TO:
Honorable Mayor and Members of the City Council
THROUGH:
Mark Danaj, City Manager
FROM:
Bruce Moe, Finance Director
Henry Mitzner, Controller
Libby Bretthauer, Financial Analyst
SUBJECT:Title
Fiscal Year 2015-2016 Fourth Quarter Budget and Capital Improvement Plan Status Reports (Finance Director Moe/Interim Public Works Director Saenz).
RECEIVE REPORTS
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Recommended Action
RECOMMENDATION:
City staff recommends that the City Council receive the 4th quarter status report on the FY 2015-2016 Budget (pre-audit); and b) receive a status report on the Capital Improvement Plan.
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FISCAL IMPLICATIONS:
While the full accounting work for the close of Fiscal Year 2015-2016 is still in progress, the General Fund is estimated to have a year-end surplus of $15,068. This is based on revenues of $65,600,970 and expenditures of $65,585,902. The final report, pending completion of the annual audit, will be presented to the City Council in January 2017 in the form of the Comprehensive Annual Financial Report (CAFR).
With the exception of the Insurance Fund and AB2766 Air Quality Fund, all other funds have performed within budgetary expectations. At the August 16th meeting, City Council approved the following FY 2015-2016 budget amendments:
1. AB2766 Air Quality Fund - Air Quality Funds support the Commuter Pay incentive program offered to employees. More employees took part in this program than expected in FY 2015-16. As a result, Council approved an appropriation from the fund’s unreserved fund balance to cover the budget overrun of $1,320.
2. Insurance Fund - As of June 2016, Insurance Fund expenditures exceeded the adjusted budget by $368,649 resulting in the need for the additional appropriation, which Council approved on August 16th. Although the first eight months of the year trended appropriately, paid Workers Compensation claims spiked in the last four months (March through June). On November 17, 2015, City Council approved a phased transfer plan from the General Fund Unreserved Fund Balance to the Insurance Fund. Transfers in the amount of $667,000 occurred or will occur in fiscal years 2015-16, 2016-17, and 2017-18 to correct a fund imbalance that was a result of higher than expected claims activity during FY 2014-2015. With FY 2015-16 year-end results exceeding budget once again, fund reserves will be utilized until internal service charges can be increased during the FY 2017-18 Budget cycle.
BACKGROUND:
The FY 2015-2016 Budget was adopted on June 16, 2015 with a General Fund operating budget surplus of $87,338.
Revenues - $63,652,500
Expenditures - $63,565,162
Adopted Surplus/(Deficit) - $87,338
A budget represents an agency’s spending plan which takes into account all available resources that may be utilized to fund and achieve the City’s priorities for the fiscal year. Those resources may include revenues received during the current fiscal year, as well as received but not utilized in prior years, the latter of which are now included in unreserved fund balance. It is not uncommon that the unreserved fund balance may be used later for specific one-time purposes, particularly if there is a plan to replenish it; this is consistent with the City’s adopted budget policies. This is the case in the current fiscal year where a portion of General Fund unreserved balance is being utilized for one-time non-recurring costs.
These non-recurring costs include General Fund encumbrances (e.g., commitments for expenditures in the prior fiscal year that won’t occur until this year,) which have been carried forward from FY2014-2015 to FY 2015-2016 (totaling $948,292). The amount encumbered is carried forward into the new year to ensure funding is available for these contractual commitments. The funding allocated toward these purchases remained in the City’s fund balances at the end of FY 2014-2015. This standard practice occurs every new fiscal year as part of year-end accounting procedures.
In addition, after budget adoption in June 2015, the following General Fund budget adjustments were subsequently approved by the City Council:
Art Lab Youth Art Education Initiative - $24,000
As Needed Engineering Services - $60,000
El Nino Storm Preparation - $333,700
Outreach - No-Smoking in Multi-Family Units - $7,000
Temporary, Short-term Reimbursable Loan - $2,200,990
Urban Forest Master Plan - $26,980
$2,652,670
Fourth quarter results indicate the General Fund will end the year with revenues roughly equaling expenditures. Please note that these results are not final and are presented on a pre-audit basis. The final results will be presented with the Comprehensive Annual Financial Report (CAFR) in January 2017.
DISCUSSION:
Fourth Quarter Budget Status
General Fund
Structurally, the City maintains a balanced budget with on-going revenues exceeding on-going expenditures. The sources and uses of General Fund moneys are projected as follows for FY 2015-2016:
Revenues:
Ongoing Revenues - $64,820,970
(Budgeted Revenues = $63,652,500)
One-time Marriott Transfer Fee - $780,000
Estimated Year End Revenues - $65,600,970
Expenditures:
Budgeted Expenditures - $63,565,162
Adjustments:
Add: Encumbrances Carried Forward - $948,292
Add: Budget Adjustments (listed above - $2,652,670
Less: Expenditure Savings/FY 17 Carry forwards - ($1,580,222)
Estimated Year End Expenditures - $65,585,902
Estimated Surplus/(Deficit) - $15,068
Without the one-time property transfer fee, reimbursable loan and carryforward encumbrances, but with the other one-time budget adjustments listed above, the General Fund is projected to generate a surplus in FY 2015-2016 of approximately $2.4 million.
It is important to note that the policy reserve of 20% of General Fund expenditures ($12.7 million) is maintained. The economic uncertainty reserve remains at $1.8 million. Taking into account year-end projections and anticipated transfers to the Insurance, Street Lighting and Stormwater Funds, staff projects an unreserved General Fund balance of $4.7 million at fiscal year-end.
See Attachment #1, Table #1, for General Fund Projections.
Revenues received through June have exceeded initial full year estimates, while expenditures are at 97.6% of budget. One-time revenue in the amount of $780,000 was received from the ground lease transfer of the Marriott property.
Attachment #1, Table #2, lists the performance of key revenue sources compared to the budget and last year’s (FY 14-15) actual performance.
As the City’s largest General Fund revenue source, Property Tax continues to be the primary driver of growth and our abilities to provide excellent general governmental services. For full-year FY 2015-2016, we have estimated revenues 7.1% over FY 14-15 ($1,745,404). Preliminary assessed valuation data from the County of Los Angeles indicates continued growth in this source for FY 2016-17.
The budget for the City’s second largest General Fund revenue source, Sales Tax, was conservatively estimated due to trends and the loss of DeWitt Petroleum, one of the City’s most significant sales tax producers in prior years. Consistent with the third quarter projections, Sales Tax is estimated at $8,709,405, which is $259,405 over original budget estimates, but $462,110 below FY 14-15 actual receipts.
Transient Occupancy Tax continues to grow, exceeding budgetary estimates by $250,084 (6.1%) and FY 14-15 by 9.5% ($375,776). Business License Tax is also up $88,426 (2.6%) from the prior year, mainly due to higher gross receipts (the basis of most of the business license taxes) resulting from the improved local economy.
Taken together, building permits and plan check fees exceeded FY 14-15 receipts by $181,856 or 7.0%. Revenue from other permits was up $123,108 or 12.6% from FY 14-15.
Building-related fees were updated in July 2015 with the Cost Allocation and User Fee Study. Using the new tiered fee structure, the City collects more revenue from Building Permits, but less from Plan Check services. Building permit fee revenues ended the year under budget by $75,924 (-4.2%), while plan check fee revenues were under budget by $559,600 (-34.4%). Although the volume of plan checks in FY 2015-16 remained close to years past, fee revenues were less due to the reduced cost recovery changes and exclusion of fees anticipated from the Manhattan Village Mall remodel (when the budget was adopted in June 2015, it was anticipated that Plan Check fees for the mall project would be collected in FY 2015-16 with Permit fees collected in FY 2016-2017). This accounts for half of the anticipated shortfall.
The “Other Governments” category exceeded budget by $232,877. The bump is primarily due to the unexpected receipt of prior years’ State Mandated Cost Reimbursements (these are State-directed programs imposed on local governments for which the State is obligated to reimburse agencies, but which they suspended payments during difficult budget years). In 2014-15, after State revenues exceeded forecast benchmarks, the State Controller’s Office was authorized to pay cities, counties and special districts for prior year claims totaling $765 million.
The Property Transfer Fee of $780,000 was received as a result of the unexpected Marriott sale. As a best practice and consistent with our budget policies, unexpected, one-time funds should be used judiciously for similar one-time expenses, reserves or investment opportunities. To that end, staff will be recommending that the Council use these funds to complement the $500,000 allocated in the FY 2016-2017 budget to seed the Pension Rate Stabilization trust account to help address CalPERS rate increases and unfunded liabilities that are projected for future years.
General Fund expenditures (Attachment 1, Table 3) are estimated to come in $1,580,222 under the adjusted budget. Salaries and Wages have exceeded budget by $802,577 (2.6%). Within that category, regular salaries (non-sworn personnel) were under budget by roughly 2.2% ($263,280) due to vacancies (on top of the 4.6% vacancy factor included in the budget).
Sworn salaries (Police and Fire) ended the year over budget by $827,090 or 6.4% due to full staffing levels in the Police department vis-à-vis the vacancy factor (4.6%) included in the budget. The Police Department is temporarily over-staffed in anticipation of upcoming vacancies due to retirements. By over-staffing in advance of these vacancies, the Police Department’s fully-trained force is sustained.
Further, overtime costs ended the year over budget by $443,605 (112.5% of budget). Fire Department overtime was the main contributor, ending the year $249,813 (16.5%) over budget. Savings in part-time personnel ($204,838 or 10.3%) also helped offset the overages within the category.
Employee Benefits are estimated at 1.9% or $248,155 under budget for the year mainly due to savings in other post-retirement benefits based on updated actuarial valuation results.
Contract and Professional Services are projected to be under budget by $594,477 or 6.9%. Materials and Services are expected to be under budget by $287,055 or 9.9%. Included in this category is the City Council Contingency of $100,000 which was unspent in FY 2015-16. Other savings projected in this category include Training and Conferences totaling $174,991.
Utility costs and Internal Service Charges are both anticipated to end the year under budget. Cost increases assumed during the development of utility budgets have not materialized, thus causing the lower trend in actual expenditures to date.
Property and Equipment will not be fully expended by year end, and is expected to come in under budget by $513,771. Much of these costs were related to Information Systems Master Plan projects which are not completed by year end (e.g. Financial and Human Resources software system upgrades). Remaining unspent budgets for these projects have been re-budgeted for completion in FY 2016-2017.
Reserves remain healthy, and were increased in this most recent budget cycle, reflecting the City’s strong fiscal position. There is no use of established reserves in the current fiscal year, either the 20% policy reserve or the $1.8 million economic uncertainty reserve. These reserves have a combined balance of $14.5 million this fiscal year. The Government Finance Officers Association of the United States and Canada has a recommended practice that local governments maintain reserves of at least 16.7% (two months of revenues or expenditures) which would total $10.1 million based on the City’s General Fund budget. The City’s reserve level exceeds this recommended practice and totals 21.5% of budgeted expenditures.
Other Funds
Other funds tracked appropriately thru June, with the exception of the AB2766 Air Quality Fund and Insurance Fund, the latter which expended 105.9% of the full year adjusted budget.
Air Quality Funds support the Commuter Pay incentive program offered to employees. This benefit program is offered to all full-time employees as an incentive to commute to work by carpooling or using alternative methods of transportation instead of driving alone. More employees earned this benefit payment than expected in FY 2015-16 resulting in a budget overrun of $1,320. An appropriation of $1,320 from the fund balance was previously approved by City Council at the August 16th meeting to accommodate this overage.
The Insurance Fund is made up of Workers Compensation and Liability claims activity, as well as insurance premium costs. As of June 2016, Insurance Fund expenditures were over the adjusted budget by $368,649 due to excess insurance premiums, which exceeded budgeted amounts by a net of $76,058, and Workers Compensation claims.
Workers Compensation claims paid through June ($4,059,521) surpassed the prior year actual by $279,741 (7.4%) and exceeded the adjusted full year budget by $559,521 (116.0% of budget). Although the first eight months of the year trended appropriately, paid Workers Compensation claims spiked in the last four months (March through June). Lighter activity in liability claims is helping to offset these overages. After ending FY 2014-15 at an all-time high of $1.4 million, liability claims paid through June 2016 were 74.1% of budget at $510,579 (under by $178,421).
Based on the results described, City Council approved an appropriation from Insurance Fund reserves of $368,649 at the August 16th Council meeting.
It should be noted that on November 17, 2015, City Council approved a phased transfer plan from the General Fund Unreserved Fund Balance to the Insurance Fund. Transfers in the amount of $667,000 occurred or will occur in fiscal years 2015-16, 2016-17, and 2017-18 to correct a fund imbalance that was a result of higher than expected claims activity during FY 2014-2015. The additional appropriation of $368,649 in FY 2015-16 was drawn from these existing fund reserves. If necessary, internal service charges will be adjusted during the FY 2017-18 budget cycle in lieu of additional fund transfers at this time.
Clearly, controlling Liability and Workers Compensation costs continues to be challenging, and are unpredictable by nature. While much of the costs incurred in Workers Compensation are mandated by State law, the City continues to actively look for ways to control these costs.
Capital Improvement Plan
The Engineering Division of the Public Works Department oversees the City’s Capital Improvement Plan (CIP). A capital improvement project’s status is defined by the following terms:
Planning - Initial stages
Request for Proposal - Selection process to choose a consultant
Bid Process - Selection process to choose a contractor
Design - Creation of project plans and specifications
Study in Progress - Professional study is in progress
Construction - Active construction
Completed - Construction completed, project close-out
The following represents the total number of projects within each individual project status category for the 4th Quarter of Fiscal Year 2015-2016 (April 2016 to June 2016). A comprehensive list showing the specific project titles by status category for the 4th Quarter of Fiscal Year 2015-2016 is found in Attachment 2.
Planning - 19 projects
Request for Proposal - 3 projects
Bid Process - 0 projects
Design - 33 projects
Study in Progress - 1 projects
Construction - 10 projects
Completed - 1 project
PUBLIC OUTREACH/INTEREST:
The public is encouraged to provide questions and comments on the Budget and Capital Improvement Plan to staff at any time, especially during the preparation process. The Budget/CIP preparation process includes numerous opportunities for feedback at City Council and Commission meetings.
ENVIRONMENTAL REVIEW:
Regarding capital projects, environmental review is conducted on a project-by-project basis before construction commences.
LEGAL REVIEW:
The City Attorney has reviewed this report and determined that no additional legal analysis is necessary.
Attachments:
1. FY 15-16 Budget Report Fourth Quarter
2. FY 15-16 CIP Project Status List Fourth Quarter
3. PowerPoint Presentation