TO:
Honorable Mayor and Members of the City Council
THROUGH:
Bruce Moe, City Manager
FROM:
Steve S. Charelian, Interim Finance Director
Henry Mitzner, City Controller
Libby Bretthauer, Financial Analyst
SUBJECT:Title
FY 2017-2018 Mid-Year Budget Report and Update on Budget Development for FY 2018-2020 Biennial Budget (Interim Finance Director Charelian).
DISCUSS AND PROVIDE DIRECTION
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Recommended Action
RECOMMENDATION:
Staff recommends the City Council:
1) receive the Mid-Year Budget Report for Fiscal Year 2017-18;
2) receive an update on budget development activities for the Fiscal Year 2018-2020 Biennial Budget; and
3) discuss and provide direction.
Body
FISCAL IMPLICATIONS:
Current trends indicate the City’s General Fund operating budget will finish Fiscal Year 2017-18 with revenues exceeding expenditures by $3.1 million. Taking into account year-end projections and anticipated transfers to the Insurance, Street Lighting and Storm Water Funds, staff projects an unreserved General Fund balance of $6.1 million at fiscal year-end. Other Funds are trending as expected.
BACKGROUND:
The Fiscal Year 2017-2018 Budget was adopted on June 20, 2017 with a General Fund operating budget surplus of $613,383.
Revenues $71,013,648
Expenditures 70,400,265
Adopted Surplus/(Deficit) $613,383
The adopted budget represents the organization’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.
DISCUSSION:
Overall, the fiscal year 2017-2018 General Fund budget-to-actuals through mid-year are performing as expected. Revenues are estimated to exceed the adjusted budget by $510,588 (0.7%). Expenditures (including all budget adjustments subsequent to adoption) are expected to total $2,335,886 (3.3%) under the adjusted budget (the adjusted budget includes City Council-approved amendments during the current year as well as encumbrances carried forward from the prior year).
When comparing estimated year-end revenues and expenditures irrespective of the budget, revenues are expected to exceed expenditures by $3,034,881.
Adopted General Fund Surplus $613,383
Net Budget Adjustments to date (374,976)
Revenues exceeding Budget 510,588
Operating Expenditures under Budget 1,164,191
Property & Equipment under Budget 1,171,695
Projected General Fund Surplus $3,084,881
Nearly $1.2 million of this anticipated surplus is due to delayed procurements of one-time capital expenditures, which are expected to be carried forward into FY 2018-2019, including $928,585 for the Enterprise Resource Planning (ERP) system.
General Fund revenues are generally stable, with modest growth expected overall. Savings are predicted in several expenditure categories as cost control remains a priority.
General Fund Revenues
The following are highlights of several key revenue areas. Please see Table 2 on Attachment #1 for General Fund Revenues.
Property Tax
Property tax is the General Fund’s largest revenue source, accounting for approximately 40% of total revenue. Property Tax as a category is anticipated to come in $778,631 (2.6%) over budget and $2,073,924 (7.4%) ahead of last year. Net taxable assessed property values have grown 7.0% from fiscal year 2017, reflecting the continued strength of the Manhattan Beach housing market. This continues the trend from the prior year’s growth of 7.1%.
FY 2015 Revenue: $24,435,184
FY 2016 Revenue: $26,344,276
FY 2017 Revenue: $28,215,712
FY 2018 Budget: $29,511,005
FY 2018 Full Year Estimate: $30,289,636
Real Estate Transfer Tax
Real Estate Transfer Tax revenue is derived from a charge of fifty-five cents per $500 of sales price, split evenly between the City and the County of Los Angeles. Available data for single-family home sales indicate strong volume over the last two calendar years (Source: HdL 2017-18 Property Tax Data).
Detached Single Family Residential Home Sales by Calendar Year:
Sales Median Price
2015: 328 $2,067,500
2016: 365 $2,110,000
2017: 379 $2,369,400
Median single-family sales prices continued to reach new heights in 2017, increasing to nearly $2.4 million. Based on transfer tax collections from all properties (residential and commercial), collections are expected to outperform budget by $100,000 (16.7%). This conservative estimate also takes into account the new tax reform law and its potential impact on future high-value home sales.
FY 2015 Revenue: $720,826
FY 2016 Revenue: $792,829
FY 2017 Revenue: $756,049
FY 2018 Budget: $600,000
FY 2018 Full Year Estimate: $700,000
Sales Tax
Sales Tax, the city’s second largest General Fund revenue source (13% of total revenue) is expected to remain flat. Although FY 2016 included a one-time accounting accrual adjustment, overall declining retail “Point of Sale” returns and low fuel prices (which have recently increased) have contributed to the sluggish growth. Modest growth projections made in consultation with the City’s sales tax consultants indicate Sales Tax for the current year should come in at approximately $9.0 million, the budgeted amount. Among the bright spots in retail sales, the City’s restaurants and hotels have continued to perform well, and with remodeling of the Westdrift (Marriott) Hotel and Manhattan Village Mall underway, these improvements are expected to generate modest growth in the future.
FY 2015 Revenue: $9,171,517
FY 2016 Revenue: $9,348,605
FY 2017 Revenue: $8,962,617
FY 2018 Budget: $9,000,000
FY 2018 Full Year Estimate: $9,000,000
Transient Occupancy Tax
Also known as the hotel bed tax, the City levies a 10% Transient Occupancy Tax (TOT) on hotel and motel rooms with 8.5% of the rate going to the General Fund. The remaining 1.5% goes to the Capital Improvement Fund to fund Police & Fire Facility debt service and future projects. This year, TOT revenues have been negatively impacted by significant remodeling activity underway at the Marriott Hotel (West Drift). In total, TOT revenues for the full year are expected to be $276,500 (-6.1%) below budget and $278,870 (-4.0%) below the prior year. With the imminent completion of Westdrift remodeling, TOT revenues are projected to return to normal levels.
General Fund
FY 2015 Revenue: $3,955,209
FY 2016 Revenue: $4,336,943
FY 2017 Revenue: $4,428,868
FY 2018 Budget: $4,526,500
FY 2018 Full Year Estimate: $4,250,000
Plan Check and Building Permit Fees
Taken together, Building Plan Check and Permit fees collected in FY 2017-18 are anticipated to exceed budget by $462,300 (14.7%) and be higher than the prior year by $86,248 or 2.5%.
In the first six months of the fiscal year, the volume of plan checks is trending 15.9% higher than the same period in the prior year. However, the total valuation of the plan checks is lower by about $31.4 million (-22.6%). The prior year spike in Plan Check fees was due to a few large submittals, including the Manhattan Village Mall. Plan check fee revenues in the current fiscal year are expected to exceed budget by $400,000 (28.6%) due to the continued high volume of projects.
Plan Check
FY 2015 Revenue: $1,410,029
FY 2016 Revenue: $1,063,654
FY 2017 Revenue: $1,893,389
FY 2018 Budget: $1,400,000
FY 2018 Full Year Estimate: $1,800,000
Building permit fee revenues are expected to come in 3.6% above budget at $1,800,000. As with plan checks, the number of building permits issued in the first six months of the fiscal year is higher than the prior year by 23.2% (140). The valuation is also higher as a result of the aforementioned large projects reaching the permitting stage.
Building Permits
FY 2015 Revenue: $1,196,590
FY 2016 Revenue: $1,696,882
FY 2017 Revenue: $1,620,363
FY 2018 Budget: $1,737,700
FY 2018 Full Year Estimate: $1,800,000
Business License Tax
Business license tax, which is generally calculated upon a business’ gross receipts, is conservatively estimated to come in slightly higher than last year’s collections. This revenue showed resilience against the troubled economy and has remained level or had slight increases year over year. Analysis of previous years showed this revenue is somewhat inelastic to the ebbs and flow of the economy. Business license tax has remained steady, likely due to the fact that around 82 businesses pay the maximum gross receipts business license, and changes in their gross receipts are unlikely to impact their total license tax.
FY 2015 Revenue: $3,376,112
FY 2016 Revenue: $3,475,794
FY 2017 Revenue: $3,658,194
FY 2018 Budget: $3,600,000
FY 2018 Full Year Estimate: $3,600,000
Interest Income
The City invests its idle cash in a number of instruments ranging from the state-run Local Agency Investment Fund and corporate debt, to U.S. Treasury notes, Governmental Agencies and Certificates of Deposit. During the last recession and associated economic problems, interest rates declined dramatically and remained at very low levels for several years. Recent moves by the Fed have increased rates slightly, resulting in the City’s maturing investments to be reinvested at slightly higher rates. The portfolio was recently yielding 1.615% in January 2018, up from 1.236% one year prior. Additional rate increases are predicted in 2018.
FY 2015 Revenue: $443,721
FY 2016 Revenue: $589,596
FY 2017 Revenue: $701,523
FY 2018 Budget: $600,000
FY 2018 Full Year Estimate: $833,790
Other General Fund Revenues
Other revenues worth mentioning include:
Miscellaneous Revenues
This category included budgeted lease-purchase proceeds that will eventually result when the City finances a new Enterprise Resource Planning (ERP) system to replace the current outdated Finance and HR systems. A multi-departmental team of City staff is diligently working to move this project forward, but the anticipated revenue of $830,000 was eliminated from the year-end estimate due to the timing of the lease/purchase which will likely occur in FY 2018-2019. The project costs, and associated lease-purchase financing components, will be included in the FY 2018-19 Proposed Budget as a carry-forward item.
The Miscellaneous Revenue category also includes Workers’ Compensation Salary Continuation, which is a reimbursement to the General Fund for wages paid to injured employees receiving benefits. Based on recent workers’ compensation claim activity in FY 2017-18, reimbursement revenue is projected to be come in over budget by $100,000 or 16.7%. Although this means more General Fund revenue, ultimately this is a negative indicator that workers’ compensation claim activity is higher than the conservative estimates based on prior year experiences.
Parking Citations
Prior to the adoption of the FY 2016-17 biennial budget, parking citation fees were increased by $5 in alignment with other comparable cities. Hence, the budget for parking citation revenue was increased in anticipation of higher revenues at a similar volume. However, citation volume has been down due to several factors, including Community Service Officer staffing and battery issues with the smart meters. Although the budget projection has not been realized, General Fund citation revenues are projected to end the year in line with the prior year at approximately $2.4 million.
While a General Fund revenue source, a portion of the revenue from Parking Citations ($4 of all citations except expired meters) goes to the CIP Fund. The CIP fund utilizes the moneys to pay debt service on the Police/Fire facility and to fund other general CIP projects.
General Fund Expenditures
Mid way through the year the City has expended and encumbered $32.9 million or 46.4% of the total adjusted budget allocation. After a thorough review by all departments, General Fund expenditures are expected to end the year $2.3 million or 3.3% under budget. Table 3 on Attachment #1 breaks down General Fund Expenditures by category.
Salaries and Wages overall are expected to be over budget at the end of the fiscal year by $370,989 or 1.1%. Within this category, regular salaries are projected to be under budget by $442,837 or 3.3%, mainly due to open positions. The City has several recruitments underway for key positions, but two vacancies, Assistant City Manager and Economic Vitality Manager, will remain unfilled for the rest of the fiscal year (these positions will not be re-budgeted going forward). Part-time salaries are estimated to end the year over budget by $189,958 or 8.9%. This variance is mainly attributable to three departments with part-time staffing overages. In Parks and Recreation, demand has increased for several revenue-generating programs and additional part-time staffing has been necessary to maintain an appropriate staff-to-participant ratio. Additionally, more weekend and evening programs have been developed for Older Adults in conjunction with the Senior Advisory Committee (e.g. Coffee, Technology and You and a Caregiver Support Group). The Police Department has temporarily increased part-time staffing hours to cover for vacant full-time positions. Several positions are in the recruitment phase; as such, part-time background investigators have also been working extra hours. Lastly, temporary part-time positions in Community Development exceeded the budget allotment; these positions have since been eliminated.
Sworn salaries (Police and Fire) are trending over budget for the full year, by 1.8% or $230,324, mainly due to full staffing levels in the Fire Department and the 4.0% vacancy factor included in the budget. The Police Department is currently backfilling its multiple open positions with overtime hours to maintain current service levels. Police Department Sworn Overtime is projected to end the year over budget by $351,320 or 27.3%. Fire Department overtime costs are currently trending slightly over budget by $44,618 or 1.6%.
Employee Benefits are estimated at 3.8% or $550,956 under budget for the full year. Most significantly, the City’s employer pension contributions are expected to be under budget for both regular employees (12.4% or $246,281) and sworn employees (5.5% or $244,123) due to vacancies. It should be noted this savings does not exactly correlate to the activity in the Salaries & Wages category since 1) exiting employees may “cash out” accumulated leave balances and 2) overtime wages are not ”pensionable” wages. In addition to vacancies, Employee Benefits savings can also be attributed to some of the City’s Group Medical Insurance plans experiencing lower premium increases than expected.
Within the Contract & Professional Services category, costs were included to contribute to the RCC’s CAD System upgrade. Although small initial payments have been paid, $272,500 is expected to be due next fiscal year as the RCC completes their system upgrades. This amount will be re-budgeted in FY 2018-19 within the Police and Fire Department budgets.
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. Savings in Internal Service Charges are mostly due to savings realized in the Fleet Maintenance Fund that gets spread throughout the using departments.
Property and Equipment will not be fully expended by year-end, and is expected to come in under budget by $1,171,695. Most of this amount is related to enterprise-wide technologies that will replace the City’s permitting software and Financial/HR software systems. The unspent budgets for these projects will be re-budgeted in FY 2018-19 for completion.
Savings of about $155,000 in debt service is also being realized this year due to the delay in the implementation of the ERP System. As explained in the Miscellaneous Revenues section, lease-purchase financing for the ERP System was included in this year’s budget. Since this financing will not occur in the current fiscal year, the budgeted capital financing principal and interest payments will not be expended.
Overall, General Fund expenditures are trending 3.3% or $2,335,886 under budget.
Other Funds
Other City fund revenues and expenditures have been reviewed. Halfway through the fiscal year, other funds are trending at appropriate levels given historical spending trends and identified spending patterns.
Worth noting are other Funds receiving subsidies from the General Fund, which diverts resources from public safety and other general governmental services. Over the next five years, General Fund subsidies to the Storm Water and Street Lighting & Landscape District Funds are projected between $1 million and $2 million per fiscal year.
The Street Lighting and Landscaping Fund currently has no fund balance and assessments are inadequate to fund operations or provide for future capital needs. As a result, the General Fund subsidizes this fund every year, budgeted at $223,904 in FY 2017-18.
The General Fund’s subsidy to the Storm Water Fund is budgeted at $982,355 in FY 2017-18. This fund is encountering higher operating costs due to legislative action to clean storm water runoff and limits, which reduces funds for highly needed capital improvement projects. While these issues require a Proposition 218 vote, it is most appropriate that the General Fund no longer support these ancillary services.
In addition to these transfers, the City Council approved a phased transfer plan from the General Fund Unreserved Fund Balance to the Insurance Fund on November 17, 2015 to correct a fund imbalance that was a result of higher than expected claims activity during FY 2014-2015. Transfers in the amount of $667,000 occurred in fiscal years 2015-16 and 2016-17 and the final transfer of $667,000 will occur this fiscal year. Due to increased activity in liability claims, year-end expenditure estimates total $6.8 million, which is $326,337 above budget but $306,619 less than the prior year actual. Staff is monitoring this trend and will recommend a budget adjustment later in the fiscal year if necessary.
FY 2017-18 MID-YEAR BUDGET SUMMARY
Overall, Mid-Year results are trending as expected. General Fund revenues are stable and reflective of the local economy. Revenues are expected to outpace budget by $510,588 while expenditures are expected to come in $2,335,886 under budget. This can be attributed to the increases in Property Tax, Building Plan Check and Permit fees as well as savings in Employee Benefits, Contract Services and Equipment. Irrespective of budget, revenues are expected to exceed expenditures at year-end. Although economists are not predicting a recession in the next two years, the City is preparing for more challenging times with only minimal growth in revenues compounded by significantly rising pension costs. Therefore, a continual focus is streamlining costs while maintaining the levels of service provided to the community.
BUDGET DEVELOPMENT FOR FY 2018-2020 BIENNIAL BUDGET
With respect to the budget for fiscal years 2018-19 and 2019-20, two significant community engagement initiatives have already concluded. On January 30, 2018, the City held a Community Budget Social providing a fun and interactive way for attendees to learn about and address their budget priorities with City staff. After receiving information on key operating areas (Attachments #2 and #3), attendees were given the opportunity to ask questions and provide input on which areas to reduce, maintain or enhance in future years.
To help attendees relate to the City’s operating budget areas, City services were defined in four areas: Protect, Preserve, Support and Shine.
Protect Public Safety and Emergency Services to protect life and property.
Preserve Infrastructure & Investments to preserve our quality of life
Support City-wide Internal Support Services
Shine Services & Programs that make Manhattan Beach shine.
Attachments #2 and #3 further describe these operational areas as well as provide the associated costs and staffing needs for current service levels.
Comment cards received during the Social included the following information:
Budget Area Comment
SUPPORT Reduce. City Manager should not have subsidized housing. Finance and HR seem bloated (# of staff).
PROTECT Reduce. While I love the responsiveness and value it, the pension payments to support are just too high.
SHINE Enhance Dial-A-Ride - Extend hours to allow late diners to ride home.
SHINE Reduce. Dial-A-Ride and Cultural Arts are underutilized and should be reduced.
SHINE Enhance Sports & Aquatics and Begg Pool.
SHINE Enhance parks, fields, tennis courts maintenance so that we really shine. Polliwog is a shining star but acknowledge its value.
SHINE Enhance access to all fields during the day.
PRESERVE Maintain current service levels.
As these comments indicate, opinions of attendees varied quite a bit. Attendees voted to maintain or enhance almost all budget areas. No budget areas received a majority of votes to reduce spending, which is not realistic if all other areas are maintained or enhanced and revenues remain limited. Although no hard data came out of the meeting given the wide-ranging responses, the Community Budget Social served to provide an engaging way for community leaders to learn about budgetary challenges and discuss their priorities with others.
Further information was gathered using Open City Hall. This online Budget Survey was publicized and available in January and February. Responses are listed in Attachment #4.
Taken together, this input may assist to inform the City Council of trending topics within the Community related to City spending.
PUBLIC OUTREACH/INTEREST:
Future opportunities to provide input on the FY 2018-2020 Biennial Budget include May 1st, when the Proposed Budget is presented to the City Council, and subsequent City Council Budget Study Session(s). Tentative dates being held for one or more Budget Study Sessions include May 8, 10, 17, and 22. The public hearing and formal budget adoption will occur in June.
Questions and Comments may also be submitted to Budget@citymb.info.
ENVIRONMENTAL REVIEW
The City has reviewed the proposed activity for compliance with the California Environmental Quality Act (CEQA) and has determined that there is no possibility that the activity may have a significant effect on the environment; therefore, pursuant to Section 15061(b)(3) of the State CEQA Guidelines the activity is not subject to CEQA. Thus, no environmental review is necessary.
LEGAL REVIEW
The City Attorney has reviewed this report and determined that no additional legal analysis is necessary.
Attachments:
1. General Fund Year-End Estimates for FY 2017-2018
2. Community Budget Snapshot
3. Operational Budget Areas
4. Open City Hall Budget Survey Results
5. PowerPoint Presentation