The mid-year budget update provides an opportunity to reflect on how the City financially finished for the prior fiscal year (FY 2017-18) as well as provides an opportunity to highlight emerging financial/budgetary trends with the current fiscal year (FY 2018-19) and preliminary projections for the next five fiscal years.
As part of the presentation, staff would also like policy direction on revising the City’s General Fund Reserve Policy as well as developing a policy on pre-funding pension obligation costs through the City’s Section 115 Trust Account through the Public Agency Retirement Services (PARS).
Fiscal Year 2017-18 (Prior Fiscal Year)
Staff is please to report the City’s General Fund finished FY 2017-18 with revenues over expenditures of $529,261. At budget adoption on June 19, 2018, this number was expected to be $270,462. This improved number did not come easy to this organization. In fact, actual revenues were below estimates by approximately a million dollars due to a delay in sales tax payments by the State, unrealized Birch Hills Golf Course revenues, and unrealized development related revenue. Significant savings came from the departments underspending their budgets. There was almost a million dollars in salary savings alone from unanticipated vacancies and departments keeping vacant positions open throughout the entire organization. This is in addition to the permanent salary savings realized from the efforts of the Vacancy Review Board (VRB).
As you may recall, the City initiated the VRB which was created to evaluate vacant positions within the organization for opportunities to provide budgetary savings as well as efficiencies within the organization. Since the VRB’s inception, the organization has eliminated just over 14 full-time equivalents (FTEs) over the past three years. Departments have been diligent on “holding the lines” while making every effort to maintain services to the community which resulted in significant savings for FY 2017-18.
Fiscal Year 2018-19 (Current Fiscal Year)
At budget adoption on June 19, 2018, the General Fund for the current fiscal year was balanced due to a number of reductions in operating expenses. In addition to a million dollars in staff reductions previously mentioned, there was no salary increases for employees programed in the current year budget. Also, there was reduced expenditures in areas such as street stripping, tree trimming and employee training.
For Fiscal Year 2018-19, the preliminary year end estimate indicates that the City will have revenues over expenditures of $1,705,910, mostly due to one-time unanticipated revenues. This significantly improved the City’s forecast for the current fiscal year with $2.2 million in new revenues as shown below:
- $200,000 – one-time revenues from excess property taxes collected from the former Redevelopment Agency.
- $761,000 – one-time bump in sales tax due to new auto sales. Our sales tax consultant does not anticipate this rate to continue; however sales will remain higher than normal. In addition, a sales tax payment that was received after the financials were prepared was attributed to FY 2017-18 sales.
- $200,000 – increase in anticipate Fine Revenue (Police Services is analyzing this revenue spike)
- $198,793 – one-time grant revenue from CalTrans
- $111,000 – one-time recognition of revenues from property and evidence for closed Police Department cases
- $361,360 – one-time reimbursements for responses to Strike Team Response. These revenues offset overtime cost.
- $135,000 – increase in user related fees
- $145,000 – one time Golf Course rent from prior year
Overall, these preliminary numbers (including expenditure increases from the 1st and 2nd quarter budget adjustments) have a $1.7 million net positive impact on the City’s General Fund budget than was previously projected at budget adoption of $53,364.
As noted, many of these increased revenues are one-time revenues and are temporary increases. Based on our fiscal policies, these revenues should be spent on one-time expenditures. Again, departments and employees were the key factor to getting the organization where we are today. Without their assistance, the predicted surplus would be much less or possibly negative.
FY 2019-20 and Beyond
With updated revenues and budget assumptions the projected shortfall for future fiscal years is as follows:
| FY 2019-20 |
($549,062) |
| FY 2020-21 |
($920,800) |
| FY 2021-22 |
($1,498,777) |
| FY 2022-23 |
($1,268,085) |
| FY 2023-24 |
($1,361,117) |
These projections assume an overall two percent increase in all operating expenditures. Staff anticipates that certain operating and maintenance contracts may increase more than two percent; however as a whole two percent overall growth is a reasonable assumption.
Although these are improved projections, staff cautions these projections do not take into consideration any recessionary impacts. It is also important to note that departments have yet to submit their estimated expenditures for the current fiscal year (FY 2018-19) as well as their requests for the upcoming fiscal year (FY 2019-20) which will change the projections presented tonight.
Budget submittals from departments were due February 1st and are currently being evaluated by staff. Staff will provide an updated five year projections at the Council Budget Workshop in May.
General Fund Reserve Policy
The City’s General Fund Reserve Policy currently states the following:
“The City will maintain General Fund contingency reserves at a level at least equal to 8% to 10% of the General Fund expenditures. The specific purpose of this reserve is for (1) natural (e.g. fire, earthquake, flood) and catastrophic disasters (e.g. civil unrest, acts of terrorism, airplane crashes); and (2) normal business cycle variations (e.g. cash flow, interest earnings, economic uncertainty).
Staff is recommending City Council consider revising the Reserve Policy to 25% of which 10% is for operating reserves and 15% is for contingency reserves.
City’s Section 115 Trust Account through Public Agency Retirement Services (PARS)
On October 20, 2015, the City Council committed $6 million of General Fund reserves to a Section 115 Trust Account through PARS. The program through PARS was established to assist agencies in “pre-funding” their pension obligation costs in an irrevocable Section 115 trust account. Some benefits of the program include:
- City maintains oversight of investment management and control over the risk tolerance level of the portfolio;
- Assets held in the PARS Trust Program allows for greater investment flexibility and risk diversification compared to the City’s General Fund investments;
- Assets could be accessed to offset unexpected rate increases (rate stabilization);
- Potential to improve an agency's bond rating;
- Flexibility to access trust assets at any time as long as it is used to pay employer's pension obligation; and
- The City can also pre-fund retiree health care (OPEB) liabilities within the same program.
As of December 31, 2018, the book value of the trust is approximately $7 million dollars which is a million dollars of accumulated interest since the establishment of the trust and has an annual income/interest of approximately $167,000.
At tonight’s meeting, staff is interested in getting initial thoughts and considerations on the desire to establish a policy to pay down the City’s pension obligation costs by identifying a strategy to contribute and make withdrawal of funds from the trust for pension obligations. Staff anticipates continuing this discussion at a future Council meeting in March/April.
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