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, 2005, and to request Council approval of mid-year adjustments to the Fiscal Year (FY) 2005-06 approved Budget.  The report will also provide relevant detail as it pertains to the development of the City�s FY 2006-07 Budget. 

Moreover, this report is intended to provide the City Council with an as accurate as possible picture of how all City Funds are operating six months into the fiscal year based on the original revenue and expenditure estimates.  Although it is the intent of this report to review the status of all Funds, the focus is primarily on the General Fund.  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 legislative 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 ascertain 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 November and December 2005, it was determined that although most departments are able to absorb the majority of unanticipated costs through budgetary savings in other areas, there are still some expenditures that will cause several departments to be in jeopardy of overspending their budgets. 

In addition to the mid-year budget review identifying whether any unanticipated costs may have occurred, it also provides the opportunity to look at where the City�s overall expenditures and revenues fall based on the current year projections.  This review of the City�s overall financial status is particularly important since effective FY 2006-07, the State will no longer divert the City�s and Redevelopment Agency�s Educational Revenue Augmentation Fund (ERAF) revenue based on the agreement reached between the State and local government.  Also, due to the passage of Proposition 1A, the State cannot take back any sales tax, property tax, or vehicle license fees from local governments, unless a true fiscal emergency exists.

GENERAL FUND�S FINANCIAL STATUS:

The City recently closed the second quarter of FY 2005-06.  Based on the results of the fiscal year-to-date, the following is a revised recap of the General Fund for FY 2005-06, including the recommended mid-year adjustments.

 RECURRING

Recurring Revenues                                                                                 $123,282,906

Less � Utility Users Tax (UUT) In Lieu Set Aside Revenue                       (2,059,000)

Net Estimated Recurring Revenues                                                        $121,223,906

Less:

Recurring Appropriations                                                                          (123,191,941 )

Potential Impact of Anticipated MOUs (BMA, Unrepresented, Execs)         (936,811)

Impact of Mid-Year Appropriations � Recurring                                                (10,000)

Plus:

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

Recurring Balance                                                                                           $  (710,866)

Use of PERS Stabilization Fund                                                                         710,866

RECURRING BALANCE                                                                                    .          -0-

NON-RECURRING

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

Plus:  Use of UUT In Lieu Set Aside                                                                     300,000

Total Available Non-Recurring Sources                                               7,577,482

Less:

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

Increase in emergency reserves                                                                         (374,000)

Compensated absences                                                                                     (800,000)

Budgeted One-time Items (Attachment A/Schedule B)                                    (915,353)

Additional PERS enhanced retirement costs                                                    (877,000)

Anticipated Retiree Medical Trust (Year 4)                                                        (407,610)

Impact of Mid-Year Appropriations � Non-Recurring                                     (1,252,926)

GRAND TOTAL

Total Non-Recurring Uses                                                                                  (5,767,889)

Plus Available Recurring Balance (from above)                                                     -0-

Plus Available Non-Recurring Sources (from above)                                         7,577,482

Estimated Available Fund Balance, June 30, 2006                $1,809,593

 In addition to the undesignated projected fund balance for June 30, 2006, the following is a breakdown of the estimated available balances for non-recurring sources. 

• PERS Stabilization Fund ($1.993 million less $710,866)          $   1,282,000

• 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 12/31/05)                         1,283,117

FY 2005-06 Recurring Perspective � General Fund Revenues

For the first six months of the fiscal year, the General Fund received $49,250,650 in recurring revenue (net of the UUT In-Lieu Set-Aside), which represents 40.8 percent of the adopted estimated revenues.  For perspective, last year�s six-month report showed the City receiving 38.5 percent of its estimated revenues, or $44,439,005.  Overall, the City�s revised recurring revenue estimates for FY 2005-06 have been increased by a net $558,028 over original estimates as a result of increases in the following categories: Sales Tax, Service Charges, Interest/Use of Money, Parking/Traffic/Other Fines, and Building Permits/License Fees.  Revenue reductions were made in Franchise Fees and Intergovernmental Revenue. 

It is also worth mentioning that the current Sales Tax information is for receipts collected for the first four months of the fiscal year. Due to the way in which Sales Tax dollars are reported and distributed from the State to local governments, there is typically a two to three month lag.  Thus, it is possible that the City�s Sales Tax revenues could further grow throughout the remainder of this fiscal year because the impact of the holiday shopping season has not yet been fully realized. 

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] 

(Note: the numbers indicated below are directly associated with the categories shown in Table 1 above).

The following are brief explanations supporting the revenue adjustments mentioned above:  

1.      Sales Tax � Sales Tax revenues are the City�s largest revenue source and are tracking better than expected, therefore, we have increased our revenue estimate by $400,283.  The account entitled �ERAF Sales Tax Shift� (Item No. 8) represents the State�s �triple flip� payment derived from sales tax revenue effective FY 2004-05. 

4.   Service Charges (Intra City) � The $39,617 is comprised mostly of increases in plan check volume ($145,000) and the Castaways Restaurant ($183,000) offset by a decrease in emergency medical transportation services ($381,500). 

9.      Interest/Use of Money � The increase of $22,250 in this category is due to higher interest rates. 

10.  Parking/Traffic/Other Fines � The increase of $50,000 in this category represents increased volume. 

12.  Building Permits/License Fees � This category increased by $262,705 due to the continued increased building activity. 

15. Franchises � The decrease of $214,428 in this revenue estimate reflects that cable and Southern California Gas Company franchise fees are not meeting expectations thus far. 

17.  Intergovernmental Revenues � The minor $2,400 reduction in this category is due to off-highway motor fees not coming as expected. 

City�s Largest Revenue Sources

The following chart highlights the top three General Fund revenue categories, Sales Tax, Property Tax and Utility Users Tax (UUT) and compares FY 2004-05 adopted revenue estimate to the actual, and the revised projected estimates for FY 2005-06:

*Note:  Sales Tax includes the segregated monies which are part of the ERAF Sales Tax Shift under the �triple flip.�  Also, $5.6 million which was previously categorized under Motor Vehicle In-Lieu Fees (VLF) in FY 2004-05 was reclassified to Property Tax in FY 2005-06 to reflect the State�s VLF property tax shift.

 The next chart focuses attention on the Transient Occupancy Tax and the Transient Parking Tax by comparing revenues for the same time periods � adopted for FY 2004-05; the actual for FY 2004-05; and the projected estimate for FY 2005-06:

General Fund Appropriations Perspective:

With the exception of the requested mid-year adjustments detailed in this report, 49.1 percent of the recurring appropriations have been expended as of December 31, 2005 � exactly the same percent for the same period last year.  This is particularly notable since departments reduced their discretionary budgets by 1 percent from last year. 

Typically, the majority of the requested mid-year adjustments are either related to unexpectedly higher costs, or capital outlay resulting from various projects that are in progress.  This year�s general fund mid-year requests total $1.3 million.  However, over $1 million of this was due to the fire and subsequent flood damage (�Harvard Incident�) (with only $10,000 of the remaining $300,000 being recurring), compared to $5,355,303 requested last year (recurring was $124,970).  One reason this year�s total is much less than last year�s is due to last year�s requests of $3 million requested for the first year of the Central Library ramp-up and the $1,000,000 for infrastructure replacement).

The following table highlights the recurring component of the General Fund budget as of December 31, 2005, by department or category. 

Table 2 � General Fund Recurring Appropriations

 Non-General Fund Mid-Year Status:

In addition to the General Fund, below is a brief summary of all the Non-General Funds. 

Special Revenue Funds:

Special Revenue Funds refer to twelve governmental funds that receive dedicated revenues that can only be spent on dedicated projects, such as grant revenue for Community Development Block Grant or Housing. 

A review of the twelve special revenue funds show that revenue and expenditures are tracking as follows:  Realized revenue:  62 percent; Realized expenditures:  47 percent. 

Internal Service Funds:

Internal Service Funds are used to generate resources to pay for a variety of services that could, theoretically, be provided in the private sector.  The City also uses internal service funds to set money aside in a prudent way to provide for replacement of capital assets in the future.  These funds receive revenues by charging other funds and departments for services or from appropriated transfers. 

Revenues and expenses in the Internal Service Funds are tracking as expected with revenues tracking about 52 percent of projected, and expenses tracking at 35 percent.  The Funds continue to be monitored for changes that may impact future budgets.  Cashflows are currently in the process of being developed for FY 2006-07 to determine next year�s rental rates. 

Redevelopment Agency:

The Redevelopment Agency had four capital project funds for each of the project areas, four debt service funds for the project areas and the 20 percent housing set-aside obligation.  However, starting in FY 2005-06, three of the four capital project area funds (Golden State, City Centre, and South San Fernando) were merged into one project area, leaving only West Olive as separate.  However, the debt service funds remain separate for each of the areas.  Revenue comes primarily from property taxes and interest.  Revenue in the housing set-aside funds is derived from contributions from other funds. Expenditures in the capital project areas vary depending on project area activity. Debt service expenditures are more predictable as the primary expenses for principal and interest have specific payment dates as per bond covenants.  Revenues and expenditures are as anticipated. 

Housing Authority:

The Housing Authority revenues and expenditures are pursuant to federal government regulations and are performing as anticipated as of December 2005. 

Parking Authority Funds:

The Parking Authority is responsible for the debt service and maintenance of City-owned parking facilities (structures and lots), as well as construction of new facilities.  The Parking Authority has two funds, a capital projects fund and a debt service fund, and revenues and expenditures are on track for this fiscal year. 

Enterprise Funds:

Enterprise Funds are established to account for City operations that are financed and operated in a manner similar to private business enterprises and include the Electric and Water Funds (under Burbank Water and Power (BWP)), Water Reclamation and Sewer Fund, Golf Fund, and the Refuse Collection and Disposal Fund, all of which are performing as anticipated for this time of year. 

Staff is currently in the process of reviewing the following funds� cash flows:  Water Reclamation & Sewer Fund, Golf Fund and Refuse Fund.  Currently, the Water Reclamation & Sewer Fund�s adopted budget reflects an overall sewer rate increase of 7% (proposed three-year smooth rate, and then 4.5% for the fourth year), while the Refuse Fund includes a refuse rate increase of 3% (year one of a proposed five-year smooth rate).  Any necessary changes to rates will be proposed during the upcoming budget process. 

As of December 31, 2005, the Electric Fund�s revenues were $74,367,000 compared to a budget of $74,357,000.  Operating expenses (net of wholesale) were $66,946,000 compared to budget of $61,672,000. The higher operating expenses were primarily due to higher cost of replacement power due to the commercial operation date delay and outages at Magnolia Power Project during the first half of this fiscal year.  The Water Fund�s potable water revenues were $8,802,000, compared to the budget of $9,532,000.  Water Fund operating expenses of $7,916,000 were lower compared to budget of $8,482,000. 

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. 

GENERAL FUND (Total requested:  $1,262,926) (All are non-recurring except where noted) 

Fire and Flood Costs (�Harvard Fire Incident�) Total Amount Requested:  $1,137,613:

�     Fire Department: Overtime Non-Safety - An additional $4,082 is requested by the Fire Department to cover fire personnel staffing at the Emergency Operations Center (EOC).

�        Fire Department: Overtime-Safety - An additional $63,863 is requested to cover overtime funds expended to cover emergency fire personnel response.

�        Non-Departmental:  The amount of $318,883 is requested for equipment rentals, fuel, food and supplies for the fire ground and base camp to support the firefighting efforts.

�        Non-Departmental:  The amount of $53,074 is requested for food and supplies for the EOC and McCambridge shelter.

�        Non-Departmental:  The amount of $497,711 is requested for Debris Basin Cleaning:  The fires in September and October 2005 were followed by an unusually heavy rainstorm which caused debris flows in the recently burned areas, and filled four City-owned debris basins in the hillside area.  Emergency work was performed to clean out these debris basins to prevent additional downstream flooding.

�        Park, Recreation and Community Services

o       Private Contractual Services - The Park, Recreation and Community Services Department is requesting an additional $200,000 to pay the following expenses due to the fire and floods in the Wildwood Canyon:

�         K-Rail - rental and/or purchase of 10 foot sections of K-Rail $19,000

�         Vital Link redesign, repairs to trails $30,000

�         Irrigation repairs $13,000

�         Structural engineer to check debris wall & Wildwood dams $20,000

�         Hydrologist to check water flow at Wildwood & Stough $24,000

�         Geologist to analyze slope stability, check dams and stream restoration at Wildwood and Stough $9,000

�         Debris cleanup, initial repairs to dams, debris wall and restore stream $40,000

�         Immediate road repairs $20,000

�         Landscape and grading repairs (including new plants, trees and picnic tables) $25,000 

City Clerk

�        Legal Advertising and Printing - An additional $15,000 is requested by the City Clerk�s office for the increase in volume for publishing legal documents, resolutions, ordinances, bid schedules, and other items. 

Library Services

�        Private Contractual Services (revenue offset) - The Library Services Department is requesting an increase of $2,580 representing grant money received in October 2005.  This amount was beyond what was projected from the State (Act Reimbursement).

�        Literacy Services (revenue offset) - The Library Services Department is requesting an increase of $1,594 in their Literacy Services account as a result of receiving more than expected in their Literacy Grant revenue account from the State.

Management Services

�        Special Departmental Supplies - Management Services is requesting an additional $2,700 to cover an unbudgeted computer router that became unsupported by the Department of Justice (DOJ) during the first 6 months of the fiscal year.  Requested funding covers the cost of a new, secure and direct router that is supported by DOJ in connection with the LiveScan operations.

�        Office Supplies, Postage (recurring) - Management Services is requesting an additional $5,000 to cover the postage increase of $.02 which became effective January 8, 2006.  Since the increase was unknown at the time of budgeting, it is requested that funding be provided to cover the increase for citywide postage. 

Park, Recreation and Community Services

�        Special Recreational Contract Service [Olive] (revenue offset) - The Park, Recreation and Community Services Department is requesting an additional $40,000 to pay contract service instructors; appropriation is offset by revenue from increase in class registration fees.

�          Private Contractual Services - The Park, Recreation and Community Services Department is requesting an additional $3,057 to pay for portable toilets for the Habitat for Humanity Event that occurred this year.

�          Burbank on Parade (recurring) �The Burbank on Parade Board (BOP) has asked the City to pay for the insurance for this event which will cover spectators, BOP Board, and the vendors/exhibitors. The cost is expected to be $5,000. 

Police Department

�        Donations � Shelter (revenue offset) - The Police Department is requesting to appropriate the current balance of $31,936 (as of mid-year) from their animal shelter donation revenue account.  This money is comprised of various donations that are received when citizens renew their animal registration so individual transfers are not completed.  This will be used for animal shelter operations. 

Public Works

�        Private Contractual Services - The Public Works Department is requesting $7,700 to cover invoices from Los Angeles County for weed spraying that were received after the Purchase Order Mass Cancel and Carryover process from last year.  Because the invoices were paid from the FY 2005-06 budget instead of FY 2004-05, FY 2005-06�s budget will be short.

�        Private Contractual Services - Public Works is also requesting $10,746 for the maintenance of six storm water pump stations to comply with the National Pollutant Discharge Elimination System Permit for the cleaning of catch basins (the account was used in an emergency situation to clean up debris caused by heavy rains).  Therefore, it is necessary to replenish the account to pay for upcoming routine preventative maintenance and compliance expenditures. 

NON-GENERAL FUND (Total Requested:  $11,769,578) 

Proposition A� Transportation Fund (Fund 104) Total Requested:  $65,000 � An additional $51,000 (CNG Bus Expansion Account) is requested for painting, fare boxes and bus bike racks to complete Phase III of bus service.  Also, $14,000 (Special Departmental Supplies) is requested for further marketing of new bus service expansion.  About 35,000 flyers will be distributed throughout the community detailing the services of all five routes. 

Gas Tax (Fund 125) (revenue offset) Total Requested: $446,067 � The State restored funding to local agencies for street repair, therefore, a $446,067 appropriation is requested to match the State�s revenue commitment (Street Improvements). 

Public Improvements/Developmental Impact Fees (Fund 127) (revenue offset) Total Requested:  $34,600 - Community Development (CDD) is requesting $9,600 for capital outlay to purchase six computers ($1,600 each) for the Inspection staff.  Currently, they use cascaded computers that are no longer supported by the Information Technology Department (IT).  CDD is also requesting $25,000 (Special Departmental Supplies) so the Building Division may continue the conversion of permit records and construction documents to digital formats and transfer them into the document imaging system.  These requests are offset by the monies collected as part of the administration fee for Developmental Impact Fees.  The balance as of December 31, 2005 is $180,771. 

Youth Endowment Services (YES) (Fund 130) Total Requested:  $291,607  � The Park, Recreation and Community Services Department is requesting $291,607 from the City Grants account to fund previously awarded YES grants that were inadvertently excluded from the prior year's carryover list. 

Refuse Collection & Disposal Fund (Fund 498) Total Requested: $60,000 - An additional $60,000 is requested for temporary refuse drivers for the remainder of the year (Private Contractual Services). 

Vehicle Replacement Fund (Fund 532) Total Requested:  $44,851 - The Police Department has requested $1,851 to cover the remaining shortfall for a replacement police motorcycle (total cost is $19,000).  Also, the Public Works Department has requested $43,000 (Private Contractual Services) to pay for temporary personnel, consultants for grant writing (100% track record), engineering design, fleet regulation research, and design of www.cleanburbank.com.  These funds were to be carried over from FY 2004-05 but were inadvertently left off the document sent to Finance. 

Office Equipment Replacement Fund (Fund 533) Total Requested:  $194,066 � The amount of $34,643 (Equipment-clearing) has been requested by the City Manager�s Office to replace a character generating system used by the Public Information Office in the Council Chambers control room to create overlay graphics and wording for programs including the Council Meetings, Burbank Council News, etc.  The current system has reached the end of its useful life and is due for replacement.  Also, the Fire Department has requested $159,423 to replace defibrillators on all Fire Department apparatus to retain trade-in value of old defibrillators. 

Municipal Building Replacement Fund (Fund 534) Total Requested:  $855,000 � The amount of $55,000 is requested for computer room security enhancements.  Items include securing windows, multiple doors, keypad access and cage for data center, and surveillance cameras.  Also, per the Development Oversight Committee, $350,000 is requested to purchase and install a new, permanent stand-by generator at City Hall.  The purpose of the generator is to supply power to City Hall for operational needs, including the elevator and all Information Technology operations, with the exception of air conditioning and reprographic machines, in the event of a power outage or other emergency.  An additional $450,000 is requested for the Public Works Equipment Shop Modification project (a permanent safety modification mandated by the Fire Department to work safely on alternative fuel vehicles such as CNG, hydrogen, etc.) which was originally budgeted at $927,000.  However, due to the tremendous increases in construction costs that have been seen on projects throughout the City, the project bid came in higher than originally estimated at $1,396,193 (the balance of approximately $19,000 will be absorbed by other accounts in the fund). 

Computer Equipment Replacement Fund (Fund 537) Total requested:  $90,000 � The amount of $90,000 is requested for the replacement of the Switch Infrastructure for all Enterprise Servers located in the Computer Room.  This project is urgent in order to correct several "single point of failure" issues on the City's network infrastructure. 

Magnolia Power Plant Operation (MPP) (Fund 483)(revenue offset) Total Requested:  $9,688,387 � The net amount of $9,688,387 is requested as additional appropriations which represent MPP operating expenses that are fully reimbursed from the MPP agreements with other cities, or will be directly paid by MPP.  Some of the notable accounts include Generation Labor, Maintenance Spare Parts, and Maintenance Labor. 

TOTAL MID-YEAR BUDGET ADJUSTMENTS BY FUND:

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

 DEVELOPMENT OF FISCAL YEAR 2006-07 BUDGET AND FIVE YEAR FINANCIAL FORECAST:

This section of the 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 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 2005-06 through FY 2009-10 will average 3.41 percent versus an average recurring expenditure growth of 4.25 percent.  The revenue growth includes the projected increase in Sales Tax^[1] (average of 2.9 percent excluding jet fuel which is explained below), Property Tax (5 percent), Transient Occupancy Tax (2.5 percent), Transient Parking Tax (2.7 percent) and Utility Users Tax (.2% for FY 2005-06 and no change thereafter). 

One important item to note is that effective January 2008 (FY 2007-08), commercial jet fuel sales tax will become allocated at wing tip, not where the contract is negotiated.  This will result in incremental sales tax revenue of approximately $500,000 annually to the City and is included in the forecast. 

The expenditure growth assumes the following costs: 

Memorandum of Understanding (MOU) Projected Costs:

The Burbank City Employees Association (BCEA), Police and Fire MOUs have been approved for FY 2005-06.  Staff is still awaiting finalization of the other groups.  MOUs are a primary reason for increased recurring costs to the City.  It remains a Financial Policy, though, for the city to strive to pay market-based competitive wages. 

Materials, Services & Supplies (MS&S):

MS&S appropriations are assumed to increase at 2.5 percent per year.  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 chart shows the projected PERS rates included in the Five-Year Financial Forecast 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, although the method will be different than in the past.  Starting with the FY 2006-07 budget, rather than �freezing� positions (which means they remain in the budget and are backed out manually), staff is going to actually eliminate the positions from the budget.  Naturally, staff will note what positions had been frozen so that should it become necessary to restore them, staff will have a record. 

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.  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.  Both of 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 December 2005 on the PerformArts grant principal is $1,632.  These one-time appropriations were funded by the use of the incremental UUT 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 December 31, 2005, $180,002 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. 

Infrastructure Reserve Fund:

Fiscal Year 2005-06 is the year one of five wherein $1 million per year out of excess budget savings, if available, would be used for any necessary infrastructure improvements. 

New Central Library Ramp-Up:

Similar to the Infrastructure Reserve Fund above, the forecast includes ramping up $1 million per year by using excess year-end budget savings, if available.  This is in addition to the $3 million non-recurring amount set aside in FY 2004-05 during the Mid-Year review funded from the UUT In-Lieu Set-Aside. 

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. 

FY 2006-2007 BUDGET DEVELOPMENT PARAMETERS:

It is important to note the City projects a recurring budget deficit position over the next several years due to the increase in our recurring costs, especially related to negotiated salaries and benefits.  As a result, the General Fund budget parameters for this year are once again strict. 

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. 

Frozen Positions:

From FY 2003-04 through FY 2005-06, departments were allowed to freeze positions instead of formally eliminating them from their budgets; these frozen positions were considered budgetary reductions.  As mentioned earlier, these positions were still budgeted in the personnel budget system, and then backed out manually and the dollars were put into salary holding accounts (departments were not allowed to use these funds).  However, starting in FY 2006-07, the positions will be officially removed from the personnel budget system entirely to more accurately reflect the reductions.  The annual savings of eliminated positions formerly frozen equates to an annual savings of approximately $2 million. 

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. 

Budget Reduction Scenarios:

For FY 2006-07, departments have been requested to present discretionary appropriation reductions of 1 percent.  In past years, revenue increases, either through fee increases or through volume, could be used towards a department�s reduction.  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.  It is the intent to use anticipated UUT In-Lieu Set Aside Funds to balance the FY 2006-07 recurring budget to cover any remaining shortfall. 

STATE BUDGET IMPACTS TO FY 2006-07:

The Governor released his FY 2006-07 proposed State budget on January 10, 2006 which now projects that the State will be able to fund much more than a current-law budget and still maintain fiscal balance in 2006-07.  Expenditures are estimated to be $98 billion (including $4 billion in increased spending) and revenue to be $99 billion.  The governor also proposed a $222 billion (over 20 years) infrastructure proposal covering transportation, flood protection and water supply, education and corrections.  The Legislative Analyst�s office feels that the budget should focus more on paying down debt before making expansive new commitments. 

As part of the State�s improving revenue outlook, the Governor has restored funding to many programs, including grants to local agencies.  FY 2006-07 is the first year after the passage of Proposition 1A year that the State can no longer take ERAF funds from both the City and the Redevelopment Agency, unless a State fiscal state of emergency is declared. 

FORECAST CONCLUSION:

While we are in the process of contemplating an upcoming difficult budget process, it is important to keep in mind that the City�s forecast for the next several fiscal years does get worse, primarily caused by projected negotiated salaries and benefits. 

Although staff plans to provide the Council with a more descriptive five-year forecast throughout this year�s budget process, the following chart will serve to highlight the difficult challenge the City will be facing over the next several years.  Clearly, the structural imbalance between recurring revenues and expenditures is a continued focus and will continue to be addressed.

Due to the combination of the overall economic climate and the City�s expected spending, the projected recurring deficit is expected to be just over $700,000 at the end of FY 2005-06 (balanced by the PERS Stabilization Fund).  The budget gap in year 5 (FY 2009-10) is projected to be $5.7 million. 

As mentioned earlier, over the next five years, revenues are expected to increase an average of 3.41 percent annually, and costs increasing an average of 4.25 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.  Some possible revenue enhancements include potential monies from a paid �prime/peak� parking system, an increase in the TOT (which will be brought back for Council consideration), along with no longer backing out the UUT In-Lieu Set Aside funds and keep them as part of recurring revenue. 

FISCAL IMPACT STATEMENT:

If approved, the requested mid-year adjustments for the General Fund will have a total impact of $1,262,926 (net of revenue it is $1,218,752).  Again, the majority of the amount requested ($1,137,613) was disaster-related.  There will also be an impact to the Non-General Funds of $11,769,578 (net of revenue it is $1,600,524).  The total fiscal impact Citywide is $13,032,504 (net of revenue it is $2,819,276). 

RECOMMENDATION:

It is recommended that the City Council approve the proposed resolution requesting mid-year adjustments to the Fiscal Year 2005-06 Budget. 

Attachments:

            Attachment A (Matrix)

            Attachment B (Forecast)

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