The purpose of this report is to provide the City Council with a review of the City�s financial status as of December 31, 2002, and to request Council and Youth Endowment Services (YES) Fund Board approval of mid-year adjustments to the Fiscal Year (FY) 2002-03 approved Budget. The report will also provide relevant detail as it pertains to the development of the City�s FY 2003-04 Budget.

This report is intended to provide the City Council with an as accurate as possible picture of how all City Funds are operating six months into the fiscal year based on the original revenue and expenditure estimates. Although it is the intent of this report to review the status of all Funds, the focus is primarily on the General Fund.

Further, the middle of the fiscal year is also a good time to ascertain whether any expenditures, outside the realm of the original approved budget, have surfaced which would potentially jeopardize the current budget authority and thus, require legislative action of appropriate budgetary adjustments.

Moreover, this mid-year report is especially important in light of the economic uncertainty prevailing the State and Federal economies.

Following the annual audit, the General Fund ended FY 2001-02 with an available undesignated fund balance of $5,642,748. At the first quarter report in November 2002, the FY 2001-02 year-end available projected fund balance had been reduced to $3,581,932. However, due to other factors not previously known, the fund balance has now been reduced to $200,453. The following identifies the components that have caused this fund balance to be reduced:

Projected Projected

FY 2002-03 FY 2003-04

Anticipated Recurring Revenues $ 110,994,925 113,546,453

Less BWP Set-Aside (4,049,000) (4,204,000)

Available Recurring Revenues 106,945,925 109,342,453

Recurring Appropriations, *Includes MOU and PERS Rates for 03/04 108,336,429 117,967,709

Recurring Revenue Over Recurring Appropriations (1,390,504) ( 8,625,256)

Available Beginning Balance $ 5,642,748 200,453

Non-Recurring Revenues (Attachment A) 2,874,832 3,052,907

Sub-Total of Non-Recurring Revenues 8,517,580 3,253,360

Non-Recurring Appropriations:

One-Time Appropriations (Attachment B) (4,368,481) (675,000)

Mid-Year Adjustments, Net (1,777,142) -0-

Required Increase in Reserves:

**Working Capital -0- -0-

**Emergency (181,000) -0-

Compensated Absences (600,000) (600,000)

Sub-Total Non-Recurring (6,926,623) (1,275,000)

Excess of Non-Recurring 1,590,957 1,978,360

Ending Available Fund Balance $ 200,453 (6,646,896)

* For FY 2003-04 the Burbank Police Officers Association (BPOA), Burbank Fire Fighters Association (BFFA) and Burbank Fire Fighters Chief Officers Unit (BFFACOU) already have adopted MOU�s in place. A projected amount is also included in the budget for the remaining MOU agreements to be negotiated next year.

** The required increase of $543,000 in the Working Capital Reserve for 2002-03 will be funded our of year-end budget savings. The required increase in Emergency and Working Capital Reserves for 2003-04 will also be funded out of year-end budget savings.

Overall, the City�s recurring revenues for 2002-03 have been decreased by $501,809 a result of major losses in the following revenue categories: Utility Users Tax (UUT), Interest/Use of Money, Transient Occupancy Tax (TOT), Franchises, and Intergovernmental Revenues. The decrease was not as high as it might have been due to the fact that the City�s Property Tax, Sales Tax and Motor Vehicle In-Lieu revenues have realized a moderate increase over the original projection, which has offset the total realized decrease in revenues. It is also significant to note that pursuant to Council direction, the performance of the overall revenues has been further impacted by a projected $4,049,000 decrease for the Burbank Water and Power (BWP) Competitiveness Revenue. This BWP revenue includes the incremental increase in the UUT and BWP-In-Lieu revenues from the electric rate increases. It also includes any interest earned on the monies that are set-aside. Additionally, it is important to understand the need to continue to fund the City�s Reserve Funds (working capital and emergency) at the level established by the City�s Financial Policies; however, it should be noted that the ending balance in FY 2002-03 will not be adequate to fund the Working Capital Reserve. Therefore, staff will propose funding the Working Capital Reserve out of the FY 2002-03 budget savings.

It is worth mentioning that the current Sales Tax information is for receipts collected for the first four months of the fiscal year. Due to the way in which Sales Tax dollars are reported and distributed from the State to local governments, there is typically a two to three month lag. Thus, it is possible that the City�s Sales Tax revenues could further grow throughout the remainder of this fiscal year because the impact of the holiday shopping season has not yet been realized.

With the exception of the requested mid-year adjustments detailed in this report, the City�s current expenditures are on target, with 47 percent of the appropriations expended as of December 31, 2002. The majority of the requested mid-year adjustments are either related to: higher than expected program costs and the addition of a street sweeper due to the City�s stormwater permit; or, the impact of the clean-up of the Fire Department salaries and benefits. The total mid-year adjustments requested are as follows: General Fund - $4,336,653; Non-General Fund - $521,487. Due to offsetting revenues, the net impact to the General Fund is $1,777,142 and to the Non-General Funds is $130,024.

The City is heading into the 2003-04 fiscal year with a projected year-end available fund balance of $200,453. More importantly however, due to known decreases in revenues, continual increased costs for the Public Employee Retirement System (PERS) rates, known and projected 2003-04 bargaining unit costs, the need to replenish the City�s reserves, and the anticipated State Budget impacts, the City is headed into an even more serious budget crisis that has no chance for improvement over the next several fiscal years.

It is good that unlike most cities in California and in many cases throughout the nation that Burbank�s outlook is not as bleak. This is in large part due to the City�s hard work and success over the years to create a viable economy that is well balanced with strong property values, varied tax sources, etc. That being said, it is still important to remember that Burbank has its own increasing costs and declining revenues and will ultimately be subjected to the State�s overall economic doldrums and the Governors efforts to balance the States Budget. Obviously our economy is struggling and all levels of government will feel their share of the pain. Unfortunately for Burbank this means we are not in a position to be considering new programs or services, instead all departments are in the process of developing realistic 10 percent budget reduction scenarios and also are considering other ideas that will cut program costs with minimal impact and/or increase fees to pay for programs, all of which will eventually be discussed by the Council and possibly included in the 2003-04 Budget. The State of California is currently projecting a $34.6 billion shortfall for this and next year. Based on the Governor�s current proposal to deal with this enormous deficit, which is being highly debated by the legislature, we believe our hit from the State for 2003-04 will be $4,093,127 for the General Fund and $3,009,921 from the Redevelopment Agency and Low and Moderate Housing Funds, however, it could get worse rather than better. Most importantly we must remember that even before the City considered the potential State Budget impacts to the 2003-04 Budget, the City was already progressing into a deficit position over the next five years due to the underperformance of several of our revenue categories and the significant increase in our recurring costs, especially the PERS rates.

Half way into each fiscal year the Financial Services Department asks each department to review their existing budgetary appropriations to ascertain whether any changes need to be made as a result of unanticipated costs that may have occurred thus far during the fiscal year. As a result of that review conducted during November and December 2002, it was determined that although most departments are able to absorb the majority of unanticipated costs through budgetary savings in other areas, there are still some expenditures that will cause several departments to be in jeopardy of overspending their budgets.

In addition to the mid-year budget review identifying whether any unanticipated costs may have occurred, it also provides the opportunity to look at where the City�s overall expenditures and revenues fall based on the current year projections. This review of the City�s overall financial status is particularly important this fiscal year due to the potential financial impact of the State Budget crisis.

Further, due to the uncertainty of this economy and the State�s projected budget shortfall of $34.6 billion in the current year and next, this report will also provide a brief glimpse of the current direction the City is heading in as well as the relevant concerns surrounding the development of next year�s budget.

CITY�S FINANCIAL STATUS:

In order to place the mid-year departmental adjustment requests into the proper perspective, it is prudent to preview the City�s FY 2002-03 General Fund financial status.

On November 19, 2002, staff presented the Council with a first quarter review of the General Fund�s financial status (as of September 30, 2002). As was discussed in that report, pending the annual audit, staff anticipated that the FY 2001-02 General Fund would end with an available balance of $1,510,435. Based on actual results, the available fund balance was $5,642,748 (an increase of $4,132,312). This ending fund balance of $5,642,748 was primarily the result of departmental budgetary savings as well as additional revenues collected.

At the end of the first quarter, the General Fund projected available fund balance was $3,581,932. However, since the time that the first quarter report was presented to the Council, this projected fund balance has decreased due to the re-estimation of revenues, the impact of the 2002-03 bargaining unit agreements, the impact of the mid-year appropriation requests, and inclusion of additions to the City�s reserve funds.

General Fund - Revenues:

For the first six months of the fiscal year, the General Fund received $43,708,945 in revenue, which represents 41 percent of the original and 42 percent of the adjusted estimated revenues. For perspective, it is worth noting that at the prior year six-month report, the City received 41 percent of its estimated revenues.

Based on the results of the prior fiscal year and revenues received through December 31, 2002, staff is projecting a net decrease of $501,809 in General Fund revenues through June 30, 2003. As will be cited in more detail below, overall, the City�s recurring revenues have been decreased as a result of major losses in the following revenue categories: Utility Users Tax (UUT), Interest/Use of Money, Transient Occupancy Tax (TOT), Franchises and Intergovernmental Revenues. The decrease was not as high as it might have been due to the fact that the City�s Property Tax, Sales Tax and Motor Vehicle In-Lieu revenues have realized a moderate increase over the original projection, which has offset the total realized decrease in revenues. It is also significant to note that pursuant to Council direction, the performance of the overall revenues has been further impacted by a projected $4,049,000 decrease for the Burbank Water and Power (BWP) Competitiveness Revenue. This BWP Revenue includes the incremental increase in the UUT and BWP-in-lieu revenues from the electric rate increases. It also includes any interest earned on the monies that are set-aside.

It is worth mentioning that the current Sales Tax information is for receipts collected for the first four months of the fiscal year. Due to the way in which Sales Tax dollars are reported and distributed from the State to local governments, there is typically a two to three month lag. Thus, it is possible that the City�s Sales Tax revenues could further grow throughout the remainder of this fiscal year because the impact of the holiday shopping season has not yet been realized.

As a result of the aforementioned issues coupled with the actual revenues received to date, staff is recommending adjustments to certain revenue categories delineated in the table on the next page. (Please note that a brief description of the changes to each category follows the table.)

The following are brief explanations supporting the revenue adjustments mentioned above:

1. Sales Tax � Sales Tax revenues are the City�s largest revenue source. FY 2002-03 revenues are projected to increase over the actual FY 2001-02 revenues by approximately 9.1 percent. The significant increase is due to the opening of the Burbank Empire Center. Receipts from July through September 2002 were up 10.9 percent over the last year same quarter. It is worth noting that Southern California only gained 4.9 percent over the same period.
2. Property Taxes � The City�s Property Tax revenues are estimated to increase by 8.3 percent. This increase is due to the City�s growth in assessed valuation related to the 2002-03 Fiscal Year.
3. Utility Users Tax � This revenue category has been re-estimated downward due to the following factors: Cellular telephone UUT revenues continue to increase due to the trend away from traditional telephone usage to cellular. The City loses UUT revenues in this transition, as the major cellular phone companies do not apply the UUT against usage fees. The City, along with many other cities, is actively pursuing this escaped taxation. UUT revenues from local and long distance phone services continue to decrease while electric and UUT revenues continue to under perform budgetary estimates due to another cool summer. Actual Mega Watt hours (MWh) sold through December 31, 2002 versus December 31, 2001 decreased by .03 percent from the prior year. Further, in FY 2001-02 staff anticipated a 27.5 percent reduction in natural gas revenues but they were actually down by 35.1 percent.
4. Service Charges (Intra City) � There is no change in this revenue category.
5. Services Charges � The $174,000 increase in this revenue category is primarily the result of receiving more Emergency Medical Services billing fees than in the prior fiscal year.
6. BWP In-Lieu - This revenue category has also been re-estimated and is down by $71,228 from the original revenue estimate due to a reduction in anticipated electric sales.
7. Motor Vehicle In-Lieu � The $485,000 increase over the original revenue estimate is the result of prior year�s actual receipts and the receipts received so far this fiscal year.
8. Interest / Use of Money � The $404,000 decrease over the original estimate relates to the continued decline in interest rates.
9. Parking/Traffic/Other Fines � The $285,000 reduction relates to lower than expected parking fines due to the delay in hiring parking control officers.
10. Transient Occupancy Tax � Even before the events of September 11^th, TOT revenues had declined by 6.2 percent compared to the prior year. Although Burbank is fortunate to have several new hotels come on line in the past year, the TOT revenues are still lagging behind budget estimates. As a result, staff has re-estimated this revenue category by decreasing it by $617,610.
11. Building Permits/License Fees � There is no change in this revenue category.
12. Transient Parking Tax � This revenue category remains flat however, it is important to note that the Airport recently decreased their daily rates to $8, which may have some impact on this revenue. Further, it is worth mentioning that the authority for the Council to consider an increase in this revenue is on the 2003 General Election ballot
13. Business Taxes � This category decreased by $37,638 due to a reduction in the index.
14. Franchises � The decrease of $109,000 from the prior fiscal year reflects the decline in franchise tax revenues received from cable television due to the exclusion of internet access fees related to cable modems from the payment of franchise taxes.
15. Contributions to Other Funds � The $47,000 increase relates to the Assembly Bill 1290 required tax sharing related to the West Olive Project Area.
16. Intergovernmental Revenues � The $46,518 increase in this revenue category is the result of the State not taking as much revenue as proposed.

The chart on the next page highlights the top two General Fund revenue categories, Sales Tax and Property Tax and illustrates the final FY 2001-02 revenue to the original revenue estimates for FY 2001-02 and the revised projected estimates for FY 2002-03.

The next chart focuses attention on the Transient Occupancy Tax, Transient Parking Tax and Utility Users Tax by comparing revenues for the same time periods � FY 2001-02, the final estimate for FY 2001-02 the original projected for FY 2002-03 and the revised projected estimate for FY 2002-03. As was previously noted, these revenue categories have experienced and will continue to experience a decrease.

General Fund � Expenditures:

Overall, for the first six months of the fiscal year, the General Fund (including the original appropriation and appropriation adjustments) has expended approximately 47 percent of recurring appropriations. Again, for perspective, please note that the prior mid-year expenditures represented 46 percent of the recurring appropriations.

The table below highlights the recurring component of the General Fund budget as of December 31, 2002, by department or category. It is important to note that the revised number includes the impact of the bargaining unit agreements recently negotiated and approved by the Council.

Special Revenue Funds refer to twelve governmental funds that receive dedicated revenues that can only be spent on dedicated projects, such as grant revenue for Community Development Block Grant or Housing. In many cases, especially with grants, the City has to spend the money on the project and then bill the grantor agency, so that revenues lag behind expenses.

A review of the twelve special revenue funds revealed nothing of concern regarding revenues or expenditures. Revenues and expenditures appear to be reasonable for this time of year.

Internal Service Funds are used to generate resources to pay for a variety of services that could, theoretically, be provided in the private sector. The City also uses internal service funds to set money aside in a prudent way to provide for replacement of capital assets in the future. These funds receive revenues by charging other funds and departments for services or from appropriated transfers.

Revenues and expenses in the Internal Service Funds are as expected. The Funds continue to be monitored for changes that may impact future budgets. Cashflows are currently in the process of being developed for FY 2003-04, and there are known increases for the Communications Replacement Fund General Liability Self-Insurance Fund, and Worker�s Compensation Fund.

Redevelopment Agency:

The Redevelopment Agency has four capital projects funds for each of the project areas, four debt service funds for the project areas and the 20% housing set-aside obligation. Revenue flows come primarily from property taxes and from interest. Revenue in the housing set-aside funds is derived from contributions from other funds. Expenditure flows in the capital projects area, vary depending on project area activity. Debt service expenditures are more predictable as the primary expenses for principal and interest have specific payment dates as per bond covenants. Revenues and expenditures are as anticipated; however, the City Centre Project Area remains in fiscal distress. To address this concern, staff is looking at various options, including the merging of all the project areas, and will return to the City Council and Redevelopment Agency in the future with a plan to provide additional resources to the City Centre Project Area.

The City�s three Housing Authority funds (Section 8 Certificates, Affordable Housing and Section Housing Vouchers) revenues and expenditures are pursuant to federal government regulations and are performing as anticipated as of December 2002.

Parking Authority Funds:

The Parking Authority is responsible for the debt service and maintenance of City-owned parking facilities (structures and lots), as well as construction of new facilities. The Parking Authority has two funds, a capital projects fund and a debt service fund, and revenues and expenditures are as expected.

Enterprise Funds are established to account for City operations that are financed and operated in a manner similar to private business enterprises and include the Water Reclamation and Sewer Fund, Golf Fund, Refuse Collection and Disposal Fund, all of which are performing as anticipated for this time of year.

FY 2002-03 was the third year of a four-year smooth rate increase for the Water Reclamation and Sewer Fund. Staff is currently in the process of reviewing the Funds cash flow and at this point projects that ongoing operational expenditures are exceeding revenues due to the National Pollution Discharge Elimination System (NPDES) permit requirements which increase operational and maintenance cost to run the Burbank plant as well as the Los Angeles Hyperion contract. As part of the FY 2003-04 budget process, staff will recommend an additional rate increase over the current rate increase set for next year and will continue for several years.

Staff is also in the process of evaluating the cash flows for the Refuse and Golf Funds. However a preliminary review that both are operating as expected for this time of year.

Electric and Water Funds:

The year-to-date megawatt hour (Mwh) sales for the Electric Fund of Burbank Water and Power (BWP) were 554,157 compared to the adopted budget of 577,112. The sales remain slightly below budget due to conservation efforts and cooler than average temperatures in the summer months.

The year-to-date revenues were $68,114,000 compared to the adopted budget of $73,203,000, while wholesale revenues were $31,298,000 compared to the adopted budget of $8,817,000. The operating expenses were $90,271,000 compared to the adopted budget of $83,124,000, which is primarily attributable to the higher than expected wholesale expenses. The wholesale gross margins continue to be higher due to BWP�s ability to efficiently use utility assets to increase sales in the wholesale market during the summer months.

The year-to-date water sales were 4,442,934 compared to the adopted budget of 4,633,118. The year-to-date water revenues were $6,960,000 compared to the adopted budget of $7,387,000 while operating expenses were $5,911,000 compared to the adopted budget of $6,709,000 resulting in an operating income of $1,049,000 which is $371,000 higher than budget.

MID-YEAR BUDGET ADJUSTMENTS:

As was previously discussed, each department was asked to identify any necessary adjustments to their budgets as a result of changed circumstances that are beyond their control and budget authority. Each of the requested adjustments (both appropriations and revenues) is delineated in detail by department and found in Attachment 1, attached to the proposed resolution. However, there are several requested adjustments that deserve special note.

Expenditures Resulting from the Fire-Department Salary and Benefit Catch-Up:

For the past two fiscal years the negotiated MOU increases have not been included in the Fire Departments overtime and constant staffing budgets. There have also been unexpected increases in the Departments actual usage of their overtime and constant staffing budgets which has not been included in the salary and benefit budgets for the past two years. This is primarily due to the fact that for several fiscal years the Department realized salary savings hence there was no need to increase their budgets. Further, it has been difficult to capture and fully understand the actual impacts of overtime, constant staffing and special pay because an analysis to match up of the actual employees to the budgeted amounts had not been completed for a number of years. However, in FY 2001-02 the salary and benefits budgets finally exceeded the salary savings, largely attributed to increased overtime, constant staffing and industrial accident (IA) costs. Due to the fact that this overage occurred, Financial Services, along with the Fire Department, conducted thorough research on the issue and have arrived at a one-time fix that will be a major recurring impact to the General Fund. Below, the overall impact is summarized:

Non-Recurring Impact:

*Disaster Services Backfill with Fire Captain through 1/31/03 $ 71,397

U.S. Forestry revenues related to Strike Teams 60,461

Sub-Total of Non-Recurring: $ 131,858

*Although this is shown as a non-recurring impact, it actually will be a continued impact for the remainder of this fiscal year since the Disaster Services Coordinator has been activated to full duty in the Coast Guard once again. It is unknown how long he will be gone, so this could become a recurring impact. But, as can be seen below, the backfill for positions like this, will be funded by a pool of General Fund dollars designated for this purpose.

Recurring Impact:

MOU Adjustments Catch-up & Overall Increased Overtime/Constant Staffing $ 606,998

Increase in Industrial Accident Costs (reimbursed by Workers Compensation) 250,000

Special Pay Costs (hazmat, paramedic, fire prevention, education) 221,144

Sub-Total of Recurring Impact $1,078,142

Total Impact of Recurring and Non-Recurring to the General Fund: $1,210,000

The City has approximately 12 reservists that could be called into active duty at anytime. At this point, three have already been activated by the Federal Government. Knowing that the national events are still aggravated, it is safe for the City to assume that our employees are vulnerable to activation and this could be the case for several fiscal years. As a result, staff is recommending that $500,000 be set into a non-departmental account so that in the event departments must backfill the reservist position, (each will be reviewed on a case-by-case basis by the City Manager�s Office) there will be a pool of funds to pay for the associated costs.

Negotiated Bargaining Agreement Cost:

The City negotiated a Post Retirement Health Benefit that will be made available to all employees. To implement this program, the City has set-aside (not-deposited) the sum of $1,915,000 for three years worth of monthly payments for the prospective retirees. Staff is recommending that this be funded from the BWP-UUT/In-Lieu holding account. With the approved use of this money, the BWP-UUT/In-Lieu Fund will have an approximate available balance of $3,588,519 as of December 31, 2002.

Wind Damage � unexpected cost:

Due to the extensive winds the City experienced in December, the City incurred unexpected costs to repair the damage. The total non-recurring cost for the Park, Recreation and Community Services Department was $33,725.

Background Checks � unexpected cost:

The Management Services Department experienced an increased demand for background check services due to the increasing number of Community Disaster Volunteers (CDV) participating in this worthwhile program operated by the Fire Department.

Spay/Neuter Fund � on-going cost for program:

The Animal Shelter spay/neuter fund has been depleted and there is currently a deficit of $5,729. An additional recurring impact of $20,430 is requested to handle the current deficit and to handle new animal spay/neuters for FY 2002-03. With this years annual animal license renewal, the Police Department added a line requesting Burbank residents to consider making contributions to the spay/neuter fund and it is hoped that the donations received will help to keep the fund whole in future years.

Additional Street Sweeper and Personnel � ongoing cost for program:

The City currently owns and operates five street sweepers. In addition to regularly sweeping the streets the Public Works Department also sweeps the alleys and City-owned parking lots. Under the City�s new stormwater permit, the City is required to sweep its alleys and parking lots once more per month. It has been determined that operationally the Public Works Department cannot accommodate the increased street sweeping requirement with the existing equipment and personnel, thus, is forced to purchase a new street sweeper at a cost of $184,000. The inclusion of this new sweeper will have a recurring impact on personnel ($9,000) and rental rates ($29,876).

Africanized Bee Control � on- going cost for a new program:

Los Angeles County is no longer available to help the City with africanized bee control services. Thus, the City will have to assume responsibility for the costs associated with City property and will use an outside contractor for an annual recurring cost of $2,500.

TOTAL MID-YEAR BUDGET ADJUSTMENTS:

The following is the total gross amount of the adjustments requested by each Fund: (Please look at Attachment 1 of the Proposed Resolution for a detailed description of each individual request by Fund).

Total General Fund $ 4,336,653

Revenue Offset Requests (644,511)

Funded by BWP-UUT/In-Lieu (1,915,000)

Net Impact to General Fund $ 1,777,142 ($1,156,948 recurring)

Non-General Fund

Proposition C Fund (Transportation) 2,300

Development Impact Fees Fund 20,000

Youth Endowment Services Fund 500

Capital Projects Fund 122,837

Vehicle Equipment Replacement Fund 204,000

Municipal Building Replacement Fund 171,850

Total Non-General Fund 521,487

Revenue Offset Requests (391,463)

Net Impact to Non-General Fund $ 130,024

At this point, it is staff�s expectation that based on current trends, the total recurring revenue growth for FY 2003-04 will be 3 percent versus a recurring expenditure growth of 8.7 percent.

The revenue growth includes the projected increase in Sales Tax (2.2%), Property Tax (4.9%), UUT (2.5%), and TOT (4.3%).

The expenditure growth assumes the following costs:

Like many agencies, for many years, the City was superfunded in the Public Employees Retirement System (PERS) and as a result did not have to pay the actual employer rates and was able to use the budgetary savings for other City expenditures. However, with the downturn of the market and the economy in general as well as the enhanced retirement packages offered to the bargaining groups, the City, along with many other agencies, has lost its superfunded status for Police and Fire and we are expected to lose our superfunded status for miscellaneous employees in FY 2004-05, and thus will again be required to pay PERS the actual employer rates. The recent PERS actuarials received project greater increases than were previously anticipated by the City. They are as follows:

Current Rate Actual Projected

2002-03 2003-04 2004-05

Police 3% @ 50 9.198% 8.910% 23.6%

Fire 3%@ 55 6.2% 10.823% 22.96%

Miscellaneous 2% @ 55 0% 0% 2.7%

Based on the projected rate projections, staff is proposing to establish the budgetary rate half way between the actual FY 2003-04 and projected FY 2004-05 PERS rate.

50% Budgetary PERS

Ramp Up_ Impact Savings_

Police 3% @ 50 16.255% $ 867,300 $ 902,000

Fire 3%@ 55 16.891% 1,101,000 625,000

Miscellaneous 2% @ 55 1.35% 514,000 514,000

$2,482,000 $2,041,000

For FY 2004-05, PERS Cost will Increase an Additional $2,182,000

In a related PERS cost, the City is also responsible for paying a portion of the Retiree PERS Health Care for each employee as mandated by Senate Bill 1464. This cost will annually increase from the current $25 per month per retiree to $32.20 for 2004 and will increase to $97 in FY 2008 where after it will increase by the Consumer Price Index (CPI). The impact to the 2003-04 Budget is projected at $19,000.Fire Overtime/Constant Staffing:

As was previously discussed, the impact to address the deficit in the overtime and constant staffing budgets for the Fire Department will be a recurring cost of $1,116,000 after escalating the assumed MOU increase.

Memorandum of Understanding Projected Costs:

Three of the bargaining units have agreements in place for FY 2003-04. The BPOA calls for an increase of 1.75 up to a maximum of 7 percent based on the April CPI, and the BFFA and BFFCOU call for a 3 to 5 percent increase based on survey. Based on staff�s estimate of where the survey will be, the approximate cost of these already negotiated MOU�s along with the remaining bargaining agreements to be negotiated next year is estimated to cost approximately $3.8million.

Buena Vista Library Costs:

With the new Buena Vista Library came the addition of 97 computers. This increase in equipment is estimated cost the General Fund an additional $182,000 in rental rates.

Staff is still in the process of evaluating each of the ISF rental rates however, thus far, it has been projected that the General Liability and Workers Compensation Self-Insurance Funds are expected to increase by $1,350,000 due to an increase in both the insurance costs and claims, the Communications Replacement Fund is estimated to increase by $314,000 to provide sufficient funding to replace radios Citywide over a five or more year period, and the Computer Equipment Replacement Fund is expected to increase by at least $91,000 to maintain current and future equipment needs.

FY 2003-2004 Budget Development Parameters:

New Positions/Upgrades:

No new positions or upgrades will be accepted unless there is a "rock solid" revenue offset.

The positions that were frozen in the FY 2002-03 Budget will remain frozen. This equates to an annual savings of $201,000

Materials, Supplies & Services (M S & S):

There will be no allowable increase in M S & S. Any exceptions must be beyond the Departments control.

Capital Outlay:

No new requests for capital outlay will be allowed.

10 Percent Budget Reduction:

All General Fund departments have been provided a target amount that they need to achieve to comply with the required 10 percent budget reduction. A 10 percent reduction, if achieved, will equate to approximately $9 million and will be helpful in addressing the projected deficit at June 30, 2004.

In addition to the 10 percent budget reductions all departments are also exploring other types of budget reductions as well as revenue enhancements. An exhaustive list has been created which identifies possible reduction and revenue enhancement ideas. All of these matters are being studied by the appropriate department and if any prove to be feasible, they will be presented to the Council at some point during the 2003-04 Budget adoption process. For perspective to what is being considered, listed below are some of the different ideas.

Possible revenue enhancements include:

• Updating the existing Fee Schedule rates to ensure the City is recovering its costs and consider creating new fees for existing services;
• Revisiting the City�s application of penalty fines to ensure proper and consistent compliance;
• Creating contribution opportunities where appropriate (i.e. similar to the Animal Shelter who has placed a line on the annual license renewal asking pet owners to donate to the spay/neuter fund);
• Considering an increase in the General Fund transfers from the Enterprise Funds; enhancing our billing collectibles for property damage related incidents;
• Establishing an equity sharing with the General Fund from BWP�s fiber optic network; Development Impact Fees).
• Considering an increase in the Transient Occupancy Tax rate in the 2005 Municipal General Election;
• Pursuing corporate sponsorships of City facilities and services (i.e. Pepsi Parks, sell space on refuse trucks etc.); and,
• Re-examining the City�s use of Proposition A and C funds (i.e. should a portion of the funds pay for Got Wheels, street improvement projects, etc.).

Possible expense reductions include:

• Considering an extension of the life cycle of vehicles and equipment (i.e. similar to the policy that will increase the police car life expectancy from 2 to 3 years in FY 2003-04);
• Considering a freeze on the purchase of all General Fund capital items;
• Considering a reduction in the City fleet;
• Exploring the feasibility of contracting out City services such as janitorial or landscape maintenance; and,
• Considering joint operations with other governmental agencies (similar to our management of Glendale�s traffic signals).

Remaining Unfunded Discussion Papers:

As the Council will recall, during the FY 2002-03 Budget process, there were 19 discussion paper items presented to the Council for consideration. Due to the concerns with the State Budget, the Council opted to fund seven of the discussion paper items and deferred consideration of the remaining 11 (one item � CDBG Code Enforcement was for information only) until the mid-year report, a time when staff felt the true impacts of the State Budget cuts would be known.

Re-Cap of Funded Discussion Paper Items in FY 2002-03: Funded Amount

Magnolia Park Parking, Streetscape, Flags $125,000

Enforcement Program for Conditions of Approvals (pilot program) 100,000

Hazardous Materials Area Plan Update/Modification 25,000

Disaster Preparedness Program (equipment for Division) 47,650

Buena Vista Branch Library Sunday Hours (recurring) 12,678

Downtown Tree Lights (Funded from Fund 129) 76,427

Remaining Unfunded Discussion Paper Items: Recurring Non-Recurring

In House Airport Attorney $197,500 42,361

Annual Citizen Survey 40,000

Grant Writer Program and Federal Lobbyist 100,000

Battalion Chief Staff Assistant 210,485

Mobile/Wireless Initiative 120,000

Buena Vista Library Interior Arts & Plants 62,000

Tree Trimming Response Time Reduction 278,323 147,500

Community Services Grant Funding Mechanism 100,000

Additional PerformArts Grants Funding 7,950

Landscaping of LADWP Lots 45,000

Burbank Center Stage/Colony Theater Signage _ 65,000

Total Outstanding Unfunded Items: $1,042,258 $419,861

City Council Chamber Conference Room:

With the remodel of the City Council Chambers, the City has been planning the construction of a new Council Chambers Conference Room. The design concept has been discussed with and approved by the State Historical Preservation experts and is in the development process. It is estimated that this project will cost $750,000

Development and Community Services Building (DCSB):

The Council gave staff the authority in December 2002 to complete the plans and construction documents for the DCSB building project. To address the eventual debt service that will be part of the bond financing for this project, staff has been ramping up each fiscal year to a current estimated amount of $1,268,000 in FY 2006-07. The FY 2003-04 ramp up amount is $931,000.

State Budget Impacts:

On January 10, 2003, the Governor released his Proposed 2003-04 Budget. As we are all aware, the U.S. and California economies are taking longer than expected to recover from the current downturn, and the stock market has continued to lose ground. As such, the State General Fund revenues from the major tax sources are expected to fall to $64.8 billion in 2003-04, which has resulted in a budget shortfall in the current 2002-03 Budget and 2003-04 Budget totaling $34.6 billion.

How does the Governor Propose to Make Up the $34.6 Billion Deficit?

With the release of the Governor�s Budget, local government�s worst nightmare has come true! The Budget proposes to eliminate $1.3 billion of the remaining 2002-03 fiscal year Vehicle License Fee (VLF) backfill payments, and eliminate $2.9 billion of the VLF backfill payments estimated for 2003-04. The impact of this proposal to Burbank would be as follows:

FY 2002-03 FY 2003-04

Burbank�s payment $2,022,677 $4,045,355

As a percent of General Fund recurring revenues, Burbank�s VLF hit will equate to 1.98 percent in 2002-03 and 3.6 percent in 2003-04.

Fortunately, it would appear that cities are safe for the 2002-03 Fiscal Year as the State�s mid-year appropriations have taken this revenue shift off the table. Both Senate and Assembly Budget Committees approved mid-year spending cut packages in mid-January that rejected the Governor�s proposals to sweep funding from redevelopment housing funds (explained later) and to take away city and county vehicle license fee backfill money. The budget bills then moved to the respective floors for action in the later part of January.

At this point, we know that the Assembly acted last week on a mid-year budget spending reduction package that did not include any shift of the VLF or cut to redevelopment agencies. The Governor�s proposal to sweep an estimated $500 million in "unencumbered" low and moderate income housing funding from agencies and shifting that revenue to ERAF accounts was also not included. Part of the Assemblies package included Assembly Bill 4X (Wesson), which would allow the Director of the Department of Finance to trigger an increase in the VLF. The Senate also acted on a similar package of cuts to the mid-year budget and followed the Assembly�s lead in not taking redevelopment money or the shift of the VLF. Although this is great news, the latest word out of Sacramento is that the Governor will veto the package.

The Mayor of Burbank, along with other cities, including Los Angeles as well as the League of California Cities have gone on record with our Legislators and the Governor opposing this proposal. In addition, both Burbank�s Police and Fire unions have been very aggressive in lobbying our Legislators to take action to protect city revenues. It had appeared that the Governor heard the message loud and clear because in an article in the Los Angeles Times dated January 30, 2003, it was reported that the Governor has acknowledged that his "proposal to end $4 billion in annual car tax payments to local governments is all but dead in the Legislature." That being said the word on the street today is that he will veto the budget proposal from the Legislature. Either way, the fact remains that the State still needs to find a way to cut an additional $4 billion from its budget next year. Although it has not been included in our budget estimate, it is important to keep in mind that if the Governor�s Budget proposal is ultimately approved, Burbank�s General Fund could be hit with an approximate decrease of $4.1 million in recurring revenues.

Public Library Foundation

The proposal also included an additional 50 percent reduction in the Public Library Foundation (PLF) over and above the approved 2002-03 Budget reduction. From this the State will generate $15.8 million in 2002-03 and 2003-04. For Burbank, this is a reduction of approximately $46,286. This reduction has been included for FY 2002-03 and is included in next years budget as well.

Booking Fees

Under the proposal, the State reimbursements to cities for booking fees will be ended. This will impact Burbank with a $12,772 revenue reduction. For this fiscal year, this reduction was not included, however it is still a likely candidate in the 2003-04 budget.

The proposal does mention that the State will be reevaluating the programs that have been suspended for payment since the 2002-03 Budget, however, at this point, the suspension of payments on various reimbursable State mandate claims received by the State will be maintained for 2003-04. The total impact in this revenue category is $227,500.

The proposal includes an impact to the money collected from the State for traffic related expenses. Should the State eventually take these funds from the cities, Burbank stands to lose $79,662 per quarter for a total annual loss of $318,648. This loss has not been included in the FY 2002-03 Budget due to the uncertainty of whether or not it will get touched by the Governor.

The Governor�s proposal includes the reduction in the reimbursement to local law enforcement for cost of student travel and reimbursement (POST) during training. Burbank�s total reimbursement from the State in this area is $35,000. The City has been notified that effective March 1, 2003, the POST reimbursements will discontinue.

PLF $ 46,286

State Mandates 227,500 (already accounted for)

Total Anticipated Impact on General Fund for FY 2003-04 Budget:

VLF $4,045,355

Booking Fees 12,772

POST Grants 35,000

Total Potential Loss $4,093,127

*State Mandates $227,500 (already accounted for)

The Governor�s proposal includes an ongoing shift of $250 million from Redevelopment Agencies to fund the State�s obligation to fund schools. In the Proposed Budget there is a statement of intent to increase this shift until the full amount of the school district share of property tax revenues is diverted from the redevelopment agencies. Estimates on this total today are as high as $1.2 billion. The State will use these funds to support schools; they become part of the Education Revenue Augmentation Fund (ERAF) shift of local property taxes.

Staff is uncertain how the Governor and Legislature will determine Burbank�s ERAF payment, but the ERAF shift for FY 2002-03 was $912,097 which represented a total of $75 million. Based on the allocation of the $75 million, a $250 million ERAF shift equates to a potential loss of tax increment revenues for FY 2003-04 of $3,009,920. The Governor has stated his desire to increase the proposed FY 2003-04 shift until 50 percent of the tax increment has been diverted from redevelopment agencies to the State to fund its school obligation.

It is also worth noting that an additional proposal by the Governor, unveiled in December, would have swept unencumbered balances in the low and moderate income housing funds into ERAF accounts. This move was estimated to raise approximately $500 million this fiscal year for the State. This could have had a detrimental impact on our Redevelopment Agency�s existing and future projects. However, it would appear thus far, that this proposal from the Governor has not garnered adequate support from the legislature.

FIVE YEAR FORECAST:

While we are in the process of contemplating an upcoming difficult budget process, it is important to keep in mind that the City�s forecast for the next several fiscal years only gets worse. It is not ever fun to report "doom and gloom," but the mere fact is that the City�s revenues cannot keep pace with its expenditures over the next few years. Some of the big contributing factors to the growing expenditures are increased PERS rates and MOU costs as well as the continual weakness in some of our revenue categories including UUT, TOT, and interest earnings.

Although staff plans to provide the Council with a very descriptive five-year forecast at their annual retreat in May which will include ideas of how to alleviate some of the projected deficit, the chart on the following page will serve to highlight the enormous challenge the City will be facing over the next several years.

Five Year Forecast � Revenues and Expenditures 

The City is heading into the 2003-04 fiscal year with a projected year-end available fund balance of $200,453. More importantly however, due to known decreases in revenues, increased costs for the Public Employee Retirement System (PERS) rates, projected 03-04 bargaining unit costs, and the anticipated State Budget impacts, the City is headed into an even more serious budget crisis that has no chance for improvement over the next several fiscal years. Burbank�s situation is no different than any other city in California and in many cases throughout the nation. Obviously our economy is struggling and all levels of government will feel their share of the pain.

Unfortunately for Burbank this means we are not in a position to be considering new programs or services, instead all departments are in the process of developing realistic 10 percent budget reduction scenarios to eventually be included in the 2003-04 Proposed Budget. The State of California is currently projecting a $34.6 billion shortfall for this and next year. At this point we believe our hit from the State could be $4,093,127 for the General Fund and $3,009,920 from the Redevelopment Agency with the potential of $13.6 million in future years; however, it could get worse rather than better. Most importantly we must remember that even before the City considered the potential State Budget impacts to the 2003-04 Budget, the City was already progressing into a deficit position over the next five years due to the underperformance of several of our revenue categories and the significant increase in our recurring costs, especially the PERS rates.

Based on the prior year results, the requested mid-year adjustments will have a combined net financial impact of $1,907,166. As was previously stated, each Fund is operating at expectations and can absorb the additional appropriations without jeopardizing the City�s financial position at this point.

RECOMMENDATION:

It is recommended that the City Council and Youth Endowment Services Fund Board approve the proposed resolution requesting mid-year adjustments to the Fiscal Year 2002-03 Budget.

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