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HomeMy WebLinkAbout12/12/2000, 2F - GENERAL FISCAL OUTLOOK FOR 2001-03 Counat MmunsDW i1-�2-oa j agcnoa wpont "� � CITY O F SAN LUIS O B I S P O FROM: Bill Statler, Director of Finance Vr_ SUBJECT: GENERAL FISCAL OUTLOOK FOR 2001-03 CAO RECOMMENDATION - Consider the City's general fiscal outlook for 2001703. DISCUSSION Preparation of the five-year fiscal forecast for the General Fund is currently underway, and will be ready for distribution by the later part of January 2001. While we will have a much better handle on the City's fiscal outlook once we complete this comprehensive review of where we've been and where we seem to be headed, a few general conclusions can be reached based the results of the recent Ten Year Financial Plan and our initial work so far. Favorable Indicators Strong Current Financial Condition. The City continues to be in a strong fiscal position by state and national standards. As discussed more fully in the annual financial report for 1999-00, the City's General Fund's fiscal performance for the past year compared very favorably with budget projections. Positive Economic Outlook for the Region. The UCSB economic forecast recently presented a favorable outlook for the coming year: while not as "robust" as 2000, the next two years should still see continuing economic growth in the region. However, while improvement in the regional economy is a positive indicator, it is by no means certain that the City will share in this. This is especially true given the increased (and successful) competition by the north and south county areas on our traditional position as the retail center for the County. Situs Sales Tax By Type This is underscored by the recent trends in Omer sales tax revenues, which are our most 27°i° General Consumer important General Fund revenue source Goods (accounting for about 30% of total ' "" revenues). Three businesss—car ou h`M s St' P )<^ sales, general consumer goods and Business-to- `•.; business-to-business sales—account for Business Auto Dealers about 75% of "situs" revenues. Over the 18% &Supplies20% past several years, new car and business- to-business sales have been the leading 2F-1 Council Agenda Report—General Fiscal Outlook for 2001-03 Page 2 forces behind our significant increases in sales tax revenues, while growth in general consumer goods (which is our largest retail sales category) has been sluggish at best. Hopefully, the growth in business-to-business sales is sustainable; however, the unprecedented growth in new car sales is unlikely to be. In fact, there have already been reports of softening new car sales in the national media. In short, while current economic forecasts are generally favorable for 2001-03, there are challenges ahead of us. No Further State Budget Cuts—But No Returns. State cuts to cities over the past several years have resulted in an annual revenue loss of about $1.5 million to the City. Of this amount, about $1.0 million is related to property tax cuts resulting from shifts from cities, counties and special districts to the Educational Revenue Augmentation Fund (ERAF). This helped the State meets its local school funding requirements by using local property taxes instead of its own revenues. The Legislative Analyst's Office (LAO)—which is generally considered one the most independent and reliable sources on State finances—recently issued a report on the State's fiscal outlook for 2001-02. The LAO concluded that the State is again facing unprecedented budget surpluses (much of it provided by past ERAF and other revenue takeaways). For example: ■ The LAO projects an ending General Fund balance for 2000-01 of $6.9 billion. This is "only" $5.1 billion more than budgeted ■ The "baseline" surplus projection for 2001-02 (no new expenditure or tax reduction plans, but including the proposed '/4 cent sales tax reduction) is$3.4 billion – and projected to grow annually thereafter. ■ This means there is $10.3 billion available in 2001-02. The LAO suggests this means funding for "one-time" programs/revenue reductions of $6.9 billion (the beginning fund balance) and $3.4 billion (and growing)for ongoing new initiatives. Given the State's rosy revenue outlook, this would seem the best possible time for the State to return the takeaways of the mid-1990's. However, this has been equally true for the past two years, and no significant progress has been made in this area. (While the State has provided small, one-time and non-discretionary funds to the City over the past two years, these have not been significant relative to what has been taken away; and they have been one-time with strings attached.) Despite his campaign promises to do otherwise, the Governor has been the leading obstacle in bringing about a meaningful return of State takeaways. Long Story Short. While there should be no further takeaways by the State, no returns—other than perhaps token efforts as in the past—are likely in 2001-03, despite the State's extraordinarily positive fiscal outlook. Unfavorable Indicators Increasing Operating Costs. Even if we do not expand or enhance service levels, there will be still be inflationary cost pressures on operating expenditures, which account for about 75% of 2F-2 Council Agenda Report—General Fiscal Outlook for 2001-03 Page 3 General Fund outlays. The critical question in this regard—which will be addressed in the five year fiscal forecast—is whether revenues overall will rise faster than operating costs. However, past experience tells us that even if we control our current cost base to just increases in inflation, there will still be significant pressures to expand or enhance operating programs in responding to legitimate, unmet service needs. Further, we can expect employee groups to want to share in our improved fiscal circumstances; and binding arbitration for police officers and firefighters (our largest General Fund cost area) could place additional cost burdens on the City, if used. Infrastructure and Facility Needs. Continuing our commitment to a strong capital improvement plan (CIP), especially in the area of adequately maintaining our existing infrastructure and facilities, will continue to be a major my MM fiscal challenge. Further, as reflected in the recent Ten - ' Year Financial Plan, there continues to be a number of Public Safety Facilities unmet needs based on already-adopted Council policies Intersection Improvements and plans, such those in the sidebar. Railroad Crossings • Bikeway/Pedestrian Paths Additionally, there is a strong possibility of funding a Flood Protection City office building on the Copeland/French site. This Community Centerlrherapy Pool • Park Improvements issue will be presented to the Council in February 2001, Downtown Plan Improvements before the next Financial Plan is adopted. Railroad Area Improvements • Mid-Higuera Area Improvements Limited Revenue Options. With the passage of Civic Center Improvements Proposition 218, our revenue options are more limited than they have been in the past. While a few options remain that can be implemented by the Council, any increased or new tax source will require voter approval. Retirement Costs. Over the past several years, the City has been on a roller coaster ride when it comes to our retirement costs. Based on the most recent actuarial analysis, our retirement plans for both sworn and non-sworn employees have assets significantly in excess of liabilities. For this reason, the City currently makes no employer contribution to the plans. However, our "normal" plan contributions should be 13% of payroll for sworn employees and 5% for non- sworn employees. If these rates were in place today, our contributions would be about $1.4 million annually in the General Fund (versus no'costs in 2000-01). At this time, the State forecasts a continuing "zero" employer contribution rate for the foreseeable future. However, based on our past experience, this can change abruptly and dramatically. Further, the "zero rate" forecast assumes no changes in plan benefits, such as 3% at 50 for swom employees or increased "cost-of-living" allowances. These are not "free," and if implemented, would significantly alter the funding status of our plans. At some point, they would result in a return to the "normal rate" plus an increase to fund the added benefits. Liability and Workers' Compensation Insurance. The City has been extremely fortunate in controlling these costs in recent years. However, it was not that long ago these were among the City's fastest rising costs. Hopefully, this will continue into the future, but there are no 2F-3 Council Agenda Report—General Fiscal Outlook for 2001-03 Page 4 guarantees. For example, in the area of workers' compensation, our most recent actuarial analysis shows the potential for significant cost increases in the future if current trends continue. Internet and Catalog Sales. While there are many advantages to the "new economy," e- commerce presents major problems to us in the collection of sales taxes, our most important revenue source. While Internet sales are still a relatively small component of total retail sales (about 0.3% in 1998), all projections indicate significant increases in the future—as much as $3.2 trillion by 2003—especially as traditional "bricks and mortar" retailers move to e-commerce themselves ("clicks and mortar"). Projecting revenue losses from this is very difficult. Hopefully, there will be a rational resolution to collecting such an important revenue source, and this type of assessment will be academic and not required. Placing this in perspective, sales taxes are the State's second largest General Fund revenue (after personal income taxes), bringing in about $22 billion annually and funding about one-third of State operations. In other states, sales tax revenues play an even larger role. In Texas, for example, there is no income tax, and sales tax is the primary state revenue source. In short, because this is such a major issue in funding state and local governments throughout the nation, hopefully a reasonable resolution will ultimately emerge. But if one does not, Internet sales will significantly undercut the City's fiscal condition. SUNMARY It is likely that we will have adequate resources to fund current service levels and adequately maintain our existing assets in the 2001-03 Financial Plan. However, improving service levels or more fully achieving our capital improvement (CIP) goals will be very difficult. This challenge is highlighted by the recent Ten Year Financial Plan, which projected that there would be about $7.0 million available over the next ten years for $1.500,000 Ten Year Financial Plan Available"New" CIP Funding "new" facilities and infrastructure improvements $1.zoo.000 (after maintaining current $900000 171 service levels and existing g assets), while meeting W $600,000 adopted capital improvement goals would cost in excess of $300,000 $100 million. so s s s a Difficulties in funding CIP s g N g b g o Q goals are further highlighted in comparing General Fund contributions to the CIP in the 1999-01 Financial Plan for the first two years (1999-01)compared with the third and fourth years (2001-03): 2F-4 Council Agenda Report—General Fiscal Outlook for 2001-03 Page 5 ■ For 1999-01, the total over two years is $8.2 million, or about $4.1 million annually. At this level, the 1999-01 Financial Plan was a "balanced budget." ■ In 2001-03, this increases to $14.7 million, or about $7.3 million annually. This means that there is an unfunded difference of about $3.2 million annually in CEP projects between the first two years of the four-year CIP and the third and fourth years. Conclusion. In summary, we do not foresee major difficulties ahead of us at this time in maintaining current services and existing assets. However, there are areas where our operating programs should be improved, and facility needs where more than maintenance efforts are warranted. In short, funding these improvements in our current fiscal environment will be very difficult. Nonetheless, this does not mean that we cannot fund new initiatives, although this will not be easy. Several options are available to us in doing this: ■ Existing Resources. Re-prioritize current service levels, programs and projects. While this is a viable option, it is easier said than done. ■ Increased Revenues. Grow the economy at levels better than forecasted; or implement some of the remaining (but limited) revenue options available to the Council under Proposition 218. ■ Voter-Approved Revenues in November of 2002. Under Proposition 218, any increased or new tax requires majority voter for general purposes; and two-thirds voter approval for special purposes. Unless there is an emergency, elections for general-purpose revenues must be held in conjunction with Council member elections. This means that the soonest such an election could be held for general purposes is November 2002. (Elections for special- purpose revenues can be held at any time, but research has shown these typically do better in conjunction with general elections.) While this might help with our longer-term prospects, this not a likely source funding for the 2001-03 Financial Plan due to these timing requirements. ■ Legislative Efforts. Work to restore revenues taken away from us by the State, and hope that the Governor and Legislature will be receptive to these efforts. Of all these options, this is the one least in our ability to control, and given the recent history of State and local government fiscal relationships, the one least likely to be successful. G:2001-03 Financial Plan/Council Goal-setting/Council Agenda RepcmvGeneral Fiscal Outlook 2F-5