HomeMy WebLinkAbout12/08/1998, 6 - GENERAL FISCAL OUTLOOK FOR 1999-01 council '�°D=12_k l�k
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CITY OF SAN LU I S O B I S P O
FROM: Bill Statler, Director of Finance V��
SUBJECT: GENERAL FISCAL OUTLOOK FOR 1999-01
CAO RECOMMENDATION
Consider the City's general fiscal outlook for 1999-01.
DISCUSSION
Preparation of the five year fiscal forecast for the General Fund is currently underway, and will
be ready for distribution by the later part of January. While we will have a much better handle
on the City's fiscal outlook once we complete this comprehensive review of where we've been
and where we seem to be headed, a few general conclusions can be reached based on our initial
work so far:
Favorable Indicators
■ Strong current financial condition. The City continues to be in strong fiscal position
by state and national standards. As discussed more fully in the annual financial report for
1997-98, the City's General Fund's fiscal performance for the past year compared
favorably with budget projections.
■ Positive economic outlook for the region. The UCSB economic forecast recently
presented a favorable outlook for the coming year. while not as"robust"as 1998, the next
two years should still see continuing growth in the region. However, while improvement
in the regional economy is a positive indicator, it is by no means certain that the City will
share in this. This is especially true given the increased (and successful) competition by
the north and south county areas on our traditional position as the retail center for the
County.
■ No farther state cats—or returns. While no initiatives are on the horizon to restore any
of the State cuts to cities over the past several years (totaling over $1.5 million annually
for the City),there are also no current discussions underway to make further cuts to cities.
Unfavorable Indicators
■ Increasing operating costs. Even if we do not expand or enhance service levels, there
will be still be inflationary cost pressures on operating expenditures, which account for
about 75% of General Fund outlays. The critical question in this regard—which will be
addressed in the five year fiscal forecast—is whether revenues overall will rise faster than
operating costs. However, past experience tells us that even if we control our current cost
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Council Agenda Report General Fiscal Outlook for 1999-01
Page 2
base to just increases in inflation, there will still be significant pressures to expand or
enhance operating programs in responding to legitimate,unmet service needs.
■ Infrastructure and facility needs. Continuing our commitment to a strong capital
improvement plan (CIP), especially in the area of adequately maintaining our existing
infrastructure and facilities,will continue to be a major fiscal challenge.
■ Limited revenue options. With the passage of Proposition 218, our revenue options are
more limited than they have been in the past. While a few options remain that can be
implemented by the Council, any increased or new tax source will require voter approval.
■ Retirement costs. As reported to the Council during the 1998-99 budget process, the
State has made significant changes in the methodology used to calculate the City's
retirement rates. In addition to a change in actuarial assumptions, they also converted to
a new computer system which they believe provides a more accurate calculation of those
rates. The initial impact appears to be a significant unfunded liability for public safety
employees,which is likely to result in substantially higher retirement costs.
Compared with an employer contribution rate of 4% in 1998-99, this rate could be as
high as 23.6% in 1999-00, resulting in an increase is General Fund costs of$1.4 million
annually. At the same time, the retirement assets for miscellaneous employees are over-
funded and can temporarily offset some of the increased public safety costs. Once PERS
calculates the 1999-00 fiscal year rates, a strategy for funding the revised costs will be
evaluated as part of the 1999-01 Financial Plan process. Unfortunately,we do not expect
to receive these updated actuarial costs until late December at the soonest.
SUNIIVIARY
In general, it is likely that we will have adequate resources to fiord current service levels and a
limited capital improvement plan.
However, improving service levels or more fully achieving our capital improvement goals will
be very difficult. This challenge is highlighted by the proposed CIP in the third and fourth years
of our current 1997-99 Financial Plan compared with the first and second years: the average
General Fund commitment to the CIP for 1997-99 is $2.4 million; for 1999-01, this increases to
$3.7 million, an increase of$1.3 million. And this does not include the $1.1 million increase in
annual funding for street maintenance and reconstruction recommended in the recently adopted
Pavement Management Plan.
In summary, we do not foresee grave difficulties ahead of us at this time in maintaining current
service levels and supporting a minimal capital improvement plan. However, there are operating
programs where improvements should be made, and infrastructure needs where more than
minimal capital improvement plan projects will be warranted. Funding these improvements in
our current fiscal environment will be very difficult. Nonetheless, this does not mean that we can
not fund new initiatives, although this will not be easy. Several options are available to us in
doing this:
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Council Agenda Report—General Fiscal Outlook for 1999-01
Page 3
■ Existing resources. Re-prioritize current service levels,programs and projects.
■ New resources. Grow the economy at levels better than forecasted, or implement some
of the remaining revenue options available to the Council under Proposition 218.
■ Voter-approved revenues in November of 2000. Under Proposition 218, any increased
or new tax requires majority voter for general purposes; and two-thirds voter approval for
special purposes. Unless there is an emergency, this election must be held in conjunction
with Council member elections. This means that the soonest such an election could be
held is November of 2000. While this might help with our longer-term prospects as
discussed in the Long-Term Fiscal Health `white paper" presented to the Council in
January of 1998, it is not a potential source of fimding for the 1999-01 Financial Plan
due to this timing requirement.
■ Expenditure reductions. Limit operating programs to current service levels; and cut
back on current CIP levels.
■ Legislative efforts. Work to restore revenues taken away from us by the State, and hope
that the Governor and Legislature will be receptive to these efforts. Of all these options,
this is the one least in our ability to control, and given the history of State and local
government fiscal relationships,the one least likely to be successful.
G: 1999-01 Financial Plan/Council Goal-Setting/Council Agenda Reports/General Fiscal Outlook Agenda Report—December 8,1998
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