Full Text
AGENDA BILL Agenda Item No. 7(A) Date: December 17, 2013 To: El Cerrito City Council From: Lisa Malek-Zadeh, Finance Director/City Treasurer Subject: FY 2013-14 Budget Update ACTION REQUESTED Receive a presentation that will provide the City Council and the public with: 1. An update on preliminary year-end results for Fiscal Year 2012–13 that ended on June 30, 2013 2. An update on city revenues and expenditures for the first quarter of Fiscal Year 2013–14 3. An overview and discussion of next steps related to the City budget. ANALYSIS Fiscal Year 2012-13 Year-End Results Overview: Beginning in October, the City’s external auditors Maze and Associates began their review on the City’s financials for FY 2012-13. As in previous years, results of their findings will be presented before the end of the calendar year to staff and the Financial Advisory Board. Staff is working closely with Maze and Associates in providing all necessary financial information as well as developing the Comprehensive Annual Financial Report (CAFR), Memorandum of Internal Controls and the Management Discussion & Analysis. At this time, staff does not anticipate any significant findings but concerns raised by the auditors will likely focus on the use of reserves and the negative balances in certain restricted funds. Staff will be discussing strategies associated with these findings in the coming months. Table 1 shows the FY 2012-13 likely year-end results. Personnel savings were achieved through vacancies, the two-year service credit program and utilization of special funds when appropriate to offset losses in General Fund revenues. Although recurring annual expenses were in line with the budget, increases in revenues were well below what was projected for the year- end with the largest decline related to City’s largest tax revenues including Property Taxes, Utility Users Tax (UUT), and Sales Taxes. As a result of these significant losses in the City’s major revenue streams, staff anticipates that General Fund reserves declined from roughly 10% to approximately ---PAGE BREAK--- Agenda Item No. 7(A) Page 2 Table 1 Fiscal Year 2012-13 Year-End Results Property Taxes: Projected Property tax revenues did not increase as anticipated with the shortfall largely related to the Proposition 8 assessed value reductions made by the County Assessor, which has resulted in many properties in El Cerrito not subject to Proposition 13 being assessed at well below market value. These reductions offset any increase in values of the remaining properties. Although home prices are very strong, the number of homes on the market lags well below the levels seen before the economic collapse of the market. Utility Users Tax: The original UUT projection was based on actual receipts and the final inclusion of all EBMUD collections into revenues last fiscal year. Based on actual collections, staff chose not to revise its FY 2012-13 end-of-year projections and based the current year projections on these amounts. Although current projections remain as budgeted, actual receipts for the end-of-year close for FY 2012-13 appear to have fallen short of projections by over $400,000, or approximately 1.3% of reserves. Staff has yet to determine the reason, and is currently analyzing the data as well as considering engaging an outside firm with expertise in auditing receipts and vendors subject to the UUT. There is also some concern that certain vendors are not participating and/or some payments were not remitted as required, including many large and small cell phone providers in numerous iterations. Based on the actual receipts for the UUT in the first four months of this fiscal year, it appears that collections have returned to initially anticipated levels and are reflected in the current year-end projections for FY 2013- 14. However, it is important to closely monitor UUT revenues. Staff will keep the Council apprised of this issue. Sales Taxes: Sales tax projections for FY 2012-13 were budgeted at $5.5 million. Actual revenues received totaled $5.1 million, about $400,000 less than the projected budget. While revenues were on track throughout the year, an adjustment by the state Board of Equalization General Fund Summary Revenues + Expenditures FY 2011-12 Actuals FY 2012-13 Adopted FY 2012-13 Amended FY 2012-13 Projected FY 2012-13 Actuals Beginning Restricted Balance $598,957 $598,957 $598,957 $598,957 Beginning Unassigned Balance $6,434,405 $2,690,745 $2,690,745 $2,608,745 $2,608,745 Total Revenues $29,298,213 $29,192,110 $29,392,110 $29,396,433 $29,366,108 Total Expenses $32,524,916 $29,020,023 $29,955,116 $29,095,626 $29,161,850 Personnel $22,619,755 $22,759,903 $22,959,903 $22,954,537 $22,699,721 Non-Personnel $9,905,161 $6,260,120 $6,995,213 $6,141,089 $6,462,129 Annual Balance/Shortfall ($3,226,703) $172,087 ($563,006) $300,807 $204,258 Transfer Out- Grants Fund $598,957 $0 Transfer Out - Solar CIP $1,157,184 Total Transfer out of Restricted Funds $598,957 $1,157,184 Ending Fund Balance/Deficit $3,207,702 $3,461,789 $2,726,696 $2,909,552 $2,254,776 Restricted Fund Balance (CIP Solar 301) $460,715 Restricted Fund Balance( Grants Fund 221) $598,957 $598,957 Ending Unassigned Fund Balance/Deficit $2,310,595 $1,195,104 Ending Unassigned Reserve Percent 10% 12% 9% 10% 8% ---PAGE BREAK--- Agenda Item No. 7(A) Page 3 (BOE) regarding Home Depot made at the end of the fiscal year reduced the revenue the City had anticipated receiving. The allocation of sales tax between the City of El Cerrito and the City of Richmond has been a long-standing issue and has been under review by the BOE for the last four years. A decision was reached toward the end of the fiscal year and BOE implemented the new distribution in the final quarter of FY 2012-13. Further details are provided later in this report. Fiscal Year 2013-14 Analysis and Projections Overview: As previously discussed, the General Fund will begin the year with reduced reserves. While staff is projecting a year-end surplus based on current projected revenues and expenses, a further decrease in the ending fund balance is anticipated as shown in the chart below. With the one-time use of Municipal Service Corporation (MSC) Grants as well as the close-out of the solar procurement project, the unrestricted reserves will likely drop to around six percent. Table 2 Fiscal Year 2013-14 Projections General Fund Revenues Although many years of historical data exists, projecting revenues can still be quite challenging, particularly with the recent economic downturn that impacted most cities. In addition, the uncertainty and loss of revenue associated with the elimination of Redevelopment and now the ambiguity associated with splitting Home Depot sales tax revenues with the City of Richmond, estimating revenues becomes even more difficult. The revenue assumptions in Table 3 reflect the information staff currently knows and what is anticipated to occur within FY 2013-14. As was also shown in Table 2, loan proceeds for the Solar Procurement Project artificially inflated revenues in FY 2012-13 due to these one-time receipts. General Fund Summary Revenues + Expenditures FY 2012-13 Actuals FY 2013-14 Adopted FY 2013-14 Amended FY 2013-14 Projected Beginning Restricted Balance $598,957 $1,059,672 Beginning Unassigned Balance $2,608,745 $2,909,552 $2,909,552 $1,195,104 Total Revenues $29,366,108 $28,479,079 $28,451,079 $28,456,546 Total Expenses $29,161,850 $28,453,592 $28,588,150 $28,011,612 Personnel $22,699,721 $22,182,379 $22,182,379 $21,887,454 Non-Personnel $6,462,129 $6,271,213 $6,405,771 $6,124,158 Annual Balance/Shortfall $204,258 $25,487 ($137,071) $444,934 Transfer Out- Grants Fund $0 $598,957 Transfer Out - Solar CIP $1,157,184 $460,715 Total Transfer out of Restricted Funds $1,157,184 $0 $0 $1,059,672 Ending Fund Balance/Deficit $2,254,776 $2,935,039 $2,772,481 $1,640,037 Restricted Fund Balance (CIP Solar 301) $460,715 Restricted Fund Balance( Grants Fund 221) $598,957 Ending Unassigned Fund Balance/Deficit $1,195,104 $2,935,039 $2,772,481 $1,640,037 Ending Unassigned Reserve Percent 8% 10% 10% 6% ---PAGE BREAK--- Agenda Item No. 7(A) Page 4 Table 3 Fiscal Year 2013-14 General Fund Revenues Property Taxes: Based on actual property tax receipts last fiscal year, it now appears that the projected property tax revenues for FY 2013-14 did not take into account all of the adjustments that occur after the revisions to assessed values are applied to the tax base, most notably the Proposition 8 assessed value reductions that have occurred during the past five years. As a result, the projection assumed in the adopted budget for FY 2013-14 was based on gross assessed values as opposed to net assessed values. Staff has revised FY 2013-14 property tax projections based on net assessed values, which is more consistent with the prior three year actuals. Although staff is now confident in the revised projection, actual revenues have not yet been received and may require a true-up of the projection in the next few months. Sales Taxes: The FY 2013-14 adopted budget for General Fund sales tax revenue is composed of four different sources: • One percent local share of sales tax collected in the City million) • The City’s share of a half cent tax for public safety adopted by California voters through Proposition 172 and administered by the County ($277,000) • Reimbursement with property taxes by the County of a prior year 25% State deduction of local sales tax, also known as the Triple Flip ($766,000) and • Half-cent sales tax adopted by El Cerrito voters for general operations through Measure R ($1.6 million). Other sales tax revenues collected by the City (such as Measure A-Streets) are accounted for in separate, restricted funds. Fortunately, current forecasts from the City’s sales tax consultant for revenues are optimistic, despite the closure of several retailers in El Cerrito. Although the City has not recovered the significant decreases from the loss of Target and the Guitar Center, overall sales taxes continue General Fund Revenues FY 2012-13 Actuals FY 2013-14 Adopted FY 2013-14 Projected Property Taxes $5,564,453 $6,407,213 $6,025,472 Sales Taxes $5,109,397 $4,593,750 $4,737,154 Utility Users Taxes $3,066,580 $3,605,000 $3,605,000 Other Taxes $1,911,739 $2,128,400 $2,138,400 Total Taxes $15,652,169 $16,734,363 $16,506,026 Licenses & Permits $516,703 $606,000 $636,000 Fines & Forefeitures $277,222 $290,000 $290,000 Intergovermental Revenues $5,027,113 $4,900,128 $5,018,788 Charges for services $5,255,702 $4,942,062 $4,993,931 Other Revenues $289,671 $202,147 $177,147 Loan Proceeds, Transfers $2,347,528 $804,379 $834,654 Total Other Revenues $13,713,939 $11,744,716 $11,950,520 Total Revenues $29,366,108 $28,479,079 $28,456,546 ---PAGE BREAK--- Agenda Item No. 7(A) Page 5 to increase at a solid level. Staff is hopeful that the recent loss of OSH will simply redistribute the revenues to other competitors within the City. However, the impact of Home Depot reallocations will have some effect on current year revenues and likely an even larger impact in the coming years. Home Depot: Because of the confidential nature of individual store sales tax distributions, staff cannot provide actual Home Depot sales tax numbers because information could be extrapolated to determine actual sales figures for the store. However, it is important to provide as much information as possible to understand the situation. Pursuant to the long standing agreement with the City of Richmond, the FY 2013-14 adopted budget for the one percent local share of sales tax included a reduction from the prior year’s budget, anticipating the need to reimburse the City of Richmond for sales tax misallocated to El Cerrito by Home Depot for its store straddling the El Cerrito-Richmond border. El Cerrito and Richmond staff have been working together to determine how much El Cerrito owes Richmond, in order to comply with the revenue sharing agreement entered into by the two cities in 1990 which splits the sales tax from Home Depot, 70% for Richmond and 30% for El Cerrito, based on the approximate proportion of land in each jurisdiction. Subsequent to the adoption of the FY 2013-14 budget, the State Board of Equalization (BOE) notified El Cerrito staff that it is not willing to apply the 70/30 revenue split contained in that agreement, and intends to make a retroactive adjustment of nearly $2.5 million to account for Home Depot’s misallocation back to 2005, based on a methodology involving the distribution of cash registers within the store between the two cities. This adjustment does not acknowledge the approximately $1.8 million already distributed to Richmond by El Cerrito or the impact associated with the apparent fact that Home Depot has been misallocating the two half-cent sales taxes, Measure A and Measure R. These adjustments accounted for a portion of the shortfall in revenue in FY 2012-13. Making matters more confusing, it is not yet clear how Richmond’s Measure Q will be handled. To make this issue even more complicated is how the allocations (and subsequent changes in allocation) impact the State and County shares of the sales tax distributions as well as the Triple Flip collections. These changes could impact collections all the way back to 1991. El Cerrito has requested and received 90 days to review BOE’s methodology and determine whether to appeal its determination. The ultimate amount and timing of any adjustments by BOE are unknown, but could potentially occur over between one and eight quarters (or potentially more) starting as early as March 2014. While BOE is not willing to implement the revenue sharing agreement, Richmond staff has so far agreed that any adjustments by BOE will subsequently be addressed with a reimbursement, in keeping with the 70/30 split in the agreement. BOE has indicated it might recognize a new tax sharing agreement between the two cities; so, staff and the City Attorney are also evaluating that option. Utility Users Tax: Based on initial receipts, budget projections have not been revised in this update. However, it is important to proceed with caution as more time is needed to have a greater degree of certainty that actual UUT revenues will be achieved. A decline in UUT revenue from the current projections will require balancing measures to maintain a budget that ---PAGE BREAK--- Agenda Item No. 7(A) Page 6 is balanced based on current year revenues. Without these changes, a further decline in reserves will be required to offset this loss in revenue. Other General Fund Revenues: Projections for the remaining revenues within the General Fund remain fairly consistent with the adopted budget. A minor increase of approximately $200,000 has been included based on some anticipated changes in licenses and permits as well state reimbursements. General Fund Expenditures Based on expenses through November 2013, the expenditure budget in the General Fund remains roughly on track to meet or exceed the adopted budget. Since adoption of the budget in July 2013, the City Council has increased expenditures by $102,000 (most of which consists of the grant match for a ladder fire truck) with no offsetting revenues yet identified. In order to balance the budget this fiscal year, approximately $1.5 million in salary savings was assumed. Current estimates indicate that these savings will be reached and perhaps exceeded. Staff is continually looking for opportunities to reduce other expenses in addition to identifying new sources of funds. Table 4 describes General Fund expenditures. Table 4 Fiscal Year 2013-14 General Fund Expenditures Reserves As discussed previously, staff anticipates that General Fund reserves declined from 10% to approximately 8% during FY 2012-13. Further, it appears that reserves will likely decrease by a similar amount by the end of FY 2013-14 due to less than anticipated revenues, the use of one-time restricted reserves to offset economic development activities and completion of the solar building improvements project. Although the City’s Comprehensive Financial Policy and City Council discussions take into account the use of reserves for unanticipated events such as the Home Depot reallocation by the BOE and fiscal emergencies such as the recession and its impacts (which are still not behind us), it is essential that we address the causes of this decline and deal with any structural deficits that can continue depleting reserves. Developing a plan to restore reserves to an amount equal to or preferably exceeding the 10% goal is recommended over the next two fiscal years (FY 2014- 15 and FY 2015-16) even though the Policy says this increase could occur over five years. General Fund Expenditures FY 2012-13 Actuals FY 2013-14 Adopted FY 2013-14 Projected Personnel $22,699,721 $22,182,379 $21,887,454 Non-Personnel Purchased Professional & Technical Services $2,339,754 $2,299,700 $2,189,700 Property Services/Other Services $2,214,040 $2,006,850 $1,969,795 Supplies $662,994 $640,150 $640,150 Property & Capital $355,657 $375,032 $375,032 Financing Costs $777,427 $814,381 $814,381 Transfers Out $1,269,441 $135,100 $135,100 Total Non-Personnel $7,619,313 $6,271,213 $6,124,158 Total Expenditures $30,319,034 $28,453,592 $28,011,612 ---PAGE BREAK--- Agenda Item No. 7(A) Page 7 The issue of the proper amount of reserves and their purpose was discussed by the City Council during last year’s budget process. The Financial Advisory Board is currently analyzing the issue with staff as well. It is staff’s expectation to bring this matter to the City Council in early 2014 for discussion and possible direction on the appropriate amount and use of reserves and an approach for increasing the amount above current levels over the coming fiscal years. Special Revenue Funds Approximately 30% of the City’s budget is supported by Special Revenue Funds with the largest percentage allocated to Public Works programs. As the pressure on the General Fund has increased since the Great Recession began and Redevelopment was eliminated, Special Revenue Funds have become an increasingly important source of funding, particularly for Public Works functions. Historically, the General Fund contributed a fair amount of funding to the overall budget for Public Works. In 2004, the General Fund contributed 22% of Public Works funding, rising to 31% in 2009. By 2013, the General Fund’s contribution had decreased by more than $200,000, or 21%. The FY 2013-14 adopted budget for Public Works reduced the General Fund contribution to 12%, even though overall budgeted expenditures are decreasing. Public Works has continued to reduce its reliance upon the General Fund and instead use Special Revenue Funds for eligible expenses (such as for street improvements, storm drain repairs, transportation improvements, and other similar costs), in an effort to retain service levels since there is limited or no ability for the City to increase revenues in other areas such as Police or Fire. While this decision has in fact helped maintain City services, a number of these Funds, as described in the FY 2013-14 budget document, are expected to spend more than they receive and will need at least one more fiscal year to recover. $0 $1,000,000 $2,000,000 $3,000,000 $4,000,000 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Table 5 General Fund Contribution to Public Works Expenditures FY 2003-04 - FY 2013-14 Other Funds General Fund ---PAGE BREAK--- Agenda Item No. 7(A) Page 8 This increasing reliance on Special Revenue Funds is not sustainable, as those revenues are limited to specified uses and those functions need increased attention. As a greater percentage of these funds are utilized to support areas that were previously paid for by General Fund revenues, it is becoming increasingly difficult to optimize the specific activities in which these Special Revenue Funds should be targeted. Staff has implemented a plan to increase certain revenues franchise fees), shift certain expenses street sweeping) and reduce other expenses in an effort to get these funds in balance by the end of next fiscal year. However, that assumes staffing remains at currently reduced levels. Unless General Fund revenues are returned to prior levels or new revenues are identified, these funds will likely be underfunded after next fiscal year. Staff will be presenting these issues to the Council in more detail in early 2014. NEXT STEPS The Great Recession, loss of Redevelopment, and outside reductions in key revenue streams have all served to have an impact on the City’s ability to obtain adequate funding to maintain the current level of services that the City provides. The City has been able to support ongoing operations through the use of one-time measures, personnel savings, and approved use of reserves, however these methods are unsustainable. As previously discussed, staff plans to take several actions to address these issues, including examining the policy on reserves and working to address the Special Revenue Funds. Moreover, should the City prevail in its lawsuit with the state Department of Finance around the dissolution of the Redevelopment Agency, the City’s revenue projections would improve and would prevent reductions in economic development activities and programs. City staff will present its formal mid-year budget review to the City Council in late February or early March. Additionally, staff intends to work internally and with the public to address the City’s resources with respect to community priorities for the upcoming fiscal year budget process. Implementation Action Plan: Since its adoption in April 2013, the Strategic Plan has been serving as the road map for how City staff oversees the direction of the City organization, particularly with respect to resource allocation. In the FY 2013-14 budget document, staff began the process of implementing the Strategic Plan to serve as a method of benchmarking and informing the development of future departmental budget requests. As staff moves forward with a detailed Citywide Implementation Action Plan (IAP), data is being gathered and used to develop quantifiable measures for determining how efficiently and effectively the City is meeting its mission, goals, and strategies in the Strategic Plan. Resource allocation and prioritization will occur by aligning programs and services to the Strategic Plan goals. The IAP will serve as a comprehensive review of the entire organization, identifying programs offered by the City, identifying the costs of those programs, evaluating the relevance of programs offered on the basis of the community's priorities, and ultimately guiding the City Council and staff to the policy questions to be answered with the information gained from the budgeting process. Alignment to the Strategic Plan and development of priority-based budgeting concepts will continue to be refined with an eye toward financial sustainability and ---PAGE BREAK--- Agenda Item No. 7(A) the implementation of data-driven performance measures. The lAP will be reflected in the upcoming FY 2014-15 budget process. Community Engagement: To complement and inform the City's lAP efforts, staff will be implementing a series of public engagement budgeting activities that will also serve to fulfill the City's identified value of Transparency and Open Communication. During late winter and early spring 2014, staff will be leading community forums, both in-person and online, to involve the public in refining the strategies developed within the Strategic Plan with an eye toward resource allocation and setting priorities. Staff will also take advantage of the public forum afforded by our Financial Advisory Board by using its expertise to help involve and educate residents on the budget process. Engaging our residents and other stakeholders in the budget process is intended to increase understanding, create better and more sustainable decisions, improve customer satisfaction with our services, and build trust and a more cohesive community. Scott Hanin City Manager Page9