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 First Quarter Budget Status Report; Two Year Budget Process for Fiscal Years 2016-17 and 2017-18 (Finance Director Moe).
RECEIVE REPORT; APPROVE
Line
_________________________________________________________
Recommended Action
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 First Quarter Budget Status Report; Two Year Budget Process for Fiscal Years 2016-17 and 2017-18 (Finance Director Moe)
RECEIVE REPORT; APPROVE
Line
_________________________________________________________
Recommended Action
RECOMMENDATION:
Staff recommends that the City Council: a) receive the First Quarter Budget Update Status Report for Fiscal Year 2015-2016; and b) approve a two-year budget cycle starting with the FY 2016-2017 budget.
Body
FISCAL IMPLICATIONS:
Fiscal implications are discussed within this report. No budget adjustments are required at this time.
BACKGROUND:
In an effort to keep the City Council and community fully informed of the City’s fiscal performance, we are providing quarterly presentations of financial information to the City Council. While this information has, and will continue to be provided to the Council in the form of written reports on the agenda, this presentation will provide for more interactive discussion on a periodic basis.
DISCUSSION:
The City Council and staff respond to the community’s needs in part through the budget. The budget is both a spending plan for the City’s available financial resources and the legal authority for City departments to spend the resources for public purposes. Through these resources, services are provided to meet the needs of Manhattan Beach residents.
First Quarter Budget Overview (July-September 2015)
General Fund
The General Fund is performing within expectations. FY 2015-2016 revenues are expected to exceed budgetary estimates, while expenditures are anticipated to come in below projections. Reserves remain healthy, and were increased in this most recent budget cycle, reflecting the City’s strong fiscal position.
Through the first quarter, revenues are at 16.2% of full year estimates, which is typical for this time frame, while expenditures are at 23.3% of budget 25% of the way through the year. The following illustrates the revenue and expenditure patterns for the current year as well as the past three fiscal years:
Revenues
Q1-2016 - 16.2%
Q1-2015 - 16.5%
Q1-2014 - 16.2%
Q1-2013 - 16.1%
Expenditures
Q1-2016 - 23.3%
Q1-2015 - 24.5%
Q1-2014 - 22.9%
Q1-2013 - 23.9%
The typical pattern of General Fund cash flow includes significant Property Tax revenue in the months of December, January, April and May (after Q1). As a result, cash flow in other months is often negative (expenditures exceed revenues for the month). This is fully expected, and typically by year-end, revenues have exceeded expenditures. Thus it is historically anticipated that at this point in the year, expenditures have exceeded revenues by $3,947,203. The City maintains sufficient liquidity in the investment portfolio to accommodate these patterns.
Revenues
General Fund revenues totaled $10,301,685. This is an increase of $447,252 (4.5%) from the prior year period. See Attachment #1 for the list of key General Fund revenues.
• Property Tax is the City’s most significant General Fund revenue source. This first quarter update does not include the major collections of Property Tax since significant collections don’t commence until December. This revenue source was originally estimated to total $25,948,000 in FY 2015/16. However, recent data indicate that assessed values (which translate into Property Taxes) are up 8.1% from last year. This is expected to result in property taxes exceeding budget by 1.3% or $260,000.
• The City’s second largest General Fund revenue source, Sales Tax, is estimated to total $7,480,517 in FY 2015/16. Through the first quarter, revenue is down by $61,272 (3.3%) from the prior year. The City lost a major sales tax producer in April 2015, which contributed to the drop in this revenue from the prior year. The largest contributors to sales tax are from the general consumer goods, restaurants and hotels, and fuel and service stations sectors.
• Transient Occupancy Tax (TOT) is up 12% from last year at this time, continuing the recent trends of strong growth in this revenue that represents 6% of General Fund revenue.
• Trending in line with higher TOT, receipts from Marriott Hotel Rent (ground lease) are up by 15.5% ($42,238 over the prior year period). First quarter receipts totaled $314,314 (31.6% of budget). The City receives 6.25% of Marriot room rental revenue in addition to Transient Occupancy Taxes.
Building and construction revenues have mixed results. While some of the gains in these revenues can be attributed to updated fees implemented on July 1, the spike in Building Permit revenue (up 95% from last year) has been partially caused by an inadvertent advanced collection of Building Permit fees at the time of Plan Check Services (normally permit fees are collected separately after plan check is completed and the project is approved to proceed). This error was caused by a miscalculation in the permit system which has since been corrected. The advanced payments, which total approximately $220,927, are being held on account until the subsequent Building Permits are approved, at which time the credit will be applied. Hence, this spike will smooth out over the coming months. In factoring out the advanced payment of $220,927, the actual year-over-year increase in Building Permits is $98,580, or 29.3%.
Additionally, certain building permits issued, inappropriately included a plan check fee component when the nature of the construction did not require plan check. These included shoring, re-roofing, pool, and certain mechanical/electrical/plumbing and minor building projects (this was also caused by mis-calcuations in the permit system). There are approximately 160 of such permits for which refunds totaling an estimated $133,000 are currently being processed. These refunds will reduce the Q1 revenue in Plan Check to $238,571, a year-over-year reduction of $33,505 or 4.9%.
Expenditures
General Fund expenditures are trending under last year at this time, having decreased by $360,723 or 2.5% (see Attachment #1). The overall decrease is due to Bond Debt expenditures, down by $759,888, reflecting last year’s scheduled payoff of pension obligation bonds. Contract and Professional Services (-$254,831, -14.6%) and Materials and Services (-$136,493, -19.8%) are down from the prior year due to non-recurring expenditures in FY 2014/15, and the timing of invoices for Plan Check Services (September’s billing from the contractor was not received/paid before the issuance of the Q1 financial statements).
Increases by category include Salary and Wages (+$306,561, +4.7%), Employee Benefits (+$292,674, +10.9%), and Property & Equipment ($112,617). Internal Service Charges are up $125,478 (+7.4%); this category reflects internal charges for Workers Compensation, Liability claims, Information Technology Services and Fleet charge outs.
• The Salary and Wages increase includes full- and part-time salaries as well as overtime costs. Within this category, both regular salaries (+$159,174, +2.82%) and overtime costs (+$147,387, +16.1%) are up over the prior year. The increase in overtime costs can be attributed to sworn personnel, including Fire Department Strike Team deployments, for which the City will receive Mutual Aid reimbursement.
• Employee benefits are trending higher than the prior year due to PERS contributions (+$124,854, +12.1%) and Workers Compensation costs (+$132,420, +17.7%). Increases in PERS contributions were anticipated due to known rate adjustments. Workers Compensation charges, which are a fixed amount for the year, billed to departments in an amount equal to one-twelfth of the annual total each month, also increased based on the budget which was estimated using historical claims activity.
• Prior year expenditures included one-time costs to seal coat all Manhattan Beach Unified School District parking lots and playgrounds as well as professional services payments for executive recruitment costs and to the Chamber of Commerce. Within Materials and Services, one-time purchases of public safety equipment, including tasers and fire protection gear, contributed to the variance from FY 2014/15.
• Within the Internal Service Funds, there are two main drivers for the increase: Insurance Fund charge outs, which are up $122,745, and Fleet Maintenance charge outs, up $50,233. Both reflect increases in budgeted expenditures for FY 2015-2016.
• One-time software purchases for the electronic document management system contributed to the increase in Property and Equipment.
Other Funds
Expenditures in other funds appear to be tracking appropriately thru the first quarter, with the exception of the Insurance Fund, which has expended 43.4% of the full year budget. This trend is due to liability, property and workers compensation premiums ($1.2 million, or 19.2% of the total budget) paid annually in August, early in the fiscal year. This will normalize as the year progresses. Workers Compensation Claims paid through the first quarter of the year are trending at 25.1% of budget. Liability Claims paid through the first quarter are at 33.8% of budget.
Due to conservation efforts, revenues in the Water and Wastewater funds are trending below prior years. Water consumption in the first quarter of FY 2015/16 has decreased approximately 20% from FY 2014/15, meeting the City’s required reduction in water use per the Governor’s water conservation order. While current year revenues for water and wastewater were projected conservatively, actual revenues in FY 2015/16 will likely not meet the Adopted Budget due to the City’s successful conservation efforts. However, there are also cost savings from reduced water purchases. Sufficient moneys are available in both funds to sustain operations as well as fund infrastructure projects in the near term.
As with all funds, revenues and expenditures will continue to be monitored and adjustments recommended if necessary.
Two-Year Budget Cycle
While we are only into the fifth month of the current budget year, planning is underway for next year’s budget. The preparation of the FY 2015-2016 budget included many new features, such as the Community Budget Priorities town hall meeting, and more opportunities for resident engagement in the process. We will continue to build on those successes in the coming years.
A new approach we are recommending is instituting a two-year budget cycle. Under this proposal, the City would develop and present spending plans for the next two years: Fiscal year 2016-2017 and Fiscal Year 2017-2018. The rationale and advantages behind this approach are described by the Government Finance Officers Association as consisting of five objectives: 1) greater emphasis on management and service delivery; 2) greater emphasis on program evaluation and monitoring; 3) improved long-term planning; 4) relocation of human resources to more value-added activities other than budget preparation; and 5) reduction in staff time spent on budget development.
Under the two year budget, the first year of the biennial budget is adopted (as has been done in the past with our one-year budgets). The second year of the budget is approved as a spending plan but not adopted - that occurs before the beginning of the second year. At the end of the first year, the City would go through an abbreviated review process for any critical changes to the second year spending plan, hold the public hearing, and then formally adopt the second year’s spending plan.
Existing quarterly and mid-year budget reviews will continue. This provides an opportunity to monitor progress and make adjustments as necessary. Additionally, at the end of year one, the budget review focuses on year-two changes to incorporate any updated data and trends.
The purpose of the two year budget is to encourage longer range planning, and link the spending plan to that vision of the Strategic Plan, which prioritizes the City’s goals for the coming years. The multi-year budget is also linked to other planning efforts such as community surveys. The document will also benefit from the certainty that comes with multi-year labor agreements being negotiated.
Additionally, one of the greatest benefits to the two-year budget involves the City’s Capital Improvement Plan (CIP). Under the one year budget process, the development and approval of the CIP happens concurrently with the budget. Review of the CIP generally occurs at a Budget Study Session as a subset of the operating budget. This does not provide adequate time for a thorough review of one the City’s major spending components - capital projects. Under the recommended two-year budget, the first year would center on the operating budget with less emphasis on the CIP. The second year would more closely focus on CIP. Given recent policy conversations around a few significant possible projects (e.g., fire station #2, a community pool, and a new downtown streetscape) and the numerous water service improvements coming in the near future, an opportunity to more exclusively focus on the CIP during “off-budget” years could prove particularly helpful.
One concern that may be raised with a two-year budget is adapting to unexpected, unstable economic conditions, which can occur very rapidly. However, as is the case now, adjustments to the budget may be made at any time by the City Council to reflect new information. In those cases, staff will keep City Council apprised of situations that may warrant such action. Finally, as the approval of the second year of the budget nears, staff will recommend adjustments (positive and negative) based on current trends.
A two-year budget cycle is most appropriate and more common for agencies that have strong and relatively consistent financial histories like the City of Manhattan Beach. In addition, our city has a portfolio of established services, such as public safety, parks and recreation, and public works, that do not significantly vary in investment level by fiscal year-again due to our long history of exceptional financial management-and thus make us a good candidate for considering a two-year development.
Community Budget Priorities Meeting
Last year, the City instituted the Community Budget Priorities Meeting, which took place in early March. The gathering brought together over 150 people to discuss City services and priorities for spending City resources. That was preceded by a City Council meeting in January at which time the Council established budget policies.
With the upcoming budget cycle, staff believes it would be beneficial to reverse the order of these meetings, and hold the Community Budget Priorities session before the Council considers policies for the coming budget. This will allow Council to consider the input from the community meeting when setting policies.
Staff has tentatively set the Community Budget Priorities meeting for January depending upon scheduling around other events and activities. Staff will advise the Council when the schedule has been established, and will aggressively promote the session to ensure maximum participation.
CONCLUSION:
The Q1 budget report indicates that actual performance is in line with budgetary estimates through September 2015. The next quarterly update will occur in February 2016 with the mid-year budget report.
Staff recommends that the City Council: a) receive the First Quarter Budget Update Status Report for Fiscal year 2015-2016; and b) approve a two-year budget cycle starting with the FY 2016-2017 budget.
Attachments:
1. First Quarter Fiscal Performance Report
2. Q1 Budget report PowerPoint Presentation