PURPOSE:

The purpose of this report is to provide the City Council with a review the City�s General Fund financial status as of September 30, 2005 and the City�s Five Year Financial Forecast.

GENERAL FUND�S FINANCIAL STATUS:

FY 2005-06 Recurring Perspective � General Fund Reserves

For the first quarter of the fiscal year, the General Fund received $19,940,534 in recurring revenue, which represents 16.2 percent of the original estimated revenues.  To put this figure in perspective, the City received only 14.5 percent within the first quarter of last year (FY 2004-05).  Table 1 on the following page provides a summary of the following: recurring revenues received for last fiscal year, FY 2005-06 original revenue estimates, revised FY 2005-06 revenue estimates, FY 2005-06 first quarter revenues, and the percent of revenues realized through end of the first quarter.

The one revenue revision since the budget adoption is in the Service Charges category in the amount of $183,937.  This increase is due to the renegotiated agreement between the City and the Castaway Restaurant which goes into effect December, 2005 (the $183,937 represents 6 months of increased revenue).  Staff expects the annual incremental increase from the renegotiated lease agreement to be between $320,000 to $450,000 over the next 5 years.

A couple of comments regarding the following table are:

1. Property Taxes.  The bulk of property taxes are remitted to the City in December/January and April/May, hence the small percent realized as of the end of the First Quarter.

2. Transient Parking Tax (TPT).  TPT is due the month after the close of each quarter, so the percent realized is also negligible.

As has been publicized recently, rates for natural gas are expected to increase between 45 to 55 percent over last year (Source: Southern California Gas Company) due to supply and demand pressures caused by Hurricane Katrina.  At this time, staff has the Utility Users Tax (UUT) estimate unchanged, but we will be looking at adjusting it accordingly as revenue is realized.

Table 1 � General Fund Recurring Revenues

The top three general fund revenue accounts continue to be Sales Tax, Property Tax and the UUT, representing nearly 59% of the recurring General Fund Revenue:

General Fund Appropriations Perspective:

Overall, the General Fund has expended approximately 25 percent of recurring appropriations as of September 30, 2005.  For comparison, on September 30, 2004, General Fund expenditures also represented 25 percent of recurring appropriations for FY 2004-05.

Table 2 below illustrates the recurring expenditures of the General Fund budget as of September 30, 2005, by department or category.

Revised FY 2005-06 Budget

Based on the re-estimation of anticipated revenues and the adopted FY 2005-06 appropriations, the following is a recap of the FY 2005-06 budget (more detail is contained within the FY 2005-06 Budget Matrix in Attachment A):

Total Recurring Revenues                                                                                     $122,908,815

Less � Use of UUT & In-Lieu Set Aside                                                                  (2,059,000)

Net Recurring Revenues                                                                                         120,849,815

Less:

Recurring Appropriations                                                                                     (121,950,096 )

Potential Impact of Anticipated MOUs (BCEA, BMA, Z, Execs)                          (2,126,275)

Plus:

Savings from Frozen Positions (Attachment A/Schedule A)                                   2,203,981

Recurring Balance/(Deficit)                                                                                       (1,022,575)

Use of PERS Stabilization Fund to balance the budget                                          1,022,575

RECURRING BALANCE                                                                                              $-0-

Undesignated Fund Balance, July 1, 2005                                                              $7,277,482

Plus:   Use of UUT & In-lieu Set Aside[1]                                                                       300,000

SUBTOTAL                                                                                                                    7,577,482

Less:

Budgeted one-time items (Attachment A/Schedule B)                                           (1,215,353)

Estimated cost for recent fire and flood damage                                                    (1,000,000)

Increase in working capital reserves                                                                         (1,141,000)

Increase in emergency reserves                                                                                   (374,000)

Compensated absences                                                                                               (800,000)

Retiree Medical trust appropriation (year 4)                                                                (407,600)

Total Non-Recurring Uses                                                                                           (4,937,953)

Available Non-Recurring Balance                                                                                2,639,529

Plus Available Recurring Balance (from above)                                                                     -0-

Estimated Available Fund Balance, June 30, 2006                          $2,639,529

As previously noted, the recurring deficit for FY 2005-06 will be funded by the PERS Stabilization fund. A significant unexpected expense that occurred during first quarter was the fire and subsequent flood damage which is expected to cost at least $1,000,000.  Staff will be bringing back expenditure requests at Mid-Year that will address overall disaster related costs.  To offset some of these expenses, staff will be looking at potentially using a majority of the unused military pool account that was carried over from last year.  The military pool money was set aside to supplement military pay for those employees who were called to service.  This account currently has $466,920 and some or all of it could be used, if Council approves, to help cover these unanticipated costly events.

It is also important to point out other available Non-Recurring Resources:

• PERS Stabilization Fund ($1.993 million less $1.023 million)             $   970,425

• Budget Stabilization Fund                                                                          1,573,230

• Utility Users Tax (UUT) In-Lieu Set Aside (est. for 6/30/06)                   2,853,112

• Capital Projects Contingency Appropriation                                           3,928,292

• Interest Earned � Bond Proceeds (as of 9/30/05)                                  1,236,472

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 2005-06 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.  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 2004-05 results and subsequent information such as FY 2005-06 assessed valuations and first quarter revenues received.  As noted above, one particular increase was due to the execution of the new Castaway lease, which will have a positive impact on the City.  Other 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 was 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 3.4 percent over the prior year due to the opening of a new Home Depot, then reverting to 2.5 percent growth for future years.  The City�s current sales tax base will continue to be at risk from the trend to purchase electronically.  However, in FY 2007-08 (January 2008), the City will benefit from the passage of AB 451 which defines the point of sale for commercial jet fuel to be at wing tip.  This is expected to generate approximately $500,000 per year in incremental sales tax to the City. 

Property Tax � The City�s assessed valuation continues to provide solid growth.  Assessed valuation for FY 2005-06 grew by 8.82 percent.  The Forecast assumes a conservative 5 percent growth rate for FY 2006-07 and thereafter.

Utility Users and In-Lieu Taxes � Forecasted utility users tax (UUT) assumes an increase of 1 percent for FY 2005-06 due to increasing natural gas prices, increasing cellular phone usage and higher-than-expected electricity sales.  However, these increases are offset by continued decreases in the local and long distance phone carriers.  We are anticipating UUT revenues beginning in FY 2006-07 and thereafter to remain flat even though natural gas prices may remain higher than in the past.  The long range forecast for electric rates continues to be uncertain.  Because of all the uncertainty of this revenue category, staff plans on paying close attention to all the various components that make up this significant revenue category for the City and making necessary adjustments as further information is obtained.

There are several pieces of federal legislation that may negatively impact the City�s UUT revenue.  One active bill is S1504 (Ensign and McCain), �The Broadband Investment and Consumer Choice Act,� which significantly rewrites federal communications law and virtually eliminates state and local regulation of telecommunications, including cable and telephone.  Currently, this bill would result in all cable franchise agreements immediately becoming null and void and result in the payment of very limited franchise fees.  Needless to say, this could negatively impact the UUT and franchise fee revenues of local governments nationwide, including the City of Burbank.  Staff will continue to monitor this bill and other bills that could negatively impact the City�s revenue.

Transient Occupancy and Parking Taxes � Forecasted Transient Occupancy (TOT) and Transient Parking (TPT) taxes are expected to grow by 2.5 percent and 3.3 percent, respectively, in FY 2005-06.  Thereafter, the expected growth rate will resume to 2.5 percent for both revenue streams.  Transient Parking Tax�s increase in FY 2005-06 is due to Council approving an increase from 11 percent to 12 percent effective July 1, 2005.

Interest Revenues � The forecast assumes that investment yields for FY 2005-06 and beyond will continue to increase over the five year horizon.  Staff expects that continued interest rate increases will be beneficial to this revenue category.

Contributions from Other Funds �This category includes gas tax revenue of $1,406,352 for FY 2005-06 with assumed growth of 2.5 percent, and loan repayments from Development Impact Fees of $90,000 for FY 2005-06 and each year thereafter in the forecast.

Projected Expenditures

The recurring expenditure costs assume the following rates:

Memorandum of Understanding Projected Costs:

The projected growth in employees� salary and benefits are based on anticipated market based salaries and benefits for each of the forecasted fiscal years.  Staff will update the forecast accordingly as MOUs for the various bargaining groups are ratified.

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:

In April 2005, the CalPERS Board approved an employer rate stabilization policy, with the following features.

1. In the calculation of the actuarial value of assets, market value asset gains and losses are spread over 15 years as compared to 3 years; and

2. Changed the corridor limits for the actuarial value of assets from 90% - 110% of market value to 80% - 120% of market value; and

3. Gains and losses are amortized over a rolling 30 year period.  In the past, the amortization payment on gains and losses was 10% of the base.

4. A minimum employer contribution rate was established equal to the employer normal cost minus a 30-year amortization of surplus (but not less than 0%).

The benefit of these changes is evident in the following comparison of the FY 2005-06 PERS rates (includes the impact of the POB) versus the rates for FY 2006-07:

                                                                               FY                                           FY

                                                                          2005-06                                  2006-07

Police 3% @ 50                                             18.727%                                  17.349%

Fire 3%@ 55                                                  12.193%                                  12.563%

Miscellaneous 2% @ 55                                  9.456%                                    8.976%

The net result of the above FY 2005-06 PERS rates slightly improves the PERS impact on the five-year financial forecast from prior forecasts.  Staff will continue to follow the policy 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 13.516%.  Any overall 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 2006-07 PERS rates represents an increase in General Fund appropriations of $2.2 million over FY 2005-06.

The following is a chart of actual and budgetary PERS rates from FY 2003-04 through FY 2009-10:

The chart illustrates that the rates are expected to remain flat as a result of the PERS Board�s policy to stabilize rates.  This will assist us in forecasting future years and reduce the uncertainty over rates, which was always a challenge in previous years.

Pension Obligation Bonds (POB):

In June 2004, the City issued POBs 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 around $500,000.  Any savings in excess above this amount will be used to pay additional principle of the POB.  Staff anticipates that for FY 2005-06 an additional $133,902 will be available for principal reduction.  The anticipated net savings related to issuing a variable rate POB compared to a fixed rate POB is $545,970.

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 2007-08, $594,000 in FY 2008-09, and $890,000 in FY 2009-10.  In accordance with past practice, we are ramping-up the General Fund budget over a three year period to be prepared for this increase in appropriations.

Savings from Frozen Positions:

The FY 2005-06 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 $297,000 for FY 2007-08 and $594,000 for FY 2008-09.

Estimated Budget Savings:

Historically, the General Fund has generated prior year budget savings of between 1.5 to 2 percent of total appropriations.  As budgets continue to get tighter due to budget reductions, this savings amount will be more difficult to achieve with the actual savings factor for FY 2004-05 being a mere 1.2 percent (the budget savings for FY 2004-05 was 1.4 percent).  Because of this, the Forecast assumes a 1.2 percent annual budget savings factor going forward.  The annual budget savings can be used as follows:

1. To fund increases in the emergency and working capital reserves to be in compliance with the City Council�s adopted Financial Policies; and/or

2. To fund the compensated absences revolving fund; and/or

3. To fund one-time needs (i.e., Infrastructure Reserve Fund, Central Library)

Non-Recurring Revenues:

This includes budgeted revenues which are of a non-recurring nature and typically fund items that are also non-recurring (for example, capital projects).  Thus far, FY 2005-06 has no non-recurring revenue items that may be used for non-recurring expenses except for $53,000 earmarked for the Burbank Athletic Federation (BAF) and $10,000 for jail revenue.  These accounts are restricted and cannot be used for general one-time expenditures.

One-Time Appropriations:

A total of $125,000 is included for FY 2005-06 and FY 2006-07 for the Magnolia Park streetscape project as part of an overall 5-year plan.  FY 2006-07 also includes $20,000 for year two of two for fire helmets.

Amount Funded by UUT & In-Lieu Set Aside:

The FY 2005-06 adopted Budget included $300,000 (all non-recurring and budgeted at $100,000 each) for establishing a reserve interest-bearing account for the PerformArts Grant; Code enforcement pilot project funding; and additional sidewalk repair funding (to increase the annual amount to the originally planned $500,000).  Interest earned through September 2005 on the PerformArts grant principal is $792.  These one-time appropriations were funded by the use of the incremental UUT and In-Lieu taxes set-aside as a result of 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 $9.2 million (up from $7.9 million last year).  The estimated annual payoffs are not included within the operating budget.  The compensated absences account is treated as a revolving fund, whereby it is replenished annually from available non-recurring resources.  The amount of $800,000 has been appropriated for FY 2005-06 and will only be used when departments can not absorb the employee termination costs from salary and benefit savings.

Airport Related Expenditures:

As of September 30, 2005, $231,000 of the existing Airport Contingency appropriation still remains.  Should this funding not be sufficient to handle future airport activities by the City, an additional appropriation may be required.

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.

Five-Year Financial Forecast

General Fund Projected Revenues and Expenditures

Forecast Conclusion:

Due to the combination of the overall economic climate and the City�s expected spending, staff believes that we are in a stable, although tentative, fiscal position for FY 2005-06, with a projected recurring deficit of over $1 million at the end of FY 2005-06 (balanced by the PERS Stabilization Fund).  The overall ending balance is expected to be $2.6 million, but this excludes any additional Mid-Year appropriation requests.  The budget gap in year 5 (FY 2009-10) is projected to be $4.3 million.

Over the next five years, revenues are expected to increase an average of 3.5 percent, and costs increasing an average of 4 percent.  In the meantime, staff is continuing to look at options via revenue enhancement, efficiencies and/or cost cutting to assist in the balancing of future fiscal year budgets.

STATE OF CALIFORNIA BUDGET IMPACT TO BURBANK:

The State�s Enacted Budget for FY 2005-06, signed by Governor Schwarzenegger on July 11, 2005, contained four items that pertain to local jurisdictions, including the City of Burbank.  These items are the restoration of Proposition 42 Transportation funding to the Gas Tax Fund (Fund 125), the early repayment of the Vehicle License Fee (VLF), the elimination of the booking fee reimbursement, and revisions to State mandated program cost reimbursement.  All of these items, with the exception of the Proposition 42 funding, have already been incorporated into Burbank�s Adopted Budget.

Also, pursuant to Proposition 1A, local government will once again contribute $1.3 billion in Education Revenue Augmentation Fund (ERAF) shifts to help balance the State budget.  Burbank�s ERAF contribution for FY 2005-06 is expected to remain at FY 2004-05 levels ($1,850,941) and Burbank�s Redevelopment Agency�s contribution remains at $2,477,336.  FY 2005-06 should be the second and final year of these contributions.

FISCAL IMPACT STATEMENT:

There is no fiscal impact to the General Fund based on the First Quarter results, and our updated Five-Year Forecast.  This report is for informational purposes only.

RECOMMENDATION:

It is recommended that the City Council note and file this report for FY 2005-06 results for the period ending September 30, 2005.

Attachments

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