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HomeMy WebLinkAbout01 - - Introduction to Preliminary 5-Year Budg. - 7/12/2011CITY COUNCIL STUDY SESSION REPORT MEETING DATE: JULY 12, 2011 ITEM NUMBER: SUBJECT: INTRODUCTION OF THE CITY'S PRELIMINARY FIVE YEAR FINANCIAL FORECAST AND CAPITAL REINVESTMENT STRATEGY DATE: JULY 6, 2011 FROM: FINANCE DEPARTMENT /FINANCIAL PLANNING DIVISION PRESENTATION BY: BOBBY YOUNG, BUDGET AND RESEARCH OFFICER FOR FURTHER INFORMATION CONTACT: BOBBY YOUNG, BUDGET AND RESEARCH OFFICER (714) 754-5241 RECOMMENDED ACTION It is recommended the City Council discuss the City's Preliminary Five Year Financial Forecast and Capital Reinvestment Strategy and provide comments/suggestions about future priorities. BACKGROUND During the recent decline in the economy, the City's financial position changed. Over the last few years, the City's revenues have declined forcing the City to take necessary actions to reduce expenditures. As part of reducing expenditures, among other things, it was determined to delay: purchasing or replacing equipment, repairs and maintenance to facilities, and funding reserves. Unfortunately, while reducing staffing costs, the City also used fund balance or reserves in the amount of approximately $33 million. Recently, City Council has expressed a desire to determine, financially, what the next five years (FY 12-13 thru FY 16-17) look like for the City's General Fund. The City has not had a comprehensive five year financial forecast to provide such information, therefore staff has developed one. Staff created this five year financial forecast using most of the City's own tools for developing the annual budget, both revenues and expenditures. At this time, this forecast is based on preliminary assumptions and is intended to be a tool to help: 1.) project what future year's budget might be; 2.) demonstrate how decisions in the current year may impact the financial future of the City; and 3.) allow City Council to discuss and determine future priorities based upon available resources. City Council has expressed a desire to contribute more General Fund monies to capital improvements and therefore the 5 -year forecast may allow for even more clarification of priorities under the capital improvements topic (Streets, Alleys, Sidewalks, etc). ANALYSIS For revenues, staff compiled about 10 years of historical data at the individual account level. This historical information is very important when determining future forecasting. Having such data helps determine if a revenue account is relatively flat (Business License Tax), increasing at consistent rate (some fee and charges), or fluctuating with current market conditions from year to year (Sales Tax and Property Tax). Using this data, staff was able to then summarize into two line items — Total Revenue and Total Other Financing Sources (Transfers In). These two items can be seen in historical CAFR's and therefore allows for easy year to year comparison/verification. For expenditures, staff also compiled about 10 years of historical data at the department/division individual account level. Using this detail, staff was able to summarize the information into the major categories of Salaries and Benefits (S&B), Maintenance & Operations (M&O), Fixed Assets and Transfers Out, as well as have year over year data at the individual account level. Establishing a database at this level allows for maximum analysis and the ability to forecast certain line item data at the department/division level, similar to the annual budget. Since salaries and benefits are a large part of the overall expenditure forecast, staff created the necessary database to forecast these future costs at the position level. Currently, staff uses a similar database for the annual budget, which includes current salary information, applicable step/merit increases, other compensation rates/amounts, PERS rates (for a given year), medical/flex bucket amounts and Medicare contributions. While having this data for one year, staff extrapolated the same database for each of the five years to forecast. Having such a database, has allowed staff to more accurately forecast salary and benefit costs, especially with variables like PERS rates and salary increases. This salary and benefit information feeds into the department/division line item database to be combined with any M&O account analysis. Maintenance and operations account analysis is very similar to that of revenues. Having historical data helps when determining if individual accounts remain flat (office supplies and debt service), increase at a consistent rate (utility costs — water, gas, electric), or fluctuate with current conditions or needs (building modifications and fixed asset purchases). Staff reviewed current funding levels for each department/division line item and forecasted each according to the type of account. Assumptions: As with any forecast, making assumptions about future conditions is very important. For the City, assumptions need to be made for both revenues and expenditures. Revenues: At this time, staff determined there were 4 main revenue sources that would require an assumption be made, Sales Tax, Property Tax, Transient Occupancy Tax (TOT) and Building/Electrical/Plumbing Permits. In the future, it may be necessary to incorporate additional accounts in the forecast to provide more detailed analysis. With most of the assumptions, trying to eliminate year to year fluctuations while forecasting, staff determined it was prudent to assume an average rate. Sales Tax — the current sales tax assumption is an increase of 3% per year. Staff recognizes that current market conditions are more favorable than previous years and that those conditions may not continue. Using a 3% average could allow for a 6% increase in one year and a 0% increase the following. The average for those two would be 3%. 2 Property Tax — the current property tax assumption is an increase of 3% per year. A portion of the property tax base has been restricted by Prop 13, which establishes a maximum annual assessment increase to 2% (CPI Adjustment Factor). Therefore, even though market values are down, these properties may still increase annually by the CPI adjustment factor until they are assessed at the market value. Another aspect of property taxes is, with the recent decline of property values, the County Assessor reduced the assessed value of many properties. In the future, when the market value increases, these properties can be assessed in excess of the CPI adjustment factor (2% maximum) until they return to the Prop 13 assessed maximum value. Should this occur, property tax revenue will increase in excess of normal inflationary factors. Transient Occupancy Tax (TOT) — the current TOT assumption is an increase of 2% in 2012-13, 2.5% in 2013-14, and 3% the remaining years. The rate increase from 2010-11 is fully implemented and staff is including a slight increase as the economy begins to stabilize. Also the business sector may begin to increase from where it currently is and Costa Mesa will benefit by being in Central Orange County and its proximity to the airport. Building/Electrical/Plumbing Permits — the current permit assumption is an increase of 2.5% in 2012-13, 3.0% in 2013-14, and 2% the remaining years. It is anticipated by many economists that the building industry will be increasing in the next couple of years for both housing and business development. While Costa Mesa is fairly built out for new development, the City is starting to see more redevelopment of current properties. Staff reducing this increase in future years is a conservative reduction. For all other revenue line items staff used historical trends to help determine changes (increases or no change) from year to year. Expenditures: At this time, staff determined there were 2 main expenditure attributes that would require assumptions: salary increases and PERS rates. Since greater than 70% of the City's budget is salary and benefits, staff felt it important to focus on those aspects at this time. Staff recognizes both attributes could change as part of the negotiation/contract process so both are viewed more conservatively as to not influence that process. For both assumptions there are 3 categories — Miscellaneous, Police and Fire. Miscellaneous should be considered all non -sworn full time personnel. Police and Fire are the sworn personnel in each of those departments. Salary Increases — City staff have not received salary increases since the 2003-09 fiscal year. The current salary increase assumption for the Miscellaneous personnel is 0% until 2014-15, then 2% the remaining two years. The current employment contract is effective until 2013. Given current employment market conditions and the length of the current employment contract, staff is not forecasting a salary adjustment for three years. Staff has included a 2% salary increase in the final two years of the forecast as it may be more probable some adjustment would take place in the future. 3 The current salary increase assumption for sworn Police personnel is 0% until 2014-15, then 2% the remaining 2 years. This is based on the current employment contract that states if the City's top 3 revenues have increased to previous all time highs (FY 07-08) then a minimum 2% increase would be required. At this time, the current forecast does not meet this requirement; therefore staff is not including a salary increase until 2015-16. The current salary increase assumption for sworn Fire personnel is 0% in 2012-13 the 2% the remaining 4 years. This is based on the current employment contract that states the requirement by the City not to adjust salaries until September 2013. Therefore starting in FY 2013-14 staff has forecasted a 2% increase and assumed the same each year after. PERS Rate Increases — Staff based the forecast using the most recent PERS rate increases received from PERS in March 2011. They are displayed as the total PERS rate (including both the Employee and Employer rates). For calculating the forecasted cost, staff has separated the two as it normally does for the annual budget, and only taken into account the City's net cost (excluding the amounts paid by employees). The forecasted rates for Miscellaneous are as follows: FY 11-12 FY 12-13 FY 13-14 FY 14-15 FY 15-16 FY 16-17 18.53% 19.38% 27.18% 27.58% 27.88% 28.18% There are 2 reasons for the increase in FY 13-14. One is because CalPERS has projected a rate increase of 2.8%. They are currently projecting rate increases to level off after that year. The other reason is because that is the time when the current employment contract will conclude and the 5% the Miscellaneous personnel currently contribute would revert back to the City. In FY 13-14, staff estimates that amount to be $740,067. The forecasted rates for Police are as follows: FY 11-12 FY 12-13 FY 13-14 FY 14-15 FY 15-16 FY 16 17 38.06% 38.80% 42.20% 42.50% 47.80% 48.10% The reason for the increase in FY 13-14 is because CalPERS has projected a rate increase of 3.4%. They are currently projecting rate increases to level off after that year. The reason for the increase in FY 15-16 is because that is the time when the current employment contract will conclude and the 5% the Police personnel currently contribute would revert back to the City. In 15-16, staff estimates that amount to be $894,908. The forecasted rates for Fire are as follows: FY 11-12 FY 12-13 FY 13-14 FY 14-15 FY 15-16 FY 16-17 40.04% 47.70% 51.90% 52.50% 53.00% 53.50% The reason for the increase in FY 12-13 is because that is the time when the current employment contract will conclude and the 6% the Fire personnel currently contribute would revert back to the City. In 12-13, staff estimates that amount to be $637,598. The reason for the increase in FY 13-14 is because CalPERS has projected a rate increase of 4.2%. They are currently projecting rate increases to level off after that year. 4 For all other expenditure items, staff also used historical costs to help determine changes (increases or no change) from year to year. Certain items that are based on current rates (utilities and insurance), staff included annual increase amounts and will continue to determine if included amounts are reasonable. For other more controllable line items (office supplies, furniture, equipment), staff forecasted flat using current proposed budgeted amounts. Preliminary Forecast Results: Given these assumptions, staff was able to forecast the fiscal years 2012-13 thru 2016-17 (five fiscal years) and determine if the City would have a positive or negative change in fund balance (difference between revenues and expenditures) from year to year. It appears that if the City is able to control expenditures while the revenues increase, each forecasted year shows a positive change (excess) in fund balance or more revenues than expenditures (as shown on Attachment 1). Staff then began drafting a list of current and future year initiatives (as shown on Attachment 2) to use as an example of how or where excess fund balance can be prioritized. The first items in the initiatives (#1 - #5) relate to the current year budget proposed by the CEO. They include savings created by the Police Department Reorganization and Continued Organizational Efficiencies (reduction in personnel/vacant positions). Both items, because they are structural in nature, will continue to generate savings each fiscal year since those costs are included in the forecasted expenditures on Attachment 1. When staff updates the forecast in the future, it will take into account any decisions made by City Council while adopting the budget as part of the analysis on Attachment 1. Other priorities include the replenishment of fund balance for both the General Fund and the Equipment Replacement Fund. Also, based on City Council's desire to begin reinvestment in Capital Infrastructure with General Fund monies, staff created line items (#6 - #11, #15) including: Building Modification/Park Maintenance, Streets, Alleys, Sidewalks, IT (Information Technology/Computer) Upgrades and Website Design. Items #12 — 14 and #16 — 20 are other initiatives staff wanted to include to track and determine City Council's desire to fund them in the future. The last item #21 is for Budget Contingencies and at this point is a balancing amount to account for all available funds. A description of the items has been included as Attachment 3 to help provide City Council and the public with some general information of each. Staff has included funding amounts on Attachment 2 as an example and should be viewed as a starting point for City Council to establish funding priorities for future initiatives. Staff also recognizes more information may be necessary to properly set funding levels and will do so when provided that direction. ALTERNATIVES CONSIDERED Staff has not considered any alternatives at this time FISCAL REVIEW There is no fiscal impact to the Five Year Financial Forecast. 9 LEGAL REVIEW There is no legal review necessary at this time. CONCLUSION Recently, City Council has expressed a desire to determine, financially, what the next five years (FY 12-13 thru FY 16-17) look like for the City's General Fund. The City has not had a comprehensive five year financial forecast to provide such information, therefore staff has developed one. Staff created this five year financial forecast using most of the City's own tools for developing the annual budget, both revenues and expenditures. At this time, this forecast is based on preliminary assumptions and is intended to be a tool to help 1.) project what future year's budget might be, 2.) demonstrate how decisions in the current year may impact the financial future of the City, and 3.) allow City Council to discuss and determine future priorities based upon available resources. City Council has expressed a desire to contribute more General Fund monies to capital improvements and therefore the 5 -year forecast may allow for even more clarification of priorities under the capital improvements topic (Streets, Alleys, Sidewalks, etc). LARRY I R5- Interim Finan Director DAN BAKER Management Analyst BOBtj�arch Officer Attachment(s): 1 —Total Revenues, Expenditures and Net Fund Balance 2 — Current and Future Year Initiatives 3 — Current and Future Year Initiatives Descriptions 4 — Current Assumptions ro ) j < / & 2 00 (� \\\\k 00 05 oc� L6 }/ \ =a k =»ocw /�%/\\& to k ] m §2 \ § S@] m LO 7 }CL \ \ =a a � 8@2 a 22 ) 2 ®$ ° \\$ co ° �{ \ § /g��/ Ln / � 4° �= m ��\ \ �CD } §) / ° & \ Lo }/ m / �a ( \) \ � a ■ o\ E \/»/\ LO 2 La + /2� F- ' fa 22 \//m\ 2Q\ \k L £g /g�L E ®, / /b o L \ °® 2 r m@2 7 LO §) \ \SIN m 2 L� w� � § a n \0 2 , 0 r \\ k )mc)a0rae �C '/\\\ G@L f !«\ 2\\ 0/ ®a J / /3 / & 2 v IN aon00000 O mcg LL. N C co T 19 m� d c LO E lo - CD O M U C c'• 0 O �O 1 O coc a0 N.'_ T d •p aro I. E y N N N a 2 } aL C C i d SSI �- J i `+ O toco WI T ci In (0 i N O N >- L L LL a N 6q aci lam C N d E2 Ad W LO T C d V O 3L T T N O N N0— U m ?ac LL 6. C d LL. O .O E�'E C w M a >. U d N o d L N O L a ` U LL to y Tlw as ++ N M .0 0 aw N ooy�' .fl d c c M 060�Lao=i L iq O U w O N KIK d m VJQ� 01 u LL 0 0 S] a �. �a L FSU O N aci '0 VLL ](-4CN y 5T N M I(O(O I�� O) N. NM V LO (O I— 00 OO� .- — .-QTc-� Z U G R aon00000 Mo"o 0 O mcg LL. N C co T 19 m� d c LO � CD O M O C c'• 0 O �O 1 O N.'_ J I. E y 0 y ^Z N a 2 - C C C i SSI �- J i Im C W E m O x 0 . U (0 IL y•� o c >- L y m aci lam C N d E2 O C M'O 3L L� Y��(n N0— U m ?ac nL?�a C Mo"o 0 of f�/1 y m O mcg LL. N C co T 19 m� d c r � CD O M O C c'• 0 O �O 1 O of f�/1 y m O mcg LL. C 19 m� d c r O N O M N C c'• C M L O �O Q LU O N.'_ J V N a E y 0 y ^Z N a 2 - C C C m �- J Im C W E m O x 0 . U (0 IL y•� o c >- L y m aci lam C N d E2 O C M'O 3L L� Y��(n N0— U m ?ac nL?�a C d O .O E�'E O w M a >. U c O LL. C d c r M c N d O) E C C M L O �O Q LU O V N a E y 0 y ^Z N N M N d 2 m �- Im C r o c >- L y m aci d v N d E2 C M'O 3L L� Y��(n N COL O LL ` `w d,o y Tlw as dlu vEo aw mL ooy�' .fl d c c M 060�Lao=i L iq O U w O N KIK d m VJQ� 01 u 0 0 0 S] a �. �a L FSU O u aci y 5T N M I(O(O I�� O) N. NM V LO (O I— 00 OO� .- — .-QTc-� Z U 0 O N m CL Attaclunent 3 City of Costa Mesa 5 Year Current and Future Initiatives Descriptions Current & Future Initiatives Cumulative Total 1. Structural Changes — Police Department Reorganization ($7,697,710) (Savings) This amount represents the savings created from the proposed Police Department reorganization. Because the salaries and other costs are included in the expenditure forecast for each year, when structural changes are made, those savings continue in future years. 2. Continued Organizational Efficiencies (Savings): ($10,311,738) This amount represents additional reductions proposed by the CEO. As presented the savings in FY 11-12 are $238,225. A commitment from the CEO to continue has been to continue to create structural savings in future years. Should any positions (vacant or filled) be reduced in future years, the City can expect these additional savings. 3. Other Budqet Changes (Savings): ($955,695) This amount represents the net changes proposed by CEO for FY 11- 12. These include reducing the amount allocated for the General Plan, CAD equipment, Aquatics program; and increasing the City Attorney, Finance and CEO's department budget. 4. Replenishment of General Fund - Fund Balance: $2,576,984 This amount represents the commitment to replenish General Fund reserves which have been used during the recent economic downturn. 5. Replenishment of Equipment Replacement Fund — Fund $4,566,775 Balance: This amount represents the commitment to increase the amount set aside for replacement of the City's vehicles and equipment. 6. Building Modifications: $2,500,000 Many of the City's facilities are in need of funding for necessary repairs and improvements. Over the next five years the City is planning to commit $2.5 million in General Fund dollars to facilitate these necessary improvements to its' facilities to ensure a safe working environment for both employees and Costa Mesa residents and visitors. Attachment 3 City of Costa Mesa 5 Year Current and Future Initiatives Descriptions re Initiatives Cumulative Total $4,500,000 iresidenitsan;iiii intenance, repair, and replacement are some of the most components in keeping Costa Mesa a healthy and safe . Safety is not only important for its' visitors but also for its' nd businesses that call Costa Mesa home. As such, over the next 5 years the City is planning to invest $4.5 million in General Fund dollars to keep Costa Mesa streets healthy. These General Fund dollars will be in addition to the roughly $20 million dollars in grant funding that the City will utilize over the next five years to ensure the maintenance and repair of Costa Mesa's roads and arterials. $1,900,00 8 Allam_ Over the next 5 years the City is planning to invest $1.9 million in additional General Fund dollars towards the rehabilitation of the City's unfinished alleys. These General Fund dollars will be in addition to the existing grant funding the City annually utilizes (CDBG, Measure M, Gas Tax, etc.) to complete the improvements. The improvements include the removal of all existing asphalt and replacing with new concrete. Proper drainage will also be ensured. Currently, the estimated cost to repair all of Costa Mesa's roughly 100 unimproved alleys is approximately $17 million. $900,000 9. Sidewalks: Over the next 5 years the City is planning to invest an additional $900,000 of General Fund dollars to continue its' priority sidewalk repair program and continue to invest in the remaining neighborhoods that are currently without sidewalks. These additional General Fund dollars will be in addition to the existing grant funding the City annually utilizes (CDBG, Measure M, Gas Tax, etc.) to complete sidewalk and parkway improvements. $1,500,000 10. IT Upgrades: The City's computer and information infrastructure is aging and is in need of necessary upgrades and improvements. Some of these improvements include the replacement of all public safety Mobile Computers, the purchase and licensing fees for all computer upgrades to windows 7, as well as the purchase of an HP 9000 server and other miscellaneous servers for City Hall and Police department networks. Over the next 5 years the City is planning to invest $1.5 million General Fund Dollars to ensure the completion of these necessary upgrades and improvements. Attachment 3 City of Costa Mesa 5 Year Current and Future Initiatives Descriptions Current & Future Initiatives Cumulative Total 11. Website Improvements: $250,000 Over the next 5 years the City is planning to invest in the enhancement of the overall way it communicates with its' residents. The primary focus will be in the creation and maintenance of a vibrant, useful, and highly interactive website where citizens can access all the information they need and want regarding the daily operation of not only City Hall but all current happenings within the City. 12. Cal PERS Unfunded Liability: Undetermined Cal PERS is reporting that the City has an unfunded liability of $221 million dollars. While this item may need future funding, the appropriate amount has yet to be determined. 13. Medical Unfunded Liability: Undetermined Currently the City has an unfunded liability of $35 million dollars regarding the cost to cover all retiree medical costs that started employment with the City of Costa Mesa prior to 2003. In 2003 the City of Costa Mesa ended this plan but still has an annual liability for all retirees. While this item may need future funding, the appropriate amount has yet to be determined. 14. Compensated Absence Unfunded Liability: Undetermined Employees accrue general leave hours every pay period. When an employee chooses to cash out these leave hours the City is obligated to pay the employee per his/her hourly rate. Currently the City funds this liability at 75 percent. While this item may need future funding, the appropriate amount has yet to be determined. 15. Youth Sports — CM United: $500,000 The City of Costa Mesa is committed to the health and welfare of all the outstanding young men and women that are proud to call Costa Mesa home. As such, the City is planning to pledge $100,000 a year for the next five years to Costa Mesa United. Together, this partnership will bring in the necessary funding to make the City of Costa Mesa an attractive place for young families to settle and raise their children by providing outstanding venues and opportunities for the youth of Costa Mesa. Attachment 3 City of Costa Mesa 5 Year Current and Future Initiatives Descriptions Cent &Future Initiatives urr Cumulative Total 16. Library Upgrades: Undetermined Many, if not all, of the City's library facilities are in need of funding for necessary repairs and upgrades. The City is committed to provide additional funding to facilitate not only needed repairs but necessary upgrades. However, the appropriate amount of future funding has yet to be determined. 17. Sports Fields Master Plan: Undetermined The City is committed to completing a Sports Field Master Plan. This plan will advise City stack holders as to the best and most effective use of open space for the future of Costa Mesa youth sports. While the creation of a Master Plan is a priority, the appropriate amount of future funding has yet to be determined to complete the plan. 18. Problem Properties: Undetermined Throughout both the commercial and residential sectors of Costa Mesa, properties, from time to time, fall prey to a number of different scenarios that leave them both unattractive and unsafe to the community. As such, the City will look to set aside funding to purchase such properties and either rehabilitate or transform such properties into the best use for the citizens of Costa Mesa. While this item may need future funding, the appropriate amount has yet to be determined. Undetermined 19. Tree Plan: The City is committed to establishing a greener canopy. As such, the City will continue to beautify Costa Mesa by designating specific areas of need and planting additional trees. While this plan is a priority, an appropriate amount of future funding has yet to be determined. Attachment 3 City of Costa Mesa 5 Year Current and Future Initiatives Descriptions Current & Future Initiatives Cumulative Total 20. 800 MHz Countywide Communications Systems: Undetermined The current 800 MHz Countywide Coordinated Communications Systems (CCCS) is expected to serve the County radio infrastructure through 2015. All Orange County municipalities, the County of Orange, the Orange County Fire Authority and other participating agencies jointly govern and finance the CCCS. With the endorsement of the Orange County City Manager's Association, Orange County Chiefs of Police and Sheriff's Association, Orange County Fire Chief's Association, 800 MHz User Group and 800 MHz Governance Committee the Orange County Sheriff's Communications Division was given approval to research/evaluate and propose an approach to upgrade the CCCS into the Next Generation platform. A four phase approach to ensure system functionality was reviewed at the November 2010 Orange County City Manager's Association (OCCMA) meeting. While this item may need future funding, the appropriate amount has yet to be determined. 21. Budget Contingency: $5,830,123 This amount represents an annual general budget contingency for unexpected increases in expenditures and/or decreases in revenues. ro k \ § / / C:) jj\ \\\ \ \\ \\\ 6 ci to /// yeIa , m/ ol \§® \ \ %% \§\/ C6 C6 C6 cq [ƒ m // § a (§§ LO 000000 # 0 C6 C6 C6 2 [ƒ J \\\ k %\s 2 / / k 03 04 0 §\( $ [/ � - \/\ co) ` \\\ U. �\W d )) k � f ; ) ) § ) / a. ) LLL ? 0 \`/ ��� \ ] L) E $£ s \ r2 § 3 E ® } _k U () o « ! @ ) > 7 4 =§) , J c v §}}ƒ/ \ �/ CL .. a > /k ƒ al $ \ $ §$`\ )//\ /§ |Az( J / / C:) jj\ \\\ \ 6 ci to /// yeIa , m/ 2 \§® \ \ %% \§\/ cq // ) a (§§ 0 # \\\ k %\s 2 / 03 §\( � - \/\ ` �\W k ) ) § / a. ) 0 \`/ ��� \ E $£ s \ r2 § E } )k( () « ! @ ) Us § 4 =§) J c §}}ƒ/ CL .. a > /k ƒ $ / /