Title
Receive a Summary of Proposed Budget for Fiscal Years 2015-16 and 2016-17. (Finance 2410)
Body
To: Honorable Mayor and Members of the City Council
From: John A. Russo, City Manager
Re: Receive a Summary of Proposed Budget for Fiscal Years 2015-16 and 2016-17
BACKGROUND
A slide show summary of the proposed General Fund budget and forecast for fiscal years 2015-16 and 2016-17 is attached. Staff requests that the City Council provide direction regarding preparation of the General Fund budget for fiscal years 2015-16 and 2016-17 in anticipation of the budget hearing on June 2, 2015.
DISCUSSION
Staff has prepared an initial proposed budget and forecast for fiscal years 2015-16 and 2016-17 covering the General Fund (Attachment A). As presented at the March 17, 2015 Council meeting, a series of workshops have been scheduled on April 16, April 29 and May 12, 2015 to allow the Council and the public to discuss the budget in detail. Consideration of a resolution to adopt the budget covering all City and Successor Agency funds is scheduled for the June 2, 2015 Council meeting.
General Fund Preliminary Budget
This is the first budget in the last three years where departments were not required to cut their budgets in order to arrive at a balanced budget. Moreover, although the General Fund preliminary available fund balance is declining in the next five years, it will not only remain positive, it will conform to the City's 20% fund balance reserve policy over that same five year period. This is a stark change from the projections of the last budget, when the General Fund balance was estimated to be zero after five years. This is the beneficial result of previous cuts made to get expenditures under control, and also a sign of the improving economy.
Economic Outlook
The U.S. economy has been showing signs of slow but steady improvement. The national economy grew 5% in the third quarter 2014 and 2.6% in the fourth quarter 2014. At the state level, the Legislative Analyst Office, too, forecasts continuation of the current economic recovery for California and even assumes that no recession will occur between now and 2020. As the local economy continues to improve, the East Bay labor market has performed in similar fashion, according to Beacon Economics. As of December 2014, total employment in the region was up 2.4% from December 2013. This is 0.5% higher than the pre-recession high in March 2007. The unemployment rate was down to 5.3% compared to 6.5% in December 2013. This is good news for the region, as those individuals entering the labor market will drive up the taxable sales. All of these are positive indicators that the City of Alameda economy will continue to expand in the next two years.
A significant portion of the City's revenue is influenced by both residential and commercial real estate trends in the region. HdL Coren & Cone, the City's property tax consultants, reported that the housing market has continued to improve in 2014 although the pace has slowed due to increased prices and tight inventories. The median price of all single family residential homes in 2014 was $660,000, which is higher than prices seen before or during the last recession. The City's property net taxable value increased 5.9% for the 2014-15 tax roll. Most of the growth is attributed to the Proposition 13 inflation adjustment.
Sources of Risk
Every budget has the risk that estimation will not accurately predict future performance for revenue and expenditures and that conditions will deviate from the assumptions used to make estimates.
The fiscal years 2015-16 and 2016-17 Proposed Budget and the 5-year projection include assumptions about cost increases that depend on collective bargaining results. Benefit costs will also depend on CalPERS performance, amortization and smoothing policies, and revisions of actuarial assumptions. Other Post-Employment Benefits (OPEB) cost increases are incorporated in the 5-year projection based on the City's practice of pay-as-go method. All of these risks described above must be taken into account in making decisions about ongoing expenditure and reserve levels.
Revenue Performance
Overall, City of Alameda annual revenues, including transfers in, are estimated to increase by $1.4 million from FY 14-15 to FY 15-16 and $0.2 million from FY 15-16 to FY 16-17. Most of the general tax revenues showed higher than expected growth in the last two years. To get a better handle on what may happen to the City revenues in the coming five years, staff consulted with Beacon Economics (Beacon) to review and estimate five of the City's largest revenue sources: property tax, sales tax, transient occupancy tax, property transfer tax and motor vehicle license tax. Both staff and Beacon are in agreement that the above listed revenues are on the rise and will continue to grow in the future. However, forecasts prepared by Beacon showed significantly aggressive growth, which staff did not view as prudent nor sustainable. As a result, more conservative estimates were used for the Fiscal Years 15-16 and 16-17 budget-cycle.
· Property tax and Property Transfer Tax - combined make up about 39% of General Fund total revenues. Property Tax is expected to increase by 2.6% from the FY 14-15 projection and 1% from the FY 15-16 proposed. Property transfer tax is expected to decrease 4.9% in FY 15-16 due to exclusion of large one-time payments received in FY 14-15. Staff estimates an increase of 8% in this revenue source in FY 16-17.
· Sales tax revenue - is dependent on consumer spending and on the economy overall. Staff projects that FY 14-15 sales tax revenue will increase nearly 15% from the prior year based on receipts to date. This increase is used as a base for the new budget cycle projection. Staff is estimating that sales tax will grow an additional 4% in FY 15-16 and 2.9% in FY 16-17.
· Transient Occupancy Tax -directly benefits from increased spending activities. Staff estimates a 3% increase in FY 15-16 and a 10.2% increase in FY 16-17. The larger growth in FY 16-17is attributed to the opening of a new hotel and the expansion of another hotel.
· Motor Vehicle License Fee - are being allocated through property taxes and as such have a similar growth pattern.
· Utility User Tax - is expected to decline not only in the next two years but throughout the 5-year forecast. This tax is generated on cable television, telephone services, natural gas and electricity. As consumers bundle their cable, telephone and broadband services, the tax collected is reduced due to lower pricing. In addition, the City's Ordinance is outdated and does not provide for collection of tax on certain services that could be subject to this tax.
· Franchise Tax - is projected to decline 12% in FY 15-16 due to catch up for prior year prepaid tax from Alameda Municipal Power (AMP). In FY 16-17 AMP franchise fee payments will resume as normal, causing an increase of 16.6%.
· Business License Tax - is projected to show minimal growth of 1% each year.
· Departmental Revenues - is expected to decrease 5% due to elimination of Basic Life Support (BLS) pilot program administered by the Fire Department. In future years, departmental revenues are projected to remain unchanged.
One-time Revenues, advances and loans
Staff is adhering to the best practices in using one-time revenues for one-time, non-recurring expenditures. However, in fiscal year 2015-16, the General Fund is getting a repayment of a prior loan to Alameda Municipal Power (AMP) in the amount of $2.2 million. This loan repayment is recognized as revenue for budgeting purposes.
Expenditures
Staff is not proposing any cost of living adjustments for contractual services or materials and supplies unless provided by existing contracts with vendors. Increases in labor costs are due to normal salary increase as well as estimated 2% COLA based on estimated BRI, rising costs for the retirement system, expected increases in the cost of other benefits and an addition of three new positions. The Fire Department is adding $500,000 to its overtime budget as a result of the expiration of the SAFER grant. The City is in the application process for a new SAFER grant to add six positions to substantially reduce overtime. The results of the submitted grant application will be available sometime in August 2015. The City Manager's Office is adding three new positions - Director of Technology and Innovation, Information Technology (IT) Systems Coordinator, both of which are in the IT Division, and Administrative Services Coordinator- Resiliency. The Director and IT Systems Coordinator positions are equally funded by the General Fund and AMP and Administrative Services Coordinator is funded by the General Fund.
California Public Employee Retirement System (CalPERS)
Fiscal year 2015-16 will be the first time CalPERS will set the employer contribution rates using the new amortization and smoothing policy. In April 2013, the CalPERS Board of Administration approved a new policy to pay for all gains and losses over a fixed 30-year period with increases or decreases in the rate spread directly over a 5-year period. Previously, CalPERS smoothed rates over a 15-year period. These changes will improve CalPERS funding levels by putting City plans on a path to be fully funded in 30 years. However, it does come at a cost to all agencies contracted with CalPERS, including Alameda. The employer contributions rates will be more volatile; short term contribution rates will increase; though, it is anticipated that long term rates will be flat or lower.
CalPERS projects contributions rate for the next five years as follows:
Plan |
FY 2015-16 |
FY 2016-17 |
FY 2017-18 |
FY 2018-19 |
FY 2019-20 |
Safety |
55.036% |
58.2% |
60.5% |
62.9% |
65.2% |
Miscellaneous |
26.777% |
28.5% |
30.0% |
31.5% |
32.7% |
It should be noted that safety and miscellaneous employees will contribute 15% and 8.868% toward these costs respectively by 2017.
Infrastructure and Deferred Maintenance
The City of Alameda's current infrastructure condition requires a significant investment of resources to deal with years of deferred maintenance of sidewalks, storm drains, buildings, and streets. We are allocating $10.5 million towards sidewalk maintenance The maintenance requirements for the City's storm drains is approximately $45 million and the City's buildings is $10-20 million. Deferred maintenance on Alameda's streets is more nuanced. To maintain the City's streets in fair condition, as they are today, requires no additional funds beyond those already afforded under current transportation funds. A moderate street improvement program would require an allocation of approximately $13 million, while an aggressive street improvement program would require an allocation of $60 million. Further details on deferred maintenance will be provided during Public Works' budget presentation on May 12, 2015.
Transfers
The General Fund Proposed Budget includes transfers to other City funds of $7.8 million in FY 15-16 and FY 16-17. The purpose of the transfers is: to support City programs that are not able to be self-sufficient without increasing charges and fees; to pay debt service; and to provide discretionary funding for capital improvement program to deal with deferred infrastructure maintenance and replacement as described above.
In addition, the General Fund Proposed Budget includes transfers in from other City funds of $0.5 million in each FY 15-16 and FY 16-17. Transfers into the General Fund come from Bayport Municipal Services District, Assessment District CFD1 and Parking Meter funds. The purpose of the transfers is to reimburse the General Fund for Police and Fire Department services, costs of regulating the use of and maintaining the City's parking; and to reimburse the General Fund for administrative services.
General Fund Reserves
It is the City Council's policy to maintain General Fund reserves, also referred to as available fund balance, at 20% of annual operating expenditures. The proposed budget for fiscal years 2015-16 and 2016-17 maintains the General Fund reserve level at 38% and 36%, respectively. While the available fund balance is projected to drop to 20% in FY 19-20, Government Finance Officers Association (GFOA) suggests to maintain General Fund available fund balance at 16.67% (or two month of operating expenditures). During the presentation, staff will be discussing the potential use of reserves.
Based upon direction provided by the City Council after presentations made by each Department, staff will bring the Proposed Budget to the City Council for presentation and adoption at the June 2, 2015 Council meeting.
FINANCIAL IMPACT
There is no impact to the General Fund or other funds as a result of this action. The Proposed Budget provides detailed revenue and expenditures information regarding the General Fund. The General Fund proposed appropriations, including transfers out, total $80.5 million for Fiscal Year 2015-16 and $83.1 million for Fiscal Year 2016-17.
MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE
This action is in conformance with the Alameda Municipal Code and all policy documents.
ENVIRONMENTAL REVIEW
This activity is not a project and is exempt from the California Environmental Quality Act (CEQA) pursuant to section 15378(b)(4) of the CEQA guidelines, because it involves governmental fiscal activities which do not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment.
RECOMMENDATION
Receive the draft Budget Summary Report and provide direction to staff regarding the proposed draft budget to be presented for Council consideration on June 2, 2015.
Respectfully submitted,
Elena Adair, Finance Director
Exhibit:
1. General Fund Budget Summary and 5-Year Forecast