TO:
Honorable Mayor Powell and Members of the City Council
FROM:
Mark Danaj, City Manager
Bruce Moe, Finance Director
SUBJECT:Title
Fiscal Year 2014-2015 First Quarter (July-September) Budget Update Status Report and Implementation of the OpenGov Financial Application (City Manager Danaj).
RECEIVE REPORT; COMMENT
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Recommended Action
RECOMMENDATION:
Staff recommends that the City Council receive and comment on the First Quarter Budget Update Status Report for Fiscal year 2014-2015, and receive a presentation on the implementation of the OpenGov financial application.
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FISCAL IMPLICATIONS:
Staff anticipates that no additional appropriations are necessary at this time.
The programs described later in this report fit within the existing budget and do not impact established reserves. Because the City customarily realizes expenditure savings at year-end, we currently anticipate no additional appropriations at this time (unless otherwise noted). However, as always, depending upon how budgeted expenditures develop during the year, adjustments during the mid-year review may be requested if necessary in order to fund the City Council's directives.
BACKGROUND:
As I complete my first quarter as your City Manager, I continue to be impressed with the City, the organization and the community. There are so many new and exciting opportunities and initiatives that I look forward to implementing under the leadership of the City Council. To that end, and based on the Council's request, I have taken the past four months to assess where we are as an organization and where we would like to be. This has led me to identify some gaps and new opportunities that I believe are crucial at this time, and since I was not the City Manager during this fiscal year's budget deliberations, I wanted to take the opportunity to layout those items. This list of items that is discussed later in the report generally represents items that have either been approved by the Council, or have been discussed as a priority of this Council.
Additionally, in an effort to keep the City Council and community fully informed of the City's fiscal performance, I am instituting 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 "Receive and File" written reports on the agenda, this new format will provide for more interactive discussion.
As discussed later in this report, I will also be launching the City's new OpenGov web application that provides transparency by offering public access to the City's financial performance data, and allows for users to run their own queries.
The new schedule of verbal reports is as follows:
Quarter Months Included Council Agenda
Q1 July-September November 2014
Q2 (mid-year report) July-December February 2015
Q3 July-March May 2015 (w/Proposed Budget)
Q4 (pre-audit*) July-June August 2015
* Fully audited financial statements are presented no later than February 1st after the end of the fiscal year.
DISCUSSION:
The City Council and City 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 2014)
General Fund
The General Fund is performing within expectations. FY 2014-2015 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 16.33% of full year estimates, which is typical for this time frame, while expenditures are at 24.6% of budget. 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 $4,149,623.
Based on these patterns, we offer the following highlights of the City's Q1 financial performance compared to the prior year:
· General Fund revenues totaled $9,746,922. This is an increase of $406,405 (4.4%) from the prior year period. The increase is attributable to Transient Occupancy Tax (+$118,076, 11.9%), Building Permits (+$98,829, 41.6%), Business License Tax (+$56,613, 42.4%) and Sales Tax (+29.545, 1.6%). See Attachment #1 for the list of key General Fund revenues.
o Property tax is the City's most significant General Fund revenue source. Although this first quarter update does not include the major collections of this revenue source given the timing of this report, property tax revenues are now estimated to total $24,358,150 in FY 2014/15 (an increase of $447,000 over the adopted budget). Staff projects this revenue will increase to $25,449,926 million in FY 2015/16, an increase of 4.5%.
o The City's second largest General Fund revenue source, Sales Tax, is estimated to total $9,112,873 in FY 2014/15, growing to $9,386,259 in FY 2015/16, an increase of 3%.The largest contributors to sales tax are from the general consumer goods, restaurants and hotels, and fuel and service stations sectors.
o Building and construction also continue to perform well.
· General Fund expenditures have outpaced last year at this time, increasing by $1,086,841 or 8.9%. Increases by category include Salary and Wages (+$535,814, 8.9%), Contract and Professional Services (+$295,561, 20.4%) and Materials and Services (+$195,279, 42.2%). Internal Service Charges are up $369,939 (27.8%); this category reflects internal charges for Workers Compensation, Liability claims, Information Services and Fleet charge outs. Bond Debt decreased by $321,660 reflecting last year's refunding of debt which included an expenditure for the payoff of existing bonds.
o The Salary and Wages increase is reflective of the new positions added at the beginning of last fiscal year which have since been recruited for and filled (the positions were vacant at this time last year). Additionally, salary adjustments provided to labor groups, including Police, Fire and Management/Confidential which are now in effect, were not in place during the first quarter last year.
o Within the Internal Service Funds, there are two main drivers for the increase: Information Systems Fund charge outs which are up $185,181, and Building Maintenance and Operations Fund charge outs, up $174,016. Both reflect budgeted expenditures for FY 2014-2015. Some variations from year-to-year may be explained by the timing of expenditures. For example, Building Maintenance Fund contract expenditures last year were $25,000 in Q1 compared to $192,046 for the current year.
Lastly, I want to underscore that 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 $15,787,616 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 $9.97 million based on the City's General Fund budget. The City's reserve level exceeds this recommended practice by $5.8 million. In addition, the FY 2014/15 budget anticipates ending the fiscal year with $16,977,937 in fund balance (including the reserves). In the event of another downturn, our reserves should allow us time to adjust service levels to match our resources without major service disruptions.
Other Funds
Other funds appear to be tracking appropriately thru the first quarter, with the exception of the Insurance Fund, which has expended 71.9% of the full year budget. Controlling Liability and Workers Compensation costs continues to be challenging, and staff continues to monitor these costs, which can be unpredictable by nature.
The Insurance fund is made up of Workers Compensation as well as Liability claims activity. Workers Compensation claims ($1,513,974) have outpaced the prior year's Q1 activity ($568,495) by $945,479, an increase of 166%. Liability claims for Q1-2015 of $421,429 are up $328,075 (+350%) over Q1-2014 ($93,354). Additionally, the annual payments for excess insurance premiums ($1,342,429) were made in Q1 and represent 28.5% of the total annual budget. These premiums exceeded budgeted amounts by a net of $253,036 (23%) due to a hardening of the insurance market which was not anticipated (actual premium levels are not always known until after budget adoption).
While it appears that expenditures in this fund may exceed allocated funds, sufficient moneys are available in the Insurance Fund for these costs. While a mid-year budget adjustment may be necessary in order to authorize expenditures, staff does not anticipate the need for an equity transfer (cash from the General Fund) to support these activities.
New City Manager Budget Review
As noted above, I used my first four months as your City Manager to assess where we are as an organization and where I see opportunities. Below are a compilation of items that I have either recommended to the Council or items that have been directed and or/discussed by the Council. As stated earlier, the adjustments I have described fit within the existing budget and do not impact established reserves. Between higher than expected revenues from Property Tax, Sales Tax and Transient Occupancy Tax, and customary expenditure savings typically realized at year-end, we currently anticipate no additional appropriations at this time (unless otherwise noted).
Four Key Strategic Investments/Positions
On October 7th City Council approved the first recommended modifications I made to the adopted FY 2014 - 2015 budget. These included the reinstatement of one position and the addition of three positions which will be filled over the next several months and into next calendar year. Currently, we are recruiting for the IT Director and the Communication/Civic Engagement Manager positions and anticipate filling them by year end. After the first of the year, we anticipate beginning the recruitments for the Economic Development Manager and the Assistant Finance Director.
The salary ranges for these positions were set based upon a salary survey using the benchmark cities we have traditionally used for Management/Confidential positions. The benchmark cities include: Beverly Hills, Culver City, El Segundo, Hawthorne, Hermosa Beach, Inglewood, Newport Beach, Redondo Beach, Santa Monica, and Torrance. The salary ranges established for these positions and approved by City Council are commensurate with the salaries established in the survey cities.
The estimated annual cost to fill all the positions is $847,700 (salary and benefits). The actual salaries at time of appointment will be within the following ranges:
Position Minimum Annual Salary Mid-Point of Range
Comm. Mgr. $119,412 $137,388
Econ. Dev. Mgr. $119,412 $137,388
Asst. Finance Dir. $132,252 $152,160
IT Director $156,648 $180,516
The actual costs for FY 2014 - 2015 are estimated to be $356,400 due to the phasing in of the positions, likely placement of the candidate at the lower end of the range, and the timing of the recruitments.
These costs will be charged to the Salaries and Wages and Employee Benefits expenditure categories. The Communications Manager and Economic Development Manager will be included in the Management Services Department budget; the Assistant Finance Director will be incorporated into the Finance Department budget and the IT Director will be charged to a newly created IT Department.
Downtown Planning
Funding ($125,000) was allocated at the October 21st Council meeting for the services of Urban Land Institute (ULI) to create the vision for the downtown. The product of this activity will flow to the Downtown Plan (or Specific Plan), which has already been budgeted for $100,000 in FY 2014-2015. Depending upon the direction of the City Council on the Downtown Plan (or Specific Plan) additional funds of up to $160,000 (for a total of $260,000) will be needed to complete the project.
These costs will be allocated to the Contract and Professional Services expenditure category within the Community Development Department.
Mills Act
The City Council approved the City's next step in Historic Preservation through the creation of a Mills Act process. Ultimately, the potential creation of a commission and the addition of a half-time employee position to support their activities will be necessary. The estimated annual cost of this is $50,000.
These costs will be allocated to the Community Development Department. Expenditure categories will include Salaries and Wages for part time labor as well as Contract and Professional Services for any consultant assistance.
Strategic Planning and Community Survey
While the Council recently reviewed the City's interim work plan, the ultimate goal is to re-institute a strategic planning process. This would include a community survey. The entire planning process would flow through to the creation of the operating budget in order to fund the plan goals. The estimated cost of the Strategic Planning process is $50,000, which includes the community survey ($30,000) and the facilitator ($20,000).
The Contract and Professional Services expenditure category will be utilized for these costs, which will reside in the Management Services budget.
Employee Survey
Staff is key to the City's organizational development as well as the provision of services. Understanding our employees' opinions and needs will give us insight regarding employee satisfaction, engagement, and other workplace issues. The estimated cost for the survey is $12,000.
The Contract and Professional Services expenditure category will be utilized for this cost, which will be charged to the Human Resources budget.
These are a few of the most important recommended additions to the budget for FY 2014-2015.
Five-Year Forecast
Each year during the preparation of the annual budget, staff presents a five-year forecast of fund balances, revenues, expenditures, transfers, reserves and ending fund balances for the year. Certain assumptions are made regarding revenue and expenditure trends. Known events are factored into the projections, such as changes in pension costs, and debt payoff schedules.
Recently, when the City Council approved the four new positions, staff presented information from a revised five-year forecast which included those new expenditures. At that time, staff confirmed the City's ability to fund the new positions now and in the future.
Staff has once again updated the five-year forecast to include not only the four new positions, but also the additional recommended activities listed above. The updated forecast continues to indicate that these added activities can be accommodated.
However, it is important to note that the trend of reduced General Fund surpluses over the coming five years, which was first presented in the five year forecast at the time of budget adoption, is still projected to continue in this latest forecast (see Attachment #2).
Staff has also highlighted the on-going need for the City Council to address the General Fund subsidies of the Storm Water ($4.6 million) and Street Lighting/Landscaping Districts ($1.4 million) over the next five years. Unabated, eventually these subsidies will require a drawdown of General Fund reserves for Economic Uncertainty. Current projections include the need to access the City's Economic Uncertainty reserve beginning in FY 2016-2017.
OpenGov
In addition to the existing financial reports already generated on a monthly basis, staff is pleased to announce that the City's financial results are now available to the public in graphical format, with the ability to custom query results in several ways. The information includes five years of historical data as well as the current year budget. Users can query revenues, and expenditures by fund, department, expense type (salary, benefits, materials and services) etc. Staff will present an overview of the new application during this Council meeting.
CONCLUSION:
In summary, I am pleased to introduce the new quarterly budget status report, which is designed to provide increased transparency to the City's on-going fiscal performance. Additionally, the launch of OpenGov will further enhance these efforts and provide the public with the opportunity to self-query financial data, both historic and current. The next quarterly update will occur in February 2015 with the mid-year budget report.
Attachments:
1. First Quarter Fiscal Performance Reports
2. Five Year Forecast of General Fund Revenues and Expenditures