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HomeMy WebLinkAbout10/06/2009, B5 - FIRST QUARTER UPDATE ON THE CITY'S FISCAL STATUS council mRo - 10-6-09 j acenaa RepoiztN � CITY O F SAN LU IS O B I S P O FROM: Bill Statler, Director of Finance & Information Technology SUBJECT: FIRST QUARTER UPDATE ON THE CITY'S FISCAL STATUS RECOMMENDATION Review and discuss an update on the City's fiscal status based on interim 2008-09 year-end financial results and first quarter trends in 2009-10. DISCUSSION Provided in Attachment 1 are the interim financial results for the General Fund for 2008-09. As will be discussed in this report, while the audit is not yet complete, staff believes the attached interim report provides a reasonable basis for assessing the General Fund's financial position at the end of 2008-09. However, this information is subject to change once all accruals have been made and the audit is completed. Final audited financial statements are likely to be issued in December 2009. Interim Year-End Results Summary As reflected in the attached report, City revenues were overall on target. A closer look, though, reveals that sales tax—the City's most important revenue source—was lower than the budget estimates by $773,500 (including Measure Y). However, this downturn was offset by increases in other revenue areas, in addition to expenditures ending 5%below the budget estimates. Since overall revenues were on target, the General Fund ended the 2008-09 fiscal year better than projected largely due to expenditure savings. However, these savings were based on the hiring chill and resulting staffing vacancies that were in place during 2008-09 and have to be considered "one-time" in nature. Any ongoing cost savings were considered in the newly developed 2009-11 Financial Plan. As shown in the report, these expenditure savings and related favorable year-end results showcase the strong stewardship values within the City organization. What does this mean? The decline in the sales tax base (which is described further below) means that even if the City experiences "only" the 2.5% decline anticipated in 2009-11, revenues will be reduced by $1.5 million over the next two years. Combined with the state takeaways already known – worth $1.2 million—the General Fund balance would be $2.7 million less than anticipated at the end of the 2009-11 Financial Plan, if all other factors remain the same. J First Quarter Update on the City's Fiscal Status Page 2 Fortunately, these future revenue declines are offset over the next two years by expenditure budget savings in 2008-09 of $2.7 million. This means the. General Fund should end 2009-11 with reserves at policy level which will hold the City in good stead in meeting the many unknowns and challenges that remain ahead. 2009-11 Outlook for the Top Five General Fund Revenues The City's top five General Fund revenues—sales tax, -property tax, transient occupancy tax (TOT), utility users tax, and vehicle license fee (VLF) "swap"—account for 80% of total General Fund revenue sources. By focusing on them, the City obtains an excellent understanding of the City's revenue position. Based on year-end results and preliminary information that has surfaced since then, the following is an initial, high-level assessment of the current outlook for these revenues in 2009-11. O Sales Tax General sales tax receipts in 2008-09 were $612,200 (5%) lower than estimated due to declines in nearly every major business category: new motor vehicles, lumber and building materials, home furnishings, and department stores. Similar declines were experienced statewide. Revenues from the local %-cent sales tax (Measure Y) were also lower than expected by $161,300 (3%). However, the decline in this related revenue source was not as great as general sales tax because Measure Y revenues are not subject to the five-year pass-through agreement with the County for sales tax revenues from the airport area. Actual results for 2008-09 now reflect a 10% decline from 2007-08 levels. Given that the 2008- 09 budget estimated a. decline of 7.25% from the prior fiscal year, these results are rather disappointing. The 2009-11 Financial Plan estimates an additional decrease of 2.5% in 2009-10. As noted above, if the City "only" experiences this level of downturn, sales tax revenues will be lower than current budget projections by $1.5 million due to the lower base over the two-year 2009-11 Financial Plan period. Fortunately, the outlook for the next four top revenues is slightly more favorable. ® Property Tax Property tax revenues for 2008-09 were on target with budget estimates. The City recently received final assessed valuation and property tax revenue estimates from the County for 2009-10. While assessed valuation county-wide dropped slightly for 2009-10, it is up slightly (by 3%) for the City. This compares favorably with the 2009-11 budget estimate for 2% growth. © Transient Occupancy Tax (TOT). Results for the year were slightly better than the budget estimate for an 8% decrease, but significantly down (6.8%) from the prior fiscal year. The good news so far is that based on the first month's results for 2009-10 (Attachment 2), revenues are on target with projections. However, the TOT revenue projections assume a 10% decline in 2009-10 based on an already lower revenue base in 2008-09. One month is certainly not a trend and staff will continue to closely monitor the performance of this key revenue source. L�5 --a 1 / First Quarter Update on the City's Fiscal Status Page 3 O Utility Users Tax. Results for 2008-09 were right on target. Given the historical stability of this revenue source, staff believes the current projections for 2009-11 continue to be reasonable, pending further trend data for the year. © VLF Swap. This reflects revenues from the "swap" of VLF "backfill" revenues from the State for an offsetting portion of the property tax revenues. Actual results for 2008-09 were 3% ($95,900) better than estimated. The County's projection of$3,565,100 for 2009-10 is consistent with the City's 2009-10 budget projection of$3,354,100. "Securitization" of Proposition 1A Loan Solid Program "but for"State's Failure to Follow-Through So Far As the Council is aware, the State enacted its ability to borrow $1.9 billion from local government under Proposition 1A, of which the City's share is $1.2 million. Under the State Constitution, this loan must be paid back with interest within three years. On the positive side, the State budget also provided for the "securitization" of this loan, under which the California Statewide Communities Development Authority (CSCDA)—a joint powers authority sponsored by the League of California Cities and California State Association of Counties (CSAC), of which the City is a member—is authorized to sell bonds, secured solely by the State's pledge to make these repayments. The proceeds from the bonds would then be used to make all agencies that choose to voluntarily participate "whole" in 2009-10 for the full loan amount. The State is required to pay all issuance and interest costs. Under the program: 1. The City would receive $1.2 million this fiscal year, thus fully mitigating the State takeaway. 2. Participation is very simple and straightforward. 3. There are no liabilities to the City in participating in the program: the only pledge to bond holders is the State's promise to repay. The City would not be a direct party to the bond issue: its only obligation under the program is to "sell" its loan receivable from the State to the CSCDA. 4. There are no hidden costs. The City will receive the full value of the $1.2 million loan as if it never occurred. Given the well-planned process proposed by the CSCDA, staff anticipated returning to the Council at the October 20, 2009 meeting for approval of the participation documents. However, moving forward depended upon the State legislature and the Governor approving minor, non- controversial clean-up legislation before adjourning. As outlined in Attachment 3, this approval did not happen. To get the program back on track, the League, CSAC, and California Special Districts Association have jointly urged the State legislature to immediately reconvene to approve the needed budget clean-up measures. As reflected in Attachment 4, this includes needed clean-up legislation for gas tax revenues as well. 85 -3 First Quarter Update on the City's Fiscal Status Page 4 Staff will continue to closely monitor the program's progress. Assuming that the key provisions remain the same as those initially proposed by the CSCDA, staff will return with participation documents for the Council approval as soon as they are available. ATTACHMENTS 1. Quarterly Financial Report: Fourth of 2008-09 (Interim General Fund Results for 2008-09) 2. TOT Report: July 2009 3. Excerpt from City Advocate Weekly: Legislature Concludes Session Leaving Major Items Unresolved 4. Joint Letter from the League of California Cities, California State Association of Counties, and California Special Districts Association urging the State legislature to immediately reconvene to approve needed budget clean-up measures T:\Council Agenda Reports\Finance&IT CAR\2009\CAR First Quarter Update 10-6-09.doe tar city of Attachment. san tins ompo Quarterly Financial Report Fourth Quarter of 2008-09 August 31,2009 they have already been reflected in the 2009-11 Financial Plan. OVERVIEW The Net Result. Given the one-time nature of the Since this report is for the last quarter, it serves as an expenditure savings combined with the ongoing shortfall in interim financial report for the year. While the audit is not sales tax revenues and state budget takeaways to-date, this yet complete, we believe this interim report provides a means reserves at the end of the 2009-11 Financial Plan (if reasonable basis for assessing the General Fund's financial all other factors remain the same)will be right at our policy position at the end of 2008-09. However, this information level. Stated simply, while the year-end results are is subject to change once all accruals have been made and favorable overall, there are still challenges ahead of us; and the audit is completed. Final financial statements are likely the restoration of our reserve to policy levels, which had to be issued in December 2009. fallen to 18% of operating expenditures due to State takeaways versus our policy of 20%, will hold us in good GENERAL FUND FOCUS stead in meeting these. The focus of this report is on the General Fund. However, Results Reflect our Core Values. It is a sad fact that the based on interim results, the enterprise and other funds "use it or lose it" mentality does exist in many government generally performed as well or better than budget organizations. However, we projections. are fortunate that this is not the case in San Luis Obispo. ' General Fund Overview The positive year-end results mentality does are solely due to the strong not 6xist in our org Based on interim results, financial operations for the year stewardship values of our ' were on target for overall revenues. However, as discussed organization: that when faced in greater detail below, expenditures were 5% lower than with tough fiscal times, City staff went the extra mile in budget projections. limiting expenditures and not trying to game the system by making last minute purchases at year-end. Given the state What Does This Mean? While revenues were on target takeaways and deep sales tax shortfall, this strong overall (within 0.4%), sales tax revenues (including stewardship ethic will serve us well in facing the many Measure Y) — our most important revenue source — were fiscal challenges that remain ahead of us. $773,500 below estimates, which will have an ongoing impact into 2009-11. This decline in our sales tax base- Revenue and Expenditure Summary (which is described further below) means that even if we "only" experience the 2.5% decline anticipated in 2009-10, As reflected in the following summary, overall revenues we will see reduced revenues of$1.5 million over the next were on target with budget estimates while expenditures two years. Combined with the state takeaways we already were less than budgeted by 5% ($2.7 million). Combined know about, worth $1.2 million, this means that the with minor shortfalls in revenues and other sources and General Fund balance would be $2.7 million less than uses, this results in an ending General Fund balance that is anticipated at the end of the 2009-11 Financial Plan, if all $2.4 million more than projected. other factors remain the same. Generalfund balance ..- Fortunately, these future revenue declines are offset by Revenues 53,356,500 53,097200 (259,300) 0°/ expenditure budget savings in 2008-09 of $2.7 million Expenditures* 51,341,00048,600,100 2,740,900 5% (5%). However, while the decrease in the sales tax base is Other Sources(Uses) (5,877,500) (5,964,400) (86,900) -1% ongoing, the expenditure savings are largely one-time due Fund Balance,7-01-08 14,829,100 14,829,100 to staffing savings resulting from "frozen" or vacant Fund Balance,6-30-09 10,967,100 1 13,361,800 1 2394,700 *Includes estimated expenditure savings,reimbursed expenditures. positions. And in those cases where savings are ongoing, encumbrances and MOA adjustment carryovers. J LS� 1 Attechmendm_ Quarterly 0t ►9 Top Ten Revenues better than our budget estimate for an 8% decrease, but significantly down (6.8%) from the prior fiscal year. The Our top ten revenues account for about 90% of total 2009-11 Financial Plan projects additional declines in TOT General Fund revenues. By focusing on these, we can get revenue of 10%in 2009-10. an excellent understanding of our revenue position. Development Review Fees. These are driven by the As shown below, while there are some variances both up riming of private sector permit applications, which are and down, overall our top ten revenues were within 1% of difficult to project, and as such, revenue we received this our estimates. year may simply mean lower revenues next year. While the revenues exceeded estimates, it is important to note two .. Ten Revenues Budgetthings: the budget was significantly revised downward Sales Tax:General 12,597,000 11,984,800 (612,200) -5% during the fiscal year; and actual results represent a Sales Tax:Measure Y 5,750,000 5,588,700 (161,300) -3% decrease of over $950,000 from the prior year.. In short, Property Tax 8,792,900 8,788,400 (4,500) o% while it is certainly good news that these revenues TOT 4,650,300 4,679,500 29,200 1% Utility Users Tax 4,375,000 4,358,500 (16,500) 0% exceeded our estimates-' this is a significant decline from VLF Swap 3,408,800 3,504,700 95,900 3% the prior year. Franchise Fees 2,438,600 2,439,400 800 0% Business Tax 1,874,900 1,878,500 3,600 0% Recreation Fees. Revenues from the aquatics programs, DevReview Fees 1,574,500 1,752,600 178,100 11% special events and instruction fees exceeded estimates, Recreation Fees 1,224,700 1,293,600 68,900 6% which accounts for the $68,900 positive variance in Investment Earnings. 875,000 964,400 89,400 10% recreation fees. Total 1 47561700 1 47 33100 1 1328600 1% Investment Earnings. Revenues from our investments The following highlights key revenue results: performed better than projected largely due to higher yields and larger than anticipated investable balances. Based on Sales Tax General sales tax receipts were$612,200 (5%) current interest rate trends,we anticipate a decline in future lower than estimated due to declines in nearly every major interest earnings: the 2009-11 Financial Plan anticipates business category: new motor vehicles, lumber and annual investment earnings of$475,000. building materials,home furnishings and department stores. Similar declines were experienced statewide. Expenditures Revenues from our local Y2-cent sales tax (Measure Y) After adjusting for projected expenditure savings, were also lower than expected by $161,300 (3%). g p ro p g ' encumbrances and carryovers, expenditures were 5%under However, the decline in this related revenue source was ]ower than general sales tax because Measure Y revenues budget. While savings occurred in all categories, staffing are not subject to our five year pass-through agreement savings account for about two-thirds of the total underage.. This p with the County for sales tax revenues from the airport primarily reflects positions that were impacted by the hiring freeze and remained vacant throughout the year. area. These results are worse than they appear on the surface By Department. As shown below, all expenditures by because we already estimated a decline of 7.25% from the department were below budget. prior fiscal year. Total results for 2008-09 reflect a 10% -Ex pen.ditures Budget Actual* Variance % decline from 2007-08 levels. The 2009-11 Financial Plan Administration 2,428,000 2,254,800 173,200 =o estimates an additional decrease of 2.5% in 2009-10. As CityAttomey 550,600 545,900 4,700 1% noted above, if we `only" experience this level of City Clerk 589,300 475,000 114,300 19% downturn, sales tax revenues will be $1.5 million lower Human Resources 2,519,400 2,115,500 403,900 16% than current budget projections because of the lower base Finance& IT 4,342,700 3,737,700 605,000 14% over the two years of the 2009-11 Financial Plan period. Community Dev 2,943,100 2,559,600 383,500 13% Parks&Recreation 3532,800 3,272,100 260,700 7% Public Works 12,654,400 11,780,900 873,500 7% Property Tax. Property tax revenues are on target with Police 16,262,200 15,228,400 1,033,800 6% the budget estimates. We have not seen the level of Fire 11,670,400 10,841,000 829,400 7% declines in property tax revenues that many other TotalD- arnnental 57,492,900 52,810,900 4,682,000 8% communities are experiencing. This will remain an Reimbursed Expenses (4 210,800) (4,210,800) - 0% important revenue source to monitor in the next year. MOA Adjustments 208,900 208,900 Estimated Savings (2,150,000) (2,150,000) Transient Occupancy Tax (TOT). As indicated in the Total Expenditures 51341,000 1 48,600,100 2,740,900 504, recent TOT newsletter, results for the year were slightly *Including encumbrances and carryovers of$563,800.R R� 2 By Type. Operating expenditures by type were also less than budgeted as summarized by the following. Expenditures By . Budget Actual* Variance % - Staflmg 45,272,200 42,161,300 3,110,900 7%a Contract Services 5,257,500 4,531,100 726,400 14%. Telecomm&Utilities 1,726,300 1,662,000 64,300 4% Insurance 1,195,700 1,051,500 144,200 12% 0 th er 0 perat in g Cos is 3,896,900 3,302,200 594,700 15% Minor Capital 144,300 102,800 41,500 29% Total by Type 57,492,900 52,810,900 4,682,000 8% Reimbursed Expenses (4,210,800) (4,210,800) - 00/0 MOA Adjustments 208,900 208,900 Estimated Savings (2,150,000) (2,150,000) - Total 51,341,000 48,600,100 2,740,900 5% •Including encumbrances and carryovers of 8563.800. Other Sources (Uses) Operating transfers in 2008-09 are slightly lower than projected, resulting in a negative variance in Other Sources (Uses) of $86,900. Of this variance, reduced gas tax revenues account for $19,100; reduced Proposition 42 Funds account for $57,700; and other sources (uses) account for$10,100. FOR MORE INFORMATION This summary is based on detailed information produced by the City's financial management system. If you would like additional information,or have any questions about the report,please call us at 781-7128. Council Update on October 6, 2009. We plan to provide the Council with an update on the City's fiscal status based on interim year-end results and first quarter trends at the October 6,2009 meeting. Electronic Distribution: All Employees 3 Attachment Z Cly of - _� san Luis ompo Monthly • Report July 2009 September 11, 2009 This report covers the City's transient occupancy tax (TOT) revenues for the month of July 2009 compared with the two prior years. As reflected below, revenues for July 2009 down by 10.2% from last year. Trend Analysis. TOT revenues in July continued to decline, maintaining the downward trend of the last eight months. With July traditionally being one of the strongest TOT months, this is not an encouraging start to the year. We remain hopeful, though, . .. -TOT Revenues reported improvements in Increase(Decrease) Prior Year Last Year Thus Year Last Year Vs This Year the national economy will lead 2007-0e 9008-09 2009-10Arm unt Percent to greater travel and visitor Jul $ 565,386 565,637 $ 508,195 $ 57,442 -102% activities for August and Year-taDateroral" 565;386_ ;.,999,837 s_oa;lss; =:'(s7pa2) _=�0i^yo September, August 573,057 609,452 September 465,179 416,859 What's This Mean? These October 418,474 416,905 results are consistent with the November 375,287 354,737 2009-10 fiscal year revenue December 312,510 274,871 January 287,474 258,316 projection in the 2009-11 February 342,220 292,343 Financial Plan, which forecast Mara, 386,458 289,506 TOT revenues to decline by April 388,911 391,891 10%. May 435,516 393,431 June 1 513,631 1 456,098 For More Information. I TOTAL.:.,.._'- ' 5,064;102 I 4;716,047 I 508;195 Please call Jennifer Thompson, Revenue Supervisor, at(805) 781-7129. DISTRIBUTION:City Council,Department Heads,Department Fiscal Officers,Budget Review Team,Economic Development Manager,Promotional Coordinating Committee,Visitors&Conference Bureau,SLO Chamber of Commerce,Barnett Cox&Associates,The Tribune(Leslie Stevens),UCSB Forecast Project,Mike Smith,Pragna Patel,Paul Brown,Chris Overby,Business Times Legislature Concludes Session Leaving Major Items Unresolved Pagel of 3 At Anachment JV League of California Cities L ___OF C AGUE Ci ll � e CITI ES 77777, 2009 Issue #36 er 14, 2009 HOME Legislature Concludes Session Leaving Major Items CONTENTS Unresolved Editor's Note After a long and raucous year dominated by a historic budget crisis, tension between legislators and Gov. Arnold Schwarzenegger, a recent legislator's Legislature Conclude resignation, grass roots-clamoring for legislative reform, and last-ditch efforts to Session Leaving Majo establish major policy changes on water to avoid being labeled what Senate Pro Items unresolved 1 P Y 9 9 Upcoming Events Tem Darrell Steinberg called "a culture of failure,"the Legislature wrapped up its efforts at 6 a.m. Saturday morning embroiled in a partisan dispute in the Senate that left many items unresolved, including necessary budget dean up measures important to local government. Budget Cleanup: Proposition 1A Securitization and HUTA Deferral Changes In the closing hours of the legislative session, Senate Republicans adopted the position of not supplying any votes for any legislation requiring a two-thirds vote. This position stemmed from a dispute with Senate Democratic leadership over what Republicans believed were violations of previous commitments as well as house procedural rules.The action resulted in many otherwise noncontroversial bills being stalled for lack of sufficient votes, including two measures containing necessary fixes to both the Prop. 1A securitization process and the Highway Users Gas Tax Account(HUTA)deferral. • SB 67.The securitization of the Prop. 1A property tax loan. Please see additional details posted on the League's Web site; and • SB 65. Deferral of the Highway User Tax Account(HUTA), or gas tax revenues, Please see additional details posted on the League's Web site. In the final hours, Senate Democrats amended the provisions of this measure into another vehicle AB X3 37, and sent it to the Governor. This legislation, however, cannot take effect for 90 days after the adjournment of the special session.The Third Extraordinary Session has not adjourned, meaning that the provisions affecting local HUTA revenues will not take effect in a timely manner. Thus, if the Senate returns it should be encouraged to pass SB 65, which will take effect immediately. While the Legislature is technically in recess, there are already plans to return this fall to address several items in special session. The Legislature can also be reconvened at any time to address issues.The League has encouraged Senate leadership to set aside internal disputes and immediately reconvene to adopt necessary budget clean up and other non-controversial measures, so that Prop. 1A securitization efforts can move forward in an expedited manner. City officials are encouraged to contact their Senators to ask that the Senate reconvene immediately to approve the Prop. 1A clean up measure. rison Reforms As expected, the Senate passed the prison reform package (SBx3 18)as approved by the Assembly on Aug. 31. Now being referred to as"Prison Reform lite,"the package does not include provisions which would change some wobbler crimes to misdemeanors, revise the threshold for grand theft and grand theft auto, or create a sentencing commission. In July, the Legislature approved an unallocated $1.2 billion Bs --q http://newsletter.cacities.org/e_article001542509.cfm?x=bg3Fp42,b98pNLNG 9/14/2009 Attachment LEAGUE OF CALIFORNIA o©o� CITIES California State Association of Counties California Special Districts Association League of California Cities 1100 K Street,Suite 101 11121 Street,Suite 200 1400 K Street,Suite 400 Sacramento,CA 95814 Sacramento,CA 95814 Sacramento,CA 95814 (916)327-7500 (916)442-7887 (916)658-8200 September 15, 2009 The Honorable Darrell Steinberg Senate President Pro Tem Room 205, State Capitol Sacramento, California 95814 The Honorable Dennis Hollingsworth Senate Republican Leader Room 305, State Capitol Sacramento, California 95814 Dear Senator Steinberg and Senator Hollingsworth: On behalf of the League of California Cities, the California State Association of Counties, and the California Special Districts Association, we are writing to respectfully request that you take expedited action to reconvene the California State Senate immediately to approve two budget cleanup measures of critical importance to both local government agencies and the state. These measures were included among a number of urgency measures that were approved by the state Assembly, but they did not receive the required twathirds vote in the Senate before recess early September 12, 2009. The passage of SB 67 is of critical importance to local governments that desire to securitize the state's repayment obligation for the approximately$1.9 billion in property taxes being borrowed by the state. This measure contains important changes to the language of AB X4 15 (Gaines)approved as part of the July budget agreement. These changes were deemed necessary by bond counsel and bond advisors for the transaction as well as the Department of Finance and the State Treasurer's Office. The bill represents a consensus effort agreed to by those agencies, our three associations, and legislative consultants from both parties. SB 67 provides an accelerated schedule for the securitization of the Prop. 1A loan to occur no later than mid-November, ensuring that local agencies will receive this critical funding on exactly the same schedule as they would normally receive distributions of their property tax funds. Moreover, these same changes in SB 67 make it possible for the state to save an estimated $200 million in interest costs because the bonds can then be issued on a tax-exempt basis. If SB 67 is not approved, we have been advised that this significant cost-saving advantage will most likely not apply to bonds issued next spring under AB X4 15 (Gaines) and local governments will suffer serious public safety and other service reductions as a result of a loss of their property tax funds. Bs — lb Attachment. SB 65 is a state cash flow measure that allows the state to reduce its need for temporary borrowing through alterations to the schedule of existing deferrals to better match the state's needs for cash flow. This measure also includes helpful language on provisions related to gas tax revenues being deferred under existing law. We urge you, as leaders of our state, to work together—and if necessary with the leadership of the State Assembly—to take immediate action to pass these measures that are so vital to providing local services and keeping our streets, our neighborhoods, and all Californians safe. Sincerely, Christopher McKenzie, Executive Director Paul McIntosh, Executive Director League of California Cities California State Association of Counties Neil McCormick, Executive Director California Special Districts Association cc: Honorable Members of the California State Senate The Honorable Karen Bass, Speaker of the Assembly The Honorable Sam Blakeslee, Assembly Republican Leader The Honorable Arnold Schwarzenegger, Governor, State of California g5 � � �