority to the City Manager to reduce department
budgets by an amount equal to 50% of salary savings generated by position
vacancies for miscellaneous employees and 15% of salary savings generated from
sworn public safety personnel vacancies.
3. Authorize re -amortizing the unfunded liability.of the public safety retirement plan
to achieve cash -flow savings of $810,000.
4. Provide direction to staff as to the formation of a citizens budget committee.
DISCUSSION:
The City adopted a General Fund budget for the 2004-05 fiscal year that contained a $5,356,141
budget gap. This amount increased by $380,885 as a result of the carryovers from the 2003-04
fiscal year. This is the sixth consecutive year in which the City has adopted a General Fund
budget that has contained a gap between revenues and expenditures. Despite $1.5 million in
cuts, the 2004-05 gap increased from the gap in 2003-04 by $3 million due largely to a $3.6
million increase in retirement contributions to the Public Employees Retirement System and the
state shifting anadditional $1.1 million of City property tax to the ERAF fund. These retirement
contributions are projected to increase again in the 2005-06 fiscal year before leveling out in
2006-07. The $1.1 million property tax shift is scheduled to occur again in 2005-06 and cease
thereafter. Additionally, the state is scheduled to repay the $1.8 million VLF backfill "gap loan"
which was withheld from the City in 2003-04.
Revenue Structure Change
Fiscal year 2004-2005 is a year in which the City's revenue structure changed dramatically due
to actions taken at the state level. The first change is the so-called "triple flip" which was
adopted as part of the state fiscal recovery bonds approved by California voters in March 2004.
Under the triple flip, one quarter of the City's sales tax revenue will be swapped for a like
amount of property tax. This swap will remain in place as long as the fiscal recovery bonds are
outstanding. The second major change in the revenue structure is the result of an agreement
between the governor and local governments. It involves the elimination of the backfill portion
of the vehicle license fee (VLF) revenues. As with the sales tax swap, the loss of VLF revenues
will be replaced with a like amount of property tax revenues. This is a permanent shift and
increases in future years for this revenue source will be tied to increases in assessed valuation in
the City. Although these first two changes were intended to be revenue neutral, they do change
the timing of when revenues are received by the City.
The final major change to City revenues is the above -mentioned shift of City property tax to the
ERAF (Educational Revenue Augmentation Fund) fund. The amount of the shift is $1.1 million
per year for each of the next two years and is a net loss to the City in each of those years. As
partof the agreement, the ERAF shifts will only last for two years instead of being permanent.
Additionally, Proposition IA, a constitutional amendment adopted by 84% of the voters in
November 2004, provides future safeguards for local government revenues.
Actions Taken to Reduce Budget Gap
Staff and the City Council continue to review options to close the budget gap both in the current
year and in future years. Since the July 2004 budget adoption, the following adjustments have
been made to the adopted budget reducing the current budget gap from $5.4 down to 4.3 million.
Estimated Revenues 41,521,785
Appropriations (46,877,925)
Adopted Budget Gap (5,356,140)
Prepay PERS Contributions
132,189
Increase Parking Fines
75,000
Neighbor Parking Protection Zones
75,000
Reduce Police Vehicle Purchase
51,000
Charter Cable Franchise Audit
99,000
Recovery of L.A. County Prop A Park Maintenance. Funds
285,000
Cameron Community Center Reimbursement
75,000
Positions Vacancies
300,000
Adopted Budget Amendments 1,092,189
Amended Current 2004-05Budget Gap (4,263,951)
2003-04 Budget Carryovers (380,885)
Amended 2004-05 Budget Gap. (4.644,8361
In addition to the above, the City Council previously approved the sale of the Wescove Theatre
property by the Community Development Commission and using the proceeds to make an
additional repayment on the City's loan to the CDC. This action will reduce the current budget
gap down further to approximately $3.3 million.
Greater detail regarding the budget is provided in Attachment .1 to this staff report.
Position Vacancy Budget Adiustment Authority
The City currently has 49 position vacancies in full time positions that have the potential to
generate significant budget savings. Of the 49 vacancies, fourteen are sworn fire personnel that
are being backfilled using overtime and three are sworn police officers (most of the public safety
positions are currently in various stages of the recruitment process). Currently, departments are
held accountable for their budget at the department bottom line, meaning that savings in one
division or type of expenditure can be used in another division or other type of expenditure. This
allows them to spend 100% of salary savings due to a position vacancy for personnel, supplies,
services or equipment anywhere else within their budget.
In order to capture budget savings from these vacant positions staff is proposing that the City
Manager be given the authority to reduce department budgets by 50% of the monthly position
cost of any vacant miscellaneous position for the each month that the position is vacant. As an
incentive to encourage budget savings, departments would be allowed to retain the other 50% of
the monthly salary savings for part-time help to backfill the position, provide a new incentive
allowing departments to purchase equipment, or spend it on other types of supplies and services.
Because of constant manning requirement and other safety issues that create overtime in the
police and fire departments, staff is recommending that police and fire budgets only be reduced
by 15% of position vacancy savings for sworn public safety personnel and that the departments
retain 85% of the savings to provide for adequate staffing.
Since. department supplies, services and equipment budgets have been either reduced or held at
status quo for the last three years, this would give them the discretion to manage their salary
savings to best meet their department needs, while at the same time allowing the City to identify
and capture those savings monthly by reducing the budgets of the affected departments.
Because this effectively adjusts the total budget, staff is requesting that the City Council grant
this authority to the City Manager. Reports of these savings would then be reported to City
Council with regular budget updates. Currently, General Fund savings through six months of the
fiscal year, excluding police and fire sworn personnel, are estimated at $310,000 and are
projected to be about $600,000 for the entire fiscal year. Under current budget control policies,
departments have the ability to spend 100% of these savings elsewhere within their budget. By
granting this authority to the City Manager, the City will benefit by retaining 50% of those
savings and departments would benefit by having an incentive to manage vacancies and create
budget savings that can be used in a manner that best meets their needs at that time.
Public Safety Unfunded Liability Fresh Start Amortization
The City recently met with an independent actuary to review the funding status of our retirement
plans and projected contribution rates for the future. PERS had previously notified the City of
our rates for the upcoming 2005-06 fiscal year. The safety plan combined contribution rate for
2005-06 will increase from the current rate of 36.9% to 40.8% (31.8 employer rate and 9%
employee rate), and the miscellaneous rate will increase from 7% to 14% (7% employer rate and
7% employee rate). The rates are projected to flatten out after 2005-06 with only very minor
decreases through 2010-11.
An option available to the City to provide immediate relief from pension costs is to re -amortize
("fresh start") the current unfunded liability of the safety plan. The safety retirement plan had a
$22.3 million unfunded liability at June 30, 2003, the latest date actuarial information is
available. By re -amortizing the unfunded liability over a 20-year period the employer
contribution rate would drop from 31.8% in 2005-06 to 27.3%. The actuarial consultant
indicated that there is not any additional net present value cost of re -amortizing the unfunded
liability. The fresh start actually pays down the current unfunded liability faster than the current
amortization schedule (Attachment 2) and since PERS charges it assumed rate of return of 7.75%
on the outstanding balance, this is also a benefit to the City. The estimated fresh start cash flow
savings for the safety plan are estimated to be $810,000 in the first year. The fresh start is not
available to the miscellaneous plan since that plan still had excess assets as of the last' actuarial
valuation date.
The process of re -amortizing the unfunded liability involves writing a letter to our actuary at
Ca1PERS certifying that (1) the City is in financial hardship and (2) the City has notified both
police and fire personnel of the re -amortization.
Citizens Budget Committee
At the goal setting session of the January 10, 2005 special City Council meeting Councilmember
Hernandez recommended that a citizens budget committee be established to provide input into
the budget process. This was discussed by City management staff and a consensus was that one
member from each of the City's four commissions (Community Services, Human Resources,
Planning and Senior Citizens) be appointed by council to the committee and that the committee
also include a 2-3 members of the business community, which the City Manager would solicit
volunteers. The value of this proposed committee makeup is that commissioners already have
some familiarity of City operations and budget and that members of the business community are
interested stakeholders that would provide a good balance to the committee. After gaining an
overview of the budget using the current budget and the challenges facing the City in the
upcoming years as well as the potential. solutions, this committee could be more active once a
preliminary 2005-06 budget is presented. This committee would be open to public participation.
Prepared by: Tom Bachman
Director of Finance
a
Attachment 1
Shown below is a summary of the 2004-05 adopted budget with revenues and expenditures
through the month of December (50.0% of the year). The $150,000 difference between the
original budget and the adopted budget reflects the City Council's decision to increase certain
parking fines subsequent to adoption of the budget. Certain of the larger revenue sources are
running will below the 50% mark due to timing of when revenues are received during the fiscal
year. Through the first six months of the year, the major revenue sources (sales tax, property tax,
and interest income) appear to be on track with budget estimates. As for the remaining revenue
sources, based on the information available at this time, there are no major fluctuations expected
from their budgeted amounts.
REVENUESOURCE
Sales Tax
% of
Total
23.4%
Original
Budget
9,750,000
Amended
Budget
9,750,000
YTD Actual
4,346,737
Balance
RemainingReceived
5,403,263
44.6%
Sales Tax Compensation Fund
7.8%
3,250,000
3,250,000
0
3,250,000
0.0%
Property Tax
27.5%
11,439,000
11,439,000
2,379,206
9,059,794
20.8%
Interest
10.3%
4,306,300
4,306,300
2,130,979
2,175,321
49.50o
Franchise Tax
6.4%
2,650,000
2,650,000
100,000
2,550,000
3.8%
Overhead Chargebacks
4.6%
1,900,000
1,900,000
933,468
966,532
49.1%
Business License Tax
3.4%
1,400,000
1,400,000
200,600
1,19%400
14.3%
Transient Occupancy Tax
2.0%
850,000
- 850,000
363,895
486,105
42.8%
Vehicle In Lieu
2.0%
845,000
845,000
4921540
352,460
58.3%
Other Revenues
7.8%
3,268,735
3,268,735
1,537,679
1,731,056
47.0%
Transfers In/Internal Svc Charges
4.8%
1,862,750
2,012,750
897,498
1,115,252
44.6%
Total Revenues
100.0%
41,521,785
41,671,785
13,382,602
28,289,183
32.1%
Sales Tax - Although sales tax is at 44.6% through the first six months of the year, this does not
include fourth quarter receipts, which is typically the largest quarter, and does include of the
sales tax transfer from the Fashion Plaza CFD. Sales tax revenue at this time last year was
$6,159,375 but that included the full one cent whereas this year is only paid at three-quarters of
one cent due to the triple flip.. Sales tax appears to be on track to meet'their budget estimate at
this point.
Sales Tax Compensation Fund - This revenue source is the one -quarter cent sales tax that is
being paid through property tax due to the triple flip. While this revenue source shows zero
revenue through December, the City received $1,631,010 (50.2%) in January. This amount also
includes the amount of sales tax withheld from the Plaza CFD. This revenue source will be
reconciled to actual sales tax withheld in January 2006.
Property taxes - Property tax revenues became a much larger share of the City's General Fund
revenues as part on the state budget, now making up 27.5% of total revenues. Total property tax
revenues now include $5.8 million in supplemental property taxes in lieu of VLF fees and a
deduction of $1.1 million for the ERAF shift. Due to the timing of when revenues are received
under the new payment schedule, total property taxes are only at 20.8% but should be on track to
meet their budget estimate.
Interest - Interest income is pretty close to where it should be at this time of the year. $3.4
million (81 %) of all interest income in the General Fund comes from loans to the redevelopment
agency.
Franchise Tax - Franchise tax receipts are only at 4% due to the fact that most payments are not
required to be made until later in the year. This is consistent with prior years.
Overhead Chargebacks - These are budgeted chargebacks to various department and funds that
receive external funding. This revenue source should meet its budget projection.
Business License Tax - Business license revenues are only at $200,600 (14.3%) due to most
revenue from this source being due in January. This amount was $224,157 at this time last year.
Transient Occupancy Tax - Transient occupancy taxes are at $363.895 (42.8%) of budget and
only include five months for the year. This is 20% above last year's. total of $302,193 at the
same time of year.
Motor Vehicle in -lieu - This revenue source was reduced by approximately 87% as part of the
state budget and the revenue loss is replaced with a like amount of property tax revenue. This
revenue source is running ahead of budget at this time due to large payments at the beginning of
the fiscal year as the state was adjusting to the new formula for distributing this revenue.
Other Revenues -This revenue source contains all other revenues and is at $1,537,726 (47.0%)
for the year. This exceeds last year's total of $1,427,628 at the same time of year.
Fund Transfers - This revenue source includes transfers from the Traffic Safety, Public Safety
Augmentation and West Covina Service Group Funds. This revenue source should end up the
year right at its budget estimate.
A chart of expenditures for 2004-05 is shown below.
EXPENDITURES
ity Council
% of
0.5%
Original
224,373
Amended
229,173
101,090
Balance
128,083
%
44.1%
eneral Administration
2.2%
1,025,696
1,030,296
462,226
568,070
44.9%
ity Clerk
1.5%
688,710
688,909
208,761
480,148
30.3%
Finance
4.0%
1,852,985
1,884,985
896,013
988,972
47.5%
Human Resources
1.3%
591,658
618,931
208,625
410,305
33.7%
Planning
1.1%
506,531
513,973
248,041
265,932
48.3%
Police
44.8%
21,074,542
21,069,132
10,344,776
10,724,356
49.1%
Fire
29.0%
13,677,973
13,636,896
6;401,473
7,235,423
46.9%
Communications
4.1%
1,937,301
1,938,726
806,999
1,131,727
41.6%
Public Works
8.2%
3,871,886
3,880,890
1,752,149
2,128,741
45.1%
Community Services
1.8%
' 843,586
844,786
376,153
468,633
44.5%
Environmental Management
0.4%
168,08
1%084
65,028
103,057
38.7%
Transfers Out
0.8%
353,500
353,500
3,413
350;087
1.0%
Total Operating Budget
46,816,825
46,858,281
21,874,747
24,983,535
46.7%
Capital Projects Total
0.5%
61,100
217,359
44,890
172,468
20.7%
General Fund Budget Total
100.0%1
46,877,9251
47 075,6401
21,919,6371
25,156,0031
46.6%
Most departments are running below the 50% mark midway through the year due in part to the
many position vacancies. A proposal that is part of this agenda item addresses some of the
potential budget savings from those vacancies. Additionally, the ambulance service that was
approved by the City Council in June 2004 did not begin operation until mid -October and is the
reason the fire department is running below the 50% mark.
2005-06 BUDGET OUTLOOK
Despite $1.5 million in cuts, the 2004-05 gap increased from $2.4 million in 2003-04 million to
$5.4 million. ,This was due largely to a $3.6 million increase in retirement contributions to the
Public Employees Retirement System and an additional $1.1 million property tax shift to the
ERAF fund. The current year budget gap should be reduced by almost $2 million down to $3.3
million due to a number of one-time actions previously noted in this report. The gap will again
grow to approximately $7 million in 2005-06 due additional increases in the PERS retirement
_contribution rates.. Staff is proposing a number of actions that have the potential to significantly
reduce this gap without cutting any services. Additional budget cuts will be presented to the City
Council throughout the budget process for their consideration. Those potential actions and the
effect on the budget are shown below. The amounts shown are the best estimates at this time and
will be firmed up during the budget process. Additionally, certain items will affect employees
and the City will need to meet with employee groups before acting on those items.
Ou
e
E
Estimated
Projected
Projected
Projected
Projected
2004/05
2005/06
2006/07
2007/08
2008/09
Projected Available Fund Balance 19,071,017
11,934,004
6,821,518
399,313
8,077,247
Projected Budget Deficit
Budget Solutions.
1 Ambulance Subscription Program
2Increase RDA repayment to City
3Pre-pay PERS
4Fresh-Start for Public Safety PERS
(5,356,140) (7,137,013) (5,112,486) (7,220,831) (7,677,935)
50,000
100,000
150,000
200,000
1,000,000 1,000,000
1,000,000
1,000,000
1,000,000
125,000
125,000
125,000
125,000
800,000.
824,000
848,720
874,182
8Limit Expenditure growth (1% below Rev.)
9BKK Commercial Development
10Economic Development Activity
11 New Revenue Sources
12Value Chain Analysis - Re -engineering
13Zero Capital - Use Savings
141-ocal Tax Ballot Measure
250,000 250,000 250,000
250,000 600,000
200,000 400,000 600,000
200,000 350,000 500,000
Current Year Budget Savings 1,092,189
2003-04 Budget Carryovers (380,885)
Potential. Deficit (3,644,836) (4,319.013) (1.7 (3.1 3.663.753i
Potential Available Fund Balance 20,782,321 16,463,309 14,675,822 11,478,712 7,814,958
Projections indicate that the City's cash reserves will be spent at the end of the 2007-08 fiscal
year. It is imperative that the City address these budget gaps immediately and devise a plan to
close the gap so as to avoid severe cuts in the not to distant future. Staff recommends that a
balanced plan be developed that includes reductions in service levels, economic development
that generates significant new revenue, and new revenue sources.
0
Attachment 2
Year
Current Amortization
Amortiz
ation
Period $ Payment
% Pay
Fresh Start
Period
20 $ Pa ment
% Pa
2005/06
$
24,385,872
12.1
$ 2,620,085
15.2%
$
24,385,872
20
$ 1,841,893
10.7%
2006/07
23,556,058
12.1
2,531,462
14.3%
24,363,842
19
1,901,755
10.7%
2007/08
22,753,927
12.1'
2,445,215
13.3%
24,277,967
18
1,963,562
10.7%
2008/09
21,979,157
12.1
2,361,263
12.5%
24,121,280
17
2,027,37710.7°/
2009/10
21,23.1,487
12.1
2,279,526
11.7%
23886,206
16
2,093,26710.7%
2010/11
20,510,718
12.1
2,199,926
10.9%
23,564,520
15
2,161,298
10.7%
2011/12
19,816,716
12.2
2,122,389
10.2%
23,147,284
14
2,231,541
10.7%
2012/13
19,149,415
12.2
2,046,839
9.5%
22,624,799
13
2,304,066
10.7%
2013/14
18,508,820
12.2
1,973,206
8.9%
21,986,539
12
2,378,948
10.7%
2014/15
17,895,012
12.3
1,901,420
8.3%
21,221,083
11
2,456,264
10.7%
2015/16
17,308,150
12.4
1,831,413
7.7%
20,316,049
10
2,536,092
10.7%
2016/17
16,748,476
12.4
1,763,117
7.2%
19,258,011
9
2,618,515
10.7%
2017/18
16,216,320
12.5
1,696,468
6.7%
18,032,417
8
2,703,617
10.7%
2018/19
15,712,105
12.7
1,631,402
6.3%
16,623,502
7
2,791,485
10.7%
2019/20
15,236,354
12.8
1,567,858
5.8%
15,014,188
6
2,882,208
10.7%
2020/21
14,789,693
13.0
1,505,775
5.4%
13,185,978
5
2,975,880
10.7%
2021/22
14,372,859
13.2
1,445,09.3
5.0%
11,118,848
4
3,072,596
10.7%
2022/23
13,986,710
22.5
982,444
3.3%
8,791,121
3
3,172,455
10.7%
2023/24
14,050,877
26.2
905,701
3.0%
6,179,340
2
3,275,560
10.7%
2024/25
14,199,678
31.3
835,167
2.6%
3,258,119
1
3,382,015
10.7%
2025/26
14,433,227
12.7
1,498,208
4.6%
-
-
-
-
2026/27
13,996,622
12.7
1,452,887
4.3%
-
-
-
-
2027/28
13,573,224
12.7
1,408,937
4.1%
-
-
-
-
2028/29
13,162,634
12.7
1,366,317
3.8%
-
-
-
2029/30
12,764,464
12.7
1,324,986
3.6%
-
-
-
-
2030/31
12,378,339
12.7
1,284,905
3.4%
-
-
-
2031/32
12,003,895
12.7
1,246,037
3.2%-
2032/33
11,640,777
12.7
1,208,344
3.0%-
2033/34
11,288,643
12.7
1,171,792
2.8%
-
-
-
2034/35
10,947,162
12.7
1,136,345
2.60
-
-
-
2035/36
10,616,010
12.7
1,101,970
2.5%
-
-
-
-