PURPOSE:

The purpose of this report is to provide the City Council with a review of the City�s financial status as of December 31, 2006, and to request Council approval of mid-year adjustments to the Fiscal Year (FY) 2006-07 approved Budget.  The report will also provide relevant detail as it pertains to the development of the City�s FY 2007-08 Budget.

Moreover, this report is intended to provide the City Council with an as accurate as possible picture of how the General Fund is tracking six months into the fiscal year compared to the original revenue and expenditure estimates.  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 Council action of appropriate budgetary adjustments.

BACKGROUND:

Half way into each fiscal year the Financial Services Department asks each department to review their existing budgetary appropriations to determine 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 the past several weeks, it was determined that most departments are able to absorb the majority of unanticipated costs through budgetary savings in other areas; however, there are some expenditures that will cause several departments to be in jeopardy of overspending their budgets, by year-end.

GENERAL FUND�S FINANCIAL STATUS:

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                                                                            $129,889,663

Less:  Recurring Appropriations                                                                  (129,055,035)

             Potential Additional BUSD Joint Use Agreement Appropriation        (300,000)

           Impact of Mid-Year Appropriations � Recurring                                        (52,000)

           RECURRING BALANCE                                                                        $482,628

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) est. set-aside(987,000)

                  ADJUSTED BEGINNING BALANCE JULY 1, 2006                  $6,307,184

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

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

                  Impact of Mid-Year Appropriations � One-Time                              (203,887)

                  Total Non-Recurring Uses                                                               (4,167,522)

                  Available Non-Recurring Balance                              2,139,662

                  Plus Available Recurring Balance (from above)                                482,628

                 Estimated Available Fund Balance, JULY 1, 2007  $2,622,290

In addition to the projected available fund balance, below are the available one-time resources as of December 31, 2006:

• Budget Stabilization Fund                                                                    $653,494

• Released POB Reserve Fund (includes interest)                                $5,706,454^[1]

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

• Former CSB Funds to Capital Projects Holding                              $20,043,855

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

It is important to note that all the remaining UUT/In-lieu Set Aside account and PERS stabilization fund in addition to some of the Budget Stabilization fund were used to pay for the General fund portion of the Oracle project. This amount totaled just over $2.1 million for the General Fund.

[CAM1] 

FY 2006-07 Recurring Perspective � General Fund Revenues

For the first six months of the fiscal year, the General Fund received $55,688,219 in recurring revenue, which represents 43.0 percent of the adopted estimated revenues.  For perspective, last year�s six-month report showed the City receiving 40.8 percent of its estimated revenues, or $49,250,650.  Overall, the City�s revised recurring revenue estimates for FY 2006-07 have been increased by a net $503,432 over original estimates as a result of increases in the Transient Parking Tax and Contributions from other Funds.  Slight revenue reductions were made to the Service Charges and Franchise categories based on performance.

The following highlights some of the revenue data provided in Table 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.  Although the percent realized is slightly below expectations due to the time lag in collections, year-to-date sales tax revenues total $7.7 million and are tracking as expected.

• 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).  Property Taxes are one of the General Fund�s top three revenue sources.  This tax is imposed on real property (land and permanently attached improvements, such as buildings) and tangible personal property located within the City.  A total tax of one percent (1%) is levied on the assessed value of property as determined by the Los Angeles County Assessor.  The City of Burbank receives approximately 18.5% of the assessed value. Property taxes are tracking very well.  Year-to-date property tax revenue totals $9.9 million and is up 15% over this time last year. 

• Utility Users Tax: Utility Users Tax (UUT) has grown by an average annual rate of 3% for the past six years.  This growth has been the result of the growth in telephonic communication such as cellular usage, increasing utility rates and aggressive collection efforts on the part of the City.  It will be important for the City to continue monitoring proposed State and Federal legislation related to UUT as current legislative proposals may threaten this revenue stream to the City.  The UUT is the third largest revenue source to the City's general fund.  For this time period, UUT totaled $8.7 million and increased 6.9% over last year due to increased electric and natural gas retail sales. 

• Interest/Use of Money:  Interest income represents another significant revenue source.  The City Treasurer invests idle funds in various investment instruments and the City�s portfolio receives interest income.  The main investment goal is to protect each investment while achieving the highest rate of return.  Year-to-date totals $1.4 million and is tracking as expected.

• Transient Occupancy Tax:  Transient Occupancy Tax (TOT), otherwise known as a �Bed Tax,� is a 10% tax applied to the cost of occupying a room in a hotel, inn, motel, tourist home, or other lodging facility within the City�s limits.  The General Election ballot in April will include a measure to give the Council authority to increase the TOT rate from 10% to up to 12%.  Each 1% increase in the TOT equates to over $500,000 in incremental revenue to the General Fund.  For this year, receipts total $2.4 million and are up 8.6% from the same period as last year due to the strong travel industry. 

• Contributions from Other Funds:  Interfund Transfers or contributions from other funds are made to the General Fund for assorted purposes.  For example, every year, the General Fund receives a contribution from the Gas Tax Fund (Fund 125).  Due to the stronger than expected gas tax revenues, year-to-date revenue totals $2.1 million and  this revenue category has been adjusted upward.

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 following table.

Table 1-General Fund Recurring Revenues[CAM2] 

City�s Largest Revenue Sources

The following pie chart illustrates that Sales Tax, Property Tax and the Utility Users Tax (UUT) represent 54 percent or a majority of recurring revenue:

Note:  Sales Tax includes the segregated monies which are part of the ERAF Sales Tax Shift under the �triple flip.�

General Fund Appropriations Perspective:

With the exception of the requested mid-year adjustments detailed in this report, 51.9 percent of the recurring appropriations have been expended as of December 31, 2006.  For perspective, 49.1 percent of recurring appropriations were expended for the same period last year.

The following table highlights the recurring component of the General Fund budget as of December 31, 2006, by department or category.

Table 2 � General Fund Recurring Appropriations[CAM3] 

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 C.

TOTAL MID-YEAR BUDGET ADJUSTMENTS BY FUND:

The following is a summary of the adjustments requested by each Fund:

FIVE-YEAR FINANCIAL FORECAST:

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 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 estimated due to economic cycles, federal and/or state legislation.  Staff works closely with a number of consultants, as well as various associations, to monitor revenues.  Projected revenues are updated throughout the budget development process as new information becomes available.

At this point, it is staff�s expectation that based on current trends, the total recurring revenue growth for FY 2006-07 through FY 2010-11 will average 4.30 percent versus an average recurring expenditure growth of 4.84 percent.  The revenue growth includes average projected increases in Sales Tax (3.5%), Property Tax (4.2%), Transient Occupancy Tax (4.2%), TPT (3.2%), UUT (3.0%), and Franchise Fees (0.5%).  Interest rate revenue is forecasted 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 10, 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 continue to be salaries and benefits, and the PERS rates that are applied to the base salaries.  The expenditure growth assumes the following notable 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.  The City�s Financial Policy strives to pay market-based competitive wages.

Public Employees Retirement System (PERS) Costs:

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

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.

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 as part of the compensation for services rendered by their employees.  Post-employment healthcare benefits, the most common form of Other Post-Employment Benefits, are a very significant financial commitment for many governments. 

Staff engaged actuary John Bartel of Bartel & Associates to provide a preliminary estimate of the City�s OPEB liability.  It was originally projected that the total Citywide unfunded OPEB liability could be as high as $31 million.  This equated to an annual required contribution amount of $2.8 million ($1.988 million for the General Fund as noted in the first quarter report).

One important development that has occurred since this initial actuarial study that was completed in May, is that CalPERS has announced that they will soon be able to provide a mechanism in which member agencies can contract with them to accept OPEB contributions, invest the funds, and perform payments of benefits.  If the City does not contract with CalPERS to provide this service, the other viable alternative is for the City is to create a trust and contract with a private sector financial institution to perform this service, which is likely to cost the City significantly more.

Recently, a new actuarial valuation was requested taking into consideration using the CalPERS Trust.  This new valuation also incorporated a potential prepayment of $5 million from the remaining POB reserve fund.  As a result, the new unfunded actuarial liability, depending on the different assumptions, ranged between $12.8 million to $31.5 million, which translates to a payroll rate (similar to a PERS pension rate) of 1.6%-3.8% (see attachment D).  In compliance with Council intent, staff recommends making a $5 million prepayment to CalPERS thus decreasing the City�s annual required contribution amount to $1.41 million.  The $1.41 million annual contribution assumes that the liability will be fully funded over a 30-year period, and that funds on deposit will earn an average investment return of 7.75%.  This would decrease the General Fund liability estimate from $1.988 million to roughly $987,000 per year.  Staff anticipates returning to Council to amend the contract with CalPERS within the next couple of months; however, we are requesting that Council approve the appropriation now.

FY 2007-2008 BUDGET DEVELOPMENT PARAMETERS:

The FY 2007-08 budget process has already started and departments are currently working on their respective budgets.  It is important to note the City projects a recurring budget deficit in future years beginning in FY 2009-2010.  As a result, the General Fund budget parameters for this year are once again strict. However, for FY 2007-08, departments will not be requested to prepare discretionary appropriation reductions.

New Positions/Upgrades:

Similar to the last few years, no new positions or upgrades will be accepted unless they are revenue offset, or operationally necessary.  However, effective FY 2006-07, any revenue increase used towards a department�s reduction will be counted at 50 percent, and not on a dollar-for-dollar basis.  The Executive team will be carefully scrutinizing using revenue as part of any allowed reductions and will review all cost reductions.

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 unless approved by the Executive Team.

The City�s Executive Team is scheduled to review proposed budget changes/requests during the month of March and, at that point, will identify any particular requests that may rise to the level of being considered a discussion paper item.  As in years past, March 30^th will be the deadline for any requests/changes including discussion paper items.  The Budget staff will then be able to prepare the proposed FY 2007-08 budget and budget request binder for Council review prior to the annual Council Goal setting workshop.

Should Councilmembers have special requests or discussion items of their own for the upcoming fiscal year, staff encourages the Council to indicate them prior to the scheduled budget study sessions in May in an effort to help streamline the process and provide for adequate research time for staff, if necessary.

Special Noticing Requirements due to Bighorn-Desert View Water Agency Case:

In July 2006, the California Supreme Court decided Bighorn-Desert View Water Agency v. Verjil, a ruling that metered rates for consumption of water are "property-related fees" subject to Proposition 218.  The ruling also applies to sewer service charges and charges for refuse collection where the rate is set by a government agency, as opposed to a privately contracted waste hauler.

Prop. 218 created a category of fees known as "property-related fees."  Basically, such fees may not be imposed or increased unless a local government conducts a public hearing not less than 45 days after mailing a notice to all fee payers.  Staff will be complying with this new noticing requirement.  Staff will be recommending water, sewer, and refuse fee increase to be effective in FY 2007-08.  These proposed fee increases are subject to the new noticing provisions.  The public hearing will be in conjunction with the annual budget public hearing, which is scheduled for June 12, 2007.

You will recall that during the FY 2006-07 budget workshops, staff proposed a 9% refuse rate increase.  The rate increase would have amounted to an increase of about $1.71 to the monthly 64 gallon container fee.  The rate increase was recommended to help the Refuse Fund cover its growing operating costs.  The council instead directed staff to develop a 5-year �rate smoothing� plan. Council adopted the first year of that plan, which included a Refuse rate increase of 6%.  Unfortunately, that rate increase is not sufficient to offset operating costs, and the Fund is projected to incur an operating loss by the end of FY 06-07, with deficits projected in each of the following several years as well.   Staff will be recommending that the Council consider a Refuse rate increase of 9%, which equates to $1.81 per month on a 64 gallon refuse cart.  The increase will help bring the Fund back into fiscal health and also enable the fund to comply with other legal requirements and the City�s Fiscal Policies.

STATE BUDGET IMPACTS TO FY 2007-08:

The Governor released his FY 2007-08 proposed State budget on January 10, 2007.  State revenues are expected to grow to $101 billion, a 7.2 percent increase from 2006-07.  For cities, the proposed budget continues to fund various local programs.

The highlights in the state budget for cities include:

• Transportation: The Governor proposes a plan to implement the Proposition 1B transportation bond money passed on the November ballot.  Over time, Proposition 1B will provide approximately $7.1 billion directly to local governments, including an estimated $3.4 million for Burbank

• Public Safety: The Governor proposes in his budget to continue the Citizens� Option for Public Safety (COPS)/ Juvenile Justice Grants. The budget includes $238 million for this program, fully funding it. The money goes directly to enhancing public safety services.

• Housing: To implement Proposition 1C, the housing bond measure passed by the voters in 2006, the Governor�s budget includes $654 million in Proposition 1C funds for California�s housing needs.

Staff will continue to monitor the State budget as it is revised and ultimately adopted.

FORECAST CONCLUSION:

The City�s General Fund forecast has improved over the past several years. Strong revenue growth in addition to discretionary budget reductions over the past four years have helped improve the balance between recurring revenues and recurring expenditures.  The following chart illustrates the current close relationship between revenue and expenditures for the foreseeable future.

Due to the combination of the overall economic climate and the City�s expected spending, the projected recurring surplus is expected to be roughly $483,000 at the end of FY 2006-07.  The budget gap in year 5 (FY 2010-11) is projected to be $2.1 million.  It is important to note that the forecast does not factor in the potential TOT rate increase, which would enhance revenue by over $1 million per year.

As mentioned earlier, over the next five years, revenues are expected to increase an average of 4.30 percent annually, and costs increasing an average of 4.84 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.

FISCAL IMPACT STATEMENT:

If approved, the requested mid-year adjustments for the General Fund will total $333,253 (net of revenue it is $255,887) in addition to a $5 million OPEB prepayment to CalPERS from the remaining General Fund POB Reserve.  There will also be an impact to the Non-General Funds of $1,767,706 (net of revenue it is $1,666,706).  As a result, mid year appropriation requests total $7,130,958.85.

RECOMMENDATION:

It is recommended that the City Council approve the proposed resolution requesting mid-year adjustments to the Fiscal Year 2006-07 Budget.

Attachments:

            Attachment A (Matrix)

            Attachment B (Forecast)

            Attachment C (List of Requested Mid-Year Appropriations and Revenue Adjustments)

            Attachment D (Draft Revised OPEB Actuarial Analysis Dated February 1, 2007)

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