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12-13-2016 Item 17 2017 Financial Plan Process, Economic Outlook and Consideration of Proposed Changes to the City's Budget Policies
Meeting Date: 12/13/2016 FROM: Katie Lichtig, City Manager Prepared By: Xenia Bradford, Interim Finance Director SUBJECT: 2017-19 FINANCIAL PLAN PROCESS, ECONOMIC OUTLOOK AND CONSIDERATION OF PROPOSED CHANGES TO THE CITY’S BUDGET POLICIES RECOMMENDATION 1. Review and approve the 2017-19 Financial Plan Goal Setting Process; and 2. Review and discuss the results of the Economic Outlook for the 2017-19 Financial Plan development; and 3. Review and approve proposed changes and direction regarding the City’s Budget and Fiscal Policies. REPORT-IN-BRIEF The City of San Luis Obispo utilizes a two-year financial planning process to create its budgets. This process includes extensive public outreach to assist the City Council in establishing Major City Goals and Other Important Objectives. The benefits of this process are two-fold, it ensures that resources are provided in the budget to accomplish the community’s highest priorities, most important objectives, and it is a method to help create a mutual understanding among residents, decision makers, and City staff about what can be achieved by working together. The process includes the Community Priorities Survey, the Community Forum, the Council Goal-Setting Workshop, and several other steps to prepare the City Council for selecting goals, and provide City staff with direction on work programs to support those goals. All of these steps lead up to the City Council’s Strategic Budget Direction meeting scheduled for April 18, 2017 and review and adoption of the budget at three meetings in June. For the 2017-19 Financial Plan, a new feature for community input after the Community Forum will be an online option allowing community members to vote on priorities established at the Community Forum. The Economic Outlook presents an overview of the General Fund over the next five years. The outlook focuses on major revenue sources and significant drivers for the operating expenditures to access the fund’s ability to accomplish the five criteria listed above focusing on long-term financial health. The theme of this forecast is Steady Growth Equally Challenged by Expenditure Growth and Uncertainties. While this economic forecast applies only to the General Fund (enterprise funds of Water, Sewer, Parking and Transit conduct their own fund analyses), the assumptions that apply to these other funds will be used throughout the financial planning process to all funds. This report also outlines changes in the City’s Budget and Fiscal Policies that are used to develop 17 Packet Pg. 252 budget proposals (both in the operating budget for each department and the Capital Improvement Plan projects). There are two policy changes and one area for direction proposed in this report. Specifically, staff is requesting to change the following policies: 1. Add a policy to address long-term costs that is consistent with a guiding principle adopted by the council in February 2015. 2. Modify Capital Financing and Debt Management section to add Public Infrastructure Financing Policies that are consistent with needs and priorities created by among other things new housing developments that are working their way through the approval process. In this section of the report staff is seeking council authorization to further study of City reserve requirements and need for a “Economic Fluctuation Reserve.” If authorized, staff will study if it is prudent and fiscally responsible to address known changes to the City’s fiscal situation and increased uncertainties by establishing a reserve specifically dedicated to weather these changes which we know will happen but the elements, timing and severity are more uncertain. DISCUSSION Two-Year Financial Plan Process The following six features describe the City’s Financial Plan process: goal-oriented, policy- driven, multi-year and technically rigorous. For over thirty years, the City has used a two-year financial planning process to create its budgets. The benefits of budgeting based on a two -year plan include: 1. Reinforcing the importance of long-range planning in managing the City's fiscal affairs. 2. Concentrating on developing and budgeting for the accomplishment of significant objectives. 3. Establishing realistic timeframes for achieving objectives. 4. Creating a pro-active budget that provides for stable operations and assures the City's long- term fiscal health. 5. Promoting more orderly spending patterns. 6. Reducing the amount of time and resources allocated to preparing annual budgets. The purpose of the City’s budget is to link, through the public engagement and decision making process, the interests of the community to optimize the allocation of financial resources to achieve the desired results. The fundamental purpose of the City’s 2017 -19 Financial Plan is to link what the City wants to accomplish over a two-year period with the resources required to do so. Central to the effort is providing support for the City’s core functions, including the day-to- day responsibilities carried out by City employees to support residents’ safety, quality of life and ensure regulatory compliance. In addition, the process allows the City Council to engage the community to identify Major City Goals and Other Important Objectives to be accomplished. 2017-19 Goal-Setting Process There are a variety of inputs to the City Council that enable the establishment of Major City 17 Packet Pg. 253 Goals and Other Important Objectives. These inputs are highlighted on the following chart: Many of these efforts have already started. For example, City Advisory Bodies have developed recommended goals, the Community Priorities Survey (Attachment A) has been mailed out and posted on-line, and the City Council has participated in the November 15 “Setting the Stage” study session. Notice has also been sent to over 200 community groups and individuals inviting their input (Attachment B). The two principal elements of the City’s goal setting process still to come are the Community Forum and Council Goal-Setting Workshop. The Community Forum will be held at 6:30 PM on Tuesday, January 10, 2017, at the Ludwick Community Center. Input from the January 10th Community Forum is tabulated and distributed in advance to the City Council for an all-day Council Goal-Setting Workshop held on Saturday, January 28, 2017 at the City/County Library Community Room. For the 2017-19 Financial Plan, the City extends the Community Forum with an online option allowing the community to vote on priorities established at the Community forum. Staff and facilitator Don Maruska plan to build on past successes in integrating Council goal - setting into the budget process following an approach similar to the one used for many years, including integration of proposed uses for the City’s local half-percent sales tax. The specifics are outlined below. 17 Packet Pg. 254 1. Community Forum The January 10 Community Forum is intended to solicit ideas from Council, residents, community groups, other groups of stakeholders and interested individuals on proposed City goals. It also meets the requirements of the City’s half-percent local sales tax, by providing an opportunity for the Revenue Enhancement Oversight Committee (REOC) to “revi ew and discuss the use of the revenue generated by the Local Revenue Measure.” To ensure that adequate space is available for the forum, it will be held at the Ludwick Community Center. The proposed agenda and procedures for the Community Forum are attached (Attachment C). As in past budget cycles, participants in attendance at the end of the evening will be asked to participate in ranking priorities gathered that evening through “dotocracy”, in which each person is given five dots that are intended to be placed on the five highest priority goals. Each participant will be given five dots in another color so they can also provide input on their opinion on how the Local Revenue Measure funding should be allocated. An enhancement for this year is that staff has developed a method for a virtual “dotocracy” such that people can add their perspective via an on-line voting for priorities raised during the Community Forum. It is worth noting that none of these methods are statistically valid methods for gathering community input but they do facilitate community engagement and information flow which the Council can use in your consideration of hope, dreams, wants and needs of our residents and broader community. 2. Council Homework Assignment (Due to Finance by January 17, 2017) The Council’s “homework assignment” for the January 28 workshop is attached (Attachment D). Based on all input received, it is requested that Council members prepare and submit up to seven candidate goals as Major City Goals by 9:00 a.m. on Tuesday, January 17, 2017. Council members are asked to indicate which of these goals should also be Local Revenue Measure priorities, and to prepare and submit suggestions for changes in other programs and services that might help fund their desired goals. Staff will then compile verbatim, composite lists organized by common topics, without identifying who submitted the particular statements for review and consideration before the workshop. This list will be distributed to all Council members and the community at the close of business on Wednesday, January 25, 2017. While staff will retain individual submissions in the working files, it is recommended that Council members refrain from releasing their personal lists so that each Council member can review all of the submissions and discuss them at the Goal-Setting Workshop before taking a position. 3. Council Goal-Setting Workshop At the all-day January 28 workshop, the Council will review the consolidated goals presented by Council members to ensure clarity, completeness and understanding; and then narrow the list to finalist goals that are supported by at least three Council members. The discussion will note which goals address local sales tax priorities. While the Council proceeds with the discussion outlined above, the staff will prepare a final Major City Goals represent the most important, highest priority goals for the City to accomplish over the next two years, and as such, resources should be included in the 2017-19 Financial Plan. 17 Packet Pg. 255 listing that the Council can use in prioritizing goals. In years past, the Council has used a ranking system of 5 through 0 for each candidate goal. Staff recommends continuing to use this ranking system for 2017-19, summarized as follows: 5 Most important, highest priorities for City to achieve over the next two years. 4 Very important goal to achieve. 3 Important goal to achieve. 2 Address if resources are available. 1 Defer to 2019-21 for consideration. 0 Not a priority goal. Depending on the number of candidate goals, total points available to individual Council members have ranged in the past from 50 to 75 based on 3 points per candidate goal. The exact number of points used for ranking is typically figured out on the day of the workshop. Following the ranking exercise, staff will summarize the results. Based on past experience, it is likely that two, priority “tiers” will emerge from this process: 1. Major City Goals. These represent the most important, highest priority goals for the City to accomplish over the next two years, and as such, resources to accomplish them should be included in the 2017-19 Financial Plan. The initial list of Major City Goals following the ranking will include only those goals where a majority of Council Members rank the goal as a 4 or 5. Subsequent discussion will allow the Council to refine the goal list, however, the list should remain consistent with the “Criteria for Major City Goals” (Attachment G). 2. Other Important Objectives. Goals in this category are important for the City to accomplish, and resources should be made available in the 2017-19 Financial Plan if at all possible. The outline for the goal setting workshop is provided in Attachment E; and suggested guidelines for Council members during the goal-setting process are provided in Attachment F. Included as Attachment G are the suggested “Criteria for Major City Goals”- these have proven helpful and useful historically. These criteria capture the relevant considerations to determine a Major City Goal, but the Council could refine the criteria at this time if desired. No follow-up meeting has been needed in the last several goal -setting sessions as the Council concluded all necessary actions at the Saturday Goal-Setting Workshop. Continued consideration of goals for 2017-19 will be scheduled for the next regular Council meeting following the workshop only if needed. For the 2017-19 Financial Plan, staff recommends utilization of new naming convention to focus priority areas into the following six functions: 1) Community Safety, 2) Culture & Recreation, 3) Infrastructure & Transportation, 4) Community & Neighborhood Livability, 5) Environmental Health & Open Space, 6) Fiscal Health & Governance. Attachment H provides a detail summary of function, organization and program categories proposed for the 2017-19 Financial Plan development and budget documents. The City budgets and measures service level performance at a program level and aligns allocation of funds based on the Goal-Setting Process and 17 Packet Pg. 256 Local Revenue Measure Expenditure Categories Open Space Preservation Bicycle and Pedestrian Improvements Traffic Congestion Relief/Safety Improvements Public Safety Neighborhood Street Paving Code Enforcement Flood Protection Parks and Recreation/Senior Programs and Facilities establishment of highest priorities to be accomplished within the two-year Financial Plan. Local Revenue Measure Annual Citizen Meeting It is important to know that Local Revenue Measure is a general purpose measure, and the proceeds are not restricted to specific purposes. The language on the ballot measure approved by voters in 2016 provides the types of uses that would be funded. The language on the ballot was: “To protect and maintain essential services and facilities – such as open space preservation; bike lanes and sidewalks; public safety; neighborhood street paving and code enforcement; flood protection; senior programs; and other vital services and capital improvement projects – shall the City’s Municipal Code be amended to extend the current one-half percent local sales tax for eight years, with independent annual audits, public goal-setting and budgeting, and a Citizens’ Oversight Commission?” In short, while the ballot language provided examples of the types of uses that could be funded - based on community input received before placing the measure on the ballot – the Local Revenue Measure is a general purpose tax providing Council with flexibility to respond to new circumstances and challenges. The Revenue Enhancement Oversight Commission (REOC) has established categories to track expenditures and report via the required annual report. These categories are listed below. The language in the Measure and the implementing ordinance indicates that there should be “public goal-setting and budgeting.” This is planned to be integrated and aligned with the Financial Planning process. Two specific aspects are outlined below: 1. Integration into the City's budget and goal-setting process. The estimated revenue and proposed use of funds generated by the Local Revenue Measure shall be an integral part of the City's budget and goal-setting process, and significant opportunities will be provided for meaningful participation by citizens in determining priority uses of these funds. During the Community Forum participants will be given dots that they can use to indicate how this resource should be spent. The same will be done on the on-line voting. 2. Annual citizen meeting. The Revenue Oversight Committee will hold an annual citizen 17 Packet Pg. 257 meeting concurrent with the Community Forum on January 10, 2017. City staff will also be available to meet with any group that requests a specific briefing with their members to discuss and answer questions about the revenues generated by the measure and their uses. For 2015-16, total expenditures were $4,881,086 and an additional $3,618,008 in funding was carried over for several projects (many of which are now under construction). The Revenue Oversight Committee held a meeting on November 16, 2016 and reviewed the preliminary 2015- 16 year-end report in detail. These are still the unaudited results. The final information will be included in the Certified Annual Financial Report, which will be published before the end of the calendar year. ECONOMIC OUTLOOK The purpose of Economic Outlook is to forecast the General Fund’s ability over the next five years to accomplish five things: 1. Deliver current service levels; 2. Maintain existing infrastructure and facilities; 3. Preserve the City’s long-term fiscal health by aligning operating revenues and expenditures; 4. Maintain fund balance at policy levels; and 5. Reinvest in the General Fund supported Capital Improvement Program, particularly in areas that are underfunded such as infrastructure maintenance, fleet replacement, IT replacement, and facilities maintenance. The Economic Outlook presents an overview of the General Fund over the next five years. The outlook focuses on major revenue sources and significant drivers for the operating expenditures to access the fund’s ability to accomplish the five criteria listed above focusing on long-term financial health. The theme of this forecast is Steady Growth Equally Challenged by Expenditure Growth and Uncertainties. On February 21, 2017 a General Fund Five-Year Forecast will be presented to Council based on audited 2015-16 year-end results and six months of revenue and expenditure data since the adoption of the 2016-17 Supplemental Budget, when the Council was last presented with a Five- Year Forecast. The City of San Luis Obispo contracts with Beacon Economics to provide with Economic Forecast for the City of San Luis Obispo. Beacon Economics forecast is based on time-series econometric techniques based on historical correlations and forecasts of future economic trends. Beacon Economics utilizes a layered approach based on the National, State of California and regional forecast. In summary, the United States economy continues to expand at an unexceptional rate and the Gross National Product growth rate is currently forecasted at 1.5% to 2%. The California economy for the fourth year in a row, outpaced the nation in job growth as well as output. 17 Packet Pg. 258 Revenues The Economic Outlook focuses on a review of major sources of revenue for the City: Sales Tax represents approximately 36% of the General Fund Revenue, followed by Property Tax at 14%, Transient Occupancy Tax at 10%, Utility Users Tax at 8%, and Development Review Fees at 7%. Highlights of these major revenues are as follows: Sales Tax. The City contracts with HdL Companies to monitor sales tax receipts and trends. The results of the 2nd quarter showed a significant decrease in sales tax receipts on gasoline due to gasoline low prices. Statewide sales tax rates expectations for 2016-17 have been lowered to 2.3% by HdL forecast and this expectation is conservatively carried through the five year forecast. The City of San Luis Obispo continue to benefit from its diverse and dynamic demographic and employment related structures. The sales tax growth is projected at just above 2.7% by HdL throughout the 2017-19 Financial Plan and at 2.5% to 2.6% thereafter. The City sales tax forecast for 2017-18 is projected at 3% based on current economic development in downtown San Luis Obispo. This projection will be closely monitored and updated with the Five-Year General Fund Forecast. Property Tax. Property Tax estimated revenue continues to show positive growth. 2015-16 actual property tax revenue growth was 5% over the previous year. Beacon Economics forecast based on assessed valuation trend over time and building permits, shows an expected growth rate above 6% through fiscal year 2017-18 and above 5% in the outer years. In addition, three1 significant projects are underway in San Luis Obispo incorporated area that are expected to significantly contribute to the property tax revenue growth for the City. The Economic outlook is based on a 6% growth projection through the 2017-19 Financial Plan, 5.5% percent growth in 2019-20 and 5% growth thereafter due to higher degree of uncertainty in the outer years. Transient Occupancy Tax. Transient Occupancy Tax is another revenue sources that is highly correlated with economic fluctuations that affect tourism. After seeing a slowing growth trend through the later part of fiscal year 2015-16, the City is continuing to experience that softening in the tourism marketing into the first quarter of 2016-17. Traditionally the first quarter of the fiscal year tends to be the strongest indicator for the strength of the tourism market as it represe nts the peak travel season. Based on this softening trend, the City is forecasting the adjustment in the TOT growth from 5% over the previous fiscal year to 4% and will continue to monitor the trend. Overall the softening in the marketing can be attributed to a number of factors including: addition of new lodging properties in competing destinations countywide as well as the business development of recently opened properties. In addition, various properties throughout the city have undergone renovations within the last year reducing the number of rooms available to be sold to visitors. Staff will continue to monitor the trends and analyze the impacts of the three significant hotel developments mentioned in the property tax discussion. Utility Users Tax. The City’s Utility User’ tax forecast is maintained at the level presented to the Council with the 2016-17 Supplemental Budget. There is no significant variance to this forecast at this time. The City contracts and works closely with MuniServices LLC, who provide expert advice and monitor the City’s collections of Utility User’s tax. MuniServices also monitors and actively engages in management of the revenue stream given the impacts of new technologies on 1 The projects are Monterey Hotel, Garden Street Terraces and China Town. 17 Packet Pg. 259 Utility User’s Tax. With internet and wireless communications becoming more prevalent, there is a transition from traditional means of utilities. Development Services Fees. Development Services Fees are a highly fluctuating revenue stream, and the City aims for 100% cost recovery in providing services to meet the demand for planning entitlements and building permits. To help meet the demand, the Council adopted with the 2014- 15 Supplemental Budget a policy granting authority to the City Manager to allocate 75% of over- realized Development Services revenue for temporary staffing and consultant services needed to process development services applications and related permit processing activities within expected timeframes. Expenditures On the expenditure side, the forecast is based on a modest economic growth, o perating expenditure growth of 2.5% overall, excluding retirement contributions to California Public Employees Retirement System (CalPERS). The Capital Improvement Program expenditure forecast is based on the 2015-17 Financial Plan adopted capital improvement budget and city fiscal policies. CalPERS’ required contribution rates and strategy to pay down unfunded liability continues to be a priority. As expected, the new funding formula approved by the governing board of the CalPERS has increased the annual contributions required to fund the program. This funding formula took full effect in 2015-16 and is designed to fully amortize the remaining unfunded retirement liabilities over 30 years. The City has made significant progress in its efforts to contain retirement costs, such as adding 2nd and 3rd Tier reduced benefit programs that now reflect membership by 20% of the total employees and increasing employee contributions toward the cost of retirement. However, the fiscal forecast still reflects a significant increase in the annual cost of retirement benefits as a result of these funding formula changes aimed at reducing the unfunded liabilities. In February of 2015, the Council adopted a guiding principle to prioritize allocation of one -time funds available to pay down 1) Unfunded Pension Liability, 2) Other Post-Employment Benefits, 3) Roads Infrastructure, and 4) Equipment Replacement Fund in that order. Since 2014, the Council appropriated $2.7 million in prepayments toward unfunded liability. The prepayments are applied to decrease the unfunded liability associated with a fixed portion of the unfunded liability associated with retirement benefits for the City’s sworn Fire Department personnel. This has made the most sense given this is a separately calculated unfunded liability. Outlook Summary The overall plan performance depends on actuarial assumptions and an expected long -term rate of return of 7.5%. For context the actual rate of return in 2014-15 was 2.4%. The CalPERS 2014- 15 Annual Valuation Report presents an analysis of alternative amortization schedules for municipalities that may elect to pay down unfunded liabilities in shorter period of time. For example, Annual Valuation Report for Safety Tier 1 plan shows that the 20-year amortization schedule assumes slight increases in payments over the next three years and significant ramp -up at the end of the 20-year amortization period. The 15-year amortization schedule assumes steady 17 Packet Pg. 260 increase in payments over the 15-year period in the amount of approximately $1 million per year. According to this analysis amortizing over 20 years, is expected to result in $4.5 million in savings and amortizing over 15 years is expected to result in $24 million in savings for the plan. Staff will be assessing if any of these options will be prudent to pursue (this issue applies to all funds because all full-time employees are covered by CalPERS retirement system) and will make a recommendation during the Financial Plan development process. The graph above depicts General Fund revenues over expenditures over time. Assuming 2.5% growth in expenditures to maintain current levels of service and the rates of increase in major revenue categories, the chart above shows a balanced budget over the next five years but with little to no additional capacity for growth in ongoing expenditures. While this may seem constraining, staff will be looking forward to understanding the Council’s Major City Goals and Other Important Objective before looking at creative ways to propose trade-offs, reprioritized programs or other methods to achieve the Council’s desired outcomes. The Financial Planning process has proven time and again that “We can do anything; we just can’t do everything!” These will continue to be watch words in the future. Note that the 2016-17 budget shows, expenditures exceeding revenue. This is due to allocation of one-time available fund balance toward one-time expenditures. The decline in revenue from 2015-16 is due to the end of Triple-Flip, which resulted in one-time increase in cash disbursement from the State. In addition, the 2015-16 actuals reflect mutual aid revenue, which is reimbursement revenue the City receives for providing fire protection mutual aid. 17 Packet Pg. 261 One significant economic uncertainty that arose in the last six months is the announced closure of the Diablo Canyon Power Plant. The recent announcement of settlement agreement with PG&E, the Coalition of Cities (six of the seven cities in the County including San Luis Obispo), County and San Luis Coastal Unified School District provides the possibility to soften the financial impacts of the proposed Diablo closure. The settlement agreement provides that $400,000 will be made available to develop a regional economic strategy once the California Public Utilities Commission concludes this phase of its proceedings (currently projected to be late summer or early fall 2017). This strategy will be led by the County and will help quantify the ongoing financial impacts to the City. The economic stimulus of implementing this plan will take time to realize. Additionally, the City may be developing San Luis Obispo -specific strategies and action plans that will be developed and implemented consistent with a timetable established by the City Council. As a result, there is currently significant uncertainty if negative economic and financial impacts to the region and the City can be avoided. But that is certainly going to be analyzed in greater detail both in the regional efforts and possibly through the updating of the City’s Economic Development Strategic Plan. In addition to the planning funds, the city will benefit from two other aspects of the proposed settlement. First, the city will maintain the share of Unitary Tax (a form of property tax) that is received based on the taxes currently paid by PG&E related to the property value of Diablo Canyon Power Plant. This will be the case for the next nine years and then this funding will cease. The negative fiscal impact equals a loss of revenue of approximately $140,000. The revenue allocated to the City varies from year to year. The third aspect of the settlement that will come to the City is a share of the Economic Development Fund. If the settlement and PG&E’s application to retire Diablo Canyon receives final approvals from the CPUC, the City’s share of the Economic Development Fund will be $1.82 million. It is anticipated that the process could concluded in 2018. It is prudent and consistent with Budget and Fiscal policies to consider any financial resources realized by the settlement agreement (including the taxes) as one-time resources because they are not continuing. This indicates that the Financial Plan may program these resources for one-time purposes in the timeframe they will be received. While not a lot of specific details are known now, more will likely be presented about this topic when the Five-Year Fiscal Forecast is presented in February, 2017. Staff is working on analysis of potential impacts of PG&E’s Diablo Canyon Power Plant closure and will return to Council with further analysis when more information. Lastly it might create some uneasiness that so little facts are known as of now. While it would be best if staff had more information to share it seemed appropriate to provide this information as soon as it was available to enhance awareness of these potential fiscal and economic impacts. 2017-19 FINANCIAL PLAN POLICIES As noted in the discussion above, Council goal-setting is an important “first step” in the City’s Financial Plan process. The second major feature in the City’s Financial Plan Process is reliance upon clear polices. In looking at cities across the nation that have reputations for being financially well-managed, and have maintained their fiscal health through good times and bad, one finds that they have in common clearly articulated fiscal policies used in financial decision- 17 Packet Pg. 262 making. This best practice, as implemented by the City of San Luis Obispo, has been acknowledged repeatedly by the bond rating agencies as an important factor in sustaining the City’s excellent credit rating. Formal statements of key budget and fiscal policies provide the foundation for assuring long- term fiscal health by establishing a clear framework for effective and prudent financial decision - making. The City’s Budget and Fiscal Policies are traditionally adopted by the Council when the Financial Plan is approved and are set forth in the Reference section of the Financial Plan. The policies cover a broad range of fiscal issues, including: Financial Plan organization General Revenue Management User Fee Cost Recovery Goals Enterprise Fund Fees and Rates Revenue Distribution Investments Appropriations Limitation Fund Balances and Reserves Capital Improvement Management Capital Financing and Debt Management Human Resource Management Productivity Contracting for Services At the outset of each financial planning cycle, the City reviews the policies in place to see if any updating is necessary. At this point, a few policy changes are proposed. Changes are generally intended to create consistency amongst City fiscal policies and create a system that is efficient and effective to administer. As staff begins preparing the 2017-19 Financial Plan, other additions or revisions to the City’s budget and fiscal policies may arise; if so, these will be presented for Council consideration at that time. Proposed Policy Changes Attachment I shows updated budget and fiscal policies. All changes to the policies are underlined for identification. The following major policy changes are proposed: 1. Add a policy to address long term costs. In February of 2015, the Council adopted a guiding principle to prioritize allocation of one -time funds available to pay down 1) Unfunded Pension Liability, 2) Other Post-Employment Benefits, 3) Roads Infrastructure, and 4) Equipment Replacement Fund in that order. The proposed policy is to establish that the City will give priority to applying one-time funds available for allocation to pay down long-term unfunded liabilities and to invest in infrastructure and equipment. In addition to being a prudent approach to maintaining the City’s fiscal health this policy is consistent with the Council-adopted Fiscal Responsibility Philosophy. 17 Packet Pg. 263 2. Modify Capital Financing and Debt Management section to add Publ ic Infrastructure Financing Policies. These policies offer a strategic framework for funding investments in the City’s public facilities and infrastructure. In addition to such general guidelines it is common for jurisdictions to also adopt financing policies for specific debt and land-secured financing mechanisms (e.g., Mello Roos Community Facilities Bonds). Financing guidelines and policies provide a systematic way of selecting, implementing, and assembling the funding (and/or financing the money) needed to construct needed public facilities and infrastructure in a manner that is effective, efficient and equitable. Such guidelines could be adopted by resolution, and updated regularly, as may be appropriate. The categories and types of public facilities and infrastructure improvements contemplated in these policies include water and sewer utilities, transportation infrastructure, streetscape improvements, parks and recreation facilities, and other public safety and civic facilities. Collectively, these public facilities and improvements induce private investment, facilitate real estate development including but not limited to new housing, increase economic activity, and expand the City’s tax base when coupled with sufficient market demand and wise land use policies. 3. Further study of City reserve requirements and need for a “Economic Fluctuation Reserve” Staff recommends further study of the City’s reserve requirements and review of fiscal policies to assess the need and feasibility of establishing an economic fluctuation reserve requirement. This type of requirement could smooth or mitigate impacts on ongoing operations and the level of services to the community should significant economic fluctuations occur. The recommendation is to direct staff to return with an analysis and a recommendation regarding a General Fund reserve requirement above current 20% of operating expenditures contingency as well as to consider a policy to set aside one-time funds to smooth funding operations to maintain expected service levels by the community due to major economic fluctuations. As described above there are some economic fluctuations that are on the horizon and uncertainties are anticipated. The analysis will consider best practices, trade-offs and other factors that could help the council decide if this is a prudent policy to adopt. CONCURRENCES The City’s internal Budget Review Team and the Department Head Team concur with the recommendations included in this report. FISCAL IMPACT There is no fiscal impact associated with the conduct of the City’s two-year financial planning process. The City budgets for all of these planned activities. Preparing budgets are one of the 17 Packet Pg. 264 core government functions that the City is responsible for carrying out. ALTERNATIVES 1. Modify the proposed Goal Setting activities. The Council could direct staff to pursue a different process for goal-setting this year. Staff does not recommend this alternative because there is value in conducting a similar process that residents are familiar with. If the Council is interested in making changes, staff recommends that they be incremental adjustments to the activities planned. If major changes are desired, they should be discussed and planned during the first year of the next financial plan. 2. Do not approve proposed budget policy changes. The City Council could decide not to approve one or more of the proposed budget policy changes. In this case, direction should be given to staff regarding the related issues and any other changes desired t o the budget policies. Attachments: a - Community Survey b - Community Group Notice 2017-19 Flyer c - Outline for Community Forum d - Sample Form for Council Goals e - Outline for Council Goal-Setting Workshop f - Guidelines for Council Members During Goal-Setting Process g - Criteria for Major City Goals h - SLO City Budget Organization i - Budget and Fiscal Policies_2017-19 j - Economic Outlook 2017-22 17 Packet Pg. 265 The City of San Luis Obispo is committed to including disabled persons in all of our services, programs and activities. Telecommunications Device for the Deaf (805) 781-7410. 2015-17 Major City Goals Open Space Preservation Multimodal Transportation Housing Other Important Objectives Neighborhood Wellness Laguna Lake Restoration Fiscal Sustainability Downtown The City Council wants to hear from you about what is truly important for the community. COMMUNITY PRIORITIES SURVEY What are the most important issues facing the City of San Luis Obispo? The City wants your input! Every two years, the City establishes the top priorities to make San Luis Obispo an even better place to live, work and play. The City Council then matches the resources necessary to achieve these priorities through adopting the budget in June. The adopted budget sets the City’s course of action for the next two years and helps the City to continue to provide the exceptional services and programs the community cherishes. As the upcoming 2017-19 financial plan process unfolds, economic growth remains steady. Revenues are expected to grow at a modest rate. Development review activity remains at a high level. The City has also made progress in our work to contain operating costs which in turn helps improve our overall fiscal health. Despite these positive signs, there are significant uncertainties and challenges. This is particularly true in relation to the on-going cost of retirement and insurance programs, and the need to fund the deferred maintenance of infrastructure. All of these factors are likely to lead to complex and competing budget decisions. Regardless of the specific fiscal circumstances, it is critical that we have an effective process for setting the most important, highest priority things for the City to do in the next two years. That’s where you can help! Share Your Thoughts on the City’s Priorities! The City Council needs to know your thoughts on what the community’s priorities should be so that available resources can be best allocated to achieve them. Now it’s time for you to share your ideas for 2017-19 priorities. The City needs the help of the community in two important ways: Complete the survey by visiting www.slocity.org/opencityhall or fill out the survey included in this mailing and mail it back or drop it by any City office. Attend the Community Forum on Tuesday, January 10, 2017 from 6:30 p.m. to 9:30 p.m. at the Ludwick Community Center, 864 Santa Rosa Street. This forum is an opportunity to present your ideas to the Council and discuss them with other community members. If you have any questions about the City’s goal-setting and budget process, please contact Xenia Bradford, Finance Director, at 781-7521 or Citygoals@slocity.org. City staff will compile the community feedback for the Council to review in advance of its goal-setting workshop on Saturday, January 28, 2017 at 8:30 a.m. During this public workshop, the Council will deliberate to set the Major City Goals and Other Important Objectives for the next two years. This survey is your opportunity to tell the City: What issues are important to the community? What priorities should the City focus on during the next two years? How might the City adjust other service needs to accomplish these priorities? 17.a Packet Pg. 266 Attachment: a - Community Survey [Revision 2] (1537 : 2017-19 Financial Plan Budget Foundation) For mailing – FOLD THIS END FIRST BUSINESS REPLY MAIL FIRST-CLASS MAIL PERMIT NO. 369 SAN LUIS OBISPO, CA POSTAGE WILL BE PAID BY ADDRESSEE NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES CITY ADMINISTRATIVE OFFICER CITY OF SAN LUIS OBISPO 990 PALM ST SAN LUIS OBISPO CA 93401-9938 -------------------------------------------------------------------------------------------------------------------------------------- Tape Here 17.a Packet Pg. 267 Attachment: a - Community Survey [Revision 2] (1537 : 2017-19 Financial Plan Budget Foundation) Community Priorities for 2017-19 What should be the City’s most important, highest priority goals during 2017-19? For mailing – FOLD THIS END FIRST How might the City adjust other programs & services to accomplish these priorities? Email address (optional): Providing your email will enable you to view your statement online and see statements from others. Your email address will not be included with your statement and the City will not share it. 17.a Packet Pg. 268 Attachment: a - Community Survey [Revision 2] (1537 : 2017-19 Financial Plan Budget Foundation) Attachment 2 Feedback from both the survey and Community Forum will be compiled for the City Council to review in advance of its goal-setting workshop on Saturday, January 28, 2017 at 8:30 a.m. During this public workshop, the Council will deliberate to set the Major City Goals and Other Important Objectives for the next two years. Comments can be submitted online at the City’s Open Government portal: www.slocity.org/opencityhall. If you are submitting comments on behalf of a community group, business or organization, please include Your organization ’s name within your response. To submit comments by mail, please them to Courtney Steck, Budget Manager, at 990 Palm Street, San Luis Obispo, CA, 93401; by fax at 781-7401; or by email at Citygoals@slocity.org. For more information on the goal-setting and budget process, contact Finance Department at 781-7521. For additional information on the City’s Financial Plan and Goal-Setting process, visit www.slocity.org. What are the most important priorities facing the City of San Luis Obispo? The City Council wants to hear from you about what is truly important for the community. The City of San Luis Obispo is committed to including disabled persons in all of our services, programs and activities. Telecommunications device for the deaf: (805) 781- 7410. 2017-19 Financial Plan Contact Information Key Dates Written Suggestions Comments can be submitted online at: www.slocity.org/opencityhall Or via mail to: Courtney Steck, Budget Manager 990 Palm Street San Luis Obispo, CA 93401 Fax: 781-7401 Email: Citygoals@slocity.org 2017-19 Financial Plan Meetings Budget Foundation Meeting Tuesday, December 13, 2016, 6:00 p.m. Community Forum Tuesday, January 10, 2017 6:30 p.m. to 9:30 p.m. Ludwick Community Center Goal-Setting Workshop Saturday, January 28, 2017 8:30 a.m. to 4:30 p.m. City-County Library Mid-Year Budget Review Tuesday, February 21, 2017, 6:00 p.m. Strategic Budget Direction & Major City Goal Programs Workshop Tuesday, April 18, 2017, 6:00 p.m. Budget Workshops June 1 & 6, 2017, 5:00 p.m. June 20, 2017, 6:00 p.m. 2017-19 Budget Adoption Tuesday, June 20, 2017, 6:00 p.m. Of all the things that can be done to make the City an even better place to live, work and play, which are the most important? 17.b Packet Pg. 269 Attachment: b - Community Group Notice 2017-19 Flyer [Revision 3] (1537 : 2017-19 Financial Plan Attachment 2 The City Wants Your Input Every two years, the City establishes the top priorities to make San Luis Obispo an even better place to live, work and play. Then the City Council matches the resources to achieve these priorities through adopting the budget in June. This sets the City’s course of action for the next two years and helps the City to continue to provide the exceptional services and programs the community cherishes. As the upcoming 2017-19 financial plan process unfolds, economic growth remains steady. Revenues are expected to grow at a modest rate. Development review activity remains at a high level. The City has also made progress in our work to contain operating co sts which in turn helps improve our overall fiscal health. Despite these positive signs, there are significant uncertainties and challenges. This is particularly true in relation to the on-going cost of retirement and insurance programs, and the need to fund the deferred maintenance of infrastructure. All of these factors are likely to lead to complex and competing budget decisions. Regardless of the specific fiscal circumstances, it is critical that we have an effective process for setting the most important, highest priority things for the City to do in the next two years. That’s where you can help! Share Your Thoughts on the City’s Priorities! You have the opportunity to tell the City: What issues are important to the community? What priorities should the City focus on during the next two years? How might the City adjust other service needs to accomplish these priorities? Major City Goals The City Council needs to know your thoughts on what the community’s priorities should be so that available resources can be best allocated to achieve them. Now it’s time for you to share your ideas for 2017-19 priorities. Major City Goals are identified as the most important, highest priority goals for the City to accomplish over the next two years. Open Space Preservation Housing Multi-Modal Transportation Other Important Objectives: • Neighborhood Wellness • Laguna Lake Restoration • Downtown • Fiscal Sustainability and Responsibility Your Important Role in this Process The City needs the help of the community in two important ways: Complete the Community Priorities Survey. Community members can help by completing a survey online at www.slocity.org/opencityhall, or by filling out the printed survey sent to utility customers in mid-November. Printed surveys should be dropped off or mailed to City Hall, 990 Palm Street, 93401. All surveys received before December 15, 2016 will be summarized and presented to the City Council at the Community Forum. Attend the Community Forum on January 10, 2017 from 6:30 p.m. to 9:30 p.m. at the Ludwick Community Center, 864 Santa Rosa Street. This forum is an opportunity to present your ideas to the Council and discuss them with other community members. City staff will compile the community feedback for the Council to review in advance of its goal- setting workshop on Saturday, January 28, 2017. During this public workshop, the Council will deliberate to set the Major City Goals and Other Important Council Objectives for the next two years. Current Major City Goals What Are the Most Important Needs of the City Over the Next Two Years? 17.b Packet Pg. 270 Attachment: b - Community Group Notice 2017-19 Flyer [Revision 3] (1537 : 2017-19 Financial Plan ATTACHMENT 3 Community Forum 6:30 PM to 9:30 PM, Tuesday, January 10, 2017 Ludwick Community Center 6:30 Welcome Mayor 6:35 Process, Current Goals, Local Sales Tax Priorities and Fiscal Outlook City Manager/ Finance Director 6:40 Public Comment 1. Members of public who desire to speak complete public comment cards and indicate topic. Where a group has several members present, we encourage them to select a spokesperson and have others in their group indicate support for the same position with a show of hands. 2. We invite each speaker to address: a. What do you recommend as a Major City Goal? b. Why is it important to you and the City? c. How do you suggest that it might be accomplished? 3. Facilitator calls upon a speaker and identifies general topic. 4. Department Head in the budget category for the topic steps up to write the idea on a flip chart sheet and clarifies any linkages with existing programs or plans. 5. Staff posts the public comment in the relevant budget category. 6. All participants provided with half-page “post-its” to note any suggestions or concerns about the ideas. 9:00 Closing remarks Mayor 9:15 Participants Vote on Top Priorities with Dots (no more than 1 green and yellow dot per item) 9:30 Adjourn Preparation Prepare handouts on budget process; current goals & objectives and local revenue measure priorities; and Community Priorities Survey results. Set up the room with posting area for each of the budget categories. Provide participants with half-page post-its. After receiving public comments, provide the following adhesive dots per attendee: 5 yellow for top Local Sales Tax priorities and 5 green for overall goal priorities. 17.c Packet Pg. 271 Attachment: c - Outline for Community Forum [Revision 4] (1537 : 2017-19 Financial Plan Budget Foundation) Community Forum Procedures Facilitator’s Role As noted in the agenda details, the facilitator will help organize comments by general topic and encourage groups to select a spokesperson and have others in the group indicate support for the same position with a show of hands. Documenting Testimony Each speaker will be invited to address the “what, why, and how” of his/her suggested goal. The Department Head responsible for the related budget function (i.e., Community Safety, Culture & Recreation, Infrastructure & Transportation, Community & Neighborhood Livability, Environmental Health & Open Space, Fiscal Health & Governance) will write the idea on a flip chart sheet and clarify any linkages with existing programs or plans. Staff will post the flip chart sheets with the public comments in the relevant budget functional areas on the walls. Additional Comments Participants will also receive half-page “post-it” notes for audience members to offer written comments such as resource suggestions or concerns to be posted next to goals. Voting with Dots To involve participants further and garner direct citizen feedback on all suggestions offered, “voting with dots” will be used again. At the end of the comment period, each attendee will receive adhesive dots to apply to the posted items: six green for overall goal priorities and six orange dots for top local sales tax priorities will be provided to each participant. When using the dots, the same goal could receive both a green and orange dot. That decision is within the control of community member participating in the process. Participants will be advised to avoid assigning more than one green and one orange dot to any one goal. However, because this is an informal way to gather input for the Council to be considered for the coming two year-cycle there will be no monitors or ways to prohibit participants from applying as many dots to any item as they wish. City staff will summarize the results of the forum and distribute them to the Council on January 13, 2017, to assist the Council in completing its “homework” and in preparation for the Goal-Setting Workshop. Videotaping It is also planned for the Community Forum to be videotaped so there will be a historical record other than the flip charts and individual recollections. This will be done in a way that will be low key (one camera, no lights) so the quality may not replicate a regular council meeting. Should the Council object to this effort, concern should be expressed at the December 13th Council meeting. 17.c Packet Pg. 272 Attachment: c - Outline for Community Forum [Revision 4] (1537 : 2017-19 Financial Plan Budget Foundation) ATTACHMENT 4 Council Member Candidate Major City Goals Please prepare up to 7 candidates for Major City Goals below and submit them to Finance by 9:00 a.m., Tuesday, January 17, 2017. Since the Council will identify connections between the use of Local Revenue Measure revenues and Major City Goals, please note which suggestions address Local Revenue Measure priorities. Finance will then compile a verbatim, composite list by topic without identifying who submitted the particular statements. Please refrain from releasing your personal list so that each Council member has flexibility to review all of the submissions and discuss them at the Council Goal-Setting Workshop before staking a position. Local Revenue Measure? Yes/No Local Revenue Measure? Yes/No Local Revenue Measure? Yes/No Local Revenue Measure? Yes/No Local Revenue Measure? Yes/No Local Revenue Measure? Yes/No Local Revenue Measure? Yes/No 17.d Packet Pg. 273 Attachment: d - Sample Form for Council Goals [Revision 4] (1537 : 2017-19 Financial Plan Budget Foundation) ATTACHMENT 4 Suggestions for Changes in Other Programs and Services Please provide ideas about possible changes in other programs and services to fund desired goals. Please submit them to Finance by 9:00 a.m., Tuesday, January 17, 2017. Finance will then compile a verbatim, composite list by topic without identifying who submitted the particular statements. Please refrain from releasing your personal list so that each Council member has flexibility to review all of the submissions and discuss them at the Council Goal - Setting Workshop before taking a position. 17.d Packet Pg. 274 Attachment: d - Sample Form for Council Goals [Revision 4] (1537 : 2017-19 Financial Plan Budget Foundation) ATTACHMENT 5 Council Goal-Setting Workshop 8:30 AM to 4:30 PM Saturday, January 28, 2017 City-County Library Community Room 8:30 - 9:00 a.m. Refreshments 9:00 - 9:05 a.m. Welcome and Introductions Mayor 9:05 - 9:10 a.m. Purpose, Process & Guidelines Facilitator 9:10 – Noon Review Goals by Category Council Discuss Relationship of Goals to Current Activities Formulate and Select Candidate Goals Noon – 12:15 p.m. [Council may accept further comments from the public that have not been previously presented] 12:15 – 1:15 Lunch Break [staff compiles candidate goals] 1:15 - 2:15 p.m. Discuss and Clarify the Goals Council Each Member Prepares a Written Ballot Ranking the Goals 2:15 - 3:15 p.m. Break while staff tabulates the results Staff 3:15 - 4:00 p.m. Review and Identify Major City Goals Council 4:00 - 4:30 p.m. Discuss Next Steps Council/Staff Preparation Staff compiles and distributes composite list of candidate goals to Council members. Staff prepares a template for Council ballot sheet. Assign staff to enter goal statements into spreadsheet as Council formulates them. 17.e Packet Pg. 275 Attachment: e - Outline for Council Goal-Setting Workshop (1537 : 2017-19 Financial Plan Budget Foundation) ATTACHMENT 6 Suggested Guidelines for Council Members During the Goal-Setting Process 1. Encourage advisory boards, community groups and citizens to submit written comments about desired goals. 2. Invite citizens to participate in Community Forum and to listen and learn from their neighbors. 3. Receive comments from community and acknowledge their input without prematurely expressing your point of view. 4. Assure the community that you are willing to listen openly to all perspectives. 5. Focus your submission of suggested goals on a short list of key priorities to target City resources (not to exceed seven candidate goals for consideration). 6. Avoid publicizing your submission of suggested goals. Let staff compile your submissions verbatim into a composite list of goals by category without identification of who made each suggestion. This enables you to see the whole picture. 7. Give yourself flexibility by not publicly taking positions in advance of the January 28, 2017 Council Goal-Setting Workshop. 8. Use this process as a way to learn from citizens and Council colleagues about what’s important. 9. Explore areas where the Council can come together for positive action. 10. Recognize that this is an important step, but only the first step, in the planning and budgeting for the next two years. 17.f Packet Pg. 276 Attachment: f - Guidelines for Council Members During Goal-Setting Process (1537 : 2017-19 Financial Plan Budget Foundation) ATTACHMENT 7 Criteria for Major City Goals 1. Be legitimate to our genuine beliefs (real, supported). 2. Agreed upon by a Council majority. 3. Limited in number for comprehension, communication and focus. 4. Set forth in one document—the Financial Plan. 5. Be clear and understandable. 6. Established as a high priority and a real commitment. 7. Reflect major goals that cannot be achieved without Council support. 8. Can be translated into the performance goals and objectives of employees at all levels of the organization. 9. Created within a supportive atmosphere where participants are not afraid to state their suggestions for improving goals or objectives. 10. Reflect genuine consensus: while unanimous agreement is not required, they should be accepted to the point where resistance to them is reduced or eliminated. 17.g Packet Pg. 277 Attachment: g - Criteria for Major City Goals (1537 : 2017-19 Financial Plan Budget Foundation) Fiscal Health & Governance Community Safety Culture & Recreation Infrastructure & Transportation Community & Neighborhood Livability Environmental Health & Open Space 17.h Packet Pg. 278 Attachment: h - SLO City Budget Organization (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES FINANCIAL PLAN PURPOSE AND ORGANIZATION A. Financial Plan Objectives. Through its Financial Plan, the City will link resources with results by: 1. Identifying community needs for essential services. 2. Organizing the programs required to provide these essential services. 3. Establishing program policies and goals, which define the nature and level of program services required. 4. Identifying activities performed in delivering program services. 5. Proposing objectives for improving the delivery of program services. 6. Identifying and appropriating the resources required to perform program activities and accomplish program objectives. 7. Setting standards to measure and evaluate the: a. Output of program activities. b. Accomplishment of program objectives. c. Expenditure of program appropriations. B. Two-Year Budget. Following the City's favorable experience, the City will continue using a two-year financial plan, emphasizing long-range planning and effective program management. The benefits identified when the City's first two-year plan was prepared for 1983-85 continue to be realized: 1. Reinforcing the importance of long-range planning in managing the City's fiscal affairs. 2. Concentrating on developing and budgeting for the accomplishment of significant objectives. 3. Establishing realistic timeframes for achieving objectives. 4. Creating a pro-active budget that provides for stable operations and assures the City's long-term fiscal health. 5. Promoting more orderly spending patterns. 6. Reducing the amount of time and resources allocated to preparing annual budgets. C. Measurable Objectives. The two-year financial plan will establish measurable program objectives and allow reasonable time to accomplish those objectives. D. Second Year Budget. Before the beginning of the second year of the two-year cycle, the Council will review progress during the first year and approve appropriations for the second fiscal year. E. Operating Carryover. Operating program appropriations not spent during the first fiscal year may be carried over for specific purposes into the second fiscal year with the approval of the City Manager. F. Goal Status Reports. The status of major program objectives will be formally reported to the Council on an ongoing, periodic basis. 17.i Packet Pg. 279 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES G. Mid-Year Budget Reviews. The Council will formally review the City’s fiscal condition, and amend appropriations if necessary, six months after the beginning of each fiscal year. LONG - TERM FINANCIAL PLANNING A. Balanced Budget. The City will maintain a balanced budget over the two-year period of the Financial Plan. This means that: 1. Operating revenues must fully cover operating expenditures, including debt service. 2. Ending fund balance (or working capital in the enterprise funds) must meet minimum policy levels. For the general and enterprise funds, this level has been established at 20% of operating expenditures. Under this policy, it is allowable for total expenditures to exceed revenues in a given year; however, in this situation, beginning fund balance can only be used to fund capital improvement plan proje cts, or other “one-time,” non-recurring expenditures. B. Long-Term Liabilities and Maintenance of Infrastructure. The City will give priority to applying unassigned fund-balance due to one-time expenditure savings or one-time increase in revenue to pay down long- term unfunded liabilities and invest in infrastructure and equipment. FINANCIAL REPORTING AND BUDGET ADMINISTRATION A. Annual Reporting. The City will prepare annual financial statements as follows: 1. In accordance with Charter requirements, the City will contract for an annual audit by a qualified independent certified public accountant. The City will strive for an unqualified auditors’ opinion. 2. The City will use generally accepted accounting principles in preparing its annual financial stat ements, and will strive to meet the requirements of the GFOA’s Award for Excellence in Financial Reporting program. 3. The City will issue audited financial statements within 180 days after year-end. B. Interim Reporting. The City will prepare and issue timely interim reports on the City’s fiscal status to the Council and staff. This includes: on-line access to the City’s financial management system by City staff; monthly reports to program managers; more formal quarterly reports to the Council and Department Heads; mid-year budget reviews; and interim annual reports. C. Budget Administration. As set forth in the City Charter, the Council may amend or supplement the budget at any time after its adoption by majority vote of the Council members. The City Mana ger has the authority to make administrative adjustments to the budget as long as those changes will not have a significant policy impact nor affect budgeted year-end fund balances. 17.i Packet Pg. 280 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES D. Development Services Revenue. The City Manager may allocate or designate 75% of over-realized Development Services revenues exceeding adopted budget for the current fiscal year for temporary Development Services expenditures for the purpose of timely processing of development permit applications in the current fiscal year or throughout life of applicable projects. Any and all City Manager authorized allocations and funds set aside in a designation for future use, shall be reported to the Council on a semi- annual basis. GENERAL REVENUE MANAGEMENT A. Diversified and Stable Base. The City will seek to maintain a diversified and stable revenue base to protect it from short-term fluctuations in any one revenue source. B. Long-Range Focus. To emphasize and facilitate long-range financial planning, the City will maintain current projections of revenues for the succeeding five years. C. Current Revenues for Current Uses. The City will make all current expenditures with current revenues, avoiding procedures that balance current budgets by postponing needed expenditures, accruing future revenues, or rolling over short-term debt. D. Interfund Transfers and Loans. In order to achieve important public policy goals, the City has established various special revenue, capital project, debt service and enterprise funds to account for revenues whose use should be restricted to certain activities. Accordingly, each fund exists as a separate financing entity from other funds, with its own revenue sources, expenditures and fund equity. Any transfers between funds for operating purposes are clearly set f orth in the Financial Plan, and can only be made by the Finance Director in accordance with the adopted budget. These operating transfers, under which financial resources are transferred from one fund to another, are distinctly different from interfund borrowings, which are usually made for temporary cash flow reasons, and are not intended to result in a transfer of financial resources by the end of the fiscal year. In summary, interfund transfers result in a change in fund equity; interfund borrowings do not, as the intent is to repay the loan in the near term. From time-to-time, interfund borrowings may be appropriate; however, these are subject to the following criteria in ensuring that the fiduciary purpose of the fund is met: 1. The Finance Director is authorized to approve temporary interfund borrowings for cash flow purposes whenever the cash shortfall is expected to be resolved within 45 days. The most common use of interfund borrowing under this circumstance is for grant programs like the Community Development Block Grant, where costs are incurred before drawdowns are initiated and received. However, receipt of funds is typically received shortly after the request for funds has been made. 2. Any other interfund borrowings for cash flow or other purpo ses require case-by-case approval by the Council. 3. Any transfers between funds where reimbursement is not expected within one fiscal year shall not be recorded as interfund borrowings; they shall be recorded as interfund operating transfers that affect equity by moving financial resources from one fund to another. 17.i Packet Pg. 281 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES USER FEE COST RECOVERY GOALS A. Ongoing Review Fees will be reviewed and updated on an ongoing basis to ensure that they keep pace with changes in the cost-of-living as well as changes in methods or levels of service delivery. In implementing this goal, a comprehensive analysis of City costs and fees should be made at least every five years. In the interim, fees will be adjusted by annual changes in the Consumer Price Index. Fees may be adjusted during this interim period based on supplemental analysis whenever there have been significant changes in the method, level or cost of service delivery. B. User Fee Cost Recovery Levels In setting user fees and cost recovery levels, the following factor s will be considered: 1. Community-Wide Versus Special Benefit. The level of user fee cost recovery should consider the community-wide versus special service nature of the program or activity. The use of general-purpose revenues is appropriate for community-wide services, while user fees are appropriate for services that are of special benefit to easily identified individuals or groups. 2. Service Recipient Versus Service Driver. After considering community-wide versus special benefit of the service, the concept of service recipient versus service driver should also be considered. For example, it could be argued that the applicant is not the beneficiary of the City's development review efforts: the community is the primary beneficiary. However, the applicant is the driver of development review costs, and as such, cost recovery from the applicant is appropriate. 3. Effect of Pricing on the Demand for Services. The level of cost recovery and related pricing of services can significantly affect the demand and subsequent level of services provided. At full cost recovery, this has the specific advantage of ensuring that the City is providing services for which there is genuinely a market that is not overly-stimulated by artificially low prices. Conversely, high levels of cost recovery will negatively impact the delivery of services to lower income groups. This negative feature is especially pronounced, and works against public policy, if the services are specifically targeted to low income groups. 4. Feasibility of Collection and Recovery. Although it may be determined that a high level of cost recovery may be appropriate for specific services, it may be impractical or too costly to establish a system to identify and charge the user. Accordingly, the feasibility of assessing and collecting charges should also be considered in developing user fees, especially if significant program costs are intended to be financed from that source. C. Factors Favoring Low Cost Recovery Levels Very low cost recovery levels are appropriate under the following circumstances: 17.i Packet Pg. 282 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES 1. There is no intended relationship between the amount paid and the benefit received. Almost all "social service" programs fall into this category as it is expected that one group will subsidize another. 2. Collecting fees is not cost-effective or will significantly impact the efficient delivery of the service. 3. There is no intent to limit the use of (or entitlement to) the service. Again, most "social service" programs fit into this category as well as many public safety (police and fire) emergency response services. Historically, access to neighborhood and community parks would also fit into this category. 4. The service is non-recurring, generally delivered on a "peak demand" or emergency basis, cannot reasonably be planned for on an individual basis, and is not readily available from a private sector source. Many public safety services also fall into this category. 5. Collecting fees would discourage compliance with regulatory requirements and adherence is primarily self-identified, and as such, failure to comply would not be readily detected by the City. Many small - scale licenses and permits might fall into this category. D. Factors Favoring High Cost Recovery Levels The use of service charges as a major source of funding service levels is especially appropriate under the following circumstances: 1. The service is similar to services provided through the private sector. 2. Other private or public sector alternatives could or do exist for the delivery of the service. 3. For equity or demand management purposes, it is intended that there be a direct relationship between the amount paid and the level and cost of the service received. 4. The use of the service is specifically discouraged. Police responses to disturbances or fals e alarms might fall into this category. 5. The service is regulatory in nature and voluntary compliance is not expected to be the primary method of detecting failure to meet regulatory requirements. Building permit, plan checks, and subdivision review fees for large projects would fall into this category. E. General Concepts Regarding the Use of Service Charges The following general concepts will be used in developing and implementing service charges: 1. Revenues should not exceed the reasonable cost of providing the service. 2. Cost recovery goals should be based on the total cost of delivering the service, including direct costs, departmental administration costs and organization-wide support costs such as accounting, personnel, information technology, legal services, fleet maintenance and insurance. 3. The method of assessing and collecting fees should be as simple as possible in order to reduce the administrative cost of collection. 17.i Packet Pg. 283 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES 4. Rate structures should be sensitive to the "market" for similar services as well as to smaller, infrequent users of the service. 5. A unified approach should be used in determining cost recovery levels for various programs based on the factors discussed above. F. Low Cost-Recovery Services Based on the criteria discussed above, the following types of services should have very low cost recovery goals. In selected circumstances, there may be specific activities within the broad scope of services provided that should have user charges associated with them. However, the primary source of fu nding for the operation as a whole should be general-purpose revenues, not user fees. 1. Delivering public safety emergency response services such as police patrol services and fire suppression. 2. Maintaining and developing public facilities that are provided on a uniform, community-wide basis such as streets, parks and general-purpose buildings. 3. Providing social service programs and economic development activities. G. Recreation Programs The following cost recovery policies apply to the City's recreation programs: 1. Cost recovery for activities directed to adults should be relatively high. 2. Cost recovery for activities directed to youth and seniors should be relatively low. In those circumstances where services are similar to those provided in the private secto r, cost recovery levels should be higher. Although ability to pay may not be a concern for all youth and senior participants, these are desired program activities, and the cost of determining need may be greater than the cost of providing a uniform service fee structure to all participants. Further, there is a community-wide benefit in encouraging high- levels of participation in youth and senior recreation activities regardless of financial status. 3. Cost recovery goals for recreation activities are set as follows: High-Range Cost Recovery Activities - (60% to 100%) a. Adult athletics b. Banner permit applications c. Child care services (except Youth STAR) d. Facility rentals (indoor and outdoor; excludes use of facilities for internal City uses) e. Triathlon f. Golf Mid-Range Cost Recovery Activities - (30% to 60%) g. Classes h. Holiday in the Plaza i. Major commercial film permit applications 17.i Packet Pg. 284 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES Low-Range Cost Recovery Activities- (0 to 30%) j. Aquatics k. Batting cages l. Community gardens m. Junior Ranger camp n. Minor commercial film permit applications o. Skate park p. Special events (except for Triathlon and Holiday in the Plaza) q. Youth sports r. Youth STAR s. Teen services t. Senior/boomer services 4. For cost recovery activities of less than 100%, there should be a differential in rates between re sidents and non-residents. However, the Director of Parks and Recreation is authorized to reduce or eliminate non-resident fee differentials when it can be demonstrated that: a. The fee is reducing attendance. b. And there are no appreciable expenditure savings from the reduced attendance. 5. Charges will be assessed for use of rooms, pools, gymnasiums, ball fields, special -use areas, and recreation equipment for activities not sponsored or co-sponsored by the City. Such charges will generally conform to the fee guidelines described above. However, the Director of Parks and Recreation is authorized to charge fees that are closer to full cost recovery for facilities that are heavily used at peak times and include a majority of non-resident users. 6. A vendor charge of at least 10 percent of gross income will be assessed from individuals or organizations using City facilities for moneymaking activities. 7. Director of Parks and Recreation is authorized to offer reduced fees such as introductory rates, family discounts and coupon discounts on a pilot basis (not to exceed 18 months) to promote new recreation programs or resurrect existing ones. 8. The Parks and Recreation Department will consider waiving fees only when the City Manager determines in writing that an undue hardship exists. H. Development Review Programs The following cost recovery policies apply to the development review programs: 1. Services provided under this category include: a. Planning (planned development permits, tentative tract and parcel maps, rezonings, general plan amendments, variances, use permits). b. Building and safety (building permits, structural plan checks, inspections). 17.i Packet Pg. 285 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES c. Engineering (public improvement plan checks, inspections, subdivision requirements, encroachments). d. Fire plan check. 2. Cost recovery for these services should generally be very high. In most instances, the City's cost recovery goal should be 100%. 3. However, in charging high cost recovery levels, the City needs to clearly establish and articulate standards for its performance in reviewing developer applications to ensure that there is “value for cost.” I. Comparability with Other Communities In setting user fees, the City will consider fees charged by other agencies in accordance with the following criteria: 1. Surveying the comparability of the City's fees to other communities provides useful background information in setting fees for several reasons: a. They reflect the "market" for these fees and can assist in assessing the reasonableness of San Luis Obispo’s fees. b. If prudently analyzed, they can serve as a benchmark for how cost-effectively San Luis Obispo provides its services. 2. However, fee surveys should never be the sole or primary criteria in setting City fees as there are many factors that affect how and why other communities have set their fees at their levels. For example: a. What level of cost recovery is their fee intended to achieve compared with our cost recovery objectives? b. What costs have been considered in computing the fees? c. When was the last time that their fees were comprehensively evaluated? d. What level of service do they provide compared with our service or performance standards? e. Is their rate structure significantly different than ours and what is it intended to achieve? 3. These can be very difficult questions to address in fairly evaluating fees among different communities. As such, the comparability of our fees to other communities should be one factor among many that is considered in setting City fees. ENTERPRISE FUND FEES AND RATES A. Water, Sewer and Parking. The City will set fees and rates at levels which fully cover the total direct and indirect costs—including operations, capital outlay, and debt service—of the following enterprise programs: water, sewer and parking. 17.i Packet Pg. 286 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES B. Transit. Based on targets set under the Transportation Development Act, the City will strive to cover at least twenty percent of transit operating costs with fare revenues. C. Ongoing Rate Review. The City will review and adjust enterprise fees and rate structures as required to ensure that they remain appropriate and equitable. D. Franchise Fees. In accordance with long-standing practices, the City will treat the water and sewer funds in the same manner as if they were privately owned and operated. This means assessing reasonable franchise fees in fully recovering service costs. At 3.5%, water and sewer franchise fees are based on the mid -point of the statewide standard for public utilities like electricity and gas (2% of gross revenues from operations) and cable television (5% of gross revenues). As with other utilities, the purpose of the franchise fee is reasonable cost recovery for the use of the City’s street right-of-way. The appropriateness of charging the water and sewer funds a reasonable franchise fee for the use of City streets is further supported by the results of studies in Arizona, California, Ohio and Vermont which concluded that the leading cause for street resurfacing and reconstruction is street cuts and trenching for utilities. REVENUE DISTRIBUTION The Council recognizes that generally accepted accounting principles for state and local governments discourage the “earmarking” of General Fund revenues, and accordingly, the practice of designating General Fund revenues for specific programs should be minimized in the City's management of its fiscal affairs. Approval of the following revenue distribution policies does not prevent the Council from directing General Fund resources to other functions and programs as necessary. A. Property Taxes. With the passage of Proposition 13 on June 6, 1978, California cities no longer can set their own property tax rates. In addition to limiting annual increases in market value, placing a ceiling on voter-approved indebtedness, and redefining assessed valuations, Proposition 13 establishe d a maximum county-wide levy for general revenue purposes of 1% of market value. Under subsequent state legislation, which adopted formulas for the distribution of this countywide levy, the City now receives a percentage of total property tax revenues collected countywide as determined by the State and administered by the County Auditor-Controller. The City receives 14.9% of each dollar collected in property tax after allocations to school districts. Accordingly, while property revenues are often thought of local revenue sources, in essence they are State revenue sources, since the State controls their use and allocation. With the adoption of a Charter revision in November 1996, which removed provisions that were in conflict with Proposition 13 relating to the setting of property tax revenues between various funds, all property tax revenues are now accounted for in the General Fund. B. Gasoline Tax Subventions. All gasoline tax revenues (which are restricted by the State for street -related purposes) will be used for maintenance activities. Since the City's total expenditures for gas tax eligible programs and projects are much greater than this revenue source, operating transfers will be made from the 17.i Packet Pg. 287 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES gas tax fund to the General Fund for this purpose. Thi s approach significantly reduces the accounting efforts required to meet State reporting requirements. C. Transportation Development Act (TDA) Revenues. All TDA revenues will be allocated to alternative transportation programs, including regional and munici pal transit systems, bikeway improvements, and other programs or projects designed to reduce automobile usage. Because TDA revenues will not be allocated for street purposes, it is expected that alternative transportation programs (in conjunction with oth er state or federal grants for this purpose) will be self-supporting from TDA revenues. D. Parking Fines. All parking fine revenues will be allocated to the parking fund, except for those collected by Police staff (who are funded by the General Fund) in implementing neighborhood wellness programs. INVESTMENTS A. Responsibility. Investments and cash management are the responsibility of the City Treasurer or designee. It is the City’s policy to appoint the Finance Director as the City’s Treasurer. B. Investment Objective. The City's primary investment objective is to achieve a reasonable rate of return while minimizing the potential for capital losses arising from market changes or issuer default. Accordingly, the following factors will be considered in priority order in determining individual investment placements: 1. Safety 2. Liquidity 3. Yield C. Tax and Revenue Anticipation Notes: Not for Investment Purposes. There is an appropriate role for tax and revenue anticipation notes (TRANS) in meeting legi timate short-term cash needs within the fiscal year. However, many agencies issue TRANS as a routine business practice, not solely for cash flow purposes, but to capitalize on the favorable difference between the interest cost of issuing TRANS as a tax -preferred security and the interest yields on them if re-invested at full market rates. As part of its cash flow management and investment strategy, the City will only issue TRANS or other forms of short-term debt if necessary to meet demonstrated cash flow needs; TRANS or any other form of short- term debt financing will not be issued for investment purposes. As long as the City maintains its current policy of maintaining fund/working capital balances that are 20% of operating expenditures, it is unlikely that the City would need to issue TRANS for cash flow purposes except in very unusual circumstances. D. Selecting Maturity Dates. The City will strive to keep all idle cash balances fully invested through daily projections of cash flow requirements. To avoi d forced liquidations and losses of investment earnings, cash flow and future requirements will be the primary consideration when selecting maturities. E. Diversification. As the market and the City's investment portfolio change, care will be taken to maint ain a healthy balance of investment types and maturities. F. Authorized Investments. The City will invest only in those instruments authorized by the California Government Code Section 53601. 17.i Packet Pg. 288 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES The City will not invest in stock, will not speculate and will not deal in futures or options. The investment market is highly volatile and continually offers new and creative opportunities for enhancing interest earnings. Accordingly, the City will thoroughly investigate any new investment vehicles before committi ng City funds to them. G. Authorized Institutions. Current financial statements will be maintained for each institution in which cash is invested. Investments will be limited to 20 percent of the total net worth of any institution and may be reduced further or refused altogether if an institution's financial situation becomes unhealthy. H. Consolidated Portfolio. In order to maximize yields from its overall portfolio, the City will consolidate cash balances from all funds for investment purposes, and will allocate investment earnings to each fund in accordance with generally accepted accounting principles. I. Safekeeping. Ownership of the City's investment securities will be protected through third-party custodial safekeeping. J. Investment Management Plan. The City Treasurer will develop and maintain an Investment Management Plan that addresses the City's administration of its portfolio, including investment strategies, practices and procedures. K. Investment Oversight Committee. As set forth in the Investment Management Plan, this committee is responsible for reviewing the City’s portfolio on an ongoing basis to determine compliance with the City’s investment policies and for making recommendations to the City Treasurer (Finance Director regarding investment management practices. Members include the City Manager, Assistant City Manager, Finance Director/City Treasurer, Accounting Manager, the City’s independent auditor, one City Council member, and one member of the public. The member of the public shall be appointed by the City Council in accordance with the City’s process for appointing advisory body members. L. Reporting. The City Treasurer will develop and maintain a comprehensive, well -documented investment reporting system, which will comply with Government Code Section 53607. This reporting system will provide the Council and the Investment Oversight Committee with appropriate investment performance information. APPROPRIATIONS LIMITATION A. The Council will annually adopt a resolution establishing the City's appropriations limit calculated in accordance with Article XIII-B of the Constitution of the State of California, Section 7900 of the State of California Government Code, and any other voter approved amendments or state legislation that affect the City's appropriations limit. B. The supporting documentation used in calculating the City's appropriations limit and projected appropriations subject to the limit will be available for public and Council review at least 10 days before Council consideration of a resolution to adopt an appropriations limit. The Council will generally consider this resolution in connection with final approval of the budget. 17.i Packet Pg. 289 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES C. The City will strive to develop revenue sources, both new and existing, which are considered non -tax proceeds in calculating its appropriations subject to limitation. D. The City will annually review user fees and charges and report to the Council the amount of program subsidy, if any, that is being provided by the General or Enterprise Funds. E. The City will actively support legislation or initiatives sponsored or approved by League of California Cities which would modify Article XIII-B of the Constitution in a manner which would allow the City to retain projected tax revenues resulting from growth in the local economy for use as determined by the Council. F. The City will seek voter approval to amend its appropriation limit at such time that tax proceeds are in excess of allowable limits. FUND BALANCE AND RESERVES A. Minimum Fund and Working Capital Balances. The City will maintain a minimum fund balance of at least 20% of operating expenditures in the General Fund and a minimum working capital balance of 20% of operating expenditures in the water, sewer and parking enterprise funds. This is considered the minimu m level necessary to maintain the City's credit worthiness and to adequately provide for: 1. Economic uncertainties, local disasters, and other financial hardships or downturns in the local or national economy. 2. Contingencies for unseen operating or capital needs. 3. Cash flow requirements. B. Fleet Replacement. For the General Fund fleet, the City will establish and maintain a Fleet Replacement Fund to provide for the timely replacement of vehicles and related equipment with an individual replacement cost of $15,000 or more. During the 2015-17 Financial Plan period, the City will establish and maintain a minimum fund balance in the Fleet Replacement Fund equal to $500,000 for the emergency replacement of vehicles that are damaged beyond repair, and are either not covered under the City’s property insurance program or the vehicle has a high replacement cost and insurance proceeds will be inadequate to provide for the vehicle’s replacement (fire engine). Above this contingency level, the amount retained in this fund, coupled with the annual contributions received by it from any source, shall be adequate to fully fund the equipment replacements approved in the Financial Plan. Interest earnings and the proceeds from the sales of surplus equipment as well as any related damage and insurance recoveries will be credited to the Fleet Replacement Fund. C. Information Technology (IT) Replacement Fund. The City will establish an IT Replacement Fund for the General Fund to provide for the timely replacement of information technology, both hardware and software, with an individual replacement cost of $25,000 or more. During the 2015-17 Financial Plan period, the City will establish and maintain a minimum fund balance in this fund equal to $400,000 for the emergency replacement of equipment that is damaged beyond repair and not covered under the City’s property insurance program. Interest earnings and the proceeds from the sale of surplus equipment as well as any related damage and insurance recoveries will be credited to the fund. 17.i Packet Pg. 290 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES D. Major Facility Replacement Fund. The City will maintain a reserve within this fund for the purpose of funding the cost of improvements having a cost of $25,000 or more to city-owned, general government building and structures. The amount retained in this fund, coupled with annual contributions received by it from any source, to adequately fund maintenance and replacement of City facilities. E. Infrastructure Investment Fund. The City will maintain a reserve within this fund for the purpose of funding infrastructure projects that contribute to improved economic development and enhanced quality of life in the City of San Luis Obispo. The following evaluation criteria shall be applied to project eligibility: 1. The use of City funds shall not offset any cost that would be expected to be paid to meet the fair share obligation of any developer. 2. The use of City funds shall not offset a project specific cost identified through the environmental review process or under existing regulations or policies. 3. The use of funds shall support a project that would not otherwise be feasible due to economic, timing or other issues outside control of the project proponents or the City. 4. The project shall provide public benefit by contributing to economic development and quality of life within the City. E. Water and Sewer Rate Stabilization Reserves. The City will maintain a reserve for the purposes of offsetting unanticipated fluctuations in Water Fund or Sewer Fund revenues to provide financial stability, including the stability of revenues and the rates and charges related to each Enterprise. The funding target for the Rate Stabilization Reserve will be 10% of sales revenue in the Water Fund and 5% of sales revenue in the Sewer Fund. Conditions for utilization and plan for replenishment of the reserve will be brought to Council for its consideration during the preparation and approval of the Financial Plan or as may become necessary during any fiscal year. F. Future Capital Project Designations. The Council may designate specific fund balance levels for future development of capital projects that it has determined to be in the best long-term interests of the City. For example, replacement of critical information technology infrastructure or other projects. G. Other Designations and Reserves. In addition to the designations noted above, fund balance levels will be sufficient to meet funding requirements for projects approved in prior years which are carried forward into the new year; debt service reserve requirements; reserves for encumbrances; and other reserves or designations required by contractual obligations, state law, or generally accepted accounting principles. CAPITAL IMPROVEMENT MANAGEMENT A. CIP Projects: $25,000 or More. Construction projects and equipment purchases which cost $25,000 or more will be included in the Capital Improvement Plan (CIP); minor capital outlays of less than $25,000 will be included with the operating program budgets. Such projects are accounted for in the Capital Outlay Fund. B. CIP Purpose. The purpose of the CIP is to systematically plan, schedule, and finance capital projects to ensure cost-effectiveness as well as conformance with establis hed policies. The CIP is a five-year plan 17.i Packet Pg. 291 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES organized into the same functional groupings used for the operating programs. The CIP will reflect a balance between capital replacement projects that repair, replace or enhance existing facilities, equipment or infrastructure; and capital facility projects that significantly expand or add to the City's existing fixed assets. C. Project Manager. Every CIP project will have a project manager who will prepare the project proposal, ensure that required phases are completed on schedule, authorize all project expenditures, ensure that all regulations and laws are observed, and periodically report project status. D. CIP Review Committee. Headed by the City Manager or designee, this Committee will review project proposals, determine project phasing, recommend project managers, review and evaluate the draft CIP budget document, and report CIP project progress on an ongoing basis. E. CIP Phases. The CIP will emphasize project planning, with projects progressing through at least two and up to ten of the following phases: 1. Designate. Appropriates funds based on projects designated for funding by the Council through adoption of the Financial Plan. 2. Study. Concept design, site selection, feasibility analysis, schematic design, environmental determination, property appraisals, scheduling, grant application, grant approval, specification preparation for equipment purchases. 3. Environmental Review. EIR preparation, other environmental studies. 4. Real Property Acquisitions. Property acquisition for projects, if necessary. 5. Site Preparation. Demolition, hazardous materials abatements, other pre-construction work. 6. Design. Final design, plan and specification preparation and construction cost estimation. 7. Construction. Construction contracts. 8. Construction Management. Contract project management and inspection, soils and material tests, other support services during construction. 9. Equipment Acquisitions. Vehicles, heavy machinery, computers, office furnishings, other equipment items acquired and installed independently from construction contracts. 10. Debt Service. Installment payments of principal and interest for completed projects funded through debt financings. Expenditures for this project phase are included in the Debt Service section of the Financial Plan. Generally, it will become more difficult for a project to move from one phase to the next. As such, more projects will be studied than will be designed, and more projects will be designed than will be constructed or purchased during the term of the CIP. F. CIP Appropriation. The City’s annual CIP appropriation for study, design, acquisition and/or construction is based on the projects designated by the Council through adoption of the Financial Plan. Adoption of the Financial Plan CIP appropriation does not automatically authorize funding for specific project phases. This 17.i Packet Pg. 292 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES authorization generally occurs only after the preceding project phase has been completed and approved by the Council and costs for the succeeding phases have been fully developed. Accordingly, project appropriations are generally made when contracts are awarded. If project costs at the time of bid award are less than the budgeted amount, the balance will be unappropriated and returned to fund balance or allocated to another project. If project costs at the time of bid award are greater than budget amounts, five basic options are available: 1. Eliminate the project. 2. Defer the project for consideration to the next Financial Plan period. 3. Rescope or change the phasing of the project to meet the existing budget. 4. Transfer funding from another specified, lower priority project. 5. Appropriate additional resources as necessary from fund balance. G. CIP Budget Carryover. Appropriations for CIP projects lapse three years after budget adoption. Projects which lapse from lack of project account appropriations may be resubmitted for inclusion in a subsequent CIP. Project accounts, which have been appropriated, will not lapse until completion of the project phase. H. Program Objectives. Project phases will be listed as objectives in the program narratives of th e programs, which manage the projects. I. Public Art. CIP projects will be evaluated during the budget process and prior to each phase for conformance with the City's public art policy, which generally requires that 1% of eligible project construction costs be set aside for public art. Excluded from this requirement are underground projects, utility infrastructure projects, funding from outside agencies, and costs other than construction such as study, environmental review, design, site preparation, land acquisition and equipment purchases. It is generally preferred that public art be incorporated directly into the project, but this is not practical or desirable for all projects; in this case, an in-lieu contribution to public art will be made. To ensure t hat funds are adequately budgeted for this purpose regardless of whether public art will be directly incorporated into the project, funds for public art will be identified separately in the CIP. J. General Plan Consistency Review. The Planning Commission will review the Preliminary CIP for consistency with the General Plan and provide is findings to the Council prior to adoption. CAPITAL FINANCING AND DEBT MANAGEMENT A. Capital Financing 1. The City will consider the use of debt financing only for one -time capital improvement projects and only under the following circumstances: a. When the project’s useful life will exceed the term of the financing. 17.i Packet Pg. 293 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES b. When project revenues or specific resources will be sufficient to service the long-term debt. 2. Debt financing will not be considered appropriate for any recurring purpose such as current operating and maintenance expenditures. The issuance of short -term instruments such as revenue, tax or bond anticipation notes is excluded from this limitation. (See Investment Policy) 3. Capital improvements will be financed primarily through user fees, service charges, assessments, special taxes or developer agreements when benefits can be specifically attributed to users of the facility. Accordingly, development impact fees should be created and implemented at levels sufficient to ensure that new development pays its fair share of the cost of constructing necessary community facilities. 4. Transportation impact fees are a major funding source in financing transportation system imp rovements. However, revenues from these fees are subject to significant fluctuation based on the rate of new development. Accordingly, the following guidelines will be followed in designing and building projects funded with transportation impact fees: a. The availability of transportation impact fees in funding a specific project will be analyzed on a case - by-case basis as plans and specification or contract awards are submitted for City Manager or Council approval. b. If adequate funds are not available at that time, the Council will make one of two determinations: Defer the project until funds are available. Based on the high-priority of the project, advance funds from the General Fund, which will be reimbursed as soon as funds become available. Repayment of General Fund advances will be the first use of transportation impact fee funds when they become available. 5. The City will use the following criteria to evaluate pay-as-you-go versus long-term financing in funding capital improvements: a. Factors Favoring Pay-As-You-Go Financing 1. Current revenues and adequate fund balances are available or project phasing can be accomplished. 2. Existing debt levels adversely affect the City's credit rating. 3. Market conditions are unstable or present difficulties in marketing. b. Factors Favoring Long Term Financing 1. Revenues available for debt service are deemed sufficient and reliable so that long -term financings can be marketed with investment grade credit ratings. 2. The project securing the financing is of the type, which will support an investment grade credit rating. 3. Market conditions present favorable interest rates and demand for City financings. 17.i Packet Pg. 294 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES 4. A project is mandated by state or federal requirements, and resources are insufficient or unavailable. 5. The project is immediately required to meet or relieve capacity needs and current resources are insufficient or unavailable. 6. The life of the project or asset to be financed is 10 years or longer. 7. Vehicle leasing when market conditions and operational circumstances present fa vorable opportunities. B. Debt Management 1. The City will not obligate the General Fund to secure long-term financings except when marketability can be significantly enhanced. 2. An internal feasibility analysis will be prepared for each long-term financing which analyzes the impact on current and future budgets for debt service and operations. This analysis will also address the reliability of revenues to support debt service. 3. The City will generally conduct financings on a competitive basis. However, negoti ated financings may be used due to market volatility or the use of an unusual or complex financing or security structure. 4. The City will seek an investment grade rating (Baa/BBB or greater) on any direct debt and will seek credit enhancements such as letters of credit or insurance when necessary for marketing purposes, availability and cost-effectiveness. 5. The City will monitor all forms of debt annually coincident with the City's Financial Plan preparation and review process and report concerns and remedies, if needed, to the Council. 6. The City will diligently monitor its compliance with bond covenants and ensure its adherence to federal arbitrage regulations. 7. The City will maintain good, ongoing communications with bond rating agencies about its financia l condition. The City will follow a policy of full disclosure on every financial report and bond prospectus (Official Statement). C. Debt Capacity 1. General Purpose Debt Capacity. The City will carefully monitor its levels of general -purpose debt. Because our general purpose debt capacity is limited, it is important that we only use general purpose debt financing for high-priority projects where we cannot reasonably use other financing methods for two key reasons: a. Funds borrowed for a project today are not available to fund other projects tomorrow. b. Funds committed for debt repayment today are not available to fund operations in the future. 17.i Packet Pg. 295 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES In evaluating debt capacity, general-purpose annual debt service payments should generally not exceed 10% of General Fund revenues; and in no case should they exceed 15%. Further, direct debt will not exceed 2% of assessed valuation; and no more than 60% of capital improvement outlays will be funded from long-term financings. 2. Enterprise Fund Debt Capacity. The City will set enterprise fund rates at levels needed to fully cover debt service requirements as well as operations, maintenance, administration and capital improvement costs. The ability to afford new debt for enterprise operations will be evaluated as an integral part of the City’s rate review and setting process. D. Independent Disclosure Counsel The following criteria will be used on a case-by-case basis in determining whether the City should retain the services of an independent disclosure counsel in conjunction with specific project financings: 1. The City will generally not retain the services of an independent disclosure counsel when all of the following circumstances are present: a. The revenue source for repayment is under the management or control of the Cit y, such as general obligation bonds, revenue bonds, lease-revenue bonds or certificates of participation. b. The bonds will be rated or insured. 2. The City will consider retaining the services of an independent disclosure counsel when one or more of following circumstances are present: a. The financing will be negotiated, and the underwriter has not separately engaged an underwriter’s counsel for disclosure purposes. b. The revenue source for repayment is not under the management or control of the City, such as land - based assessment districts, tax allocation bonds or conduit financings. c. The bonds will not be rated or insured. d. The City’s financial advisor, bond counsel or underwriter recommends that the City retain an independent disclosure counsel based on the circumstances of the financing. E. Land-Based Financings 1. Public Purpose. There will be a clearly articulated public purpose in forming an assessment or special tax district in financing public infrastructure improvements. This should include a finding by the Council as to why this form of financing is preferred over other funding options such as impact fees, reimbursement agreements or direct developer responsibility for the improvements. New development should generally be expected to “pay its own way,” (i.e., provide funding through one mechanism or another that funds its “proportional share” of public improvement and infrastructure costs and ongoing operations and maintenance costs). (1) The City will consider the use of city-based funding sources to fund public facility and infrastructure improvements that provide for the health, safety and welfare of existing and 17.i Packet Pg. 296 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES future residents and/or provide measurable economic development and fiscal benefits. In evaluating whether the City will use city-based funding sources, the following evaluation criteria should be considered: (a) Significant public benefit, demonstrated by compliance with and furtherance of General Plan goals, policies, and programs (b) Alignment with the Major City Goals and other important objectives in place at the time of the application (c) Head of Household Job Creation (d) Housing Creation (e) Circulation/Connectivity Improvements (f) Net General Fund fiscal impact (2) The City generally will not fund or offer public financing for infrastructure improvements that confer only private benefit to individual property owners or development projects. (3) The City shall seek continuity (or improvements to) existing levels of municipal service by assuring adequate funding for the City’s operation, maintenance and infrastructure replacement costs.” 2. Eligible Improvements. Except as otherwise determined by the Council when proceedings for district formation are commenced, preference in financing public improvements through a special tax district shall be given for those public improvements that help achieve clearly identified community facility and infrastructure goals in accordance with adopted facility and infrastructure plans as set forth in key policy documents such as the General Plan, Specific Plan, Facility or Infrastructure Master Plans, or Capital Improvement Plan. Such improvements include study, design, construction and/or acquisition of: a. Public safety facilities. b. Water supply, distribution and treatment systems. c. Waste collection and treatment systems. d. Major transportation system improvements, such as freeway interchanges; bridges; intersection improvements; construction of new or widened arterial or collector streets (including related landscaping and lighting); sidewalks and other pedestrian paths; transit facilities; and bike paths. e. Storm drainage, creek protection and flood protection improvements. f. Parks, trails, community centers and other recreational facilities. g. Open space. 17.i Packet Pg. 297 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES h. Cultural and social service facilities. i. Other governmental facilities and improvements such as offices, information technology systems and telecommunication systems. School facilities will not be financed except under appropriate joint community facilities agreements or joint exercise of powers agreements between the City and school districts. 3. Active Role. Even though land-based financings may be a limited obligation of the City, we will play an active role in managing the district. This means that the City will select and retain the financing team, including the financial advisor, bond counsel, trustee, appraiser, disclosure counsel, assessment engineer and underwriter. Any costs incurred by the City in retaining these services will generally be the responsibility of the property owners or developer, and will be advanced via a deposit when an application is filed; or will be paid on a contingency fee basis from the proceeds from the bonds. 4. Credit Quality. When a developer requests a district, the City will carefully evaluate the applicant’s financial plan and ability to carry the project, including the payment of assessments and special taxes during build-out. This may include detailed background, credit and lender checks, and the preparation of independent appraisal reports and market absorption studies. For districts where one property owner accounts for more than 25% of the annual debt service obligation, a letter of credit further securing the financing may be required. 5. Reserve Fund. A reserve fund should be established in the lesser amount of: the maximum annual debt service; 125% of the annual average debt service; or 10% of the bond proceeds. 6. Value-to-Debt Ratios. The minimum value-to-debt ratio should generally be 4:1. This means the value of the property in the district, with the public improvements, should be at least four ti mes the amount of the assessment or special tax debt. In special circumstances, after conferring and receiving the concurrence of the City’s financial advisor and bond counsel that a lower value -to-debt ratio is financially prudent under the circumstances, the City may consider allowing a value-to-debt ratio of 3:1. The Council should make special findings in this case. 7. Appraisal Methodology. Determination of value of property in the district shall be based upon the full cash value as shown on the ad valorem assessment roll or upon an appraisal by an independent Member Appraisal Institute (MAI). The definitions, standards and assumptions to be used for appraisals shall be determined by the City on a case-by-case basis, with input from City consultants and district applicants, and by reference to relevant materials and information promulgated by the State of California, including the Appraisal Standards for Land-Secured Financings prepared by the California Debt and Investment Advisory Commission. 8. Capitalized Interest During Construction. Decisions to capitalize interest will be made on case -by-case basis, with the intent that if allowed, it should improve the credit quality of the bonds and reduce borrowing costs, benefiting both current and future property owners. 9. Maximum Burden. Annual assessments (or special taxes in the case of Mello-Roos or similar districts) should generally not exceed 1% of the sales price of the property; and total property taxes, special assessments and special taxes payments collected on the tax roll should generally not exceed 2%. 10. Benefit Apportionment. Assessments and special taxes will be apportioned according to a formula that is clear, understandable, equitable and reasonably related to the benefit received by—or burden attributed 17.i Packet Pg. 298 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES to—each parcel with respect to its financed improvement. Any annual escalation factor should generally not exceed 2%. F. Development Impact Fees Guidelines and Policies Development impact fees are one-time fees levied on new development, typically levied at the time building permits are issued, to fund a range of the City’s public facilities and infrastructure. Such fees are levied both on a citywide basis as well as for specific areas (e.g., the Specific Plan Areas). The levy of development impact fees is regulated by the State’s Mitigation Fee Act (Government Code Section 66000 et seq.). 1. Development impact fees should be set, consistent with the statutory “nexus” analysis and findings, to fund new development’s proportional share of public facility and infrastructure costs. 2. Improvements funded by development impact fees should be referenced generally in the appropriate planning documents (e.g., General Plan, Specific Plans, etc.) and reflected in the City’s Capital Improvement Program. 3. An exception to this policy may be created by a development agreement between the City and a private developer. In this case public investments are offset by measurable public benefits. 4. The City’s development impact fees can be “leveraged” through the use of fee credit and reimbursement agreements with developers and landowners. 5. The City’s aggregate fee levels should not render new development that is otherwise consistent with City plans and regulations economically infeasible. Aggregate fee levels should be evaluated in terms of a reasonable standard, but not a strict limit (e.g., aggregate fee levels should not exceed an average of approximately 10 to 12 percent of the market value of the new development, either on a per-unit or per-square foot basis). 6. The City may consider reductions or waivers of its development impact fees in cases where a development project meets specific City planning or economic development policies such as affordable housing projects. In such cases the amount of funding foregone must be replaced with other funding sources available to the City. 1. Special Tax District Administration. In the case of Mello-Roos or similar special tax districts, the total maximum annual tax should not exceed 110% of annual debt service. The rate and meth od of 17.i Packet Pg. 299 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES apportionment should include a back-up tax in the event of significant changes from the initial development plan, and should include procedures for prepayments. 1. Community Facilities Districts or Assessment Districts offer a way to fund infrastructure, maintenance, or municipal services through special taxes or assessments levied on property owners benefiting from the thus-funded improvements or services. It can be used for both capital improvements and ongoing facility maintenance or services. 2. The City will consider the formation of financing districts using the State’s assessment law or the Mello-Roos Community Facilities Act for its newly developing areas on a case- by-case basis, consistent with technical analysis and City priorities (i.e., capital or ongoing funding). 3. The City will consider the effect of the special tax on the City’s ability to issue General Obligation bonds or other property-based tax measures. 4. Such districts should fund infrastructure or services serving or otherwise providing benefit to the area subject to the assessment or special tax. 5. Such districts can fund public facilities or infrastructure otherwise funded with the City’s development impact fees or project-specific exactions. In such cases the area’s development impact fee obligations will be adjusted proportionately. 6. Within any such districts, property value-to-lien ratio should, consistent with typical underwriting standards, be at least 4.0:1 after calculating the value of the financed public improvements to be installed and considering any prior or pending special taxes or improvement liens. 7. Consistent with underwriting standards and market considerations, and as a matter of policy, the City will limit the maximum amount of special taxes to be levied on any parcel of property within a Community Facilities District, in any given fiscal year, together with the general property taxes, general obligation bonds, and other special taxes and assessments levied on such parcel, shall not exceed an amount equal to one and eight- tenths percent (1.8 percent) of the projected assessed value of the parcel (and improvements if applicable). How the special tax capacity is allocated between capital and ongoing expenditures will depend upon the City’s priorities. 17.i Packet Pg. 300 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES 8. The City shall have discretion to allow a special tax in excess of the established limits for any lands within the CFD which are designated for commercial or industrial uses. 9. As a part of such district formations, the City will retain a special tax consultant to prepare a report which recommends a special tax rate and method for the proposed CFD and evaluates the special tax proposed to determine its ability to adequately fund identified public facilities, City administrative costs, services (if applicable) and other related expenditures. 2. Foreclosure Covenants. In managing administrative costs, the City will establish minimum delinquency amounts per owner, and for the district as a whole, on a case-by-case basis before initiating foreclosure proceedings. 3. Disclosure to Bondholders. In general, each property owner who accounts for more than 10% of the annual debt service or bonded indebtedness must provide ongoing disclosure information annually as described under SEC Rule 15(c)-12. 4. Disclosure to Prospective Purchasers. Full disclosure about outstanding balances and annual payments should be made by the seller to prospective buyers at the time that the buyer bids on the property. It should not be deferred to after the buyer has made the decision to purchase. When appropria te, applicants or property owners may be required to provide the City with a disclosure plan. G. Conduit Financings 1. The City will consider requests for conduit financing on a case-by-case basis using the following criteria: a. The City’s bond counsel will review the terms of the financing, and render an opinion that there will be no liability to the City in issuing the bonds on behalf of the applicant. b. There is a clearly articulated public purpose in providing the conduit financing. c. The applicant is capable of achieving this public purpose. 2. This means that the review of requests for conduit financing will generally be a two -step process: a. First asking the Council if they are interested in considering the request, and establishing the ground rules for evaluating it. b. And then returning with the results of this evaluation, and recommending approval of appropriate financing documents if warranted. This two-step approach ensures that the issues are clear for both the City and applicant, and that key policy questions are answered. 3. The workscope necessary to address these issues will vary from request to request, and will have to be determined on a case-by-case basis. Additionally, the City should generally be fully reimbursed for our costs in evaluating the request; however, this should also be determined on a case-by-case basis. 17.i Packet Pg. 301 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES B. Refinancings 1. General Guidelines. Periodic reviews of all outstanding debt will be undertaken to determine refinancing opportunities. Refinancings will be considered (within federal tax law constraints) under the following conditions: a. There is a net economic benefit. b. It is needed to modernize covenants that are adversely affecting the City’s financial position or operations. c. The City wants to reduce the principal outstanding in order to achieve future debt service savings, and it has available working capital to do so from other sources. 2. Standards for Economic Savings. In general, refinancings for economic savings will be undertaken whenever net present value savings of at least five percent (5%) of the refunded debt can be achieved. a. Refinancings that produce net present value savings of less than five percent will be considered on a case-by-case basis, provided that the present value savings are at least three percent (3%) of the refunded debt. b. Refinancings with savings of less than three percent (3%), or with negative savings, will not be considered unless there is a compelling public policy objective. C. Enhanced Infrastructure Financing District Guidelines and Policies a. EIFD financing should be considered for public facilities or infrastructure improvements that confer Citywide and/or regional benefits. This may include the “City share” of infrastructure included in the City’s development impact fees. b. Unless there is a Development Agreement in place that provides otherwise, EIFDs should not be used to fund real estate projects’ proportional share of infrastructure costs otherwise included in the City’s development impact fees or charged as project-specific exactions (e.g., subdivision improvements). c. City should consider EIFDs when more than one local government jurisdiction is participating to produce maximum benefit. d. At the time of formation of the EIFD (or if changes to the EIFD are contemplated), the City should require a fiscal impact analysis to determine if an EIFD is fiscally prudent and analyze opportunity cost to the City’s General Fund. HUMAN RESOURCE MANAGEMENT A. Regular Staffing 1. The budget will fully appropriate the resources needed for authorized regular staffing and will limit programs to the regular staffing authorized. 17.i Packet Pg. 302 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES 2. Regular employees will be the core work force and the preferred means of staffing ongoing, year -round program activities that should be performed by full-time City employees rather than independent contractors. The City will strive to provide competitive compensation and benefit schedules for its authorized regular work force. Each regular employee will: a. Fill an authorized regular position. b. Be assigned to an appropriate bargaining unit, unless designated as an unrepresented management or confidential classification. c. Receive salary and benefits consistent with labor agreements or other compensation plans. 3. To manage the growth of the regular work force and overall staffing costs, the City will fol low these procedures: a. The Council will authorize all regular positions. b. The Human Resources Department will coordinate and approve the hiring of all regular and supplemental staff. c. All requests for additional regular positions will include evaluations of: The necessity, term and expected results of the proposed activity. Staffing and materials costs including salary, benefits, equipment, uniforms, clerical support and facilities. The ability of private industry to provide the proposed service. Additional revenues or cost savings, which may be realized. 4. Periodically, and before any request for additional regular positions, programs will be evaluated to determine if they can be accomplished with fewer regular employees. (See Productivity Review Policy) 5. Staffing and contract service cost ceilings will limit total expenditures for regular employees, supplemental staff, and independent contractors hired to provide operating and maintenance services. B. Supplemental Staff 1. The hiring of supplemental staff will not be used as an incremental method for expanding the City's regular work force. 2. Supplemental staff include all employees other than regular employees, elected officials and volunteers. Supplemental staff include temporary employees, interns, and contract employees. Supplemental staff may work on a full-time or part-time basis and will generally augment regular City staffing. Supplemental staff may be used as extra-help during peak workloads, as coverage during extended absences of regular employees, seasonal workforce, as a means to assess ongoing staffing needs, or as the staffing method for program delivery that is most effectively staffed using part -time hours to ensure adequate coverage. 3. The City Manager and Department Heads will encourage the use of supplemental staff rather than regular employees to meet peak workload requirements, fill interim vacancies, and accomplish tasks where less than full-time, year-round staffing is required. 17.i Packet Pg. 303 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES Under this guideline, supplemental staff hours will generally not exceed 50% of a regular, full-time position (1,000 hours annually). There may be limited circumstances where the use of supplemental staff on an ongoing basis in excess of this target may be appropriate due to unique programming or staffing requirements. However, any such exceptions must be approved by the City Manager based on the review and recommendation of the Human Resources Director. 4. Contract employees are defined as supplemental staff with written contracts approved by the City Manager who may receive approved benefits Contract employees will generally be used for medium-term (generally between six months and two years) projects, programs or activities requiring specialized or augmented levels of staffing for a specific period. The services of contract employees will be discontinued upon completion of the assigned project, program or activity. Accordingly, contract employees will not be used for services that are anticipated to be delivered on an ongoing basis and as such, a determination as to the expected need will be made at the end of each contract term and prior to extending or renewing a contract. C. Overtime Management 1. Overtime should be used only when necessary and when other alternatives are not feasible or cost effective. 2. All overtime must be pre-authorized by a department head or delegate unless it is assumed pre-approved by its nature. For example, overtime that results when an employee is assigned to standby and/or must respond to an emergency or complete an emergency response. 3. Departmental operating budgets should reflect anticipated annual overtime costs and departments will regularly monitor overtime use and expenditures. 4. When considering the addition of regular or temporary staffing, the use of overtime as an alternative will be considered. The department will take into account: a. The duration that additional staff resources may be needed. b. The cost of overtime versus the cost of additional staff. c. The skills and abilities of current staff. d. Training costs associated with hiring additional staff. e. The impact of overtime on existing staff. D. Independent Contractors Independent contractors are not City employees. They may be used in two situations: 1. Short-term, peak workload assignments to be accomplished using personnel contracted through an outside temporary employment agency (OEA). In this situation, it is anticipated that City staff will closely monitor the work of OEA employees and minimal training will be required. However, they will always be considered the employees of the OEA and not the City. All placements through an OEA will 17.i Packet Pg. 304 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES be coordinated through the Human Resources Department and subject to the approval of the Human Resources Director. 2. Construction of public works projects and delivery of operating, maintenance or specializ ed professional services not routinely performed by City employees. Such services will be provided without close supervision by City staff, and the required methods, skills and equipment will generally be determined and provided by the contractor. Contract awards will be guided by the City's purchasing policies and procedures. (See Contracting for Services Policy) PRODUCTIVITY Ensuring the “delivery of service with value for cost” is one of the key concepts embodied in the City's Mission Statement (San Luis Obispo Style— Quality With Vision). To this end, the City will constantly monitor and review our methods of operation to ensure that services continue to be delivered in the most cost -effective manner possible. This review process encompasses a wide range of productivity issues, including: A. Analyzing systems and procedures to identify and remove unnecessary review requirements. B. Evaluating the ability of new technologies and related capital investments to improve productivity. C. Developing the skills and abilities of all City employees. D. Developing and implementing appropriate methods of recognizing and rewarding exceptional employee performance. E. Evaluating the ability of the private sector to perform the same level of service at a lower cost. F. Periodic formal reviews of operations on a systematic, ongoing basis. G. Maintaining a decentralized approach in managing the City's support service functions. Although some level of centralization is necessary for review and control purposes, decentralization supports productivity by: 1. Encouraging accountability by delegating responsibility to the lowest possible level. 2. Stimulating creativity, innovation and individual initiative. 3. Reducing the administrative costs of operation by eliminating unnecessary review procedures. 4. Improving the organization's ability to respond to changing needs, and identify and implement cost - saving programs. 5. Assigning responsibility for effective operations and citizen responsiveness to the department. H. Maintaining City purchasing policies and procedures that are as efficient and effective as possible. 17.i Packet Pg. 305 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) BUDGET REFERENCE MATERIALS Attachment 9 BUDGET AND FISCAL POLICIES CONTRACTING FOR SERVICES A. General Policy Guidelines 1. Contracting with the private sector for the delivery of services provides the City with a significant opportunity for cost containment and productivity enhancements. As such, the City is committed to using private sector resources in delivering municipal services as a key element in our continuing efforts to provide cost-effective programs. 2. Private sector contracting approaches under this policy include construction projects, professional services, outside employment agencies and ongoing operating and maintenance services. 3. In evaluating the costs of private sector contracts compared with in -house performance of the service, indirect, direct, and contract administration costs of the City will be identified and considered. 4. Whenever private sector providers are available and can meet established service levels, they will be seriously considered as viable service delivery alternatives using the evaluation criteria outlined below. 5. For programs and activities currently provided by City employees, conversions to contract services will generally be made through attrition, reassignment or absorption by the contractor. B. Evaluation Criteria Within the general policy guidelines stated above, the cost -effectiveness of contract services in meeting established service levels will be determined on a case-by-case basis using the following criteria: 1. Is a sufficient private sector market available t o competitively deliver this service and assure a reasonable range of alternative service providers? 2. Can the contract be effectively and efficiently administered? 3. What are the consequences if the contractor fails to perform, and can the contract reasonably be written to compensate the City for any such damages? 4. Can a private sector contractor better respond to expansions, contractions or special requirements of the service? 5. Can the work scope be sufficiently defined to ensure that competing proposals can be fairly and fully evaluated, as well as the contractor's performance after bid award? 6. Does the use of contract services provide us with an opportunity to redefine service levels? 7. Will the contract limit our ability to deliver emergency or other high prior ity services? 8. Overall, can the City successfully delegate the performance of the service but still retain accountability and responsibility for its delivery? 17.i Packet Pg. 306 Attachment: i - Budget and Fiscal Policies_2017-19 [Revision 1] (1537 : 2017-19 Financial Plan Budget Foundation) General Fund Economic Outlook: 2017-22 Steady Growth Equally Challenged by Expenditure Growth and Uncertainties December 2016 17.j Packet Pg. 307 Attachment: j - Economic Outlook 2017-22 [Revision 2] (1537 : 2017-19 Financial Plan Budget Foundation) Purpose of Economic Outlook The purpose of Economic Outlook is to assess the General Fund’s ability over the next five years to accomplish five things: 1. Deliver current service levels; 2. Maintain existing infrastructure and facilities. 3. Preserve the City’s long-term fiscal health by aligning operating revenues and expenditures; 4. Maintain fund balance at policy levels; and 5. Reinvest in the General Fund supported Capital Improvement Program, particularly in areas that are underfunded such as infrastructure maintenance, fleet replacement, IT replacement, and facilities maintenance. The Economic Outlook presents with an overview of the General Fund over the next five years. The outlook focuses on major revenue sources and significant drivers for the expenditures to access the fund’s ability to accomplish the five criteria listed above focusing on long-term financial health. The theme of this forecast is “Steady Growth Equally Challenged by Expenditure Growth and Uncertainties.” On February 21, 2016, a more detailed General Fund Five-Year Forecast will be presented to Council based on audited 2015-16 year-end results and six months of revenue and expenditure data since the adoption of the 2016- 17 Supplemental Budget, when the Council was last presented with a Five-Year Forecast. It is important to stress that this Economic Outlook forecast is not a budget. The forecast sets the stage for the upcoming budget process but it does not represent formally adopted revenues or expenditures. Its purpose is to provide context for considering the City’s ability to continue current services, maintain existing assets and/or fund new initiatives. The Government Finance Officers Association (GFOA) recommends that governments of all levels forecast major revenues and expenditures extending over several years into the future. The forecast should be clearly stated and made available to stakeholders in the budget process. It should also be regularly monitored and periodically updated. The City of San Luis Obispo, through its financial planning process, embraces each of these recommendations in making the forecast an integral part of the budget process. 17.j Packet Pg. 308 Attachment: j - Economic Outlook 2017-22 [Revision 2] (1537 : 2017-19 Financial Plan Budget Foundation) Summary of Findings Although all major revenues continue to point in the positive direction, the trends in major revenues highly reactive to economic fluctuations show slower growth in the recent months. Coupled with expenditure growth due to projected consumer price index growth and labor market trends as well as infrastructure needs and proactive allocation of resources to pay down unfunded liabilities, this Economic Outlooks shows revenue and expenditure trends closely aligned. The City of San Luis Obispo contracts with Beacon Economics to provide with Economic Forecast for the City of San Luis Obispo. Beacon Economics forecast is based on time- series econometric techniques based on historical correlations and forecasts of future economic trends. Beacon Economics utilizes a layered approach based on the National, State of California and regional forecast. In summary, the United States economy continues to expand at a mediocre rate and the Gross National Product growth rate is currently forecasted at 1.5% to 2%. California economy for the fourth year in a row, outpaced the nation in job growth as well as output. The Economic Outlook focuses on review of major sources of revenue for the City. Sales Tax represents approximately 36% of the General Fund Revenue, followed by Property Tax at 14%, Transient Occupancy Tax at 10%, Utility Users Tax at 8%, and Development Review Fees at 7%. Sales Tax and Transient Occupancy Tax revenue sources are highly correlated with economic fluctuations. The City contracts with HdL Companies to monitor sales tax receipts and trends. The results of the 2nd quarter showed a significant decrease in sales tax receipts on gasoline due to gasoline low prices. Statewide sales tax rates expectations for 2016-17 have been lowered to 2.3% by HdL forecast and this expectation is conservatively carried through the five year forecast. The City of San Luis Obispo continue to benefit from its diverse and dynamic demographic and employment related structures. The sales tax growth is projected at just above 2.7% by HdL throughout the 2017-19 Financial Plan and at 2.5% to 2.6% thereafter. The City sales tax forecast for 2017-18 is projected at 3% based on current economic development in downtown San Luis Obispo. This projection will be closely monitored and updated with the Five-Year General Fund Forecast. Fiscal Year Beacon HdL Fiscal Forecast 2017-18 3.70% 2.70% 3.00% 2018-19 3.60% 2.60% 2.60% 2019-20 3.70% 2.50% 2.50% 2020-21* 3.70% 2.50% 2.50% 2021-22* 2.60% 2.60% Property Tax estimated revenue continues to show positive strong growth. 2015-16 actual property tax revenue growth was 5% over the previous year. Beacon Economics forecast based on assessed valuation trend over time and building permits, shows an expected growth rate above 6% through fiscal year 2017-18 and above 5% in the outer years. In addition, three significant projects are underway in San Luis Obispo incorporated area that are expected to significantly contribute to the property tax revenue growth for the City. The projects are Monterey Hotel, Garden Street Terraces and China Town. The Economic outlook is based on a 6% growth projection through the 2017-19 Financial Plan, 5.5% percent growth in 2019-20 and 5% growth thereafter due to higher degree of uncertainty in the outer years. Steady Growth Equally Challenged by Expenditure Growth and Uncertainties. 17.j Packet Pg. 309 Attachment: j - Economic Outlook 2017-22 [Revision 2] (1537 : 2017-19 Financial Plan Budget Foundation) Transient Occupancy Tax is another revenue sources that is highly correlated with economic fluctuations that affect tourism. After seeing a slowing growth trend through the later part of fiscal year 2015-16, the City is continuing to experience that softening in the tourism marketing into the first quarter of 2016-17. Traditionally the first quarter of the fiscal year tends to be the strongest indicator for the strength of the tourism market as it represents the peak travel season. Based on this softening trend, the City forecasting the adjustment in the TOT growth from 5% over the previous fiscal year to 4% and will continue to monitor the trend. Overall the softening in the marketing can be attributed to a number of factors including: addition of new lodging properties in competing destinations countywide as well as the business development of recently opened properties. In addition, various properties throughout the city have undergone renovations within the last year reducing the number of rooms available to be sold to visitors. Staff will continue to monitor the trends and analyze the impacts of the three significant hotel developments mentioned in the property tax discussion. Utility User’ tax forecast is maintained at the level presented to the Council with the 2016-17 Supplemental Budget. The City works closely with MuniServices to monitor the revenue stream and the impacts of new technologies. Development Services review is a highly fluctuating revenue stream and the Council adopted with the 2014-15 Supplemental Budget a policy granting authority to the City Manager to allocate 75% of over-realized Development Services revenue for temporary staffing in order to timely process development services applications and related permanent processing activities. On the expenditure side, the forecast is based on a modest economic growth, inflation and compensation growth of 2.5% overall, excluding retirement contribution expenditures to California Public Employees Retirement System (CalPERS). The Capital Improvement Program expenditure forecast is based on the 2015-17 Financial Plan adopted capital improvement budget and city fiscal policies. CalPERS required contribution rates and strategy to pay down unfunded liability continues to be a priority. As expected, the new funding formula approved by the governing board of the California Public Employees Retirement System (CalPERS) has increased the annual contributions required to fund the program. This funding formula took effect in 2015-16 and is designed to fully amortize the remaining unfunded retirement liabilities over 30 years. While the City has made significant progress in its efforts to contain retirement costs, such as adding 2nd and 3rd Tier benefit programs that now reflect membership by 20% of the total employees and increasing employee contributions toward the cost of retirement, the fiscal forecast still reflects a significant increase in the annual cost of retirement benefits as a result of these funding formula changes. In February of 2015, the Council adopted a guiding principle to prioritize allocation of one- time funds available to pay down 1) Unfunded Pension Liability, 2) Other Post-Employment Benefits, 3) Roads Infrastructure, and 4) Equipment Replacement Fund in that order. Since 2014, the Council appropriated $2.7 million in prepayments toward unfunded liability of the safety side fund. The prepayments are applied to decrease the unfunded liability. The overall plan performance depends actuarial assumptions and an expected long-term rate of return of 7.5%. The actual rate of return in 2014-15 was 2.4%. 17.j Packet Pg. 310 Attachment: j - Economic Outlook 2017-22 [Revision 2] (1537 : 2017-19 Financial Plan Budget Foundation) The graph above depicts revenues over expenditures over time. As shown above, assuming normal 2.5% growth in expenditures to maintain current levels of service and the rates of increase in major revenue categories, shows a balanced budget over the next five years but with little to no capacity for growth in ongoing expenditures. As a result of the City’s continuously improving economic condition, combined with prudent and fiscally responsible actions taken to control costs in recent years, the City continues to be well positioned to cover these escalating employee benefit costs while also identifying opportunities to make new and important investments in our community. This Economic Outlook projects full payment of cost increases identified in CalPERS’ actuarial retirement valuation reports. The forecast also anticipates funding will continue to be dedicated towards vital community services and infrastructure. The Economic Outlook projects a fund balance which exceeds the City’s 20% fund balance policy reserve requirement. These reserves are an essential first line of defense against unexpected economic emergencies or natural disaster. 17.j Packet Pg. 311 Attachment: j - Economic Outlook 2017-22 [Revision 2] (1537 : 2017-19 Financial Plan Budget Foundation) City of San Luis Obispo Revenue Forecast November 2016 17.j Packet Pg. 312 Attachment: j - Economic Outlook 2017-22 [Revision 2] (1537 : 2017-19 Financial Plan Budget Foundation) City of San Luis Obispo Revenue Forecast This publication was prepared for: City of San Luis Obispo This publication was prepared by: Beacon Economics Christopher Thornberg Robert Kleinhenz Founding Partner Economist and Executive Director of Research 5777 West Century Boulevard, Suite 895 5777 West Century Boulevard, Suite 895 Los Angeles, California 90045 Los Angeles, California 90045 310.571.3399 424.646.4652 Chris@BeaconEcon.com Robert@BeaconEcon.com Eric Meux Justin Niakamal Manager, Economic Research Research Associate Eric@BeaconEcon.com Justin@BeaconEcon.com For further information about this publication please contact: Victoria Pike Bond Rick Smith Director of Communications Director of Business Development Beacon Economics, LLC Beacon Economics, LLC 415.457.6030 858.997.1834 Victoria@BeaconEcon.com Rick@BeaconEcon.com Or visit our website at www.BeaconEcon.com. Reproduction of this document or any portion therein is prohibited without the expressed written permission of Beacon Economics. Copy- right ©2016 by Beacon Economics LLC. 17.j Packet Pg. 313 Attachment: j - Economic Outlook 2017-22 [Revision 2] (1537 : 2017-19 Financial Plan Budget Foundation) Beacon Economics Report Overview Beacon Economics, LLC has undertaken a forecast of several key revenue streams in the City of San Luis Obispo ex- tendingouttothe2020–21fiscalyear.Theforecastpresentedhereusesstandardtime-serieseconometrictechniques based on historical correlations and forecasts of future economic trends.Beacon Economics’ method of forecasting follows a layered approach: National policy changes and external shocks are built into a U. S. model with a variety of economic indicators including GDP, production, demographics, interest rates, government spending, taxes, savings, income growth and real estate.Beacon Economics then crafts a California model that incorporates macro trends at the national level with trends in the statewide economy including employment/labor markets, demographics, real estate, and business activity indicators. Takingintoaccountthesestateandnationalfactors,Beacon Economics setsuparegionalmodelforSanLuisObispo County and the City of San Luis Obispo using macro trends to create a local forecast that delivers a broad outlook for the region including: Employment by industry Unemployment rate Consumer spending and income trends Population and components of change Residential and nonresidential real estate and construction. Theregionalassessmenthighlightsthemajordriversatthenationallevel,continueswithdevelopmentsintheState of California, and zooms in on the economy of San Luis Obispo County and the City of San Luis Obispo to provide a forecast of the City’s key revenue streams extending out to fiscal year 2020–21. National and State Economies The future direction of the City of San Luis Obispo economy is heavily contingent on what transpires within the national and state economies. In the most recent edition of Beaconomics (free of charge at www.BeaconEcon.com), Beacon Economics provides an in-depth analysis of current national and state economic trends. Below is a brief summary of what Beacon Economics sees happening in the U.S. and California economies. United States Economy TheU.S.economicexpansioncontinuestomovealongatasteady,ifmediocre,pace.Thereislittlereasontobe- lievethatthenationwillstrayfromitscurrentpathofgrowthin2016.BeaconEconomicscontinuestoforecast growth in the 1.5% to 2.0% range for the year overall, with perhaps better numbers next year. Retail sales were growing at their weakest pace in years at the end of 2015. But interpreting these data can be tricky because they are based on nominal numbers and because inflation is the slowest it has been in decades. Real spending data from the Bureau of Economic Analysis indicates that 2015 was a strong year for consumer spending on goods, particularly in the auto sector, with U.S. automakers enjoying a record year. During the first half of 2016, there were increases in nominal growth because more time had elapsed since the decline in energy prices, which had been a drag on inflation. City of San Luis Obispo Revenue Forecast 1 17.j Packet Pg. 314 Attachment: j - Economic Outlook 2017-22 [Revision 2] (1537 : 2017-19 Financial Plan Budget Foundation) Beacon Economics The building industry has been one of the slowest to recover in the United States, but the pace of construction isrising,and2016isshapinguptobeagoodyear.Fundamentalssuchastheaverageequityshareofownersand the overall housing vacancy rate have finally returned to historic norms. Credit is slowly easing for borrowers, and household formation is picking up. Home prices are still relatively good, given low mortgage rates. U.S. exports have been a concern lately, but despite a slowdown in China and a strong U.S. dollar, exporters increased their overseas sales slightly in 2015 over the previous year. The widening trade deficit last year was driven by imports, as U.S. consumers ramped up spending. During the first half of 2016, exports did not im- prove in real terms, but this is more a reflection of a weak global market than a warning sign for the domestic economy. There are plenty of reasons why the U.S. economy will not grow as rapidly as everyone would like over the next couple of years, but there is little reason to believe that growth will stop. Sometimes it pays to be a tor- toise—particularly when that tortoise offers the relatively high quality of life that so many Americans enjoy. California Economy California did it again. The high-priced, over-regulated, wacky state that everyone loves to hate turned in an- other strong performance in 2015. For the fourth year in a row, California outpaced the nation in job growth as well as output. The State’s labor market has continued to post strong job gains as employment growth for the first half of 2016 came in at 2.8%, just below the 3.0% rate for all of 2015. The unemployment rate has maintained a steady downward trajectory and stood at 5.4% as of June 2016, down from 6.2% a year prior. Nearly every industry in California experienced job gains over the last year, generally adding to the gains of recentyears.Professional,Scientific,andTechnicalServices,EducationandHealth,andLeisureandHospitality Services led the state’s industries, combining to produce more than 50% of the state’s total job gains last year. California’shousingmarketcontinueditsupwardtrajectoryoverthelastyearintermsofprices,sales,andnew construction. The statewide median price for a home was $416,700 in the second quarter of 2016, an increase of 5.9% from one year earlier. Sales were slightly higher in the first half of 2016 compared to the same time period one year prior but were constrained by lean inventories. Looking ahead, higher home prices and sales ought to trigger an increase in construction over this year and next, driven mainly by income growth, low but rising mortgage rates, and demographics. Despite concerns over the business climate, the state’s economy is one of the most dynamic in the country, as evidenced by the large amount of venture capital it has attracted on a consistent basis over the last several years. City of San Luis Obispo Revenue Forecast Real Estate Driven Revenues The local real estate market has been on sure footing over this last year as price growth remains robust, and market fundamentals point towards continued growth in the years to come. This bodes well for the City’s revenues tied to real estate market activity, such as property tax and property transfer tax. Construction activity is steady, and City of San Luis Obispo Revenue Forecast 2 17.j Packet Pg. 315 Attachment: j - Economic Outlook 2017-22 [Revision 2] (1537 : 2017-19 Financial Plan Budget Foundation) Beacon Economics consumer price growth in California has been trending back towards historical norms. All factors contribute to an optimistic outlook. 0 200 400 600 800 $ 000sQ1-80 Q1-90 Q1-00 Q1-10 Q1-20 Actual Forecast Source: Forecast by Beacon Economics Median Home Price 4 6 8 10 %Q1-90 Q1-00 Q1-10 Q1-20 Actual Forecast Source: Forecast by Beacon Economics 30-Year Mortgage Rate 20 30 40 50 60 $ 000sQ1-90 Q1-00 Q1-10 Q1-20 Actual Forecast Source: Forecast by Beacon Economics Inflation Adjusted Annual Cost 40 60 80 100 120 140 % of Per-Capita IncomeQ1-90 Q1-00 Q1-10 Q1-20 Actual Forecast Source: Forecast by Beacon Economics Housing Affordability Prices matter, but so do rates, inflation, and income San Luis Obispo County Home Price Outlook 0 11 1 1 1 Units (000s)Q1-90 Q1-00 Q1-10 Q1-20 Value Forecast Source: Forecast by Beacon Economics Existing Home Sales 0 0 0 0 0 0 Units (000s)Q1-06 Q3-08 Q1-11 Q3-13 Q1-16 Defaults Foreclosures Source: DataQuick Defaults and Foreclosures 0 0 1 1 1 1 Units (000s)Q1-00 Q1-05 Q1-10 Q1-15 Total Sales Less Foreclosures Source: DataQuick Sales Less Foreclosures 0 5 10 15 20 Q1-95 Q1-00 Q1-05 Q1-10 Q1-15 Source: California Assocation of Realators Months Supply Sales volumes subdued as market supply remains tight San Luis Obispo County Home Sales Outlook The median price for an exist- ing single-family home in the City stood at $707,000 as of the sec- ond quarter of 2016, a 14.5% in- crease over the same time a year prior. This was on top of a 16.8 % year-over-year increase in the first quarter of 2016. These strong gains yielded an overall 15.7% rate of growth for the first half of 2016, a marked improvement over the flat growth during 2015. In the coming fiscal year Beacon Economics ex- pectshomepricegrowthtoremain strong, growing at or near dou- ble digits. Historically low mort- gage rates and strong demand will continue to put upward pressure on home prices. Low market inventories will also contributetohomepricegrowthin the 2016–17 fiscal year, as the tight supply of homes for sale continues to be a stumbling block for would- be homeowners. According to the California Association of Realtors, in August 2016 the existing supply of homes on the market in San Luis Obispo County would be exhausted in4.4monthsatthecurrentpaceof sales. This was hardly an improve- ment over the 4.3 average reading over the preceding twelve months, and far below the long run average of six months’ supply. The tight supply is evident in the most recent data on existing home sales as well, but sales volumes are expected to pick up in the near term as more home owners are enticed by higher prices to sell and move up. Sales have thus fare trended sideway for the most part, with positive and negative growth the last few years. Sales of existing single family homes were in the second quarter of 2016 were 10.4% higher than the prior year, but in the first half of 2016 sales were down by 9.0%. City of San Luis Obispo Revenue Forecast 3 17.j Packet Pg. 316 Attachment: j - Economic Outlook 2017-22 [Revision 2] (1537 : 2017-19 Financial Plan Budget Foundation) Beacon Economics 0 50 100 150 Q1-00 Q1-05 Q1-10 Q1-15 Multi-Family Single-Family Source: Construction Industry Research Board Residential Permits 4 6 8 10 12 Values ($ Millions)Q1-00 Q1-05 Q1-10 Q1-15 Source: Construction Industry Research Board Non-Residential Permits 5 6 7 8 Jan-00 Jan-05 Jan-10 Jan-15 Source: California Employment Development Department San Luis Obispo County Construction Employment 70 80 90 100 110 120 Taxable Sales ($ Millions)Q1-09 Q3-10 Q1-12 Q3-13 Q1-15 Q3-16 Source: HdL Companies San Luis Obispo County Construction Spending Building activity holding steady San Luis Obispo Construction TrendsNew construction is anticipated to make a steady contribution to AV growth in the near term as per- mitting activity for both residen- tial and nonresidential construc- tion show new structures are in the pipeline. According to the Con- structionIndustryResearchBoard, there were 132 new residential units permitted in the 2015-16 fis- cal year. This was down from the 302 units permitted in 2014-15, but nevertheless points toward new structurestoaddtotheexistingas- sessed value base. Nonresidential permitting activity has picked up inthelastyearaspermitvaluesfor the 2015–16 fiscal year increased 11.6% over 2014–15 levels. Other commercial indicators continue to trend favorably. Rents are still rising across all property types in the broader San Luis Obispo County, and vacancy rates are falling or holding steady at healthy levels. These trends point to a steady demand, which will help maintain upward pressure on commercial property values for structures that do not change ownership. Finally, the California Consumer Price Index (CPI) has been trending favorably from the standpoint of growth in region’s AV base. From October 2014 to October 2015, the California CPI grew by 1.5%, capping growth in properties notsubjecttoreassessmentatthatlevel.Sincethen,however,year-over-yeargrowthhastrendedhigherthan2%as thedeclineinenergypricesrecedesintothepastandcoreinflationintheStateremainsfirm.Ifthistrendcontinues throughtheendof2016,itwillallowpropertiesnotsubjecttoreassessmenttogrowattheupperlimitofProposition 13 restrictions. Consumer and Business Spending Driven Revenues The local economy is expected to exhibit positive growth over the next five fiscal years, which will yield steady increases in tax revenues associated with consumer and business spending. One clear sign of strength in the local economy is that job growth in the region has remained on a steady upward trajectory and has been setting record highemploymentlevelsvirtuallyeverymonthsince.AsofSeptember2016,nonfarmemploymentinSanLuisObispo County stood at 117.7 thousand, a 2.3% increase over the same month a year prior. Notably, this pace of job creation was on par with nonfarm employment in the state overall, which grew by 2.3% over the same time period. The Leisure and Hospitality industry has been the largest contributor to overall job growth in the County over the last year. As of September 2016, this industry added over 700 new jobs to company payrolls compared to the same time a year prior, a 4.1% increase, and represented 27.2% of the net increase across all nonfarm industries. The Edu- cation and Health Care industry also posted strong job growth, adding over 550 new jobs year-over-year for an 3.9% City of San Luis Obispo Revenue Forecast 4 17.j Packet Pg. 317 Attachment: j - Economic Outlook 2017-22 [Revision 2] (1537 : 2017-19 Financial Plan Budget Foundation) Beacon Economics increase to company payrolls. This is a strong indication of a vibrant regional economy as San Luis Obispo continues to one of the top tourist destinations for residents of both Southern and Northern California. 60 80 100 120 140 Employees (000s)Q1-90 Q1-00 Q1-10 Q1-20 Actual Forecast Source: Forecast by Beacon Economics Nonfarm Employment 2 4 6 8 10 %Q1-90 Q1-00 Q1-10 Q1-20 Actual Forecast Source: Forecast by Beacon Economics Unemployment Rate -420 95 96 186 249 263 427 499 569 735 -500 0 500 1,000 Professional/Business Information Financial Activities Manufacturing Trade/Logistics Government Other Services NR/Construction Education/Health Leisure/Hospitality Industry Job Creation -3.3 6.3 2.3 2.6 1.2 1.1 7.4 7.5 3.9 4.1 -5 0 5 10 Industry Employment Growth Source: California Employment Development Department Employment levels reaching new record highs San Luis Obispo County Labor Market 500 1,000 1,500 2,000 $ MillionQ1-90 Q1-00 Q1-10 Q1-20 Actual Forecast Source: Forecast by Beacon Economics Taxable Sales -0.4 3.6 0.2 -14.1 0.3 -7.3 1.1 5.7 -15 -10 -5 0 5 Total Restaurants and Hotels General Consumer Goods Fuel and Service Stations Food and Drugs Business and Industry Building and Construction Autos and Transportation Source: HdL Companies Taxable Receipts Growth 5,000 10,000 15,000 20,000 $ BillionQ1-90 Q1-00 Q1-10 Q1-20 Actual Forecast Source: Forecast by Beacon Economics Personal Income 220,000 240,000 260,000 280,000 300,000 Q1-90 Q1-00 Q1-10 Q1-20 Actual Forecast Source: Forecast by Beacon Economics Population Local spending remains strong San Luis Obispo County Spending and Income Hotel revenues over the last year have been robust, as evidenced by the 36.5% increase in transient oc- cupancy tax revenues from fiscal year2014-15to2015-16.Steadyim- provement in the national, state, and regional economies have been a boon to the local economy has visitors enjoy all that the city has to offer. Summary Beacon Economics’ revenue fore- cast for the City of San Luis Obispo maintains an optimistic tone, and for good reason. The underlying fundamentals of the local real es- tate market are strong and are ex- pected to maintain an upward tra- jectory for the life of the forecast. Price growth is robust, sales vol- umesareholdingsteadyintheface of tight supply, and new construc- tionactivityisrunningatahealthy clip. Overall economic activity is also heading in the right direc- tion as businesses continue to hire and tourism activity in the area re- mains strong. Over the next five fiscalyears,withnothinginthelat- est data that points to trouble on theimmediatehorizon,expectpos- itive revenue growth in the City of San Luis Obispo. Although it’s not a part of the cur- rent five-year forecast, a sensitive long-run issue is the closure of the Diablo Canyon Power Plant. It has long been a part of the local economy, but it is scheduled to close in several years, with the decommissioning extending several years beyond that date. The utility has indicated that its employees City of San Luis Obispo Revenue Forecast 5 17.j Packet Pg. 318 Attachment: j - Economic Outlook 2017-22 [Revision 2] (1537 : 2017-19 Financial Plan Budget Foundation) Beacon Economics should expect to receive severance compensation, which will cushion the blow to the local economy. But local gov- ernment agencies, communities, and businesses throughout the County also stand to lose a large source of property taxes, spending power, the utility’s charitable support, and other benefits from the plant and its workers. One of the biggest concerns for stakeholders throughout the County is that there is no definitive timeline for the closure, making it hard to plan. As the situation develops, Beacon Economics will be keeping a close eye on the closure and will continue to assess how it will affect the local economy. City of San Luis Obispo - Revenue Forecast Revenue Stream Actual Forecast FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 Assessed Valuation ($000s)6,847,248,543 7,316,969,794 7,810,556,000 8,314,834,000 8,791,996,000 9,287,135,000 9,815,083,000 Growth(%)5.9 6.9 6.7 6.5 5.7 5.6 5.7 Property Tax 9,631,890 10,186,858 10,874,040 11,576,108 12,240,424 12,929,768 13,664,790 Growth(%)7.5 5.8 6.7 6.5 5.7 5.6 5.7 Utility Users Tax 5,211,207 5,413,720 5,557,909 5,766,324 6,007,247 6,287,656 6,573,414 Growth(%)-2.5 3.9 2.7 3.7 4.2 4.7 4.5 Business Tax 2,203,208 2,496,724 2,571,572 2,665,271 2,742,577 2,821,225 2,900,802 Growth(%)2.8 13.3 3.0 3.6 2.9 2.9 2.8 Transient Occupancy Tax 6,805,742 7,113,466 7,467,657 7,807,394 8,131,150 8,464,159 8,833,744 Growth(%)12.2 4.5 5.0 4.5 4.1 4.1 4.4 Taxable Sales 1,404,110,912 1,453,693,952 1,516,173,000 1,572,019,000 1,628,719,000 1,689,009,000 1,750,598,000 Growth(%)3.0 3.5 4.3 3.7 3.6 3.7 3.6 Sales Tax 15,272,683 17,498,218 18,250,283 18,922,505 19,605,007 20,330,722 21,072,073 Growth(%)-0.9 14.6 4.3 3.7 3.6 3.7 3.6 Measure Y 7,038,956 7,047,174 7,350,058 7,620,787 7,895,656 8,187,928 8,486,497 Growth(%)3.9 0.1 4.3 3.7 3.6 3.7 3.6 Proposition 172 409,590 405,066 421,390 442,255 466,726 493,747 522,632 Growth(%)4.6 -1.1 4.0 5.0 5.5 5.8 5.9 Building Permit Valuation 117,738,400 89,598,922 74,781,620 69,916,780 66,413,100 65,909,460 69,783,160 Growth(%)108.0 -23.9 -16.5 -6.5 -5.0 -0.8 5.9 Source: Forecast by Beacon Economics City of San Luis Obispo Revenue Forecast 6 17.j Packet Pg. 319 Attachment: j - Economic Outlook 2017-22 [Revision 2] (1537 : 2017-19 Financial Plan Budget Foundation) Beacon Economics About Beacon Economics Beacon Economics, LLC is a leading provider of economic research, forecasting, industry analysis, and data services. Bydeliveringindependent,rigorousanalysiswegiveourclientstheknowledgetheyneedtomaketherightstrategic decisions about investment, growth, revenue, and policy. Learn more at www.BeaconEcon.com. Services Contacts Economic and revenue forecasting Economic impact analysis Regional economic analysis Economic policy analysis Real estate market analysis Industry and market analysis EB-5 Economic analysis Public Speaking Expert Testimony Sherif Hanna Managing Partner (424) 646-4656 Sherif@BeaconEcon.com Victoria Pike Bond Director of Communications (415) 457-6030 Victoria@BeaconEcon.com Rick Smith Director of Business Development (858) 997-1834 Rick@BeaconEcon.com City of San Luis Obispo Revenue Forecast 7 17.j Packet Pg. 320 Attachment: j - Economic Outlook 2017-22 [Revision 2] (1537 : 2017-19 Financial Plan Budget Foundation) Page intentionally left blank. Budget Foundation WorkshopDecember 13, 20162017-19 Financial Plan Recommendation1.Review and approve the 2017-19 Financial Plan Goal Setting Process2.Review and discuss the results of the Economic Outlook for 2017-19 Financial Plan Development3.Review and approve proposed changes and direction regarding the City’s Budget and Fiscal Policies2 Presentation OverviewGoal-Setting Process & ScheduleEconomic OutlookFinancial Plan Policies4 Community Forum1.One of many inputs received by the City Council as part of the goal-setting process2.Opportunity for people to hear directly from other community members about their priorities3.Facilitated meeting that will again use “voting” with dots to help the Council form their candidate goals4.Expanding process to include online “voting” with dots based on priorities established at Community ForumCommunity ForumTuesday, January 10, 20176:30 PMLudwick Community Center864 Santa Rosa Street5 Local Revenue MeasureFeedback on the LRM will be a part of the Community ForumPriorities for 2017-19 will established based on feedback Identified projects will be reviewed by REOC for consistency with priorities in March before final approval by the City Council 6 Community Input Community Priorities Survey8‹#› 9 Community Forum1010 Community Forum Objectives:January 1011Community…Presents ideasListens to other community membersLearns how ideas fit with current or ongoing City activitiesExpresses preferences:Major City GoalsLocal Revenue Measure priorities‹#› Local Revenue Measure12Revenue Enhancement Oversight Committee: Annual Citizen MeetingGeneral purpose measure provides Council flexibility to respond to new circumstances and challengesCommunity Forum input helps Council align Major City Goals and Local Revenue Measure priorities“To protect and maintain essential services and facilities – such as open space preservation; bike lanes and sidewalks; public safety; neighborhood street paving and code enforcement; flood protection; senior programs; and other vital services and capital improvement projects – shall the City’s Municipal Code be amended to extend the current one-half percent local sales tax for eight years, with independent annual audits, public goal-setting and budgeting, and a Citizens’ Oversight Commission?”12 Community Forum Agenda13Welcome 6:30Process, current goals, local sales 6:35 tax priorities and fiscal outlookPublic Comment 6:40What, Why, HowFlip Chart sheets postedMayor’s Closing thank you 9:00Participants “vote with dots” 9:15Adjourn 9:30‹#› Council Goal Setting Workshop1414 Objectives for Council Goal-Setting Workshop: January 2815Council…Develops Major City Goals and Other Important Objectives for 2017-19Identifies connections between use of Local Revenue Measure revenues and Major City GoalsIdentifies ideas for changes in programs and services to achieve the highest priorities during the Financial Plan‹#› Criteria for Major City GoalsBe legitimate to our genuine beliefs (real, supported).Agreed upon by a Council majority.Limited in number for comprehension, communication & focus.Set forth in one document: the Financial Plan.Be clear & understandable.Established as a high priority & a real commitment.Reflect major goals that cannot be achieved without Council supportCan be translated into the performance goals & objectives of employees at all levels of the organization.Created within a supportive atmosphere where participants are not afraid to state their suggestions for improving goals or objectives.Reflect genuine consensus: while unanimous agreement is not required, they should be accepted to the point where resistance to them is reduced or eliminated.16‹#› Criteria for Other Important ObjectivesShare similar characteristics as Major City Goals in terms of composition and clarity.Have less intense support among a majority of Council members.Represent desirable but not critically important goals.Achievement of these objectives may rely significantly upon other resources.17‹#› How do we accomplish it?18Council “homework” assignments due January 23, 2017 @ 9 a.m.Review goals by categoryFormulate candidate goalsDiscuss and weight the goalsIdentify connections between use of Local Revenue Measure and Major City GoalsNote suggestions to changes in other programs and services18 Goal-Setting Workshop Agenda19Refreshments 8:30Welcome 9:00Purpose, process & guidelines 9:05Review goals by category, discuss relationship 9:10of goals to current activities, select candidate goalsPublic Comment if not previously presented NoonLunch Break (staff compiles candidate goals) 12:15Discuss, clarify, and rank goals 1:15Note suggestions for changes in other programs 2:15Identify Major City Goals & Measure G 3:15priorities for2017-2019Discuss next steps and adjourn 4:00-4:3019 Council Goals “Homework”please provide distinct suggestions in separate itemsDue 1/23/1720Council Member Candidate Major City Goals Please prepare up to 7 candidates for Major City Goals below and submit them to Finance by9:00 a.m., Tuesday, January 17, 2017. Since the Council will identify connections between theuse of Local Revenue Measure revenues and Major City Goals, please note which suggestionsaddress Local Revenue Measure priorities. Finance will then compile a verbatim, composite listby topic without identifying who submitted the particular statements. Please refrain fromreleasing your personal list so that each Council member has flexibility to review all of thesubmissions and discuss them at the Council Goal-Setting Workshop before staking a position. Local Revenue Measure? Yes/No Local Revenue Measure? Yes/No Local Revenue Measure? Yes/No Local Revenue Measure? Yes/No Local Revenue Measure? Yes/No Local Revenue Measure? Yes/No Local Revenue Measure? Yes/No 20 Council suggestions about changes in other programs and services to fund desired prioritiesDue 1/23/1721‹#› Priority Scale22Most important, highest priority for City to achieve over the next two years.Very important goal to achieve.Important goal to achieve.Address if resources are available.Defer to 2019-21 for consideration.Not a priority goal.Suggestion: total points available to allocate = # of candidate goals x 3.Suggestion: Major City Goals (majority of Council give 4’s or 5’s); Other Important Objectives (majority give 3’s or 4’s)‹#› Council Workshop Conclusion23Review results to identify “Major City Goals”“Other Important Objectives”Connect Local Revenue Measure and Major City Goals‹#› Council Member Guidelines24Encourage community groups/citizens to submit written/online comments about desired goals.Invite citizens to participate in Community Forum to listen and learn from their neighbors.Receive comments from community & acknowledge their input without prematurely expressing your point of view.Assure the community that you are willing to listen openly to all perspectives.Focus your submission of suggested goals on a short list of key priorities to target City resources (not to exceed seven suggested goals).‹#› Council Member Guidelines25Avoid publicizing your submission of suggested goals.Give yourself flexibility by not publicly staking positions in advance of the January 28, 2017 Goal-Setting Workshop.Use this process as a way to learn from citizens & Council colleagues about what’s important.Explore areas where the Council can come together for positive action.Recognize that while an important step, it’s only the first step in the process of developing the two-year budget.‹#› General Fund Economic Outlook 2017-22Steady Growth Equally Challenged by Expenditure Growth and Uncertainties PurposeProvide Context for 2017-19 Financial Plan1.Community Input2.Financial Context3.Long-term PlansSteady Growth Equally Challenged by Expenditure Growth & Uncertainties27 PurposeAccess General Fund Capacity to:1.Alignment of revenue and expenditure = balanced budget2.Deliver current service levels3.Maintain infrastructure4.Maintain fund balance reserve per policy5.Address Long-Term Liabilities28 Major Revenue Sources ShareSales Tax 36% Property Tax 14%Transient Occupancy Tax (TOT) 10%Utility Users Tax (UUT) 8%Development Review Fees 7%29JD5 Slide 29JD5 Companion pie chart to accompany bullets?Johnson, Derek, 12/12/2016 United States EconomySteady Slow GrowthGDP 1.5% to 2%Retail Sales Slowing Down (hard to predict)Housing vacancy rate and share of owners back closer to “pre-bubble” level30 California EconomyStrong Job Gain (unemployment rate at 5.4%)Housing Market Up (price, sales, new construction)Housing vacancy rate and share of owners back closer to “pre-bubble” levelSales Tax Forecast slower growth then predicted six months ago due primarily to low gasoline prices and slowing down in auto sales sectors31 Local San Luis Obispo EconomyPositive GrowthRegional Employment up 2.3% (hospitality)Home Prices UpFiscal Year Beacon HdL Fiscal Forecast 2017-18 3.70% 2.70% 3.00% 2018-19 3.60% 2.60% 2.60% 2019-20 3.70% 2.50% 2.50% 2020-21* 3.70% 2.50% 2.50% 2021-22* 2.60% 2.60% 32 - 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000 18,000,000 - 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,0002010-11 2011-12 2012-13 2013-14 2014-15 2015-162016-17 2017-18 2018-19 2019-20 2020-21 2021-22Sales Tax by IndustryAutos & TransportBuilding & ConstructionBusiness & IndustryFood and DrugsFuel & Service StationsGeneral Consumer GoodsRestaurants & HotelsTOTAL3333 3434 Transient Occupancy Tax (TOT)35 3636 Budgeted Development Services Fee Revenue Verses Actual37‹37› ExpenditureOperating ExpendituresPension required contribution rate uncertainty (discount rate)Long-term unfunded liabilitiesInvestment in Infrastructure 38 Operating Expenditures TrendsBased on 2016-17 adopted budget Forecasted rate of growth at 2.5% for ongoing expenditures (net of one-time allocations)Takes into account all recently approved changes to labor ratesIncludes known minimum wage increases‹#› Retirement Costs and the Unfunded LiabilityThe California Public Employees Retirement System (CalPERS) implemented a new retirement funding plan in 2015-16 which includes a strategy to have unfunded liabilities fully amortized in 30 yearsActual rate of return in 2014-15 (last Actuarial Valuation) was 2.4%, which is below long term discount rate of 7.5%2014-15 Actuarial Valuation Reports provide with alternative payment schedules amortized over 15 and 20 years40 Capital Improvement ProgramThe forecast is based on 2015-17 Five Year Capital Improvement Program plan41 Fund Balance ReserveGeneral Fund 20% of operating expenditures Fleet Replacement fund $500,000Information Technology fund $400,00042 UncertaintyEconomic FluctuationsDiablo Canyon ClosureSettlement agreement with PG&E Uncertainty – Economic and Financial Impacts‹#› 4444 Policies4545 Budget PoliciesConsistent and comprehensive fiscal policies provide a solid foundation for the long-term fiscal health of a CityWith each Financial Plan, the Council reviews its fiscal policies to determine if any updating is necessaryThis evening’s proposed changes are intended to implement efforts to increase transparency, efficiencies in our operations, and important economic development strategies46 Proposed Policy ChangesThe following are topic areas where changes are proposed:Add policy to address long-term costsModify Capital financing and Debt Management Section to add Public Infrastructure Financing PoliciesFurther study of City reserve requirements and need for a “Economic Fluctuation Reserve”Policy language is updated based on prior Council direction47 Addressing Long-Term LiabilitiesB. Long-Term Liabilities and Maintenance of Infrastructure. The City will give priority to applying unassigned fund-balance due to one-time expenditure savings or one-time increase in revenue to pay down long-term unfunded liabilities and invest in infrastructure and equipment.48 Modify Capital Financing and Debt Management SectionAdd Public Infrastructure Financing PoliciesSystematic selection, implementation, and assembly of funding to construct needed public facilities and infrastructureCategories include: water, sewer, transportation, streetscape improvements, parks and recreation facilities, and other public safety and civic facilities.49 Economic Fluctuation ReserveFurther study the City’s reserve requirements and review of fiscal policies to access the need for Economic Fluctuation Reserve50 Next Steps5151 Key Budget Dates52Goal-Setting ProcessCommunity Forum 1/10Council “Homework” Assignment 1/23Council Goal-Setting Workshop 1/28Service Level & Strategic DirectionMajor City Goal Work Programs/ 4/18Strategic Budget Direction52 Recommendation1.Review and approve the 2017-19 Financial Plan Goal Setting Process2.Review and discuss the results of the Economic Outlook for 2017-19 Financial Plan Development3.Review and approve proposed changes and direction regarding the City’s Budget and Fiscal Policies53