01-26-2004 - 2003/04 Fiscal Year Mid-Year Budget Update0
City of West Covina
Memorandum
AGENDA
Item No.: I I
Date: January 26, 2004
TO: Andrew G. Pasmant, City Manager
and City Council
FROM: Tom Bachman, Director
Finance Director
SUBJECT: 2003-04 FISCAL YEAR MID -YEAR BUDGET UPDATE
RECOMMENDATION:
It is recommended that the City Council receive and file this budget update report, and provide
direction as appropriate.
DISCUSSION:
The City adopted a General Fund budget for the 2003-04 fiscal year that contained a $2,359,431
budget gap. This budget gap is down from an initial budget gap of $5.1 million that was reduced
through a combination of revenue increases and expenditure reductions. The revenue increases
included increasing the RDA loan repayment to the City, an equity contribution from the West
Covina Services Group, an increased transfer from the Traffic Safety Fund, and increases to the
fees charged for services. The expenditure reductions included reducing the self-insurance
chargebacks, tier 1 budget reductions to various departments, and a 1% expenditure reduction
across the board to all departments. Subsequent to the adoption of the City budget, the State of
California adopted its budget, which contained items that negatively impacted the City's budget.
The adopted state budget did not contain any VLF "backfill" funds, which will cost the City
$1.976 million. This amount represents the backfill loss for the July 1 through October 1, 2003,
and is to be repaid to the City in 2006/07. This $1.976 million loss, combined with the 394,141
in additional costs related to the miscellaneous employees MOU's, has caused the City's 2003-
04 budget gap to increase to $4.73 million. When the CIP's and other encumbrances carried
over from 2002-03 are added in, the projected deficit increases to $5.7 million.
During the 2003-04 budget process, the City Council was presented with a menu of various
options to close .the budget gap. Some of those were approved and included in the current
budget, but ultimately the City Council decided to balance the budget by using reserves. Staff
was directed to come back to the City Council once the impact of the state budget was known to
review options for closing the budget gap for this year and those projected in future years. A
presentation will be made to the City Council at the meeting.
Greater detail regarding the budget is provided in Attachment 1 to this staff report.
Prepared by: Tom Bachman
Director of Finance
Attachment 1
Shown below is a summary of the 2003-04 adopted budget with revenues and expenditures
through the month of December (50.0% of the year). The revenue budget has been reduced by
$1.976 million due to the loss of the VLF backfill and the expenditure budget includes additional
appropriations for the miscellaneous employees MOU's, carryover CIP's and carryovers for
amounts encumbered by purchase orders at June 30, 2003.
REVENUE SOURCE
Sales Tax
31.1%
12,400,000
6,159,375
Balance
6,240,625
49.7%
Vehicle in Lieu Tax
11.1%
4,424,000
1,780,069
2,643,931
40.2%
Property Tax
15.1%
6,000,000
2,759,143
3,240,857
46.0%
Interest
10.6%
4,210,000
1,860,432
2,349,568
44.2%
Franchise Tax
6.3%
2,500,000
100,000
2,400,000
4.0%
Overhead Chargebacks
4.8%
1,900,000
971,226
928,774
51.1%
Business License Tax
3.4%
1,370,000
224,157
1,145,843
16.4%
Transient Occupancy Tax
. 2.1%
850,000
302,193
547,807
35.6%
Other Revenues
6.3%
2,502,660
1,427,628
1,075,032
57.00
Transfers In/Intemal Svc Charges
9.3%
3,688,862
2,819,216
869,646
76.4`ro
Total Revenues
100.0%1
39,845,5221
18,403,4381
21,442,084
46.2%
Sales Tax — Although sales tax is at 49% through the first six months of the year, this does not
include fourth quarter receipts, which is typically the largest quarter, and includes only one
quarter of sales tax transfer from the Fashion Plaza CFD. Sales tax revenue at this time last year
was $5,832,232. If revenues continue their current pace, sales tax for the year should exceed the
budget estimate and be in the 12.7 million range, which would be a 3.4% increase over last year.
Motor Vehicle in -lieu — The original estimate for motor vehicle in lieu revenue for the year was
$6.4 million. This estimate has been adjusted downward by $1.976 million due to the "backfill"
being withheld for the first three months of the year and a portion of the VLF funds being used to
fund certain realignment programs provided by counties. VLF revenues are now estimated to be
$4.424 million for the year. This amount is contingent on approval of the $15 billion fiscal
recovery bonds by voters in the state in March.
Property taxes - Property tax revenues are slightly ahead of where they should be based on the
payment schedule from the county. Current receipts are 10% above last years amount of
$2,506,759 at this time of year.
Interest — Interest income is pretty close to where it should be at this time of the year. $3.3
million (78%) 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 16.4% due to most revenue from
this source being due in January. Based on prior year receipts this revenue source should meet or
exceed its budget estimate of $1.37 million.
Transient Occupancy Tax — Transient occupancy taxes are at 35.6% of budget and only include
five months for the year. This is 13% below last year's total at the same time of year.
Other Revenues — This revenue source contains all other revenuesand is running ahead of
estimates at 57% received for the year. This is due to revenues for building permits and other
charges for services.
•
Fund Transfers. - This revenue source. includes transfers from the Traffic Safety, Public Safety
Augmentation and West Covina Service Group Funds as well as transfers of bond proceeds from
the Capital Improvement Fund for the Cameron Center. This revenue is at 76.4% due to all of
the funds for the Cameron Center being transferred in at this point. This revenue source should
end up the year right at its budget estimate.
A chart of expenditures for 2003-04 is shown below.
EXPENDITURES
Elected/Appointed
% of Total
0.6%
Amended
Budget
277,812
101,278
:.
176,594
%
36.4%
General Administration
2.4%
1,108,780
405,826
702,954
36.6%
City Clerk
1.4%
644,672
166,432
478,240
25.8%
Finance
4.0%
.1,845,468
863,759
981,708
46.8%
Human Resources
1.1%
523,927
175,291
348,636
33.5%
Police
41.9%
19,114,977
8,752,647
10,362,330
45.8%
Fire
25.9%
11,843,586
5,444,517
6,399,069
46.0%
Communications
4.0%
1,843,418
781J59
1,062,259
42.4%
Tanning
1.1%
506,873
227,370
279,503
44.9%
Environmental Management
0.4%
161,184
67,582
93,602
41.9%
Public Works
8.7%
3,965,075
1,766,418
2,198,658
44.5%
Community Services
2.3%
1,037,521
466,678
570,843
45.0%
Transfers Out
0.1%
58,535
13,040
45,495
22.3%
Total Operating Budget
42,931,888,
19,231,996
23,699,891
44.8%
Capital Projects Total
6.0%1
2,726,1091
2,266,311
- 459,7981
83.1%
General Fund Budget Total
100.0%
45,657,997
21,498,307
24,159,690
47.1%
udget Surplus/(Deficit) 1 (4,986,475) (3,094,869)
All department budgets included a 1 % reduction that was factored into the adopted budget and is
reflected, in the budget amounts presented here. Additionally, the City Manager has directed all
departments to further reduce their budgets and only spend 99% of their budget allocations. The
purpose of this was to offset the cost of the MOU's that were approved for the miscellaneous
employees after the budget was adopted. This would generate approximately $420,000 in
savings during the fiscal year.
IMPACTS OF STATE BUDGET,
The state's fiscal year 2003-04 budget contained a number of items that affected local
governments in addition to the ongoing shift of local property taxes into the Educational
Revenue Augmentation Fund (ERAF) that offsets the state's obligation for school funding under
Proposition 98. This ERAF shift has cost the City $20.4 million since 1992-93 and will reduce
City property tax revenues in 2003-04 by $2.4 million.
The following summarizes the City's 2003-04 estimated losses due to state budget actions:
VLF Backfill Gap: The City will lose $1.976 million in VLF funds, which accounts for the
backfill amount for the first three months of the. year as well as a portion of the VLF funds being
used to fund certain realignment programs provided by counties. This loss is supposed to be
repaid by the state to the City in 2006/07.
Redevelopment: The City of West Covina Community Development Commission (formerly
the redevelopment agency) will lose $573,000 in tax increment as this amount will be shifted
into the Educational Revenue Augmentation Fund.
0
Triple Flip: An element of the state budget includes a -provision to take 50% of the local sales
tax rate (1/2 of the 1%) to secure bonds covering nearly $10.7 billion of the state deficit,
backfilling that revenue loss to cities with a like amount of property taxes through an ERAF
shift, and then backfilling their obligation for fund schools from other general fund sources. This
exchange would begin in 2004-05 and be in effect until all the deficit bonds were paid off.
The new governor has since proposed a $15 billion fiscal recovery bond to be approved by voters
in the March election. This bond issue would be amortized over a longer period of time and
require. a shift- of 1/4 cent sales tax rather than the original %Z cent shift. . The increase in the
amount of the bond is to provide funding for the VLF backfill that he reinstated in Dece,rnbor
2003 If the bond fails to gain voter approval, the City's ability to continue receiving the backfill
will be: placed in jeopardy and the state will pursue sale of the smaller $10.7 million bond issue
as proposed in the budget.
Citizens' Option .for Public Safety (COPS): The City budgeted $200,000 in 2003-04 but will
now receive only $164,000, resulting in a loss of $36,000.
The state budget also eliminates Law Enforcement High Technology Grants and funding for
,State Funded Mandates. While the City has received funding under both of these programs in
the past, no amounts for either program were included in the City's 2003-04 budget
The governor has also proposed his 2004-05 budget that includes additional impacts to, local
governments. While the budget calls for full reinstatement of the VLF backfill; it does increase
the ERAF shift of -local property taxes 'by 25%, which will reduce City property tax revenues by
$575,000 in 2004-05. The. proposed budget also makes permanent the - ERAF shift from
redevelopment agencies. This will result in an ongoing loss of property tax revenues for the
Community Development Commission of approximately $575,000.
2004-05 BUDGET OUTLOOK
The City's budget gap is projected to increase to approximately $7 million in the 2004-05 fiscal
year and increase further in future years. This increase is due in large part to increases in PE S
retirement contribution rates and further reductions of City revenues due to state budget actions.
During the 2003-04 "budget process, the City Council was presented with a menu of various
options.to close the budget gap. Those options included revenue increases such as a tax ballot
measure, future economic development activities and raising charges for services, and many
expenditure reductions such as freezing or eliminating positions, and certain programs and
services. Given that public safety makes up 77% of the General Fund budget, many of these
reductions were proposed in the police and fire departments. Additionally, since many of the
non -safety functions of the City are funded in whole or part by special funds, reductions in those
areas at the level to have any kind of significant impact on closing the budget gap would be
extremely severe.
Projections indicate that the City's cash reserves will be nearly spent at the end of the 2006-07
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 including sonde
form of a tax ballot measure.
Given the magnitude of the projected gaps, staff believes that closing the gap through budget
cuts alone would result in an unacceptable level of service to the community and that some form
of tax increase is a necessary part of the solution. It is also recommended that the City retain a
public opinion .research and survey firm to conduct polling of residents to gain credible
information regarding the community's willingness to accept (and at what level) service cuts and
tax increases, and what types of uses they would like to see in future economic development
projects. The information gained from this polling will provide' additional data to be considered
when developing the plan: