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 Third Quarter Budget Status Report
RECEIVE REPORT; APPROPRIATE PROPOSITION A FUNDS; TRANSFER MEASURE R FUNDS
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Recommended Action
RECOMMENDATION:
Staff recommends the City Council receive the third quarter budget status report.
Body
FISCAL IMPLICATIONS:
Considering year-end projections and anticipated transfers to the Insurance, Street Lighting and Storm Water Funds, staff projects a year-end unreserved General Fund balance of $3.0 million.
While current trends indicate the City’s General Fund operating budget will finish Fiscal Year (FY) 2015-2016 with expenditures exceeding revenues by $1,675,750, this is primarily due to a one-time reimbursable expenditure outlay of $2.2 million; the City maintains a balanced budget with on-going revenues exceeding on-going expenditures.
Through March 2016, the Proposition A Fund, which is the primary fund used for Dial-A-Ride and other transportation related programs, is projected to exceed budgeted expenditures by $139,873. As a result, additional Measure R funds totaling $139,873 need to be transferred to Proposition A, and an additional appropriation of $139,873 is requested in Proposition A to accommodate one-time capital costs and increases in ongoing operational costs.
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. These additional one-time expenditures partially utilize unreserved General Fund balance, with the exception of the one-time 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):
Art Lab Youth Art Education Initiative $24,000
As Needed Engineering Services 60,000
El Nino Storm Preparation 333,700
Outreach for No-Smoking in Multi-Family Units 7,000
Temporary, Short-term Home Loan 2,200,990
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 year-end projection of estimated General Fund expenditures exceeding revenues for the Fiscal Year by nearly $1.7 million, primarily due to the short term, secured home loan.
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 $64,951,900
(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 (538,474)
Estimated Year End Expenditures $66,627,650
Expenditures in Excess of Revenues ($ 1,675,750)
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 $1,473,532.
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 preliminary (pre-audit) fourth quarter update in August 2016.
See Attachment #1, Table #1, for General Fund Projections.
DISCUSSION:
Overall, the fiscal year 2015-2016 General Fund budget-to-actuals through March are performing as expected. Revenues are estimated to exceed the adjusted budget by $1,264,906 (2.0%). Expenditures (including all budget adjustments subsequent to adoption) are expected to total $538,474 (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 $1,675,750. Expenditures include the 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: $26,266,432
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 2011 (Source: HdL 2015-2016 Property Tax Data).
Residential Home Sales by Calendar Year:
2015: 424
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
The city’s second largest General Fund revenue source (14% of total revenue) is trending higher than the FY 2015-16 Budget, which was conservatively estimated after the sudden loss of a major sales tax producer (Dewitt Petroleum) last year. 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 consultations with the City’s sales tax consultants, indicate that sales tax for the current year should come in at approximately $9.2 million, $43,193 (0.5%) above last year, and $764,708 (9.0%) above budget.
The most recent quarter reported (October-December 2015) indicated sales tax receipts were 9.5% lower compared to the same quarter one year prior. This overall decline was due to the significant drop in Fuel & Service Stations that included lower gasoline sales taxes and the loss of Dewitt Petroleum in April 2015. Industry groups performing positively within the City include Restaurants & Hotels, Food & Drugs, and General Consumer Goods.
FY 2013 Revenue: $9,301,731
FY 2014 Revenue: $9,135,807
FY 2015 Revenue: $9,171,517
FY 2016 Budget: $8,450,000
FY 2016 Full Year Estimate: $9,214,708
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 $366,380 or 14.1%.
The volume of plan checks through March (nine months into the fiscal year) remains steady compared to years past. Building permit fee revenues are expected to come in at budget ($1,800,000), while plan check fee revenues are expected to come in under budget by $456,000 (28.0%) 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: $1,800,000
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: $1,173,000
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: $3,450,000
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 1.079%, up from .900% 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 $186,565 or 27.4%. 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 was 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
Nine months into the fiscal year the City has expended and encumbered $47.8 million or 71.1% of the total adjusted budget allocation. Please see Table 3 on Attachment #1 for year-end projections of 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 $83,797 or 4.2%. However, Overtime for Regular Employees is projected to be over by $44,522 or 26%.
Sworn salaries (Police and Fire) are trending over budget for the full year, by 4.0% or $487,680, due to 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. Police Department Overtime costs, including special event details, are currently projected over budget by $59,105 or 4.4%.
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. Not including reimbursable Mutual Aid and Cooperative Assistance, Fire Department Overtime costs are currently trending below FY 2014-2015 spending by $147,210 (8.7%), however full-year estimates are over budget by $245,163 or 16.2%.
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.
Contract and Professional Services are projected to be under budget by $70,769 or 0.8%. Computer Contract Services are estimated to under budget by $195,101, mainly due to unspent funds for the Accela project that will be carried forward into FY 2016-2017 for project completion.
Contract Services is anticipated to be over budget by $145,670 or 2.6%. This category includes costs for City Attorney services and contract employees (including some who have costs fully recovered through fees). Increasing litigation and prosecution cases have contributed to the overage in contract legal and prosecution services. Parks and Recreation Classes for Art, Sports, and other Special Activities (Cooking, Tot Time, Education, etc.) are trending over budget as well. These costs are all revenue generating activities offset by fees. Contract Services, such as for Plan Check and Inspection Services, have also been utilized to balance workloads resulting from staffing vacancies, which is thus offset by savings in Salaries and Benefits.
Materials and Services are expected to be under budget by $260,843 or 9.0%. Included in this category is the City Council Contingency of $100,000 which remains to be spent. Other savings projected in this category include Computer Supplies ($22,255), Departmental Supplies ($44,808), and Training and Conferences ($86,035).
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 $430,725. 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). Remaining unspent budgets for these projects have been re-budgeted for completion in FY 2016-2017.
Overall, General Fund expenditures are trending 0.8% or $538,474 under budget.
Other Funds
Other City fund revenues and expenditures have been reviewed. Three quarters through the fiscal year, most 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 unless changes to assessment fees are approved.
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 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. Lower claim experiences through February resulted in fund expenditures trending below budget; however, a spike in claims activity during March brought fund expenditures in line with appropriations. Through March, the Insurance Reserve Fund has expended 75.3% of budgeted appropriations. Year-to-date expenditures in the Fund total $4,702,009 through March, compared to $5,837,853 a year ago.
Prop A and Measure R Funds
The City’s Transportation programs are funded by both Prop A and Measure R funds. The full cost of these programs is budgeted in the Prop A fund, which then receives a transfer from the Measure R Fund to cover net operations. Full-year estimates indicate a necessary transfer amount of $329,018. When the FY 2015-2016 Budget was adopted, the estimated transfer was $189,145 ($670,395 in Operating Revenue less $859,540 in Operating Expenditures).
One-time capital cost estimates exceed budget by $75,789. An encumbrance was carried-forward from FY 2014-2015 for the purchase of a Dial-A-Ride Bus adding $71,663 to expenditures in FY 2015-2016 (this encumbrance was not considered in the initial Measure R transfer to Proposition A). Additionally, the budgeted purchase of dispatching software (RouteMatch) was greater than initial estimates by $4,115.
Ongoing operational costs are trending over budget by $66,699. Incremental increases in ridership and programming have added ongoing operational costs, mainly in Part-time Salaries and Overtime. These programs and services include:
• CHOICE Program - MBUSD volunteer work program for students with special needs (average 7 round trips per week)
• Adding a fourth bus for the Thursday Lunch Bunch program (pick up and drop off for participants)
• The addition of bus on Fridays for Older Adult programs including: Osher Lifelong Learning Institute, exercise and movie day.
• The addition of second bus on Sundays for increase in Older Adult programs and local church service.
• An increase in riders in wheelchairs which increase time needed for each passenger.
Revenues:
Budgeted Prop A. Fund Revenues $670,395
Budgeted Measure R Transfer 189,145
$859,540
Expenditures:
Budgeted Expenditures $859,540
Adjustments:
Add: Encumbrance Carried Forward $71,674
Add: Capital Equipment 4,115
Add: Operational Cost Overages 66,699
Full-Year Estimate $1,002,028
Revised Net Operating Cost ($329,018)
To accommodate the revised net operating cost, an additional appropriation of $139,873 is recommended. This additional appropriation will impact expenditures in the Prop A Fund as well as the transfer of Measure R funds. This additional transfer amount was incorporated in the Five Year Forecast included in the FY 2016-2017 Proposed Budget. At this time, the Measure R Fund has sufficient fund balance to accommodate projected transfers required to maintain the current levels of service programmed in the Prop A Fund Budget.
FY 2015-2016 Third Quarter Budget Summary
Overall, July through March results are trending as expected. General Fund revenues are stable and reflective of the local economy. Revenues are expected to outpace budget by $1,264,906 while expenditures are expected to come in $538,474 under budget. This can be attributed to the increases in property tax and hotel bed tax (TOT) as well as savings in Employee Benefits, Materials & Services, 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 final FY 2015-2016 budget status report will occur in August 2016 for the 4th quarter results.
PUBLIC OUTREACH/INTEREST:
Not applicable.
ENVIRONMENTAL REVIEW
Not applicable.
LEGAL REVIEW
Not applicable.
Attachment:
1. FY 2015-16 Third Quarter Results