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HomeMy WebLinkAboutStaff Report Mid-Year Fiscal Year 2014 Budget Update. (Finance)CALIFORNIA +- N ''i.0N��_LCflh Veo ' I? "�Saai C/01rORATVD City Council Staff Report February 18, 2014 ITEM Staff Report: Fiscal Year 2014 Mid -Year Budget Review BACKGROUND Consistent with historic practice, staff brings forward a mid -year review of the City's operating budget. The intent of this report is to review the activities of the first half of the current fiscal year and provide revised projections of revenues and expenditures through the end of the fiscal year. In addition, the report recommends various budget adjustments. This report represents the second budget report of the fiscal year. A first quarter status report was presented on November 19, 2013, consistent with staff's commitment to provide quarterly reports on the status of the budget in keeping with the strategic plan objective of fiscal transparency. DISCUSSION First Half of Fiscal Year 2014 Based on year-to-date actual revenues and expenditures through December 31, 2013 and anticipated activities through year-end, the General Fund is projected to end the year with an increase in fund balance of approximately $2,008,826 over that of June 30, 2013. The expected increase results from a combination of over -realized revenues and lower than budgeted expenditures, primarily in personnel -related expenditures and pending capital improvement projects. Revenues The General Fund's primary sources of revenue are sales and property taxes. The table below compares revenues from July 1st through December 31 st of the current fiscal year to those of the same period of the prior fiscal year. Page 2 Staff Report — Fiscal Year 2014 Mid -Year Budget Review February 18, 2014 Mid -Year Revenue Comparison Revenue Category Sales & Use Tax District Sales Tax Property Tax 1 Property Tax in Lieu of VLF Property Tax in Lieu of Sales Tax Other Revenue 1 Total GENERAL FUND REVENUES AS OF DECEMBER 31ST FY 13 $3,808,463 3,053,857 725,929 3,15 8,272 FY 14 $4,048,059 3,364,825 73 8, 652 Difference $239,596 310,968 12,724 4,393,574 1,235,301 $10,746,521 $12,545,110 $ 1,798,589 ncludes reduction for property tax allocation to the Library and Parks Maintenance funds During the first six months of the current fiscal year, General Fund revenues totalled more than $12.5 million, nearly $1.8 million higher than the same period last year. Sales and Use Tax receipts outpaced those for the same period of the prior fiscal year by $239,596, in part, due to stronger auto sales and increases in business to business activity. For sales other than walk -in - stores, District Sales Taxes are allocated based upon where the goods are delivered or placed into use and, as such, do not always "track" Sales and Use Taxes. The City's District Sales Tax revenues are $310,968 above last year, with increases in several spending categories. Fiscal Year 2014 "Other Revenue," which represents the combined total of non -major revenue sources, has benefitted from the $1 million received in December from Paradise Creek Housing Partners for site infrastructure reimbursement for the Westside In -fill Transit Oriented Development Project site. Staff projects overall year-end General Fund revenues to exceed the adjusted budget by approximately $1.3 million. This estimate is based, in part, upon year-to-date and historical data, input from the City's sales tax consultant, and information obtained from the State of California and County of San Diego; however, the variance is affected by a "mismatch" of budgeted versus actual and projected revenues, which will be addressed later in this report. Page 3 Staff Report — Fiscal Year 2014 Mid -Year Budget Review February 18, 2014 Fiscal Year -End Revenue Projections GENERAL FUND REVENUES FISCAL YEAR 2014 Projected Revenue Category Adjusted Budget 1 Projected Variance Sales & Use Tax $11,358,170 $11,671,509 $313,339 District Sales Tax 9,418,000 9,446,867 28,867 Property Tax 2 1,880,173 1,953,314 73,141 Property Tax in Lieu of VLF 5,185,350 5,364,774 179,424 Property Tax in Lieu of Sales Tax 4,093,008 4,006,058 (86,950) Other Revenue 3 15,786,933 16,562,531 775,599 Total $47,721,634 $49,005,053 $1,283,419 1 adopted budget total, plus budget amendments 2 includes reduction for property tax allocation to the Library and Parks Maintenance funds 3 does not include budgeted Transfers In ($459,609) In addition to the positive effect on sales tax revenues (Sales & Use and District Sales taxes) from the aforementioned growth in various spending categories, property taxes for Fiscal Year 2014 have increased in conjunction with a greater than anticipated 4.7% increase in assessed valuations. Changes in Property Tax in Lieu of Vehicle License Fee ("VLF") revenues are tied to the change in assessed value. Although already budgeted higher than for the previous fiscal year, this revenue is now projected to exceed its budget by $179,424 or 3.5%, in correlation to assessed valuations, which are at their highest levels in more than 15 years. Regarding Property Tax in Lieu of Sales Tax, the projected amount is based on planned distribution totals released in August from the County of San Diego, replacing the slightly higher estimate provided by the City's sales tax consultant during preparation of the current fiscal year budget. The distribution, calculated by the State Department of Finance, incorporates an estimated value of the 0.25% reduction (from 1% to 0.75%) in the general purpose sales and use tax rate for the current budget year and a "settle -up" adjustment based on prior -year actuals. Finally, $776,000 of the projected excess of "Other Revenue" over the budgeted (combined) total results from a combination of the net of anticipated variances in several individual accounts (positive impact) and the lack of a mechanism to account for deferred revenues associated with capital expense appropriations carried forward from fiscal year to fiscal year (negative impact). This projection includes the $2.7 million deferred revenue, which was received from the Successor Agency in Fiscal Year 2013 (June) but which will be realized as expenses for the related project work is completed during the current fiscal year; however, unlike with appropriations, revenue budgets are not automatically carried forward from one fiscal year to the next. Council authorization is required to correct this discrepancy. Notwithstanding the negative impact on the budget -projection variance, because the expense is associated with a deferred revenue which will be realized as revenue, there is no net impact on fund balance. Page 4 Staff Report — Fiscal Year 2014 Mid -Year Budget Review February 18, 2014 Expenditures As of December 31, 2013, General Fund expenses totalled just under $17.0 million, slightly exceeding those at the same point last fiscal year. Mid -Year Expenditure Comparison GENERAL FUND EXPENDITURES AS OF DECEMBER 31ST Expenditure Category FY 13 FY 14 Difference Personnel Service $11,141,609 $12,068,484 $926,875 Maintenance & Operations 1,362,698 1,113,339 (249,358) Capital Outlay 1,434 55,612 54,178 Capital Improvement 876,039 661,850 (214,189) Internal Service Charges 3,274,193 2,877,031 (397,162) Other Expenditures 237,932 215,102 (22,830) Total $16,893,905 $16,991,419 $97,514 The increase in personnel services is attributed to the restoration and/or addition of several positions and increases to costs of living and retirement contributions. The decrease in maintenance & operations and capital improvement expenses is, in part, the result of timing differences of payment obligations and processing from year to year, with continued fiscal discipline also contributing to the Maintenance & Operations difference. At the mid -year point, however, it is difficult to ascertain the extent or proportion to which these factors apply and requires ongoing analysis as the year progresses. The increase in capital outlay expenses is associated with automotive equipment purchases. The decrease in Internal Service Charges results from the Department of Finance's transition from an Internal Service Department to a General Fund department. Staff will continue to monitor all expenses and provide greater detail in the third quarter budget report. Staff is projecting actual expenditures to end the fiscal year at nearly $6.2 million below budget; however, while recent historical data and current spending trends suggest a somewhat optimistic overall outlook, the most significant aspect of the variance is projected versus budgeted spending on capital improvement projects, nearly all of which will not result in cost savings, but, instead, simply in a delayed impact on fund balance. Page 5 Staff Report — Fiscal Year 2014 Mid -Year Budget Review February 18, 2014 Fiscal Year -End Expenditure Projections Expenditure Category Personnel Service Maintenance & Operations Capital Outlay Capital Improvement Internal Service Charges Other Expenditures GENERAL FUND EXPENDITURES FISCAL YEAR 2014 Adjusted Budget 1 $28,578,476 4,327,881 360,811 12,208,370 5,809,062 480,433 Projected $27,187,080 4,331,431 510,811 7,266,827 5,809,062 480,433 Projected Variance $(1,391,396) 3,550 150,000 (4,941,543) Total $51,765,032 $45,585,643 $(6,179,390) t adopted budget total, plus budget amendments, and encumbrances and capital projects appropriations carried forward from previous fiscal year(s) While personnel costs for the first half of this year are greater than for the same period last year, a savings of $1.4 million is expected to result from vacant authorized positions. Capital Outlay is projected to exceed its adopted total by $150,000, due to higher than anticipated expenses for renovation of the Police Property & Evidence Room upgrades. The projected $3,550 Maintenance & Operations excess is associated with the purchase of Class A uniforms for Firefighters completing probation per the City Council approved Memorandum of Understanding with the National City Firefighters' Association. It is conservatively estimated the remaining expenditures in the Capital Outlay and Maintenance & Operations categories will meet their budgeted totals. As indicated above, further review and analysis will be conducted and presented in the third quarter budget report. Capital Improvement expenses are anticipated to end the year approximately $4.9 million below their budgeted total. However, due to the multi -year nature of capital projects, it is not unusual for spending on a project, or phase of a project, to not reach its budgeted level for the fiscal year. And unlike those of operating expenditures, capital project appropriations which have no directly offsetting revenue and are unspent at the end of a fiscal year are carried forward to the following fiscal year, with the resulting fund balance categorized as "Assigned," as defined in accordance with Governmental Accounting Standards Board ("GASB") Statement 54. Transfers In/Out While technically not revenues and expenditures (and, hence, not shown above), transfers in and out of the General Fund contribute to fund balance increases and decreases, respectively. Neither Transfers In nor Transfers Out currently is expected to deviate from its budgeted total. Net Impact on Fund Balance Page 6 Staff Report — Fiscal Year 2014 Mid -Year Budget Review February 18, 2014 Combining the above revenue and expenditure projections with expected transfers in and out results in an anticipated fund balance gain of just over $2.0 million, compared to the budgeted usage of nearly $5.5 million. Again however, the variance is largely due to the manner in which capital projects are budgeted and their multi -year nature. GENERAL FUND IMPACT ON FUND BALANCE FISCAL YEAR 2014 Adjusted Budget Projected Variance Revenue $47,721,634 $49,005,053 $1,283,419 Transfers In 459,609 459,609 - Total Revenue & Transfers In $48,181,243 $49,464,662 $1,283,419 Expenditures $(51,765,032) $(45,585,643) $(6,179,389) Transfers Out (1,870,193) (1,870,193) - Total Expenditures & Transfers Out $(53,635,225) $(47,455,836) $(6,179,389) Fund Balance Change (5,453,982) 2,008,826 Beginning Fund Balance $21,449,616 $21,449,616 Ending Fund Balance $15,995,634 $23,458,442 Budget Adjustments During the mid -year budget review process, departments are afforded an opportunity to submit supplemental appropriation requests based upon actual or projected budgetary requirements not anticipated during the annual budgeting process and to request other budget adjustments. Below are the budget adjustments recommended. General Fund (001): Expenditure Appropriation Adjustment: $1,990,744.50 1. Fire Department (412) — Personnel budget increase for Overtime: $150,000 The department requests an increase of $150,000 to its overtime budget of $499,000. The anticipated increase in overtime expenditures is related to long-term injuries of employees, which requires other fire personnel to work additional overtime hours to ensure staffing compliance for the safety of City personnel as well for the safety and welfare of the general public. Department of Finance recommendation: Authorize the City Manager to approve budget adjustments totalling up to $150,000 for additional overtime expenses to be funded from either available savings elsewhere in the General Fund budget or, if necessary, unassigned fund balance in the General Fund. 2. Police Department (411) — Capital Outlay budget increase for Facility Upgrades: $150,000 Page 7 Staff Report — Fiscal Year 2014 Mid -Year Budget Review February 18, 2014 The department seeks to increase its Capital Outlay budget of $250,000 by $150,000. The increase in capital outlay expenditures is related to completing Property & Evidence Room upgrades. The department has to expand its current storage capacity to accommodate the storage of human (biological) forensic evidence as a result of the County of San Diego no longer providing that service. Additional storage space is required in order to accommodate refrigeration units, equipment, and related facility upgrades to ensure evidence is not destroyed or compromised. If this upgrade does not proceed, additional costs may be incurred for offsite storage in a facility that meets departmental standards. Department of Finance recommendation: Authorize the City Manager to approve budget adjustments totalling up to $150,000 for the Property & Evidence Room project to be funded from either available savings elsewhere in the General Fund budget or, if necessary, unassigned fund balance in the General Fund. 3. Fire Department (412) — M&O budget increase for wearing apparel: $3,550 The department requests an increase of $3,550 to its wearing apparel budget of $57,847. The increase in expense is related to the purchase of Class A uniforms for Firefighters completing probation per the City Council approved Memorandum of Understanding (MOU). Department of Finance recommendation: Authorize the City Manager to approve the budget adjustment of $3,550 for the purchase of the uniforms to be funded from either available savings elsewhere in the General Fund budget or, if necessary, unassigned fund balance in the General Fund. 4. Non -Departmental (409) — Establish appropriations to reflect acquisition of property for the relocation of Public Works Operations: $1,672,638.50 On August 20, 2013, the Council authorized the acquisition of property located at 1726 Wilson Avenue for the relocation of the National City Public Works facilities. The appropriations are necessary to ensure that the transaction is correctly recorded in the City's financial system and will reflect the amount paid for the property as well as escrow fees and other transaction expenses. Department of Finance recommendation: Authorize the City Manager to approve the necessary budget adjustments totalling $1,672,638.50 to properly record the property acquisition transaction. The funding source is unanticipated revenue received by the City from the sale of the 2100 Hoover Avenue site to the Housing Authority. 5. Mayor and City Council (401) — Establish appropriations to properly record expenditures related to the State of the City Address event: $14,556 Since 2010, donations received and expenditures for the Mayor's State of the City Address were recorded in a liability account titled, Miscellaneous Deposits. This allowed the remaining balance in the account to be carried forward into the succeeding fiscal year. However, this is not a recommended accounting practice. For true transparency, donations should be recorded in a revenue account and expenses in an appropriate expenditure account. Page 8 Staff Report — Fiscal Year 2014 Mid -Year Budget Review February 18, 2014 Department of Finance recommendation: Authorize the City Manager to establish appropriations of $14,556 in a State of the City Address account. The amount represents the sum of the balance that was in the Miscellaneous Deposits account at the end of last fiscal year ($6,056) and the donations received to date in the current fiscal year ($8,500). A corresponding revenue account and budget will also be established. General Fund (001): Revenue Budget Adjustment: $1,672,638.50 1. Other Revenue — Sales of Real Property (3601) — Increase revenue budget: $1,672,638.50 This adjustment will reflect the use of unanticipated revenue from the sale of the 2100 Hoover Avenue site for the purchase of the 1726 Wilson Avenue site. Department of Finance recommendation: Authorize the City Manager to approve the revenue budget adjustment totalling $1,672,638.50 as a companion to the recommended appropriation adjustment for the acquisition of the 1726 Wilson Avenue site. Section 8 Fund (502) — Expenditure Appropriation Adjustments: $24,000 1. Housing, Grants & Asset Management (419) - M&O increase for various items: $24,000 The department requests an increase in appropriations in the following accounts: • Professional Services (Acct #213): increase budget of $22,000 by $5,000 to hire a private law firm to handle Section 8 hearings, and $6,000 to pay a private law firm for ongoing legal expenses. • Memberships and Subscriptions (Acct #222): increase budget of $4,900 by $1,000 to pay membership dues for CAHA (California Association of Housing Authorities). • Material & Supplies (Acct #399): increase budget of $5,100 by $2,000 to purchase office supplies for the remainder of the fiscal year. • Contract Services (Acct #299): increase budget of $36,000 by $10,000 to upgrade the HAPPY Software to Housing Pro for Section 8 staff. The software upgrade will create efficiencies in managing the Section 8 program. Department of Finance recommendation: Authorize the City Manager to approve the requested $24,000 in budget adjustments. The Section 8 fund has adequate fund balance to fund these requests. Equipment Replacement Reserve Fund (644) — Expenditure Appropriation Requests: $40,000 1. Public Works Department (416) — Capital Outlay increase for the purchase of Mowers: $40,000 Page 9 Staff Report — Fiscal Year 2014 Mid -Year Budget Review February 18, 2014 The department requests the replacement of two mowers used to maintain City owned park space that cost approximately $20,000. Department of Finance recommendation: Authorize the City Manager to approve the requested $40,000 budget adjustment. The Equipment Replacement Reserve Fund is designated for these specific purposes, and has adequate fund balance to fund this purchase. Budget Transfers During the mid -year budget review process, changes to the budget were identified that, if approved, would better reflect operational needs or the character of an expense. Department of Finance recommendation: Authorize the City Manager to approve the budget adjustments described below. These transfers will not increase the overall appropriations. General Fund (001) 1. Transfer appropriations of $50,000 from Part -Time Salaries (Acct #100) to Contract Services (Acct #299) within the Community Development (418) department for the YMCA Agreement. 2. Transfer the Neighborhood Council (Activity #414) from the Community Development Department (418), including appropriations totalling $15,000, to the City Manager's Office (403). The staff member administering the program has moved from the Community Development Department to the City Manager's Office. This budget change is to ensure that oversight is properly aligned with the responsible department. 3. Transfer the Community and Police Relations Committee (Activity #415) from the Community Development Department (418), including appropriations totalling $7,500, to the City Manager's Office (403). The staff member administering the program has moved from the Community Development Department to the City Manager's Office. This budget change is to ensure that oversight is properly aligned with the responsible department. 4. Transfer appropriations of $25,000 for student interns under the San Diego State University (SDSU) Sage Program from Part -Time Salaries (Acct #100) to Contract Services (Acct #299) within the City Manager's Office (403). CONCLUSION Looking ahead, the City appears to be on pace to again build upon its fund balances in Fiscal Year 2014. If projections hold, staff recommends applying any eligible surplus to reserves, in order to remain in compliance with the City's goal of a Contingency Reserve balance ("Unassigned Fund Balance") of at least 25% percent of General Fund operating expenditures Page 10 Staff Report — Fiscal Year 2014 Mid -Year Budget Review February 18, 2014 and/or increase the funding levels of the City's other reserves, which are well below their stated goals. Factors which are likely to affect that outcome include the following: • Actuarial adjustments by the California Public Retirement System (CaIPERS) are estimated to require increases in the City's employer contribution to employee pension funds into the foreseeable future. For Fiscal Year 2014, the City's contribution has increased over Fiscal Year 2013's by 1.663% of payroll to 22.9% for miscellaneous employees and by 1.793% to 39.8% for public safety employees. Contribution rates currently are estimated to reach 33% and 52% for miscellaneous employees and public safety employees, respectively, in Fiscal Year 2020. • By Council Policy, the City maintains a series of reserves. Staff is reviewing current reserve levels and the policies governing them, as well as the inventory of deferred maintenance and deferred equipment replacement, which may result in recommendations in these areas. Staff will include discussion &/or recommendations regarding this policy in the third quarter budget report. • The voter -approved District Sales Tax is set to sunset in 2016. The City Council recently approved staffs recommendation to proceed with developing language for a ballot measure to extend the tax. As demonstrated by the revenue figures contained in this report, the District Sales Tax continues to be essential in allowing the City to meet its financial obligations. As has been the case since the year of its inception, absent this tax, the City would not be able to meet its obligations in Fiscal Year 2014. That trend is expected to continue. As such, it is imperative to reserve any surplus in preparation for 2016. RECOMMENDATIONS Accept this staff report. Authorize the City Manager to approve budget adjustments totalling up to $150,000 each for additional Fire Department overtime expenses and the Police Department's Property & Evidence Room project and $3,550 for Class A Firefighter uniform to be funded from either available savings elsewhere in the General Fund budget or, if necessary, unassigned fund balance in the General Fund. Adopt the remaining above -referenced budget adjustments and restructuring requests. FISCAL IMPACT If all recommendations are approved, the impact of budget adjustments would be a $1,990,744.50 increase of total General Fund appropriations, $1,672,638.50 increase of the Page 11 Staff Report — Fiscal Year 2014 Mid -Year Budget Review February 18, 2014 General Fund revenue budget, Section 8 Fund appropriation increase of $24,000, and Equipment Replacement Reserve Fund appropriation increase of $40,000.