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02-03-2004 - 2003/04 Fiscal Year Mid-Year Budget Update• G TO: Andrew G. Pasmant, City Manager and City Council FROM: Tom Bachman, Director Finance Department City of West Covina Memorandum AGENDA Item' No.: E-1 Date: February 03, 2004 SUBJECT: 2003-04 FISCAL YEAR MID -YEAR BUDGET UPDATE RECOMMENDATION: It is recommended that the City Council receive and file the budget update and provide direction as appropriate. DISCUSSION: This item was continued from the January 26, 2004 City Council meeting. 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 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 CIPs 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 y: 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. Sales Tax % of Total 31.1% Budget 12,400,000 YTD Actual 6,159,375 BalanceREVENUESOURCE Remaining 6,240,625 % Received 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 57.0% Transfers In/Intemal Svc Charges 9.3% 3,688,862 2,819,216 869,646 76.4% Total Revenues 1 100.0% 39,845,5221 18,403,4381 21,442,0841 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 is 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 years total at the same time of year. Other Revenues - This revenue source contains all other revenues and 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 BudgetExpended 277,872 101,278 :. 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% 1,843,418 781,159 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%1 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 44.80% Capital Projects Total 6.0% 2,726,109 2,266,311 459,798 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. 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 1/2 cent shift. The increase in the amount of the bond is to provide funding for the VLF backfill that he reinstated in December 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 budge t7t 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 gapis 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 PERS 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 fimctions 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 some form of a tax ballot measure. Given the magnitude of the projected gaps, staff believes -the 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.