Title
Adoption of Resolution Amending the Fiscal Year (FY) 2017-18 Budget. (Finance 2410)
Body
To: Honorable Mayor and Members of the City Council
From: Jill Keimach, City Manager
Re: Adoption of Resolution Amending the Fiscal Year (FY) 2017-18 Budget
BACKGROUND
This report updates Fiscal Year 2017-18 financial projections for the General Fund and proposes current year budget amendments for various City funds to reflect and respond to the City’s current financial condition.
The discussion below is presented in the following sections:
I. General Fund Revenues
II. General Fund Expenditures
III. Pension/OPEB Funding Status and Policy
IV. General Fund Annual Activity and Forecast
V. Non-General Fund Programs
DISCUSSION
The City Council adopted the FY 2017-18 budget on June 7, 2017. Since adoption, the budget has been selectively amended for specific programs, primarily for capital project activity. At this time, staff recommends approving a series of amendments to the FY 2017-18 General Fund budget based upon year-to-date activity and updated revenue projections. A short list of non-General Fund program budget amendments is also recommended for approval. To provide context for these recommendations, updated General Fund projections are provided for the upcoming FY 2018-19 budget year and for a 5-year forecast period through 2022.
I. General Fund Revenues
As shown in the following graph and as detailed in Exhibit 5, General Fund revenues in FY 2017-18 are projected to increase by $7 million and to reach $99 million in total. This revenue increase is substantially driven by $4 million of unusual property transfer tax proceeds from the sale of two high-value real estate parcels. Updated revenue projections for a 5-year forecast period through 2022 range from $96 to $99 million.
Ø Property Tax and related taxes are projected to be $1.6 million higher than the original budget. As detailed in Exhibit 6, the County Assessor has increased assessed values in the City by 5.8% over the prior year. The City is realizing strong property tax related revenue growth. Future growth in assessed values above the State Prop 13 annual 2% cap is limited to property turnover or new development entering the tax roll.
Ø Sales Tax revenue is also projected to exceed the original annual budget by $300,000. Total Sales Tax revenue is highly concentrated within a few major operators. Over 30% of the City’s sales tax is generated by its top 5 producers. The following chart depicts the source of the City’s sales tax revenues by industry group. Alameda’s sales tax revenue is substantially generated from business and industry sources.
Ø Property Transfer Tax, charged at the point of property resale, continues to generate exceptional revenues for the General Fund. The projection for FY 2017-18 is increasing by $5 million to $14 million for the year. $4 million of this increase has been generated from only three parcel sales, including the Summer House, Vue Alameda and Panomar Apartment Complexes. The FY 2017-18 annual projection is based upon the following stratification of tax receipts:
FY 2017-18 Transfer Tax Projection
Properties <$20,000 tax per transaction $ 8,500,000
Properties >20,000 < 500,000 1,500,000
Properties > 500,000 tax per transaction 4,000,000
$14,000,000
The baseline projection for future years has been increased to $10 million to match the revenue generated from the most likely individual transactions of less than $20,000. Due to the high volatility of this revenue source and the unpredictable sale of larger properties, budgeting and appropriation of revenues from larger properties are recommended to be deferred until after actual receipt of such revenues. With future year projections of $10 million per year, note that over 10% of the operating budget will be dependent upon ongoing property sales within the City, and as a result, this portion of the budget is particularly susceptible to recession or other fluctuations in real estate activity.
Ø Solid Waste Franchise Fees are trending down by $200,000 from the budget. The operator has updated the base for its franchise fee calculations. The City is in the process of validating this change in calculation.
II. General Fund Expenditures
A summary and year-to-date status of General Fund expenditures are presented in Exhibits 7 and 8. Operating expenses in total, by category, and by department are all tracking at or below approximately 50% of the annual budget through the six-month December fiscal period.
Operating expenditure budget amendments are proposed to reflect the following new programs and equipment requirements:
Ø Community Development - $203,000
The Community Development Fund #209 has incurred General Fund expenditures related to the City’s cannabis program, the North Housing Memorandum of Understanding, and other City Council referrals. A General Fund transfer is proposed to reimburse the Community Development Fund #209 for these costs.
Ø Fire/Equipment - $80,000
FY 2017-18 budget increase is proposed to fund rescue and communication equipment requirements.
Ø Fire/Emergency Operations Center - $75,000
A transfer from the General Fund to the Facilities Maintenance Fund Emergency Operations Center (EOC) Fund #706 of $75,000 is proposed to fund ongoing building operating costs. The new EOC opened for operations within the last fiscal year but had not been previously budgeted.
Ø Parks Maintenance - $24,000
FY 2017-18 budget increase is proposed to fund custom-made welded covers on light poles to prevent re-occurrence of copper wire theft.
III. Pension/OPEB Status and Policy
A General Fund expenditure budget amendment is also proposed to complete the implementation of the City’s Pension/OPEB funding for reserves established through June 2017. The City adopted a Pension/OPEB funding policy to address a growing unfunded liability for the City’s pension and OPEB (retiree medical) benefit programs. Based upon the most recent actuary reports, both the City’s CalPERS pension and OPEB plans have accumulated significant unfunded liabilities, and face increasing annual payment requirements.
The projected General Fund share of the annual CalPERS unfunded liability payment is presented in the following chart. Because CalPERS adopted a 7-year payment phase-in for recent changes in actuarial assumptions, including a reduction of the pension plan’s investment earnings assumption from 7.5% to 7.0%, CalPERS is expecting increasing payments towards City’s unfunded liabilities each year. Annual payments are increasing $1-2 million per year and are expected to double over 5 years.
Through the City’s Pension/OPEB Funding Policy, the City commits additional funds as available each year to pay down pension/OPEB obligations in advance. Specifically, 50% of the surplus available fund balance at the end of each fiscal year, in excess of a reserve target of 25% of annual operating expenditures (20% operating reserve plus 5% economic uncertainty reserve), is committed to funding Pension/OPEB obligations. Through advance pay down, the City can begin to mitigate its growing payment obligations. Without mitigation, pension/OPEB payment obligations are at risk of “crowding out” the allocation of General Tax dollars to current services and programs.
General Fund Annual CalPERS Payments
Unfunded Liability For Past Service Cost
June 2016 Actuary Report
As of June 2017, the General Fund had accumulated $16.3 million in fund balance reserves committed to the pay down of pension/OPEB obligations. The current 17-18 budget anticipated and appropriated $11.1 million for the disbursement of June 2017 Pension/OPEB reserves. The proposed FY 17-18 budget amendment increases the payment authority by $5.2 million, from $11.1 million to $16.3 million, to fully pay down the committed fund balance reserves at June 2017. By policy, 75% of pension reserves are paid directly to CalPERS, and 25% is contributed to a dedicated Section 115 trust for future payment of pension expenses. OPEB reserves are also contributed to a Section 115 trust restricted to the payment of retiree medical benefits. With the proposed budget amendment and pre-payments to CalPERS, the City will realize over $1 million in FY 2018-19 budget savings. These savings will grow over time as CalPERS liabilities are reduced.
General Fund activity now projected for FY 2017-18 anticipates the next layer of Pension/OPEB reserve funding, in part due to the unusual large revenue pick up from 2017-18 transfer tax generated on three large real estate parcel sales described above. Current General Fund projections anticipate reserve funding of $6 million at June 2018. This reserve estimate will be updated after the City’s financial audit for FY 2017-18 is complete. Disbursement of the final June 2018 Pension/OPEB reserve to CalPERS and OPEB trusts will be appropriated in FY 2018-19. With each year of new funding, the City can continue to mitigate and reduce the operating budget impact of its annual CalPERS and OPEB funding requirements.
As the Council considers its long term General Fund strategy, the chart above also presents the impact if an additional $2 million annual pension contribution can be built into future budget cycles. This $2 million is not currently included in the General Fund expenditure forecast.
IV. General Fund Annual Activity and Forecast
The proposed FY 2017-18 budget amendments, as shown in Exhibits 5 and 7, will increase General Fund revenue by $7 million, to $99 million, and will increase operating expenditures by $382,000, to $95 million in operating expenditures, and to $111 million in total expenditures including annual Pension/OPEB reserve funding. The following graph depicts General Fund revenue and expenditure trends, including updated FY 2018-19 revenue projections (Exhibit 2). For FY 2018-19, the revenue/expenditure gap adopted in the original budget now closes with current FY 2018-19 revenue projections.
The General Fund available fund balance at June 2018 is projected in Exhibit 3 at $37 million, or 39% of the General Fund’s $95 million in operating expenditures. With implementation of the Pension/OPEB reserve policy for FY 2017-18 results, 50% of the surplus fund balance in excess of 25% will be committed to next year’s Pension/OPEB reserve funding, and the adjusted available fund balance at June 2018 is projected at 32% of annual operating expenditures.
Looking forward into the General Fund 5-year forecast, as detailed in Exhibit 4, a budget deficit between revenues and expenditures for existing service levels is expected to return in FY 2019-20. The following graph updates revenue projections based upon current property, sales, and other general tax revenue trends. Expenditures in this graph repeat projections from the original FY 2017-19 budget presentation. This 5-year forecast will be further updated and refined in the FY 2018-19 Midcycle budget update scheduled for City Council presentation in June 2018. As the City plans its ongoing programs and services, it will need to balance its increasing cash flow requirements for legacy pension/OPEB obligations with commitment to maintain and enhance City services.
V. Non-General Fund Programs
In addition to the General Fund amendments discussed above, the following adjustments are proposed for programs outside of the General Fund. These adjustments are detailed in the list of budget adjustments presented on Exhibit 1.
Ø Base Reuse Fund #858 - $548,000 Revenues and $312,000 Expenditures
Budget updates are proposed for the Base Reuse Fund to recognize additional lease revenues ($548,000) and to increase the expenditure budget for Alameda Point. Expenditures include 5 commercial grade solar powered street lights with LED fixtures; emergency building demolition; fire inspections; and prior year natural gas billing correction.
Ø Library System - $43,000 Expenditures
The Library operating budget for electricity is proposed to increase by $18,000 for a meter reading correction. A $25,000 budget is also proposed for the installation of a new HVAC system at the West End Library. Expenditures will be covered from Library Fund #210 reserves.
Ø Fleet Industrial Supply Center (FISC) Lease Revenue
On December 15, 2017, Catellus Development Corporation (Catellus) sold approximately 17 acres of land at the former Fleet Industrial Supply Center (FISC) property to an affiliate of Bay Ship and Yacht (BSY) pursuant to a Disposition and Development Agreement (DDA) with the Successor Agency to the Community Improvement Commission. As part of that transaction, Catellus had an obligation to reimburse the City for costs the City incurred for the construction of Stargell Avenue and the demolition of the former hospital building at FISC that was required as the result of a fire. The City paid for these costs through its FISC and Base Reuse funds. Catellus reimbursed the dedicated FISC fund $800,000.
In addition to these obligations under the DDA, Catellus has a requirement under the amended Master Plan, approved by the City Council in July 2017, to construct a service road to access Estuary Park from Mitchell Avenue. This road would allow direct access to Estuary Park for existing Alameda Landing residents as well as future residents of the waterfront site and North Housing. The obligation to construct the service road is tied to construction of the waterfront residential units. However, it is our recommendation to take advantage of the roadway work that Catellus is undertaking for BSY and accelerate construction of the road extension to Estuary Park. It is also recommended the addition of street lights along the roadway, which is not part of Catellus’ required work.
A budget amendment is proposed to appropriate the $800,000 for construction of the roadway extension to serve Estuary Park. Six hundred and fifteen thousand dollars ($615,000) will be reimbursed by Catellus consistent with its requirements under the DDA and Master Plan, as part of the residential project. The additional $185,000 for the street lights would not be reimbursed but would be a contribution from the FISC fund towards the project.
Ø Equipment Replacement Fund Internal Service Fund - $100,000 Expenditures
An emergency engine rebuild for fire apparatus has been required during the 2017-18 fiscal year. A budget amendment is proposed to draw fund balance in the Equipment Replacement Internal Service Fund #701 to cover the cost of this engine rebuild.
Ø Unemployment Internal Service Fund - $70,000 Expenditures
This budget was reduced for Fiscal Year 2017-2018 to reflect the downward trend in cost during the last two fiscal years. However, expenses for 2017-2018 are trending closer to cost incurred during Fiscal Years 2013-2014 and 2014-2015. The Human Resources Department is monitoring year-to-date unemployment claims activity and is recommending an increase to the unemployment claims expenditure budget by $70,000. Sufficient fund balance reserves in the fund are available to cover this increase in 2017-18 claims activity.
Ø Closed Pension Funds - $660,000 Expenditures
As the City’s closed pension plans (1079/1082) wind down, surplus funds are expected as annual pension payments for these plans diminish. The City’s Pension and OPEB Funding Policy provides for surplus funds in the closed pension funds to be transferred to the Pension/OPEB Reserve Fund for the retirement of CalPERS pension and OPEB (retiree medical) obligations. As of June 2017, an additional $660,000 is available to increase the existing 2017-18 budgeted transfer of $240,000. The total proposed 2017-18 contribution of $900,000 will be transferred from the closed pension funds into the City’s Pension/OPEB Reserve Fund to further mitigate the City’s risk for increasing pension/OPEB payment obligations.
Ø Capital Improvement Projects - Recreation:
A reclassification is proposed between CIP project to reallocate unused project appropriation from Encinal Boat ramp to Estuary Park project.
Ø Capital Improvement Projects - Measure B
A reclassification is proposed between CIP project funding sources to prioritize the City’s draw on available Measure B reserves. The objective is to facilitate compliance with the Alameda County Transit Commission (ACTC) timely use of funds policy that recipients shall not carry a fiscal year ending fund balance of more than 40% of current year revenues for four consecutive years. Measure B, BB, and Gas Tax Funds will be swapped between four CIP projects to achieve the targeted draw on Measure B/BB funds. The CIP projects include the Cross-Alameda Trail; Otis Drive Traffic Calming; Signs/Curb/Painting; Mecartney and Island Intersection; and Sidewalk repairs. The funding source for each project will be updated. The scope of these individual CIP projects is unchanged.
FINANCIAL IMPACT
The proposed budget amendments to the FY 2017-18 Budget, as detailed on Exhibit 1, will increase General Fund revenue by $7 million, to $99 million, and will increase operating expenditures by $382,000, to $95 million in operating expenditures, and to $111 million total expenditures including annual Pension/OPEB reserve funding. After implementation of the Pension/OPEB reserve policy for 2017-18 results, the adjusted available fund balance at June 2018 is projected at 32% of annual operating expenditures.
The net impact of the proposed amendments on all other funds will increase both revenues and expenditures by $7 million.
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
Adopt a Resolution Amending the Fiscal Year 2017-18 Budget
Respectfully submitted,
Edwin Gato, Finance Services Manager/Acting Finance Director
Exhibits:
1. Proposed Budget Amendments
2. Annual Activity
3. Fund Balance Reserves
4. Forecast
5. Revenue Projection
6. 2013-14 to 2017-18 Assessed Values
7. Expenditure Summary
8. Expenditure Status