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 2016-2017 First Quarter Budget Status Report (Finance Director Moe).
RECEIVE REPORT
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Recommended Action
RECOMMENDATION:
Staff recommends that the City Council receive the First Quarter Budget Update Status Report for Fiscal Year 2016-2017.
Body
FISCAL IMPLICATIONS:
Fiscal implications are discussed within this report. No budget amendments are proposed at this time.
BACKGROUND:
In an effort to keep the City Council and community fully informed of the City’s fiscal performance, we are providing 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 monthly written reports on the agenda, this presentation will provide for more interactive discussion on a periodic basis.
DISCUSSION:
The City Council and 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 2016)
General Fund
The General Fund is performing within expectations. FY 2016-2017 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 15.3% of full year estimates, which is typical for this time frame, while expenditures are at 24.4% of the adopted budget 25% of the way through the year. The following illustrates the revenue and expenditure patterns for the current year as well as the past three fiscal years:
Revenues
Q1-2017 - 15.3%
Q1-2016 - 16.0%
Q1-2015 - 16.5%
Q1-2014 - 16.2%
Expenditures
Q1-2017 - 24.4%
Q1-2016 - 23.7%
Q1-2015 - 24.9%
Q1-2014 - 23.4%
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 $5,613,699. The City maintains sufficient liquidity in the investment portfolio to accommodate these patterns.
Revenues
General Fund revenues totaled $10,396,406. This is an increase of $202,053 (2.0%) from the prior year period. See Attachment #1 for the list of key General Fund revenues.
Property Tax is the City’s most significant General Fund revenue source. This first quarter update does not include the major collections of Property Tax since significant collections don’t commence until December. This revenue source was originally estimated to total $27,822,060 in FY 2016-17. However, recent data indicate that assessed values (which translate into Property Taxes) are up 7.1% from last year. This is expected to result in property taxes exceeding budget by 1.0% or $201,000.
The City’s second largest General Fund revenue source, Sales Tax, is estimated to total $9,300,000 in FY 2016-17. Through the first quarter, revenue is up by $460,391 (25.7%) from the prior year. This significant increase was caused by the unwinding of the State’s “triple flip.” Consequently, the State is no longer withholding 0.25% from the City’s monthly Sales Tax allocation. When the Triple Flip was in place, the City was re-compensated for the withholding amounts in January and May each fiscal year. Hence this first quarter bump in Sales Tax receipts over the prior year will smooth out over the coming months.
It should be noted the City’s taxable sales actually decreased by 2.9% from the prior year quarter. Within the City, the largest contributors to sales tax are from the general consumer goods, restaurants and hotels, and fuel and service stations sectors. Primary drivers of the decrease from the prior year quarter were fuel and service stations, reflecting the downward trend in gasoline prices, and general consumer goods.
Transient Occupancy Tax (TOT) is up 8.7% from last year at this time, continuing the recent trends of strong growth in this revenue that represents about 7% of General Fund revenue.
Real Estate Transfer Tax is down $67,098 (-29.4%) from the prior year quarter mainly due to a bump in FY 2015-16 from the sale of the Residence Inn hotel property and six residential properties priced between $9 and $15 million. At a sale price of $54 million, the Residence Inn transfer of ownership contributed $29,700 to the transfer tax collection in the prior year. (The City receives $0.55 per $1,000 of property value transferred.)
Building Permits are down $293,682 (-46.0%) from the prior year quarter due to an abnormal spike in the first quarter of fiscal year 2015-16 caused by an inadvertent advance collection of Building Permit Fees at the time of Plan Check Services (normally permit fees are collected separately after plan check is completed and the project is approved to proceed). This error was caused by a miscalculation in the permit system which has since been corrected. The advanced payments, which totaled approximately $220,927, were held on account until the subsequent Building Permits were approved, at which time the credit was applied. Hence, the previous year spike smoothed out over the following months. The mid-year budget report will have a clearer comparison with six months of data.
Building Plan Check Fees are down from the prior year quarter by 9.7% or $27,405. As a reminder, the downward trend in Plan Check fees is caused by the fee structure changes approved in 2015 (the updated cost allocation model collects less for plan check services but more for permit issuance which requires more staff resources). At this time, the plan check submittal for the Manhattan Village Mall project is still anticipated in FY 2016-17.
Parking Citations are up $124,564 or 19.7% from FY 2015-16. In July 2015, parking citation fees were increased by $5 in alignment with other comparable cities. However, citations were down in 2015 as a result of the downtown streetscape project last fall. Several meters had to be temporarily removed for concrete replacements during the project, which reduced both meter and enforcement revenue. With the Downtown project completed, parking conditions have normalized and the number of citations issued is on par with the summer months of 2014.
The Other Taxes and Assessments category is down $69,470 (28.6%). This decrease is predominately due to Vacation Rental Transient Occupancy Tax (TOT), which the City no longer collects. To compare, the City collected $47,718 in the first quarter of FY 2015-16.
Revenue from Other Governments is down $46,157 (-32.7%). This category often fluctuates from quarter-to-quarter and year-to-year depending on State mandate claims and grant reimbursements. In the first quarter of FY 2015-16, the City received prior year State mandate claim reimbursements totaling $125,891. To compare, the City has only received $11,298 in State mandate reimbursements in FY 2016-17 to date. This category also includes a $67,147 L.A. County Proposition A grant received for maintenance efforts at Sand Dune Park.
The Use of Property & Money category includes an adjustment for the prior year investment gain. At the end of the fiscal year, this amount will be offset by the current fiscal year’s gain/loss. This category also includes lease payments and rents, which are all trending appropriately.
Expenditures
General Fund expenditures are trending over last year at this time, having increased by $1,761,218 or 12.4% (see Attachment #1). The overall increase is primarily due to personnel costs from an additional payroll date occurring in the first quarter of FY 2016-17. City employees are paid every two weeks resulting in two months of the year having three payroll dates. Since the first quarter comparison includes seven payroll dates instead of six, Salary and Wages are up by $1,129,105 (+16.5%) and Employee Benefits are up by $245,144 (+8.2%). The mid-year budget report will include the same number of payroll dates for a better comparison.
Increases in PERS contributions were anticipated due to known rate adjustments. Workers Compensation charges, which are a fixed amount for the year and billed to departments in an amount equal to one-twelfth of the annual total each month, decreased by $65,505 or -7.5% based on the budget estimated using historical claims activity.
Contract and Professional Services ($145,008, +9.7%) and Materials and Services ($170,251, +30.9%) are also up from the prior year but trending below the 25% threshold of budget three months into the fiscal year.
Internal Service Charges are up $109,167 (+6.0%); this category reflects internal charges for Liability claims, Information Technology Services and Fleet charge outs.
Within the Internal Service Funds, Insurance Fund charge outs are the main driver for the increase. Reflecting budgeted expenditures in FY 2016-17, charge outs from the General Fund to the Insurance Fund are increasing by $895,740 or 45%.
One-time software purchases for the electronic document management system contributed to the decrease ($98,321) in Property and Equipment from the prior year.
Other Funds
Expenditures in other funds appear to be tracking appropriately thru the first quarter, with the exception of the Insurance Fund, which has expended 50.1% of the full year budget. This trend is due to liability, property and workers compensation premiums ($2.0 million, or 30.9% of the total budget) paid annually in August, early in the fiscal year. This will normalize as the year progresses.
Workers Compensation Claims paid through the first quarter of the year are trending at 34.2% of budget. Due to a reduction in required case reserves, which are adjusted every month according to Claims activity and settlements, Liability Claims paid through the first quarter are actually negative. Case reserve levels are evaluated more closely during budget development to determine adequate internal service charges to other funds (e.g. General Fund). Over the last few years, internal service charges have been increasing due to higher Workers’ Compensation and Liability claims. This trend could be reversed if case reserve levels continue to decline.
Revenues in the Water and Wastewater funds are budgeted conservatively in alignment with the City’s successful water conservation efforts. Since FY 2013-14, annual Water Fund revenues have dropped by about $1.8 million. Collections in FY 2016-17 are expected to end the year close to the prior year around $14.5 million. Cost savings from reduced water purchases offset the reduction in revenues. Sufficient moneys are available in both funds to sustain operations as well as fund infrastructure projects in the near term.
As with all funds, revenues and expenditures will continue to be monitored and adjustments recommended if necessary.
In conclusion, the Q1 budget report indicates that actual performance is in line with budgetary estimates through September 2016. The next quarterly update will occur in February 2017 with the mid-year budget report.
PUBLIC OUTREACH/INTEREST:
After analysis, staff determined that public outreach was not required for this issue.
ENVIRONMENTAL REVIEW:
Not applicable.
LEGAL REVIEW:
The City Attorney has reviewed this report and determined that no additional legal analysis is necessary.
Attachments:
1. First Quarter Fiscal Performance Report
2. PowerPoint Presentation