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 Mid-Year Budget Report; Results of Community Budget Priorities Workshops and FY 2016-2018 Budget Principles and Policies (Finance Director Moe).
RECEIVE REPORT; DISCUSS AND PROVIDE DIRECTION
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_________________________________________________________
Recommended Action
RECOMMENDATION:
Staff recommends the City Council: a) receive the Mid-Year Budget Report for Fiscal Year 2015-2016; b) receive a report on Community Budget Priorities Workshops; c) review budget principles and policies for fiscal years 2016/17 and 2017/18; and d) discuss and provide direction.
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FISCAL IMPLICATIONS:
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 $3.0 million at fiscal year-end.
While current trends indicate the City’s General Fund operating budget will finish Fiscal Year 2015-2016 with expenditures exceeding revenues by $2,028,080, this is primarily due to a one-time reimbursable expenditure outlay; the City maintains a balanced budget with on-going revenues exceeding on-going expenditures. Other Funds are trending as expected.
Without the one-time reimbursable loan and carryforward encumbrances, but with other one-time budget adjustments, the General Fund is projected to generate a surplus this year of $1,121,202.
BACKGROUND:
The Fiscal Year 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 revenues received and 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. That 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 year that won’t occur until this year) which have been carried forward from FY 2014-2015 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. These additional one-time expenditures partially utilize unreserved General Fund Balance, with the exception of the one-time temporary short-term home loan for which City Council approved the temporary use of the Economic Uncertainty Reserve (which will be replenished as loan repayment occurs):
Date Description Amount
08/18/15 Art Lab Youth Art Education Initiative $24,000
10/06/15 As Needed Engineering Services 60,000
10/06/15 El Nino Storm Preparation 333,700
10/20/15 Outreach for No-Smoking in Multi-Family Units 7,000
11/17/15 Temporary, Short-Term Home Loan 2,200,990
01/05/16 Urban Forest Master Plan 26,980
$2,652,670
As Council is aware, City Council approved a one-time bridge home loan for the Assistant City Manager, which is a short term loan for which the City receives principal payments, and interest payments at rates above the City’s liquid cash investment rate. This loan is secured and collateralized with real property, and will be fully repaid in the short term, within 3 years or less.
Collectively, these budget adjustments result in a mid-year projection of estimated General Fund expenditures exceeding revenues for the Fiscal Year by $2.0 million, primarily due to the short term, secured home loan. As a point of reference, this projection is similar to what occurred in FY 2010-2011 mid-year report when the City assisted the former City Manager with his home purchase utilizing General Fund dollars.
It is important to recognize that the $2.2 million loan, while required to be reported as an expenditure this fiscal year since, in essence, the check was written and the funds loaned, is also an asset on the City’s balance sheet as a note receivable for that amount, therefore, the fund balance is unaffected by the loan. It is equally important that while we have used a portion of fund balance for other one-time expenditures this year, we are projecting a year-end unreserved fund balance in the General Fund of $3.0 million, this in addition to the 20% financial policy reserve and $1.8 million in Economic Uncertainty Reserve.
Even after factoring these budget adjustments, structurally, the City maintains a balanced budget with on-going revenues exceeding on-going expenditures.
As a result, the sources and uses of General Fund moneys are projected as follows for FY 2015-2016:
Revenues:
Estimated Year End Revenues $64,604,896
(Budgeted Revenues = $63,652,500)
Expenditures:
Budgeted Expenditures $63,565,162
Adjustments:
Add: Encumbrances Carried Forward 948,292
Add: Budget Adjustments (listed above) 2,652,670
Less: Expenditure Savings Based on Trends ( 533,148)
Estimated Year End Expenditures $66,632,976
Expenditures in Excess of Revenues ($ 2,028,080)
Without the one-time reimbursable loan and carryforward encumbrances, but with the other one-time budget adjustments listed above, the General Fund is projected to generate a surplus this year of $1,121,202.
It is important to note that the policy reserve of 20% of General Fund expenditures ($12.7 million) is maintained. The economic uncertainty reserve is now estimated at $1.8 million after the short-term home loan disbursement. 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 $3.0 million at fiscal year-end. Staff will provide updated fund balance estimates during the third quarter update in May.
See Attachment #1, Table #1, for General Fund Projections.
DISCUSSION:
Overall, the fiscal year 2015-2016 General Fund budget-to-actuals through mid-year are performing as expected. Revenues are estimated to exceed the adjusted budget by $917,902 (1.4%). Expenditures (including all budget adjustments subsequent to adoption) are expected to total $533,148 (0.8%) 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, expenditures are expected to exceed revenues by $2,028,080. Expenditures include a non-recurring outlay of funds related to the temporary, short-term bridge home loan approved by the City Council in November. Accordingly, revenues were also adjusted to account for principal and interest monthly payments due to the City.
Last year’s improvement continues in several of the City’s major revenues, including property tax and transient occupancy tax. With revenues on target, 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. The forecast is for Property Tax as a group to come in $318,430 (1.2%) over budget and $1,831,247 (7.5%) ahead of last year. Net taxable assessed property values have grown 8.14% from fiscal year 2015, reflecting the continued strength of the Manhattan Beach housing market. This continues the trend from the prior year’s growth of 5.5%.
FY 2013 Revenue: $21,626,175
FY 2014 Revenue: $23,353,741
FY 2015 Revenue: $24,435,184
FY 2016 Budget: $25,948,000
FY 2016 Full Year Estimate: $26,266,430
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 a decline in volume from calendar year 2014 to a level consistent with 2010 (Source: HdL 2015-2016 Property Tax Data).
Residential Home Sales by Calendar Year:
2015 Sales through November: 387
2014: 488
2013: 500
2012: 492
2011: 429
2010: 394
Although the number of sales is down, the median single family sales price increased to $1.92 million in 2015, up 2.78% from the prior year. Based on transfer tax collections from all properties (residential and commercial), collections are expected to be 11.9% above the prior year, and to outperform budget by $31,313 (4.0%).
FY 2013 Revenue: $587,399
FY 2014 Revenue: $642,718
FY 2015 Revenue: $720,826
FY 2016 Budget: $775,000
FY 2016 Full Year Estimate: $806,313
Sales Tax (revised from 2-16-16 Council report)
Sales Tax, the city’s second largest General Fund revenue source (15% of total revenue) has continued to be somewhat anemic. Flat or declining retail “Point of Sale” returns, plunging fuel prices and the loss last April of one of the City’s biggest sales tax producers (Dewitt Petroleum) have all contributed to the sluggish growth. The FY 15-16 budget of $8,450,000 was a conservative estimate based on information at the time. However, new projections based on the latest information, as well as in consultation with the City’s sales tax consultants, indicate that sales tax for the current year should come in at approximately $9.1 million, $62,457 (-.7%) below last year, but $659,058 (7.8%) above budget (this is different than what was presented in the February 16, 2016 report and reflects an increase of $439,230 in expected sales tax revenue). Among the bright spots in retail sales, the City’s restaurants and hotels have continued to perform well at 6.5% over the prior year-to-date collections.
FY 2013 Revenue: $9,301,731
FY 2014 Revenue: $9,135,807
FY 2015 Revenue: $9,171,515
FY 2016 Budget: $8,450,000
FY 2016 Full Year Estimate: $9,109,058
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% 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. Up until December 31st, the City was also collecting the TOT on short-term vacation rentals. Although the City will not collect any more revenue from short-term rentals (which are no longer permitted in the Municipal Code), total TOT revenues for the full year are expected at 5.4% above budget and 8.7% above the prior year.
General Fund
FY 2013 Revenue: $3,221,069
FY 2014 Revenue: $3,565,093
FY 2015 Revenue: $3,955,209
FY 2016 Budget: $4,080,900
FY 2016 Full Year Estimate: $4,300,000
Building Permit & Plan Check Fees
Building-related fees were updated last July with the Cost Allocation and User Fee Study. With the new tiered fee structure, the City is collecting more revenue from Building Permits, while Plan Check has declined. Taken together, Building Permit and Plan Check fees collected in FY 2015-2016 are anticipated to be higher than the prior year by $408,380 or 15.7%.
In the first six months of the fiscal year, the volume of plan checks is trending the same as the prior year. Building permit fee revenues are expected to come in at budget ($1,795,000), while plan check fee revenues are expected to come in under budget by $409,000 (25.1%) due to lower cost recovery charges and exclusion of fees anticipated from the Manhattan Village Mall remodel (when the budget was adopted last June, 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). However, with the project delayed, the timing of the plan check submittal is uncertain. This accounts for half of the anticipated shortfall.
Building Permits
FY 2013 Revenue: $ 872,218
FY 2014 Revenue: $1,031,410
FY 2015 Revenue: $1,196,592
FY 2016 Budget: $1,795,000
FY 2016 Full Year Estimate: $1,795,000
Plan Check
FY 2013 Revenue: $1,041,846
FY 2014 Revenue: $1,409,954
FY 2015 Revenue: $1,410,028
FY 2016 Budget: $1,629,000
FY 2016 Full Year Estimate: $1,220,000
Business License Tax
Business license tax, which is generally calculated upon a business’ gross receipts, is estimated to come in 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. Despite modest declines and increases in businesses’ total gross receipts, business license tax has remained steady, likely due to the fact that around 70 businesses pay the maximum gross receipts business license, and changes in their gross receipts are unlikely to impact their total license tax.
FY 2013 Revenue: $3,122,503
FY 2014 Revenue: $3,140,273
FY 2015 Revenue: $3,376,113
FY 2016 Budget: $3,165,000
FY 2016 Full Year Estimate: $3,390,000
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 have remained at very low levels. As a result, the City’s maturing investments are reinvested at the current low rates. However, the portfolio was recently yielding 1.049%, up from .904% one year ago, and additional rate increases are predicted in 2016.
FY 2013 Revenue: $578,873
FY 2014 Revenue: $546,077
FY 2015 Revenue: $443,720
FY 2016 Budget: $516,350
FY 2016 Full Year Estimate: $489,669
Other General Fund Revenues
Other revenues worth mentioning include:
Miscellaneous Revenues
The Miscellaneous Revenue category 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 2015-2016, reimbursement revenue is projected to be come in under budget by $236,425 or 38.2%. Although this means less General Fund revenue, ultimately this is a positive indicator that workers’ compensation claim activity is down compared to prior year experiences.
Parking Citations
In July, 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 is down in the first half of the fiscal year. Downtown parking revenues and citations were impacted by the streetscape project last fall. Several meters had to be temporarily removed for concrete sidewalk replacement during the project, which took away both meter revenue and the expired meter citations. Although the budget projection has not been realized, General Fund citation revenues are now projected at $2.5 million, which exceeds FY 2014-2015 revenue by $213,372 or 9.3%.
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
Half way through the year the City has expended and encumbered $31.6 million or 47.0% of the total adjusted budget allocation. Please see Table 3 on Attachment #1 for General Fund Expenditures.
Within the Salary and Wages category, regular salaries are projected to be under budget by $169,431 or 1.4%, mainly due to open positions. Part-time salaries are also estimated to end the year under budget by $92,146 or 4.6%.
Sworn salaries (Police and Fire) are trending over budget for the full year, by 4.0% or $514,679, due to near full staffing levels in the Police Department, a 4.6% vacancy factor included in the budget, and Fire Department Overtime. 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 and higher overtime costs are prevented.
Within the Fire Department, one vacant firefighter position and one employee out on injury leave have caused a need for additional overtime hours. Overtime costs in the Fire Department are incurred when there are vacancies (vacations, sickness, injuries, training, etc.) that must be filled by other existing fire personnel in order to operate at the minimum level of staffing. Overtime costs are currently trending in line with FY 2014-2015 but are over the current year budget by $288,122 or 13.1%.
Employee Benefits are estimated at 0.7% or $93,685 under budget for the full year. In addition to vacancies, this change can be attributed to Group Medical Insurance trending $91,634 (2.8%) under budget due to medical premium increases rising at a slower pace than budgeted.
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 $249,700. Much of these costs are related to Information Systems Master Plan projects which are not expected to be completed by year end (e.g. Financial and Human Resources software system upgrades). Any remaining unspent budgets for these projects will be re-budgeted for completion in FY 2016-2017.
Overall, General Fund expenditures are trending 0.8% or $533,148 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 Police, Fire 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 $217,649 in FY 2015-2016.
The General Fund’s subsidy to the Storm Water Fund is budgeted at $841,266 in FY 2015-2016. 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 recently approved a phased transfer plan from the General Fund Unreserved Fund Balance to the Insurance Fund on November 17, 2015. Transfers in the amount of $667,000 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. Fortunately, this spike in claims activity has not continued. Halfway through the fiscal year, the Insurance Reserve Fund has expended 55% of budgeted appropriations. Year-to-date expenditures in the Fund total $3,448,337 through December, compared to $4,457,992 a year ago.
FY 2015-16 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 $917,902 while expenditures are expected to come in $533,148 under budget. This can be attributed to the increases in property tax and hotel bed tax (TOT) as well as savings in Employee Benefits, Utilities, Internal Service Charges and Equipment. Irrespective of budget, expenditures are expected to exceed revenue at year end, mainly due to one-time nonrecurring expenditures. A continual focus is streamlining costs while maintaining the levels of service provided to the community.
The next budget status report will occur in May 2016 for the 3rd quarter results.
COMMUNITY BUDGET MEETINGS RESULTS; BUDGET POLICIES AND GOALS FOR FY 2016-2017/2017-2018 BUDGET
With budget development for fiscal years 2016-2017 and 2017-2018 underway, staff is focused on incorporating community input and setting policies and goals for the coming two-year budget cycle.
Community Budget Meetings
Two Community Budget Priorities Workshops were held in January. On January 19, a workshop was held specifically for the Older Adults Program. Additionally, the broader community was invited to attend an evening workshop on January 21. To collect input, handwritten worksheets were used as well as new technology to collect data through a “live” survey using smartphones and tablets. Feedback collected during the workshops is presented with this report (included in Attachment #2). An Open City Hall survey was also available through February 29, 2016, the results of which are included (through February 19, 2016) with this report.
The workshops provided an opportunity for the community to share opinions about the City budget priorities early in the development of the FY 2016-2017 and FY 2017-2018 budget. Each session started with an overview of the current resource allocation, and the challenges the City faces when resources are limited. There were a total of sixty-five participants at the two sessions.
Each workshop session provided information on the City’s seven functional areas, along with the FY 2015-2016 allocation of funds:
Functional Area FY 2015-2016 Budget Percentage
Police and Fire Services $37.1 million 31%
Streets and Facilities 29.6 million 24%
Water, Storm Water, Waste Water 17.7 million 15%
Support Services 18.6 million 15%
Parks and Recreation 8.8 million 7%
Community Development 4.6 million 4%
Environmental Programs 4.5 million 4%
Totals $120.9 million 100%
In most functional areas, the majority of responses from participants indicate that the City’s funding of these activities is “about right” (rankings ranged from a high of 79% for safety services to low of 50% for support services). Community Development had a split majority of participants indicate that funding is either “too low” (36%) or “about right” (36%). A majority (57%) of respondents indicate that Water, Storm Water and Waste Water activity funding is “too low.” When asked what areas of the budget should be reduced to fund other areas, support services (Finance, Human Resources, Information Technology, City Clerk, etc.) were most often identified, although that is a common response at other budget workshops conducted in other agencies.
At the conclusion of each session, participants evaluated the sessions; 92% rated the overall experience as “good,” “very good,” or “excellent;” 91% indicated that the meeting addressed their concerns about the budget and priorities; and 87% rated the workshop materials as “good,” “very good,” or “excellent.”
Open City Hall
In addition to the workshops, a Community Budget Priorities Survey was posted to Open City Hall on the City’s website. Thirty-four people “attended” the survey information, with six forum responses (Attachment #3 lists the results).
Among the responses to what participants would like to see in Manhattan Beach in the next two years:
• Safer streets for kids to ride bikes to beach, school or friends’ homes
• The City run more efficiently with less staff and more self-reliant citizens
• Reduced retirement benefits for employees
• Control of mansionization and lot mergers
• Increased citizen participation
• Reduced developer and realtor influence
• New Fire Station on east side of City
• New swimming pool to replace Begg Pool
Participants were also asked what they would like to see in Manhattan Beach in the next ten years:
• A pedestrian-only area in the Downtown
• New Joslyn Center with more classrooms and complete gym for increased older adults programs
• Less trying to satisfy everyone
• Less “smothering” government
• Stick to basics
Other comments received included:
• Not in support of a new City Hall. Remodeling is preferred (2 similar comments)
• Not in favor of a high-rise hotel
Finally, the City received four comments on the email option (budget@citymb.info <mailto:budget@citymb.info>) on the following topics:
• Request for tentative budget study session dates (May 5th, 10th, 12th and 19th subject to change)
• Request to fund water bottle refill stations at Mira Costa ($5,000). Environmental Programs Manager Coffee responded by telephone to discuss.
• Suggestion that City meetings (including the budget workshops) source refreshments from local, small Manhattan Beach businesses, not Costco or Vons
• Request for specific budget revisions resulting from last year’s citizen input at budget workshops.
The budget@citymb.info <mailto:budget@citymb.info> option will remain active throughout the budget process this year for the community to communicate with Council and the staff.
Budget Guiding Principles and Policies; Priorities for FY 16/17 and 17/18
Last year, the City Council adopted a series of Budget Guiding Principles and Policies to aid in the creation of the FY 2015-2016 spending plan (see Attachment #4). The budget guiding principles are high level important goals for the process. These carry forward into the Budget Policies in more detail.
Budget Guiding Principles
• The budget will be created with an eye towards innovation
• We will look for opportunities to create efficiencies, including the use of alternative service delivery models
• Continuation of the City’s long history of fiscal integrity and sustainability will be a cornerstone of the plan
• We will promote civic engagement throughout the process, and provide information in a transparent manner.
• We will invest in our workforce to promote the highest service levels possible
More specifically for this coming budget, staff has added the following emphases and priorities:
• Enhancing available crime prevention tools
• Acquiring, Implementing and Improving technologies utilized to deliver outstanding services
• Planning for major capital improvements and infrastructure and the resources necessary to complete those projects
• Providing the workforce with the appropriate tools to execute services
• Addressing the six pillars of success in the City Council’s Strategic Plan when considering any and all expenditures; utilize performance measurements to communicate goals, results and values
As we commence the process for the new two-year budget (fiscal years 2016-2017 and 2017-2018), budget policies provide the framework under which staff will develop the budget for City Council review and approval. The current Budget Policies are included in the report as Attachment #4. Topics addressed include:
1. Overall Budget Tenets
2. Fiscal Integrity
3. Revenues
4. Internal Service Charges
5. Reporting
6. Civic Engagement
7. Capital Budgeting
Each section addresses important principles including maintaining a structurally balanced operating budget, streamlining of costs, innovation and adaptability, use of one-time revenues, timing of budget reporting updates, methods of communicating with the community, and development of capital budgets.
While many of these Budget Policies are also appropriately contained in the City’s Financial Policies (which are located in the budget appendix), directly tying them to the budget process emphasizes the importance of these principles, and helps guide staff in the preparation.
CONCLUSION
The Proposed Budget for fiscal years 2016-2017 and 2017-2018 will be presented on May 3rd, 2016. Following this presentation, Budget Study Sessions will be held in May before the final budget adoption occurs in June.
Attachments:
1. Fiscal Year 2015-2016 General Fund Mid-Year Results
2. Fiscal Year 2015-2016 Mid Year Budget Review/Community Meetings PowerPoint
3. Open City Hall Results Report
4. Current Adopted Budget Policies