PURPOSE:

The purpose of this report is to provide the City Council with a review of the City�s General Fund financial status as of September 30, 2006 and the City�s Five-Year Financial Forecast.  Staff is also requesting Council to approve an appropriation for $300,000 to fund airport-related legal expenditures.

GENERAL FUND�S FINANCIAL STATUS:

Fiscal Year (FY) 2006-07 Recurring Perspective � General Fund Revenue

For the first quarter of the fiscal year, the General Fund received $20,475,176 in recurring revenue, which represents 15.8 percent of the original estimated revenues, compared to 14.9 percent this time last year.  Table 1 on the following page provides a summary of the following: FY 2006-07 original revenue estimates, FY 2006-07 first quarter revenues, and the percent of revenues realized through end of the first quarter.

The following highlights some of the revenue data provided in Table 1: 

1. Sales Tax.  Effective FY 2004-05, the State redirected one-quarter cent of all cities� 1 percent local sales tax to the State to pay deficit retirement bonds (�triple flip�).  In exchange, it redirects to cities a commensurate amount of property tax from the Educational Revenue Augmentation Fund (ERAF); these funds are recorded in a separate revenue account entitled �Sales Tax Triple Flip In-Lieu.� Since the amount of property tax replacing the sales tax is the same, the only difference is timing of receipts.  Sales taxes are slightly below expectations as we head into the busy holiday shopping period.

2. Property Tax.  Secured property taxes are remitted to the City in December, January, April and May, with a final �clean up� payment in August (hence, the small percent realized as of the end of the First Quarter).  The City is scheduled to receive 40 percent of the fiscal year�s estimated total in late December.

3. Transient Parking Tax (TPT).  TPT is due the month after the close of each quarter, therefore, minimal revenue had been booked as of September 30, 2006.

4. Contributions from Other Funds.  The percent realized is higher than expected mainly due to the $1.2 million contribution from the Youth Endowment Services (YES) fund being booked in its entirety during the first quarter for the Ovrom Park project.

Table 1 � General Fund Recurring Revenues

The following pie chart illustrates that Sales Tax, Property Tax and the Utility Users Tax (UUT) represent 55 percent of recurring revenue:

General Fund Appropriations Perspective:

Overall, General Fund recurring appropriations are tracking as expected.  Twenty-six percent of recurring appropriations have been expended as of September 30, 2006, compared to 24.6 percent for the same period in FY 2005-06.

Table 2 below illustrates the recurring General Fund expenditures as of September 30, 2006, by department or category:

Updated FY 2006-07 Budget

Based on the actual ending balance for FY 2005-06, projected revenues and the adopted FY 2006-07 appropriations, the following is a recap of the FY 2006-07 budget (more detail is contained within the FY 2006-07 Budget Matrix in Attachment A):

Total Recurring Revenues                                                                           $129,386,231

Less:   Recurring Appropriations                                                                (129,055,035)

RECURRING BALANCE                                                                                 $331,196

Undesignated Fund Balance, June 30, 2006                                             $11,129,184

Less:          Infrastructure Reserve Fund Appropriation June 30, 2006      (1,000,000)

                    Increase in working capital reserves                                          (1,525,000)

                    Increase in emergency reserves                                                    (510,000)

                   Compensated absences                                                                 (800,000)

                   Other Post-Employment Benefits Liability (OPEB)                   (1,988,000)

                   ADJUSTED BEGINNING BALANCE JULY 1, 2006                $5,306,184

Less:          Approved One-Time Appropriations at Budget Adoption       (3,587,700)

                   Approved One-Time-Appropriations Post-Budget Adoption     (375,935)

                   Total Non-Recurring Uses                                                           (3,963,635)

           Available Non-Recurring Balance                                 1,342,549

           Plus Available Recurring Balance (from above)                                  331,196

           Estimated Available Fund Balance, JULY 1, 2007   $1,673,745

Although pending Council action, the requested $300,000 appropriation for airport-related legal expenditures is included as part of the post-budget adoption items listed above.

At the time of the adopted budget, there was a deficit of $3 million projected for the end of FY 2006-07.  Due to the excess of revenues over expenses coming in better than anticipated ($135 million in revenue less $130 million in expenses) and budget savings from unspent appropriations, our beginning fund balance for FY 2006-07 was higher than anticipated.  As a result, at this point in time there are no recurring or non-recurring deficits, although this is prior to any mid-year adjustment requests.

In addition to the projected available fund balance, below are the available one-time resources as of September 30, 2006:

• PERS Stabilization Fund                                                                        $   175,371

• Budget Stabilization Fund                                                                      $1,411,235

• Utility Users Tax (UUT) In-Lieu Set Aside                                             $1,102,718

• Released POB Reserve Fund (includes interest)                                $5,706,454

• Capital Projects Contingency Appropriation (capital only)                  $3,928,292

• Interest Earned � Bond Proceeds (capital only)                                   $2,543,485

Not included in the above list is approximately $20 million in capital funding that staff has proposed be transferred from the Community Services Building (CSB) project to a capital holding account.

FIVE-YEAR FINANCIAL FORECAST:

This section of the memo will discuss the Five-Year Financial Forecast.  The purpose of the forecast is to provide insight on the potential long-term financial trends for the General Fund. This long-term perspective will allow the City Council to make informed financial decisions today while fully understanding the future financial impacts of these decisions.

Projected Revenues and Expenditures:

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- or under-estimated due to economic cycles and state legislation. Projected revenues are updated periodically throughout the year as new information becomes available.  Staff is currently developing a new revenue model to enhance revenue forecasting capabilities.
 

It is staff�s expectation that the recurring revenue growth for FY 2006-07 through FY 2010-11 will average 4.0 percent versus an average recurring expenditure growth of 4.6 percent.  The revenue growth includes projected increases in Sales Tax (4.5%), Property Tax (5.0%), Transient Occupancy Tax (TOT) (5.0%), TPT (3.5%), UUT (3.5% for FY 07-08 due to the Burbank Water and Power [BWP] electric rate increase, then 2% thereafter), and Franchise Fees (2.5%).  Interest rate revenue is forecast to increase over the next five years due to increased market rates; however, market conditions may change dramatically during the five-year period.  In addition, there are several pieces of state and federal legislation that could negatively affect the City�s UUT and cable franchise fees.

Regarding the TOT, a measure will appear on the ballot for the April 2007 general election asking Burbank voters to authorize Council to increase the TOT rate from the current 10 percent rate to a maximum rate of 12 percent.  If the measure is approved and Council votes to implement an increase to become effective July 1, 2007, the forecast will be adjusted accordingly.  Each 1 percent increase currently represents roughly $500,000 in incremental revenue to the General Fund (or approximately $1 million in new annual revenue at a 12 percent TOT rate).

The two main drivers of expenditures for the General Fund are salaries and benefits, and the PERS rates that are applied to the base salaries.  The expenditure growth assumes the following costs:

Memorandum of Understanding (MOU) Projected Costs:

The projected composite growth in miscellaneous employees� salaries and benefits in staff�s current estimate is largely based on the multi-year agreements that have been reached.  Over the last two years, the City entered into multi-year MOUs with all of the City�s bargaining groups.  These multi-year agreements are very helpful in more accurately predicting labor costs for FY 2006-07 and beyond.

Public Employees Retirement System (PERS) Costs:

In April 2005, the CalPERS Board approved an employer rate stabilization policy, which relaxes the assumptions of how assets are valued actuarially.  The result of this new policy is that it gives a wider range for the invested assets� assumed value, thereby reducing the necessary increase or decrease of our PERS rate.  Although the new policy is not as strict as the previous valuation method, the net result is we do not have the radical increases (or decreases) in the rates as before.

The benefit of PERS�s rate smoothing methodology is evident by the stability in the following actual PERS rates (includes the impact of the POB).

                                                Actual FY            Budget FY                 FY                   FY

                                                 2006-07               2006-07               2007-08         2008-09 (proj.)

Police 3% @ 50                       17.349%                  same                  18.851%            18.5%

Fire 3% @ 55                          12.563%                13.516%              13.059%            12.8%

Miscellaneous 2% @ 55             8.976%                  same                    9.339%            9.2%*

*This projection from PERS does not factor in the enhancement to 2.5%.

The following chart illustrates historical and future rates (which 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� costs and reduce the uncertainty over rates, which was always a challenge in previous years.

Staff continues to follow the Council policy that if the normal cost[1] is greater than the actual cost, we use the normal cost for budgeting purposes.  At the end of the year, any savings between the actual and normal cost will be placed into the PERS Stabilization Fund and will be used when the actual PERS rate is above the normal cost rate.  Currently, the only affected bargaining group is Fire (whose normal cost percent is 13.516% vs. an actual cost of 12.563%).

Additionally, the City has budgeted for the employer share of 2.4% in additional PERS costs as a result of the agreed upon Enhanced Retirement Benefit (2.5% @ 55) that will become effective in 2008 for the City�s miscellaneous group.

Pension Obligation Bonds (POBs):

In June 2004, the City issued POBs to fully pay the Unfunded Accrued Actuarial Liability of the Police and Fire PERS plans.  Originally, the interest on the bonds was a variable rate because at the time, variable rates were very low.  However, short-term interest rates unexpectedly rose dramatically, posing significant risk to the General Fund.  Recognizing this threat, in June 2006, the City and the bondholder revised the bond agreement and converted the variable rate to a fixed rate of 5.93%.  By also paying down the outstanding principal by $5 million, this new agreement reduced the City�s bond payments by $227,370 for FY 2006-07 (which increased the recurring balance).  The new agreement will avoid the risk that interest rates will increase during the life of the bonds.

Retiree Medical Trust:

For FY 2006-07, the City�s defined contribution to the Retiree Medical Trust (year 5) will grow to $65 per employee in April 2007 from the current $52.50 per employee amount.  Because the trust has not been officially approved for years 6 onward, we have not included it in the forecast.

Other Post-Employment Benefits (OPEB):

The Governmental Accounting Standards Board (GASB) issued GASB Statement 45 in order to provide more complete, reliable, and decision-useful financial reporting.  This includes reporting of the costs and financial obligations that governments incur when they provide post-employment benefits other than pensions (OPEB) as part of the compensation for services rendered by their employees. Post-employment healthcare benefits, the most common form of OPEB, are a very significant financial commitment for many governments.  Staff recently received the actuarial report for the General Fund�s liability which calculates it to be $1.988 million for FY 2006-07 and thereafter (the Citywide liability is estimated to be $2.8 million for FY 2006-07 and thereafter).  The total Citywide unfunded OPEB liability is estimated at up to $31 million.  This cost was not known when the Council adopted the FY 2006-07 budget; therefore, it is now being factored into the budget as a liability.

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 2008-09 (formerly, we had assumed the start year would be FY 2007-08), $594,000 in FY 2009-10, and $890,000 in FY 2010-11.  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.  Also, the Redevelopment Agency is contributing $1 million annually to help fund the project.

Savings from Frozen Positions:

Starting with the FY 2006-07 budget, rather than �freezing� positions (which means they remain in the position budget and budget dollars are backed out manually in the Budget Matrix), staff eliminated the positions from the budget.  Among these positions are 6 police officers and 9 firefighters.  Staff has memorialized which positions had been frozen so should it become necessary to restore them, staff will have a record.

Infrastructure Replacement Reserve:

Beginning in FY 2004-05, $1 million annually is expected to be put into an Infrastructure Replacement Reserve account.  The goal is to fund $1 million per year out of excess budget savings, if available.  In addition, during the budget adoption process, Council requested to have an additional $1 million set aside for FY 2006-07 to supplement the aforementioned $1 million annual designation.

Estimated Budget Savings:

Historically, the General Fund has generated prior year budget savings of between 1.2 to 2.5 percent of total appropriations.  As budgets continued to get tighter due to budget reductions, this savings amount has been more difficult to achieve (e.g., the actual savings factor for FY 2004-05 going into FY 2005-06 was only 1.2 percent).  The budget savings for FY 2005-06 going into FY 2006-07 bounced back up to 2 percent; however, we are using a conservative 1.5 percent to calculate future budget savings in the forecast.

LONG RANGE BUDGET BALANCING PLAN:

It is important to keep in mind that the City�s financial forecast still faces challenges over the next several fiscal years, primarily caused by projected increased MOU costs.  The following chart highlights the challenge the City will be facing over the next several years.  Although the Forecast now has a much improved outlook than it did in the past several years, the structural imbalance between recurring revenues and expenditures continues to be a concern.

Five-Year Financial Forecast

General Fund Projected Revenues and Expenditures

Based on projected revenues and the City�s expected spending, the projected recurring surplus is expected to be approximately $331,000 at the end of FY 2006-07.  However, due to expenditures increasing at a rate higher than revenue, it is expected that the recurring budget gap in year 5 (FY 2010-11) will be approximately $2 million.  It is important to note that the potential revenue from an increase in the TOT rate is not factored into this Forecast.

As mentioned earlier, over the next five years, revenues are expected to increase an average of 4.0 percent annually, with costs increasing an average of 4.6 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 budgets.  One change that has already been implemented with the FY 2006-07 budget was to keep the UUT In-Lieu Set Aside funds as part of the recurring revenue (instead of backing them out).  This has significantly improved the recurring General Fund projections.

Required Increase in Reserves:

The City Council�s Financial Policies require General Fund reserves to equal 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 is currently $10 million (up from $9.2 million last year), and the estimated annual payoffs are not included within the operating budget.  The compensated absences account originally was set up as a revolving fund wherein it was replenished annually from available non-recurring resources.  However, due to the large unfunded liability, starting FY 2006-07, it was changed to a reserve fund wherein the balance rolls over each year, and additional appropriations may be added if deemed necessary.  For FY 2006-07, the amount of $800,000 was appropriated and added to the existing balance, and will only be used when departments cannot absorb the employee termination costs from salary and benefit savings.  The current balance is $1.6 million.  Staff is ramping up the account in preparation for a potential large number of retirements in 2008 as a result of the enhanced PERS miscellaneous employees retirement plan (2.5 percent at 55).

Airport Related Expenditures:

Concurrent with this report, staff is requesting that Council approve an additional appropriation of $300,000 to cover continued airport-related legal expenses.  The last appropriation was requested July 2001 for $1.5 million; the current available balance is $89,000.  To date, $14.2 million has been expended.

FISCAL IMPACT STATEMENT:

The requested non-recurring appropriation for airport expenses will impact the General Fund by $300,000.  The cost is already incorporated into this First Quarter report, the Matrix, and the Five-Year Forecast.

CONCLUSION:

Due to the combination of the overall economic climate and the City�s projected expenditures and revenues, staff believes that we are in a stable fiscal position for FY 2006-07, with a projected recurring balance of $331,000 at the end of FY 2006-07.  The total ending balance is expected to be $1,673,745 but this excludes any potential interim and/or Mid-Year appropriation requests.  The recurring budget gap in year 5 (FY 2010-11) is projected to be approximately $2 million.

Over the next five years, revenues are expected to increase an average of 4.0 percent, and costs are expected to increase an average of 4.6 percent.  In the meantime, staff continues to monitor and update both the revenue and expenditure projections as information becomes available.

RECOMMENDATION:

It is recommended that the City Council (1) approve the appropriation of $300,000 for airport-related legal expenditures, and (2) note and file this financial status report for the period ending September 30, 2006.

Attachments

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