PURPOSE:

The purpose of this report is to provide the City Council with a review of the impact of the Fiscal Year (FY) 2003-04 State budget and the City�s General Fund financial status as of September 30, 2003.

REVIEW AND IMPACT OF THE STATE BUDGET CRISIS:

On August 2, 2003, outgoing Governor Davis signed the FY 2003-04 State budget after many months of a budget stalemate.  The troubling news is that the budget has a structural imbalance of $8 billion and the State�s credit rating is at an all time low just above junk bond status.  Politics continues to drive a dysfunctional budget process with no meaningful structural changes in sight.  With the recent election of Arnold Schwarzenegger as Governor of California, one can suspect changes in one form or another to be made.  However, thus far, the State continues to balance its budget problems on the back of local government.  As a result, the following is a summary of the impact of the FY 2003-04 State budget on the City:

General Fund Impacts:

1.         Vehicle License Fee (VLF) Revenues � The State Budget includes the VLF fee increasing from the current effective rate of .65 percent to 2 percent beginning October 1, 2003.  There will be no �backfill� payment from the State during the roughly 90-day period between when the General Fund backfill ended and the VLF rate will increase, so Burbank will only receive revenues based on the 0.65 percent VLF rate during this time.  The net loss to Burbank will be approximately $1.2 million.  However, the budget calls for these revenues to be repaid, without interest, by the state by August 2006.  Due to the uncertainty of repayment, the receipt of these funds has not been included in the Five-Year Financial Forecast. In addition, the new Governor has vowed to repeal the VLF increase which would, ultimately, translate into an annual revenue loss of $4 million for the City.

 2.        Sales and Property Tax Revenues (Flip Flop/Triple Flip)� Beginning in 2004-05, the budget package temporarily redirects one-half cent of the local Sales Tax to the State to pay deficit retirement bonds.  In exchange, it will fully offset local government revenue losses by redirecting a commensurate amount of Property Taxes from the Educational Revenue Augmentation Fund (ERAF).

 3.                Local Government Mandates - The budget package repeals 6 mandates and suspends local government requirements to implement 37 other mandates in FY 2003-04. The budget package defers (to an unspecified date) state funding to reimburse local agencies for: (1) implementing 40 active mandates in FY 2003-04 (about $200 million) and (2) unpaid prior-year mandate claims (about $700 million).  The City did not budget reimbursement payments for FY 2003-04. 

4.                  Public Library Foundation (PLF) � PLF was budgeted at 50% of the FY 2002-03 amount.  Our adopted revenue estimate of $92,575 has been reduced to $46,288. 

5.                  Peace Officers Standards and Training (POST) Training Reimbursement � The State budget includes reinstatement of $22.5 million to the POST budget.  This translates to an incremental increase to Burbank of $35,000, since we had not included this revenue item for FY 2003-04.

Redevelopment Agency Impact:

The Budget requires a one-time transfer to ERAF of $135 million from Redevelopment Agencies.  We estimate that the one-time ERAF payment for Burbank will be $1,343,094.

GENERAL FUND�S FINANCIAL STATUS:

The City has closed FY 2002-03 and has recently closed the first quarter of FY 2003-04.

            Available Balance as of June 30, 2003                                                                    $3,797,464

            Less:

                  Anticipated 2% Budget Savings Factor                                                               2,167,000

                  Estimated Available Balance                                                                                    57,234

            Budget Stabilization Reserve                                                                                   $1,573,230

            Anticipated 2% Savings Factor                                                                               $2,167,000

            Less:

                  Working Capital Reserve Increase for FY 2002-03*                                             543,000

                  Estimated Working Capital Reserve Increase for FY 2003-04                            280,000

                  Estimated Emergency Reserve Increase for FY 2003-04                                       93,000

                  Compensated Absences                                                                                           600,000

                  Magnolia Park Streetscape Improvements*                                                            125,000

                  Restructuring costs related to SERPS*                                                                    500,000

            Remaining Available Balance, June 30, 2003                                                               $26,000

            *  Included within the proposed budget resolution.

 FY 2003-04 Recurring Perspective � General Fund Reserves

For the first quarter of the fiscal year, the General Fund received $16,980,756 in revenue, which represents approximately 15% of the original estimated revenues.  To put this figure in perspective, the City also received 15% within the first quarter of last year (FY2002-03).  Table 1 below provides a summary of the following: recurring revenues received for last fiscal year, FY 2003-04 original revenue estimates, revised FY 2003-04 revenue estimates, FY 2003-04 first quarter revenues (actuals), 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 2003-04 has been adjusted by $901,116.  The City�s sales tax estimate assumes a 2.5% growth rate offset by the potential loss of sales tax of 0.5% related to e-commerce.

2.      Property Taxes � The City�s Property Tax revised revenue estimate reflects an increase in property tax supplementals in FY 2002-03 and an increase in the City�s FY 2003-04 Assessed Valuations.

3.      Utility Users Tax � There is no change in this revenue category from the original estimate.

4.      Service Charges (Intra City) - There is no change in this revenue category from the original estimate.

5.      Services Charges � The $36,036 increase in this revenue category is primarily the result of receiving more Emergency Medical Services billing fees than expected for FY 2002-03.

6.      BWP In-Lieu � Re-estimating revenues based on FY 2002-03 actual results has increased this revenue category by $63,829.

7.      Motor Vehicle In-Lieu � The $1,221,000 decrease over the original revenue estimate is the result of the State�s adopted budget.  The State reneged on its promise to hold cities harmless with VLF backfill payments.

8.      Interest / Use of Money � The $610,000 decrease over the original estimate relates to continued changes in interest rates. The FY 2003-04 revised revenue estimate is based on FY 2002-03 results combined with the loss of interest revenues related to the remarketing of the Golden State $25 million subordinated debt.

9.      Parking/Traffic/Other Fines - There is no change in this revenue category from the original estimate.

10.  Transient Occupancy Tax � The revenue estimate was increased by $20,000 to reflect the FY 2002-03 actual receipts combined with the estimated impact of receiving a full years� worth of TOT related to one new hotel property.

11.  Building Permits/License Fees � This category decreased by $32,600 to more accurately reflect the actual amounts collected for FY 2002-03.

12.  Transient Parking Tax � Because of the continued Airport parking competition, the revenue estimate was significantly lower this fiscal year. However, as a result of FY 2002-03 amounts received, the estimate was increased by $50,000.

13.  Business Taxes � This category increased by $28,500 to reflect FY 2002-03 actual results.

14.  Franchises � The small decline in this revenue estimate 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.  Contribution to other Funds � The $36,053 decrease reflects a recalculation of the West Olive AB1290 payment to the City. The decreased FY 2002-03 payment, combined with a negative Assessed Valuation growth in the West Olive Project Area, led to this reduction.

16.  Intergovernmental Revenues � The $11,286 decrease in this revenue category is the result of the State�s budget. The PLF revenue was reduced by $46,288 which was offset by the inclusion of POST revenues of $35,000.

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, 2003. For comparison, on September 30, 2002, General Fund expenditures represented 24 percent of recurring appropriations for FY 2002-03.

Table 2 below highlights the recurring component of the General Fund budget as of September 30, 2003, by department or category.

Revised FY 2003-04 Budget

Based on the re-estimation of anticipated revenues, the adopted FY 2003-04 appropriations and the non-recurring appropriations adjustments previously mentioned, the following is a recap of the FY 2003-04 budget (more detail is contained within the FY 2003-04 Budget Matrix in Attachment A):

            Recurring Revenues (net of UUT & In Lieu set aside)                                       $108,248,526

           Plus � Use of Set-aside UUT & In-lieu                                                                       1,763,629

           Total Recurring Revenues                                                                                       110,012,155

           Less:

                  Recurring Appropriations                                                                               (109,796,800 )

                  Potential Impact of MOUs                                                                                    (2,087,687)

           Plus savings from Frozen Positions (Schedules A & B)                                           1,872,332

           Recurring Balance                                                                                                     $                 0

           Undesignated Fund Balance, July 1, 2003                                                              $3,797,464

           Plus:

                  Non-Recurring BAF Revenues                                                                                121,970

                  Use of Set-aside UUT & In-lieu                                                                                147,447

           Total Available Non-Recurring Sources                                                                      4,066,881

           Less:

                  Budgeted One-time Items (Schedule C)                                                                  319,600

                  Increase to Working Capital Reserves � FY 2002-03                                            543,000

                  Increase to Working Capital Reserves � FY 2003-04                                            280,000

                  Increase to Emergency Reserves � FY 2003-04                                                      93,000

                  Compensated Absences                                                                                           600,000

                  Restructuring Costs Related to SERPS                                                                   500,000

                  Magnolia Park                                                                                                             125,000

                  Amount Set-aside in Budget Stabilization Fund                                                   1,573,230

           Total Non-Recurring Uses                                                                                              4,033,830

           Estimated Available Fund Balance, June 30, 2004                                                    $    33,051

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 2003-04 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 events such as a September 11^th tragedy.  Projected revenues are updated throughout the budget development process as new information becomes available.  The following chart provides a recap of actual recurring revenues compared to the original budget estimate and revised revenue estimates.

The average percentage variation for the last five fiscal years for actual revenues received compared to the adopted budget estimate is 1.53% and the variance from the revised budget estimate is 1.12%.  Both percentage variances would be 0.87%, if we excluded FY 2000-01.  FY 2000-01 was the end of a period of economic expansion and the City experienced unanticipated increases in property, sales, franchise, transient parking, and transient occupancy tax revenues.  All recurring tax revenues for FY 2000-01 increased by 5.6%.

Recurring revenues have been re-estimated taking into account the impacts of the State budget, final  FY 2002-03 results and subsequent information such as FY 2003-04 assessed valuations.  Significant revenue assumptions are as follows:

Sales Tax � The City�s current sales tax base continues to be at risk from the trend to purchase electronically.  To provide protection to the City�s sales tax revenue projections, we have conservatively estimated future growth at 2.0%, or 0.5% less than the assumed CPI growth of 2.5%.   Beginning in FY 2004-05, 50% 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.  The Forecast assumes that the City will be made whole by the State related to the 50% sales tax shift.

Property Tax � The City�s assessed valuation continues to provide solid growth.  Assessed valuation for FY 2003-04 grew by 5.4%.  Because of the continued escalation in real estate prices within the City, the Forecast assumes a 5% growth rate for FY 2004-05 and 4% thereafter.  The current changes in mortgage rates could slow down the growth in assessed value due to property turnover which is the reason for the more conservative 4% growth rate for future fiscal years.

Utility Users and In-Lieu Taxes � Forecasted utility users tax (UUT) assumes a normal growth rate for all sectors except for electricity.   UUT related to electric users were forecasted based on projected demand growth offset by expected rate reductions of 6% per year beginning in FY 2004-05.  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 and Transient Parking taxes are expected to grow by 2.5%.  Transient Parking tax revenues are at depressed levels due to the price wars surrounding the Airport.  Should the price wars end, an additional $400,000 in Transient Parking taxes could be collected.  Additionally, a rate increase from 10% to 12% would generate an additional $330,000 annually.

Interest Revenues � The forecast assumes that investment yields for FY 2004-05 will increase by 12 basis points compared to FY 2003-04.  This increase was offset by the loss of interest related to the Golden State $25 million subordinated debt.  Interest rates for FY 2005-06 are expected to rise by 13 basis points and by 25 basis points in FY 2006-07 and FY 2007-08.  The assumed investment pool earnings for FY 2007-08 is 4.25%.

Contributions from Other Funds � Revenues in this category in FY 2003-04 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 loan repayments from Development Impact Fees amounting to $75,000 in FY 2003-04 and $95,000 each year thereafter.

Use of BWP Competitiveness Revenues � Because of the deficit recurring balance, $1,763,629 of the amount set-aside from the last four electric rate increases was used to balance recurring revenues and expenditures.

Projected Expenditures

The recurring expenditure costs assume the following rates:

Memorandum of Understanding Projected Costs:

The projected growth in employee�s salary and benefits is 2.5% for FY 2004-05 through FY 2007-08.  Due to the budget challenges facing the City during the next several years, the City acknowledges that it will be in a difficult position to continue to pay market based salaries and benefits.

Materials, Services & Supplies (MS&S):

MS&S appropriations are assumed to increase at 2.5% per year with the exception of utilities which reflects the anticipated reduction in electric rates.  MS&S appropriations include the Internal Service Funds rental rates (except for Worker�s Compensation).  This assumption may be difficult to sustain with the ever increasing self-insurance costs related to general liability claims.

Public Employees Retirement System (PERS) Costs:

Like many agencies, for many years, the City was super funded 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 in the equities market and the economy in general as well as enhanced retirement packages for Police and Fire, the City, along with many other agencies, has lost its excess funded status for the Police and Fire PERS.  We are expected to also lose our super funded status for miscellaneous employees in FY 2004-05, thus causing increased employer PERS rates.  Projected PERS rates will be increasing annually.  A comparison of the current PERS rates versus the expected rate in FY 2007-08 follows:

                                                                          Budgeted                                 Projected

                                                                          2003-04                                  2007-08

Police 3% @ 50                                               16.255%                                  31.522%

Fire 3%@ 55                                                    16.891%                                  31.033%

Miscellaneous 2% @ 55                                      1.35%                                    9.262%

Our forecasted PERS rates improved from prior Forecasts as PERS earned 3.69% on its investments for the FY 2002-03.  The forecasted PERS rates for FY 2004-05 have been adjusted for the Police and Miscellaneous employees to the actual rate as communicated by PERS.  The percentages for FY 2005-06 represent PERS estimated rates.  An independent actuarial report is being prepared and once complete, the forecasted PERS rates will be adjusted accordingly.  Based on the current projected rate projections, the forecasted PERS cost for FY 2007-08 is expected to increase over FY 2003-04 as follows.

                                                                                                  Budgetary Impact

Police 3% @ 50                                                                            $2,355,881

Fire 3%@ 55                                                                                   1,818,882

Miscellaneous 2% @ 55                                                                 2,880,046

Forecasted Additional PERS Costs                                            $7,054,809

The following is a chart of anticipated PERS rates:

It should be noted that the FY 2004-05 PERS rates for the all the groups were slightly higher than previously projected.

The BPOA�s current MOU requires them to pay for PERS costs above an employer rate of 7.6%.  Beginning on July 1, 2003, the BPOA began deducting 3.5% from their paychecks to fund their own obligation.  The Forecast assumes that the 3.5% deduction continues beyond FY 2003-04.  FY 2004-05 assumes the use of prior collected amounts to offset the anticipated increase in retirement costs.

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).

Central Library Costs:

The estimated staffing levels for the new Central Library is estimated to add $662,000 to the Library�s annual budget beginning in FY 2007-08.  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.

Use of PERS Ramp-up Savings:

The FY 2003-04 adopted Budget ramped up PERS costs by $1,993,000 to prepare for future PERS rate increases.  The savings were set-aside to help fund future PERS costs.  The Forecast assumes that the FY 2003-04 savings will be used in FY 2005-06.

Savings from Frozen Positions:

The FY 2003-04 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.

Estimated Budget Savings:

Historically, the General Fund has generated budget savings of no less than 2% of total appropriations.  As budgets continue to get tighter due to budget reductions, this savings amount will be more difficult to achieve.  The Forecast continues to assume a 2% annual budget savings factor.  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;

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

3.      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 2003-04, the $122,000 relates to the Burbank Athletic Federation funding capital items within the Park, Recreation and Community Services budget.

One-Time Appropriations:

One-time appropriations are budgeted items which are not recurring.  The $125,000 included for FY 2004-05 through FY2006-07 is for the Magnolia Park streetscape project.

Amount Funded by BWP UUT & In-Lieu:

The FY 2003-04 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% of the annual expenditures for working capital purposes and 5% 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 million.  The estimated annual payoffs are not included within the operating budget.  The proposed $600,000 is treated as a revolving fund, whereby, it is replenished annually from available non-recurring resources.  The $600,000 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, 2003, over $1.5 million of the existing Airport Issues appropriation still remain.  Based on the estimated remaining appropriation, we have not included any additional appropriation for FY 2003-04 through FY 2005-06.  The Forecast includes $250,000 beginning in FY 2006-07 and each fiscal year thereafter for Airport issues.

Budget Stabilization Fund:

A Budget Stabilization Fund of $1,573,230 has been established using excess budget savings from the 2002-03 fiscal year.  This fund is to be used to stabilize the next four budget years.  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 is preparing a Budget Balancing Strategic Plan which will program the use of these funds.

The following chart compares forecasted recurring revenues to recurring expenditures.

Forecast Conclusion:

The Forecast predicts difficult budget years over the next several fiscal years.  The State continues to have an $8 billion structural budget deficit with no discernable plans to resolve it.  The Forecast does not anticipate future State actions taking away additional local government revenues; however, past history tells us otherwise.  Burbank�s situation is no different than any other city in California and in many cases throughout the nation.  Obviously, our finances are struggling and all levels of government feel their share of the pain.  Staff is in the process of preparing plans to assist in the balancing of future fiscal year budgets.

FISCAL IMPACT STATEMENT:

Based on the prior year results and State budget actions, certain revenue adjustments are needed along with appropriations to fund the City�s working capital reserve for the FY 2002-03, the Magnolia Park project, fund potential restructuring costs related to SERPS, and to fund a budget stabilization account.  In addition, the Redevelopment Agency is in need to appropriate $1,343,094 to pay the ERAF payment as a result of the State budget.

RECOMMENDATION:

It is recommended that the City Council and Redevelopment Agency Board approve the proposed resolutions requesting adjustments to the Fiscal Year 2003-04 Budget.

Attachments

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