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PURPOSE:
The purpose of this report is to
provide the City Council with a review of the impact of the Fiscal Year (FY)
2004-05 State budget and the City�s General Fund financial status as of
September 30, 2004.
REVIEW AND IMPACT OF THE
STATE BUDGET:
The Governor signed the FY 2004-05
Enacted California State Budget (�Budget�)� on July 30, 2004. The Budget
package is comprised of the Budget, the governor�s local government agreement
(�agreement�), Proposition 1A (Protection of Local Government Revenues), and
various trailer bills.
Because staff had already taken
into account the State Budget�s impact to Burbank�s revenue, the only change
since the adopted budget is the restoration of booking fees which will add
$12,772 to our current revenue estimate. In addition, the Governor�s agreement
calls for cities, counties, special districts and redevelopment agencies to
endure two years of revenue losses, as $1.3 billion in local funds are shifted
to the state each year. The cities' share of this loss will be $350 million for
each of the two years. It will retain the existing funding shift from local
governments to school districts (ERAF), currently about $5 billion annually, but
would amend the constitution to prevent the legislature from increasing the
amount of these shifts in the future. Again, there were no substantive changes
from the previously publicized versions of this agreement. Also as part of the
agreement, the State will reimburse to local governments, over a period not to
exceed five years, their costs in administering State mandated programs. The
State currently owes Burbank approximately $845,000 in unpaid reimbursements
(including estimated amounts for FY 2004-05). In the event that the State
cannot reimburse local governments, local government may suspend the programs.
Proposition 1A was passed by the
voters on November 2, 2004. This proposition protects local governments� sales
tax, property tax and VLF revenue from future State raids, but will also allow
for the State to borrow the funds in case of a fiscal emergency (under limited
circumstances).
It should be noted that the City
continues to contribute to the State for prior ERAF shifts. For FY 2004-05,
this amount is estimated to be $4,806,971. The Redevelopment Agency will
contribute $2,477,103 this year and next year to the State in the form of an
ERAF shift.
GENERAL FUND�S FINANCIAL
STATUS:
FY 2004-05 Recurring Perspective � General
Fund Reserves
For the first quarter of the fiscal
year, the General Fund received $17,184,011 in revenue, which represents
approximately 14.5 percent of the original estimated revenues. To put this
figure in perspective, the City received 15 percent within the first quarter of
last year (FY 2003-04). Table 1 below provides a summary of the following:
recurring revenues received for last fiscal year,
FY 2004-05 original revenue estimates, revised
FY 2004-05 revenue estimates, FY 2004-05 first quarter revenues, and the percent
of revenues realized through end of the first quarter.
Table 1 � General Fund
Recurring Revenues
(Note: the numbers indicated
below are directly associated with the categories shown in Table 1 above).
The following are brief
explanations supporting the revenue projections mentioned above:
1.
Sales Tax
� Sales Tax revenues are the City�s largest revenue source. As a result of
exceeding projections from last fiscal year, the revenue estimate for FY 2004-05
has been increased by $928,025. The revised sales tax estimate reflects the
impact of final amounts received for the calendar second quarter clean-up
payment received in September impacted by the 25 percent �triple flip�
allocation. In addition, the amount of $5,885,508 (Item No. 8) has been
segregated into a separate account, �ERAF Sales Tax Shift� due to the State�s
�triple flip.�
2.
Property Taxes
� The City�s Property Tax revised revenue estimate reflects an increase in
supplemental property tax revenues and a 5.6 percent increase in the City�s FY
2004-05 Assessed Valuations resulting in a net increase of $296,684.
3.
Utility Users Tax
� There is a modest increase of $123,850 in this revenue category from the
original estimate due mostly to increased natural gas prices, offset in part due
to lower electricity usage during the summer months.
4.
Service Charges (Intra City)
- The decrease of $143,000 in this
revenue category from the original estimate due mostly to a smaller recovery
from Workers Compensation.
5.
Services Charges
� The $220,457 decrease in this revenue category is due to several factors,
including decreases in the Police Department�s weekend prisoner program, Police
false alarm response revenue, and miscellaneous revenue. The largest decrease,
however, is the result of receiving less Emergency Medical Services billing fees
than expected.
6.
BWP In-Lieu
� This revenue category decreased by $309,680 primarily due to re-estimating
revenues relating to a reduction in revenues received so far this fiscal year.
7.
Motor Vehicle In-Lieu �
The $87,784 increase over the
original revenue estimate is due to a revised estimate by the State Controller�s
Office becoming available.
8.
ERAF Sales Tax Shift - Beginning FY 2004-05, the State redirects
one-quarter cent of the local Sales Tax to the State to pay deficit
retirement bonds (�triple flip�). In exchange, it will fully offset local
government revenue by redirecting a commensurate amount of Property Tax from the
Education Revenue Augmentation Fund (ERAF). Due to this change in allocation,
25 percent of Burbank�s prior year�s Sales Tax has been segregated into this
separate revenue account. The original estimate was $6,050,000 but has been
decreased to $5,885,508 due to a recently released computation by the State of
California Department of Finance.
9.
Interest / Use of Money
� The $26,000 increase over the original estimate relates to amounts recovered
for property damage and finance charges received this fiscal year, offset by a
decrease in the Animal Shelter�s sale of animals.
10.
Parking/Traffic/Other Fines
- There is no change in this
revenue category from the original estimate.
11.
Transient Occupancy Tax
� The revenue estimate was
increased by a substantial $451,300 to reflect the FY 2003-04 actual receipts
combined with the impact of revenues received for the first quarter.
12.
Building Permits/License Fees
� There was no change in this revenue category.
13.
Transient Parking Tax
� This revenue category increased by $465,008 due to the combination of Council
approving a 1 percent increase in the tax rate from 10 percent to 11 percent,
and the Airport area parking operators raising their parking rates.
14.
Business Taxes
� This category increased by $43,000 to reflect FY 2003-04 actual results.
15.
Franchises �
The increase of $30,110 in this revenue estimate
reflects the increase in franchise tax revenues expected to be received from the
Southern California Gas Company.
16.
Contribution from other Funds �
The $37,000 increase reflects a
recalculation of the expected West Olive AB1290 payment to the City.
17.
Intergovernmental Revenues �
The $12,421 increase in this
revenue category is the result of the booking fee reimbursement being restored
by the State, offset by a small additional decrease in the State�s Public
Library Fund grant.
*Note: The Sales Tax graph
includes the segregated $5.9 million for FY 2004-05 which is part of the ERAF
Sales Tax Shift under the �triple flip.�
General
Fund Appropriations Perspective:
Overall, the General Fund
(including the original appropriation and appropriation adjustments) has
expended approximately 25 percent of recurring appropriations as of September
30, 2004. For comparison, on September 30, 2003, General Fund expenditures also
represented 25 percent of recurring appropriations for FY 2003-04.
Table 2 below highlights the
recurring component of the General Fund budget as of September 30, 2004, by
department or category.
Revised FY 2004-05
Budget
Based on the re-estimation of
anticipated revenues and the adopted FY 2004-05 appropriations, the following is
a recap of the FY 2004-05 budget (more detail is contained within the FY 2004-05
Budget Matrix in Attachment A):
Total Recurring
Revenues
$118,288,798
Less � Use of BWP
Competitiveness Revenue
(3,030,000)
Net Recurring
Revenues
$115,258,798
Less:
Recurring
Appropriations
(115,580,444 )
Potential Impact
of Anticipated MOUs
(902,000)
Plus:
Savings from
Frozen Positions (Attachment A/Schedule A)
2,025,060
Anticipated PERS
Contributions Paid by Police Safety
681,000
Recurring
Balance
$ 1,482,413
Undesignated Fund Balance, July 1,
2004
$4,851,227
Plus:
Non-Recurring BAF
Revenues
40,425
Non-Recurring
Airport Police
OT
390,000
Park Development
Fees
173,624
Use of Set-aside UUT &
In-lieu
289,457
Total Available
Non-Recurring
Sources
5,744,733
Less:
Budgeted One-time
Items (Attachment A/Schedule B)
996,557
Increase in
working capital
reserves
768,000
Increase in
emergency
reserves
266,000
Compensated
absences
800,000
Total Non-Recurring
Uses
2,830,557
Available Non-Recurring
Balance
$2,914,176
Plus Available Recurring
Balance (from above)
$1,482,413
Estimated Available Fund
Balance, June 30, 2005 $4,396,589
The Executive
Team recommends that that $4,396,589 estimated available balance be set aside to
fund the Community Services Building,
Robert Ovrom Park, and Police Records Management System Replacement Projects.
FIVE-YEAR FINANCIAL FORECAST:
The remainder of this memo will
discuss the Five-Year Financial Forecast based on information obtained
subsequent to the development of the FY 2004-05 Adopted Budget.
The intended purpose of the financial
forecast is to gain an understanding of the long-term financial trends. This
long-term perspective will allow the City to make informed financial decisions
today while fully understanding the future financial impacts of these decisions.
Projected Revenues
Forecasted revenues are driven by
the parameters included within Attachment B. These assumptions are inherently
conservative; however, there is a risk that certain revenues may be over
estimated due to economic cycles and unexpected events such as a September 11th
tragedy. Projected revenues are updated throughout the fiscal year as new
information becomes available.
Recurring revenues have been
re-estimated taking into account the impacts of the State budget, final FY
2003-04 results and subsequent information such as FY 2004-05 assessed
valuations and first quarter revenues received. Significant revenue assumptions
are as follows:
Sales Tax � We have estimated future growth at 2.5
percent, or the same as the assumed Consumer Price Index (CPI) growth of 2.5
percent. Beginning in FY 2004-05, 25 percent of the prior year�s estimated
sales tax amount has been shifted to the State and replaced by an ERAF shift
back to the City (�triple flip�). The Forecast assumes that the City will be
made whole by the State related to the 25 percent sales tax shift. In FY
2006-07, the sales tax increase is presumed to be 4 percent over the prior year
due to the opening of a new Home Depot, then reverting to 2.5 percent for future
years. The City�s current sales tax base will continue to be at risk from the
trend to purchase electronically.
Property Tax
� The City�s assessed valuation continues to provide solid growth. Assessed
valuation for FY 2004-05 grew by 5.6 percent. Because of the continued
escalation in real estate prices within the City, the Forecast assumes a 5.6
percent growth rate for FY 2004-05 and 5 percent thereafter.
Utility Users and In-Lieu Taxes
� Forecasted utility users tax (UUT) assumes an increase of .5 percent for FY
2004-05 due to increasing natural gas prices and increasing cellular phone
usage. These increases are offset by continued decreases in the local and long
distance phone carriers and electricity sales from a soft first quarter. UUT
revenues beginning in FY 2005-06 and thereafter are expected to decrease by 1.6
percent due to anticipated electric rate decreases amounting to 20 percent over
a five-year period. The expected rate decreases have reduced the amount
set-aside for the incremental UUT and in-lieu taxes related to the last four
electric rate increases. The long range forecast for electric rates continues
to be uncertain; however, electric rates are anticipated to decrease from
current levels during this five-year forecast.
Transient Occupancy and Parking
Taxes � Forecasted Transient Occupancy
(TOT) and Transient Parking (TPT) taxes are expected to grow by 9.1 percent and
41.6 percent, respectively, in FY 2004-05. Thereafter, the expected growth rate
will resume to 2.5 percent for both revenue streams. TOT revenue in FY 2004-05
reflects the results of the first quarter increase of 9.1 percent. Transient
Parking tax revenues had been at depressed levels for the last few years due to
the price wars surrounding the Airport, however, the parking operators raised
their rates early FY 2004-05. This, combined with Council�s approval of
allowing the City to raise the TPT from 10 percent to 11 percent, has positively
impacted the General Fund.
Interest Revenues
� The forecast assumes that investment yields for FY 2004-05 and beyond will
continue to increase over the five year horizon.
Contributions from Other Funds
� Revenues in this category in FY 2004-05 include AB 1290 tax sharing funds
related to the West Olive Redevelopment Project Area. Amounts increase in
future fiscal years based on the anticipated tax increment growth rate in the
West Olive Redevelopment Project Area. This category also includes gas tax
revenue of $1,338,000 for FY 2004-05 with assumed growth of 2.5 percent, and
loan repayments from Development Impact Fees of $90,000 for FY 2004-05 and each
year thereafter.
Projected Expenditures
The recurring expenditure costs
assume the following rates:
Memorandum of Understanding
Projected Costs:
The projected growth in safety
employees� salary and benefits are based on anticipated market based salaries
and benefits for each of the forecasted fiscal years.
Materials, Services & Supplies
(MS&S):
MS&S appropriations are assumed
to increase at 2.5 percent per year, which is the anticipated CPI increase.
MS&S appropriations include the Internal Service Funds rental rates (except for
Worker�s Compensation).
Public Employees Retirement System (PERS)
Costs:
Like many agencies, the City has been
experiencing increasing Public Employees Retirement System (PERS) costs due to
investment losses and increasing benefits. For the FY 2005-06 actuarial, PERS
changed several important actuarial assumptions. PERS decreased its assumed
investment return rate from 8.25 percent to 7.75 percent. This actuarial
assumption change has the impact of increasing employer contributions to
compensate for lower investment earnings. This assumption change greatly
impacted the Miscellaneous Plan due to its large ratio of assets compared to
covered payroll. Another key actuarial assumption change relates to the
assumption that safety employees would retire when they reach the 90 percent cap
on benefits. PERS now assumes that safety employees work beyond the date the cap
is reached which has the impact of reducing employer contributions on an annual
basis. This key actuarial change combined with the positive impact of the
Pension Obligation Bonds (POB) greatly reduces the FY 2005-06 PERS rates related
to the Police and Fire plans. A comparison of the FY 2004-05 PERS rates
(includes the impact of the POB) versus the rates for FY 2005-06 follows:
FY FY
2004-05 2005-06
Police 3% @
50
17.697% 18.727%
Fire 3%@
55
15.646% 12.193%
Miscellaneous 2% @ 55
3.543%
9.456%
The net result of the above FY 2005-06 PERS
rates improves the five-year financial forecast from prior forecasts. Staff
recommends that the budgetary PERS rate for any group be no less than the normal
cost. As a result, the attached forecast assumes a Fire PERS rate of 13.515%.
The savings will be placed in the PERS Stabilization Fund and will be used when
the actual PERS rate is above the normal cost rate. The budgetary impact of the
FY 2005-06 PERS rates represents an increase in General Fund appropriations of
$1,324,000 over FY 2004-05.
The City has engaged an Actuary to provide a
five year forecast of future PERS rates. The results of the forecasted rates
will be included in the forecast for the mid-year update scheduled for February
2005.
The following is a chart of actual and
budgetary PERS rates from FY 2003-04 through FY 2008-09:
Pension Obligation Bonds:
In June 2004, the City issued POB to fully pay
the Unfunded Accrued Actuarial Liability of the Police and Fire PERS plan as of
the last actuarial valuation date. The POB greatly reduced the PERS rate. For
budgetary purposes, staff assumed an annual net savings of $519,200. Any
savings in excess above this amount will be used to pay additional principle of
the POB. Staff anticipates that for FY 2004-05 an additional $120,000 will be
available for principle reduction. The anticipated net savings related to
issuing a variable rate POB compared to a fixed rate POB is $623,000.
Another side benefit of issuing the POB in June
2004 was the advantage of participating in the PERS asset return of 16.7 percent
for FY 2003-04. The benefit of this return will start to be reflected by PERS
for the FY 2006-07 actuarial valuations.
Central Library Costs:
The estimated staffing levels for
the new Central Library is projected to add $297,000 to the Library�s annual
budget beginning in FY 2006-07, $594,000 in FY 2007-08, and $890,000 for the
next two years. In accordance with past practice, we will ramp-up the General
Fund budget over a three year period to be prepared for this increase in
appropriations.
Savings from Frozen Positions:
The FY 2004-05 adopted Budget
includes frozen positions. The Forecast assumes that these frozen positions
will continue throughout the forecast.
Non-recurring Items
Non-recurring items are as
follows:
Ramp-Up Savings:
This includes the budget savings
related to the anticipated increase in the Library�s budget for the new Central
Library. These amounts are available for non-recurring budget appropriations
and total $891,000 for FY 2006-07 and FY 2007-08.
VLF Loan Repayment
This item relates to VLF taken by
the State in FY 2003-04. Based on the agreement with the State, we are
projecting that $1,772,000 will be repaid by the State in FY 2006-07.
Estimated Budget Savings:
Historically, the General Fund has
generated budget savings of no less than 2 percent of total appropriations. As
budgets continue to get tighter due to budget reductions, this savings amount
will be more difficult to achieve. The actual savings factor for FY 2003-04 was
1.4 percent. Because of this, the Forecast assumes a 1.5 percent annual budget
savings factor. The annual budget savings can be used as follows:
-
To fund increases in the
emergency and working capital reserves to be in compliance with the City
Council�s adopted Financial Policies;
-
To fund the compensated absences
revolving fund; and/or
-
To fund one-time needs.
Non-Recurring Revenues:
This includes budgeted revenues
which are of a non-recurring nature. Amounts are typically used for budgeted
capital projects. In FY 2004-05, the $40,425 relates to the Burbank Athletic
Federation funding capital items within the Park, Recreation and Community
Services budget, $390,000 for Safety Overtime related to the Airport, and
$173,624 for Park Development Fees.
One-Time Appropriations:
$125,000 is included for FY 2004-05
through FY 2006-07 for the Magnolia Park streetscape project. FY 2005-06
includes $1,500,000 to replace the Police Records Management System, and $6,000
for Fire shelters (year two of two year phase-in). In FY 2007-08, $685,000 has
been included to open the anticipated Central Library.
Amount Funded by BWP UUT &
In-Lieu:
The FY 2004-05 adopted Budget
included certain one-time appropriations which were funded by the use of the
incremental UUT and in-lieu taxes set-aside from the last four electric rate
increases.
Required Increase in Reserves:
The City Council�s Financial
Policies require General Fund reserves to represent 15 percent of the annual
expenditures for working capital purposes and 5 percent for emergencies. The
Forecast assumes that these reserves continue to be funded on an annual basis.
The City�s unfunded compensated absences liability exceeds $7.9 million. The
estimated annual payoffs are not included within the operating budget. The
proposed $800,000 is treated as a revolving fund, whereby, it is replenished
annually from available non-recurring resources. The $800,000 will only be used
when departments can not absorb the employee termination costs from salary and
benefit savings.
Airport Related Expenditures:
As of June 30, 2004, over $1.1
million of the existing Airport Issues appropriation still remain. Based on the
estimated remaining appropriation, we have not included any additional
appropriation for FY 2004-05 through FY 2009-10. Should the City and Airport
Authority not enter into a development agreement, additional appropriations of
at least $1 million annually may be needed.
Budget Stabilization Fund:
A Budget Stabilization Fund of
$1,573,230 was established using excess budget savings from the 2002-03 fiscal
year. This fund is to be used to stabilize recurring budget deficits. The fund
is intended to be used to balance recurring revenues and expenditures and allow
for future structural changes to generate budget savings. The Forecast does not
assume the use of these funds. Staff continues to update the City�s Long Range
Budget Balancing Plan which will program the use of these funds as appropriate.
The following chart compares
forecasted recurring revenues to recurring expenditures.
Forecast Conclusion:
Due to the combination of the
overall economic recovery and the City�s prudent spending, staff believes that
we are in a strong fiscal position for FY 2004-05, with a projected excess of
$1.4 million at the end of FY 2004-05. Due to the passage of Proposition 1A,
Burbank is in a position to better project and retain revenue due to the
inability of the State to divert Sales, Property and VLF revenue. Even if the
State were to meet its �fiscal emergency� criteria in order to borrow funds from
local government, Burbank�s liability is capped at $1.5 million (or 8 percent of
its property tax). Future years are always uncertain, but compared to this time
last year, the City was projecting a budget gap of $7 million in year 5 (FY
2007-08). In contrast, the gap has decreased by nearly half, or to $4 million
in year 5 (FY 2008-09). Revenues are expected to increase an average of 3.3
percent, and costs increasing an average of 4.2 percent. However, to put this
into perspective, the five year budget gap average this time last year was $5.2
million versus $2.6 million at this point in time, therefore, our five year
outlook has improved dramatically. In the meantime, staff is preparing plans to
assist in the balancing of future fiscal year budgets.
FISCAL IMPACT STATEMENT:
There is no fiscal impact to the
General Fund based on the First Quarter results, and our updated Five-Year
Forecast.
RECOMMENDATION:
It is recommended that the City
Council note and file this report for FY 2004-05 results for the period ending
September 30, 2004. The Executive Team recommends that that $4,396,589
estimated available balance be set aside to fund the Community Services
Building, Robert Ovrom Park, and Police Records Management System Replacement
Projects.
Attachments
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