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 2014-2015 Third Quarter Budget Status Report (Finance Director Moe).
RECIEVE REPORT
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Recommended Action
RECOMMENDATION:
Staff recommends that the City Council receive and file this report.
Body
FISCAL IMPLICATIONS:
Based on updated projections for FY 2014-2015, the General Fund is estimated to have a year-end surplus of $729,469; an increase from prior projections of approximately $256,000.
Through the end of April (Third Quarter plus one month) all other funds are trending as expected with the exception of the Insurance Reserve Fund, which has continued to experience unusually high claims activity above budgeted levels. These trends in the Insurance Fund were identified and reported to the City Council early in FY 2014-2015, and again at mid-year budget.
Given the volatility in the Insurance Fund, and the fact that there are still two remaining months of activity to report in the current fiscal year, staff is deferring any recommended transfers or appropriations until further, fully informed analyses may be performed. Factors that may contribute to the final Insurance Fund results include any reductions in reserves from cases that may be settled (thereby improving the results) or continued high claims activity which would negatively impact the fund.
In lieu of incremental adjustments at this point in the fiscal year, staff believes it is prudent to defer and fully understand the impacts for the entire year, and perform a one-time adjustment to rectify the FY 14-15 budget. Staff will return to the City Council after the close of FY 2014-2015 with a full analysis of the Insurance Fund activity and recommendations for any appropriations and/or fund transfers.
We have the capacity to make any anticipated transfers, which will not affect the balancing of the budget for FY 2015-2016.
BACKGROUND:
Last fall, in an effort to keep the City Council and community fully informed of the City's fiscal performance, the City Manager instituted quarterly presentations of financial information to the City Council. While this information was, and will continue to be provided to the Council in the form of "Receive and File" written reports on the agenda, this new format will provide for more narrative detail. Such reports were presented for the first and second quarters of FY 2014-2015. This report includes the third quarter as well as the first month of the fourth quarter (April 2015).
DISCUSSION:
Third Quarter Budget Status
General Fund
The General Fund is performing within expectations. Through April (83.3% of the way through the year), revenues are at 86.5% of full year estimates, while expenditures are at 80.6% of budget. FY 2014-2015 revenues are expected to exceed budgetary estimates, while expenditures are anticipated to come in below projections. Based on these patterns, we offer the following full-year projections:
General Fund Revenues $61,580,888
General Fund Expenditures $60,851,419
Expected Surplus $ 729,469
Attachment 1, Table 2, lists the performance of key revenue sources compared to the budget and last year's (FY 13-14) 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 general governmental services. For full-year FY 2014-2015, we have projected growth of 4.1% over FY 13-14.
The City's second largest General Fund revenue source, Sales Tax, has been revised lower from prior estimates due to trends, and the recent loss of DeWitt Petroleum, one of the City's most significant sales tax producers. Sales Tax is now estimated at $8,842,774, $270,099 below original budget estimates, and $293,034 below FY 13-14 actual receipts.
Transient Occupancy Tax continues to grow, exceeding budgetary estimates by $257,150 (7.0%) and FY 13-14 by 10.1% ($361,057). Building permits are estimated to exceed FY 13-14 levels by 16.3%, or $168,588. Plan Check fees are estimated to meet budget at $1.35 million.
General Fund expenditures (Attachment 1, Table 3) are estimated to come in $923,456 under the adjusted budget.
Within that group, Salaries and Wages are estimated to exceed budget by $534,127 (1.9%). This is mainly caused by Fire Department overtime which is estimated to exceed budget by $364,271 due to higher than anticipated backfill hours for Workers Compensation injuries on duty.
All other expenditure categories are performing within or close to the adjusted FY 14-15 budget.
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 $4 million economic uncertainty reserve. These reserves have a combined balance of $16.1 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 by $5 million and totals 26.6% of budgeted expenditures.
Other Funds
Other funds are tracking appropriately thru April, with the exception of the Insurance Fund, which has expended 107.4% of the full year budget.
The Insurance fund is made up of Workers Compensation and Liability claims activity, as well as insurance premium costs. Workers Compensation claims through April ($3,517,931) have outpaced the prior year's period by $1.1 million (45%) and has thus far exceeded the full year budget in FY 14-15 by nearly $400,000 (112.8% of budget).
Liability claims through April 2015 total $1,010,733 and have also exceeded the full year budget by $128,733 (114.6% of budget). Additionally, excess insurance premiums exceeded budgeted amounts by a net of $56,016 due to a hardening of the insurance market.
This year, Insurance Fund expenditures have been exceptionally volatile. For example, Workers Compensation monthly claims activity costs have ranged from $116,600 to $579,100 (annualized: $1.4 million to $6.9 million), making trends difficult to identify and establish. Additionally, old claims by former employees can add to those costs, as was the case in January 2015 when a 1979-1980 case reserve was increased by $127,900 (case reserves are reported as claims paid). Finally, as the City's Third Party Administrator (TPA) establishes reserves for liability cases, that amount is also then presented as claims paid in the Insurance Fund. That activity has been abnormally high this year as well.
As discussed in the fiscal implications section above, staff recommends a comprehensive analysis at year-end in order to develop recommendations for the City Council to consider. This will avoid an incremental approach that may or may not be sufficient to address the fund's activity levels this year, and will allow staff to recommend adjustments with full knowledge of final results. Adjustments may include fund transfers and additional appropriations.
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 look for ways to control these costs.
Staff promotes the return to work program in an effort to get injured employees back to work as soon as possible, thus reducing costs. Additionally, we are out to bid for the services of the Third Party Administrator who oversees the claims activity and is key to the cost control chain. Finally, implementing additional employee safety and educational programs and trainings, such as MB Fit, may serve to improve our injury experiences. We will continue to seek new ways to help employees seek proper treatment and return to work in a timely manner.
Controlling these costs remains a very high priority.
CONCLUSION:
The General Fund is performing ahead of budgeted expectations and is projected to have a year-end surplus (revenues in excess of expenditures) of $729,469. Reserves are healthy and maintained.
All other funds are performing as expected with the exception of the Insurance Reserve Fund. High levels of Workers Compensation and liability claims activity, as well as high insurance premium costs, are contributing to the fund's poor performance in FY 2014-2015.
Staff recommends that the City Council receive and file this report.
Attachments:
1. Third Quarter Full Year Projections FY 14-15