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HomeMy WebLinkAbout11/16/2006, - ATTACHMENT 5 2005-07 FINANCIAL PLAN GENERAL FISCAL OUTLOOK ATTACHMENT 5 Attachment 5 2007=09 Financial Plan GENERAL FISCAL OUTLOOK November 2006 S�1 LUSO city of san WIS 0131spo 2007-09 Financial Plan GENERAL FISCAL OUTLOOK November 2006 TABLE OF CONTENTS Overview 1 Where We've Been: Past Fiscal Challenges and Budget Balancing Actions 1 Interim Financial Results for 2005-06: Our Current Financial Condition 3 Current Trends 5 Retirement Costs: Projected Stabilization of Rates Is Happening 6 Infrastructure and Facilities Maintenance 6 Results of November 2006 Sales Tax Measure 7 Summary 7 city of san tuis oi3ispo GENERAL OUTLOOK OVERVIEW We will present a comprehensive look at our fiscal outlook when we present the results of our five-year General Fund fiscal forecast to the Council at the upcoming "Budget Foundation" workshop scheduled for December 12, 2006. However, in "setting the table" for this upcoming forecast, we have prepared this General Fiscal Outlook, which highlights six key factors that will shape our fiscal outlook in the next two years: 1. Where we've been: past fiscal challenges and budget balancing solutions 2. Interim financial results for 2005-06: our current financial condition 3. Current trends 4. Retirement costs: projected stabilization of rates and costs is happening 5. Infrastructure and facilities maintenance 6. Results of November 2006 sales tax measure The Very Short Story. For the first time in a long time, we are looking at a favorable fiscal outlook for 2007-09. With the exception of infrastructure maintenance, each of these indicators shows positive signs for the future. While the Council will still have tough resource allocation decisions to make in funding a number of competing priorities and needs, we will not be in the cutback mode that has characterized our budget process for the last five years. And with the passage of Measure Y on November 7 with 65% voter approval, we will have the fiscal flexibility of considering service restorations as well as new initiatives, without having to make cuts in other important services to do so. 0 WHERE WE'VE BEEN Past Fiscal Challenges and Budget Balancing Actions The City has faced continued fiscal challenges for the last five years. On the heels of closing a $7 million General Fund budget gap in 2003-05 — and another $1.4 million the following year— we were faced with a$2.1 million gap in 2005-07, largely due to continued State takeaways. For 2005-07, we were successful in preparing a Financial Plan that reasonably balanced the delivery of core services with the resources available to us. However, achieving this balance required service reductions in all areas of the City's operations, including public safety and basic infrastructure maintenance. The following chart summarizes the strategy we have used beginning in 2003 to close budget gaps, which consisted of: 1. Strategic use of reserves. 2. Further reductions in capital and operating program costs and related service levels (including cutting over 25 positions). 3. Implementation of selected new revenues as allowed under Proposition 218. - 1 - GENERAL OO As reflected in this chart, expenditure cuts accounted for about 70% of our budget balancing strategy. This reflects reductions like a 50% cut in infrastructure maintenance—including General Fund Budget-Balancing Strategy 67% cut in paving — and a reduction of 25 full-time equivalent positions, including o Pase^'es sworn police officers. 18% o capital o New & Program Where We're Headed Increased alts User Fees We will not go into the 2007-09 Financial 14°i° Expenditures: 68% Plan process facing the same fiscal challenges that we have in the two prior o Operating Program Financial Plans for three key reasons: cuts 26% 1. Measure Y. As discussed in more detail below, the passage of Measure Y will provide the City with $4.5 million annually in new revenues for the next eight years. This will significantly improve our fiscal capacity to restore cuts in key services and infrastructure maintenance as well as consider new initiatives. 2. Structural Budget Balance. With the expenditure cuts we have made beginning in 2003, we have achieved "structural budget balance" for the long-tern. In short, this means that had Measure Y not passed, we would not have been facing another cutback mode. However, without the added resources provided by Measure Y, restoring service cuts or launching new initiatives would have been very difficult. On the other hand, with the passage of Measure Y, this means that these added revenues will not be required simply to forestall even greater cuts, but can be used for service restorations and new initiatives, based on the goals that emerge during the City's budget process. 3. Stronger Beginning Financial Condition. As detailed below, based on financial results for 2005-06, we will go into the 2007-09 Financial Plan process in better fiscal shape than we had previously projected. How do the results of Measure Y affect the City's upcoming budget process? The short answer. It doesn't. The slightly longer answer: Even with the passage of Measure Y, the fundamental purpose of the City's goal-setting and budget process remains unchanged: linking what we want to accomplish for our community over the next two years with the resources necessary to do so. Obviously, with the passage of Measure Y,we have more resources to accomplish important things than if it hadn't. However, we need to clearly set forth our highest priorities in both good fiscal times and bad; and based on these, evaluate options and make our resource allocation choices wisely in addressing our highest priority needs. This is the essence of the City's budget process, and it will serve us well in determining the best use of these new resources. Y -2- GENERAL FISCAL OUTLOOK © INTERIM FINANCIAL RESULTS FOR 2005-06 Our Current Financial Condition We broadly distributed interim financial results for 2005-06 for the General Fund in September 2006. As we noted at that time, we do not expect to issue audited financial statements until December 2006. (Council review of the audited results for 2005-06 is scheduled for the"Budget Foundation" workshop on December 12). However, we believe the interim report provides a reasonable basis for assessing the General Fund's financial position at the beginning of the current fiscal year. Ending Fund Balance As discussed in the September interim report, financial results for 2005-06 were better than estimated on both the revenue and expenditure side, with each contributing about the same amount to the bottom line. As summarized below, revenues General Fund Balance Budget exceeded our projections by Revenues 41,807,900 43,209,200 1,401,300 3.476 about 3%; and expenditures Expenditures 38,934,600 37,464,500 1,470,100 3.8% were under budget by about 3% Other Sources(Uses) (3,862,200) (3,815,900) 46,300 1.2% (largely due to one-time savings Fund Balance,7-01-05 9,742,100 9,742,100 - as discussed below). Fund Balance,6-30-06 8,753,200 11,670,900 2,917,700 What does this mean? We ended 2005-06 in better shape than we projected — and this is certainly good news. In short, our financial condition today is better by $2.9 million than projected in the 2006-07 Financial Plan Supplement. However, as discussed below, this was largely due to one-time revenues and cost savings in 2005-06. As such, this did not fundamentally change the need for new revenues — like Measure Y — in closing the long-term gap between projected General Fund revenues and the community's needs for the future. In short, the ending results for 2005-06 certainly improved our ability to deal with future downturns; however, our ability to deliver needed services in the long-term — without a new, significant revenue source like Measure Y—did not. Top Ten Revenues Our top ten revenues account for about 90% of total General Fund revenues. By focusing on these, we can get an excellent understanding of our revenue Top _ n Revenues 'Budget Actual Variance % position. Sales Tax 12;275,600 12,712,100 436,500 3.60/6 Property Tax 6,981,500 7,519,300 537,800 7.7% Overall, our projections for TOT 4,535,600 4,539,200 3,600 0.1% these key revenues were right on Utility Users Tax 3,968,600 3,947,100 (21,500) -0.5% VLFNLF Swap 2,306,200 2,486,400 180,200 7.8% target: as shown in the side bar Business Tax 1,568,900 1,577,500 8,600 0.5% chart, they were within 3% of Franchise Fees 2,128,400 2,101,300 (27,100) -1.3% our estimates. Dev Review Fees 2,536,500 2,777,400 240,900 9.5% Recreation Fees 1,109,200 1,107,700 (1,500) -0.1% Interest Earnings 350,000 281,300 68,700 -19.6% Total 37,760,500 139,049,300 1 1,288,800 3.4% .s -s -3 - GENERAL OUTLOOK The following highlights key results for the year and implications for the future. Sales Tax Sales tax revenues were higher than our projections by about 3%. Three factors account for most of this: 1. General consumer goods performed well, largely due to the new Costco. On one hand, gross sales for Costco are on target with our estimates. However, transfers from existing stores appear to be lower than we projected (which is good news). This reflects a positive trend for the future,with a lower impact on existing businesses than our initial assumptions. 2. Revenues from fuel sales are up sharply. However, given the adverse consequences of higher fuel costs on the economy, hopefully this will not be a continuing trend. In fact, we have recently seen significant decreases in gasoline prices; and this will mean lower sales tax revenues from this source in the future. 3. New car sales remained strong — but given downward sales trends by Ford and GM nationally(which are major players in San Luis Obispo), we do not expect this continue. In summary, while we saw better sales tax results this year than we projected, both the underlying base and growth rates are likely to be lower in the future. Property Tax Property taxes performed much better than expected, solely due to supplemental assessments during the year that were much higher than expected, totaling $750,000 and accounting for about 10%of total property tax collections.. What drives this? The property tax levy is "fixed" for the fiscal year in July based on property values as of the prior January. However, supplemental assessments are made by the County throughout the year based on three key factors: 1. Property sales during the year, which trigger a re-assessment to current market values. This is the largest portion, which we estimate to be about $560,000 in 2005-06 (about 75% of supplemental roll revenues). 2. New construction and improvements during the year. This is a relatively small portion of the supplemental roll (estimated at about $75,000 in 2005-06, or 10% of supplemental roll revenues). 3. As discussed below, our vehicle license fee (VLF) "swap" revenues now grow by increases in assessed valuation, rather than population and vehicle valuations. Based on information from the County, this change also affects the supplemental roll, and we estimate this to account for about $125,000 in 2005-06 (or about 15% of supplemental roll revenues). Given the slowdown in new home sales combined with moderation in market value growth rates, we do not expect to see this type of interim year growth in the supplemental roll revenues in the future. Transient Occupancy Tax (TOT). Results for the year were right on target with our budget estimates. 6 -4- L O FISCALGENERAL OUTLOOK Vehicle License FeevVLF Swap. The State's budget for 2005-06 includes the "VLF Swap," under which an equal amount of"VLF Backfill" (in our case, about $1.8 million annually) was "swapped" for an equal amount of revenues to be collected with the property tax roll. While this swap was conceptually revenue neutral, actual revenues were higher than projected due to growth in assessed value that is relatively higher than the prior base. Development Review Fees. These are driven by the timing of private sector permit applications; which are difficult to project. In short, revenue we received this year may simply mean lower revenues next year. Interest Earnings. Generally accepted accounting principles (GAAP) require a restatement to market value at the end of the fiscal year. Fluctuations in the marketplace have little effect on our long-term investment yield because it is our policy to hold investments to maturity. However, adjusting to market values as required by GAAP resulted in a decrease in recorded interest earnings of$168,000. Expenditures After adjusting for projected expenditure savings, encumbrances and carryovers, expenditures were about 3% lower than budgeted. As shown in the sidebar chart, all expenditures were well within budget. However, most of these savings are one-time in Expendituresbudget- nature and will not be ongoing. Staffing 33,351,600 31,240,300 2,111,300 6.3% Contract Services 4,707,700 4,669,700 38,000 0.8% Telecomm & Utilities 1,376,700 1,341,400 35,300 2.6% For example, staffing savings Insurance 967,100 901,000 6,100 0.7% account for over 90% of the Other Operating Costs 2,816,900 2,749,800 67,100 2.4% total variance. This was largely Minor Capital 156,800 152,300 4,500 2.9% Total by Type 43,316,800 41,054,500 1 2,262,300 5.2% due to vacant positions — many Reimbursed Expenses (3,594,700) (3,590,000) (4,700)1 0.1% of which were previously Estimated Savings 787,500 787,500 frozen as an interim cost saving ITotall 138,934,600 37,464,500 1 1,470,100 1 3.8% measure — which are now filled. In other cases, the savings we saw in 2005-06 have already been reflected in reduced budgets in 2006-07; or were due to one-time circumstances that are not likely to recur. Summary Based on interim results for 2005-06, our financial condition is better today than our projections in the 2006-07 Financial Plan. However, most of this is a"one-time" improvement, and as such, any use of reserves above our policy level should only be used for one-time purposes. Additionally, unless compelling circumstances surface in the interim, we should consider any use of these higher reserves as part of the 2007-09 Financial Plan process, where they can be placed in the context of other competing priorities. © CURRENT TRENDS With only the first quarter of the fiscal year complete, it is too early to identify any major financial trends. However, as noted in the First Quarter Financial Report, there do not appear to -5- GENERAL FISCAL OUTLOOK be any significant deviations from revenue and expenditure patterns for the first quarter of last fiscal year. In short, we are on target with our budget projections. O RETIREMENT COSTS Projected stabilization of rates and costs is happening As detailed below, our projected stabilization of costs is in fact occurring; and while we are not likely to see reductions in our rates in the near future, continuing increases are not on the horizon. Additionally, since we have a structurally balanced budget for the long-term that fully funds current retirement costs, any improvements in our fiscal situation can go directly to restoring cuts made in infrastructure maintenance — like our street paving program — and addressing other high-priority needs that surface from the Council's goal-setting process for 2007-09.. PERS Costs in Context. For 2006-07, our estimated PERS cost for employer contributions is $5.9 million. To place this in perspective, this represents 7% of our total City budget for 2006- 07 of$80.2 million. So, while it's certainly a significant cost, it is not an undue portion of total City costs. And this 7% share has remained stable over the past three PERS Employer Contribution Rates years; and it is likely to remain the same (or lower) over the next two 4 years. 35% 30% Rate Stabilization. As projected, 25% our employer contribution rates 20% have stabilized. We recently 15% received our rates for 2007-08 and 10% projections for 2008-09 from 5^io PERS, which reinforce our"stable" 0^io outlook. This is reflected in the 200405 2005-06 2006-07 2007.08 2008-09 sidebar chart, which shows the five-year stability in rates for both ❑sworn o Nonswom sworn and non-sworn employees. Can Rates Go Lower? If PERS most recent yield trends continue, then at some point we can expect that contribution rates will steadily decline to more closely resemble "normal" contribution rates. However, because of PERS "smoothing" methodology, this will take several years. For this reason, we should not assume any significant reductions in the near term. However, we can reasonably assume that the increase in retirement costs is over. © INFRASTRUCTURE AND FACILITIES MAINTENANCE The forecast we prepared two years ago estimated that adequately maintaining, repairing or replacing existing General Fund facilities, infrastructure and equipment we already have in place would cost about$7 million annually. This excludes any enhancements or"betterments." p� -6- GENERAL FISCAL OUTLOOK To place this is context, our 2006-07 General Fund capital improvement plan (CIP) appropriations are $2.1 million. This very lean CIP reflects the significant reductions in infrastructure maintenance we have made in balancing our budget over the last five years — like reducing our street paving program by 67%; and the tough decisions the Council has had to make in preserving critical day-to-day services like police and fire protection. It also underscores the tough decisions ahead of the Council in preparing a balance budget for 2007-09, even with our improved financial outlook. © RESULTS OF MEASURE Y We estimate that Measure Y will generate about $4.5 million annually over the next eight years. The added '/�-cent sales tax will become effective on April 1, 2007, which means these added revenues will be in place in 2007-09. And for this reason, use of these added revenues in meeting the following community priorities that have surfaced over the last eighteen months is likely to be a major focus of the 2007-09 goal-setting and budget process: 1. Repairing and maintaining City streets,potholes,parks and storm drains. 2. Continuing programs that reduce and effectively manage traffic congestion. 3. Improving levels of police, fire and paramedic services. 4. Preserving open space. 5. Protecting senior services and programs. These added revenues will go a long way in improving our ability to fund community priorities However, tough policy decisions will remain. On one hand, we certainly have more resources to address community needs; on the other hand, they are not unlimited. Placed in context, Measure Y represents an increase of about 10% in General Fund resources. Obviously, this improves our funding capacity, but we still have to identify our highest priorities and make wise resource choices accordingly. SUMMARY The purpose of this "general fiscal outlook" is to highlight the key factors that are likely to affect us financially over the next two years. We will be better able to place these in a more "empirical" context, along with other key factors, after we have finalized the five-year General Fund forecast, which we plan to present to the Council on December 12,2006. However, based on this initial "high-level' look, our fiscal situation as we enter the 2007-09 Financial Plan process is much better than it has been in many years. However, even with this improved situation, significant challenges remain ahead of us in answering the fundamental policy questions posed by the budget process: Of all the things we want to do in making our community an even better place to live, work and play, which are the most important? And what are the resource trade-offs we have to make to do them? �=9 -7-