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FISCAL YEAR 2012-13 FOURTH QUARTER GENERAL FUND BUDGET UPDATE AND YEAR-END PROJECTION
RECOMMENDATION
It is recommended that the City Council accept this report, adopt a resolution amending the Fiscal Year 2012-13 Annual Budget to address a shortfall in funding for Debt Administration and amend the Adopted Budget Council Resolution 2013-06-25-1601-01, Section 7 to provide for the retention of $3.1 million of the Ending Fund Balance in the General Fund.
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Summary
The City's General Fund budget for Fiscal Year 2012-13 was balanced by making $26 million in reductions to creditors and retirees under the Pendency Plan adopted on June 26, 2012. All reductions included in this Plan/budget were effective through the entirety of the 2012-13 Fiscal Year.
Staff provided the City Council with three previous status reports on the Fiscal Year 2012-13 General Fund - the first quarter results on December 11, 2012, the second quarter results on March 19, 2013 and the third quarter results on June 25, 2013. The third quarter report concluded that based on information available at that point, and assuming trends apparent at that time continued, the General Fund would end the year with a positive available balance between $6.9 and $8.9 million, depending on whether any portion of the $2 million General Fund Contingency Reserve was used in the last quarter of the year.
The Budget Office has now reviewed and analyzed the preliminary financial activity in the General Fund for the final three months ended June 30, 2013, with results shown in Attachment A. The City has closed its financial records and the year-end audit is in progress, however end of year totals are preliminary and unaudited in this report. Staff does not anticipate significant changes to these amounts. Though we had anticipated a normal schedule, and this year-end budget update report would be presented to City Council within six months of year end, there was more effort needed to close out the 2012-13 year. As was discussed in prior reports, the antiquated financial systems, getting outstanding audits caught up, bankruptcy negotiations, preparation for the 2014-15 budget process and start of labor negotiations, all create competing priorities which delayed this report. Going forward, it will be important to address this issue in order to avoid negative impacts on the implementation of Measures A & B. Staff is requesting additional positions as part of the Measure A & B implementation plan (subject to a separate staff report at this meeting). These added positions will not only support the new sales tax measure but can provide much needed assistance with closing efforts and bringing financial reporting current.
Based on twelve month revenue and expense totals, the General Fund is projected to have ended the year with a positive available fund balance of approximately $16.1 million. This includes $2.0 million in contingency reserve budget that was not used, as well as approximately $828,000 of unused Labor Litigation/Chapter 9 funds.
The Adopted Budget Council resolution directed that the General Fund ending balance in its entirety was to be transferred to the Bankruptcy Fund to be used for claims and related costs to exit bankruptcy. The Government Finance Officers Association recommends, at a minimum, that general-purpose governments, regardless of size, maintain unrestricted fund balance in their General Fund of no less than two months of regular General Fund operating revenues or regular General Fund operating expenditures, which is equivalent to 16.67% of those amounts. Cities with formal reserve policies generally specify between 10 - 20% reserve levels. The Administration now recommends that the portion of the Ending Fund Balance ($3.1 million) that resulted from the unanticipated refund of County Property Tax Administration Fees (explained in detail later in this report), be retained in the General Fund to help build the available fund balance. With a balance of $3.1 million (or just under 2%), the City is still substantially below these recommended levels. This recommendation is made to provide a small start towards building up one-time monies to meet the many unfunded, but mission critical needs for spending. These include significant expenditures for deferred building and facility maintenance, deferred tree maintenance, mobile and portable radios for public safety, proposed technology projects identified in the City-wide Technology Strategic Plan, and additional rate changes to fund accumulated deficits in the City Internal Service Funds (Workers' Compensation - $44.0 million; General Liability-$4.9 million).
The remaining $13 million fund balance will, per prior Council direction, be transferred to the Bankruptcy Fund. These funds will be used to settle the claims of creditors that have been negotiated and to pay for the legal expenses associated with the City's bankruptcy. Settlements could be paid from these funds such as the retiree settlement and the anticipated move to the 400 East Main building as part of the settlement with Assured Guaranty under the plan. The City expects to conclude the bankruptcy case by the end of the fiscal year but we expect additional expenses to conclude the case and to fully implement the plan of adjustment. Should the bankruptcy case continue, due to the aggressive efforts of the one significant creditor that has yet to reach an agreement with the City, these funds would be used for associated legal expenses. If that case were to be long and protracted these funds would not be sufficient to cover all of those expenditures.
The increase in the 2012-13 General Fund available fund balance estimate provided in this report compared to the third quarter report (including no use of Contingency) is approximately $7.2 million. This increase was the result of an increase in revenue estimates in a number of categories, as well as higher than previously projected savings in various expenditure categories described below.
By far the largest change was the unanticipated receipt of a one-time Property Tax Administrative Fee (PTAF) refund in the amount of $3.1 million from San Joaquin County as the result of a court ruling earlier in the year. The remaining variances from the third quarter projections in revenue were improvements in Sales Tax ($382,000), Utility User Fees ($151,000), Refunds and Reimbursements ($720,000) and Rents, Leases and Concessions ($258,000), partially offset by lower than anticipated collections in Indirect Cost Allocations ($329,000) and Program Revenues ($119,000).
Total expenditure savings were up from third quarter estimates by approximately $2.6 million. This represented higher than previously anticipated savings in Labor Litigation and Chapter 9 expenditure ($828,000), as well as higher savings in several City departments and expenditure categories: Fire, Administrative Services, Human Resources, RDA Successor Agency, Grant Match and Tax Collection and Election costs.
Final 2012-13 General Fund year-end revenues are projected in this report at $162.2 million, an increase over the Amended Budget of $6.2 million, or approximately 4%. General Fund expenditures for 2012-13 are estimated at $148.8 million, $9.5 million, or 6.0% below the Amended Budget. Of the $9.5 million in expenditure budget savings, $2.0 million is the result of not utilizing any of the $2.0 million Contingency Reserve budget. Again, this $16.1 million in savings is only possible due to the $26.0 million in cuts made through the City's bankruptcy to balance the budget and the deferral of critical expenditures.
DISCUSSION
Background
One of the strategic initiatives developed to support the City Council's "Fiscal Sustainability - Getting our Fiscal House in Order" goal was to provide regular analysis and reporting of the City's financial status. The Quarterly Budget Update reports are provided as part of that effort.
Prior Budget Actions
During the prior three years, several extensive budget actions have been brought before Council that involved significant service and compensation reductions. The Fiscal Year 2011-12 Budget, as adopted by Council on June 21, 2011, was balanced using a combination of service reductions (approximately $12 million) and significant employee compensation reductions (approximately $25 million) imposed under the City's second declaration of fiscal emergency in addition to the deferral of critical expenditures. On February 28, 2012 a Fiscal Condition Update was presented to Council that included a revised Fiscal Year 2011-12 net annual operating deficit projection of $8.6 million. The change was primarily due to declines in revenue, additional subsidy to the Redevelopment Agency for expenditure overdrafts, other actions to address prior year accounting adjustments (e.g. writing off accounts receivables, cash reconciliation variances, etc.), and other items described in that report. The Council approved $15 million in solutions to resolve deficit fund balances (FY 2010-11 $6.6 million and FY 2011-12 $8.6 million) through unrestricted fund transfers and suspending certain general fund supported debt payments, and other actions Without these actions at year-end, the General Fund would have ended FY 2011-12 with a large deficit fund balance and a negative cash balance.
On June 26, 2012 the Council closed a $26.0 million budget deficit by approving the 2012-13 Annual Budget and Pendency Plan assuming the protection of Chapter 9 (bankruptcy). The Pendency Plan suspended debt payments, reduced retiree medical benefits in FY 2012-2013, continued reductions of pay and benefits imposed under Declarations of Fiscal Emergency and reduced compensation components that exceeded those in the City's labor market. The City filed for Chapter 9 Bankruptcy on June 28, 2012 and on April 1, 2013 the judge ruled that Stockton is eligible for bankruptcy relief. The City continues to provide services under the Pendency Plan while under Chapter 9 protection. The FY 2012-13 Pendency Plan was amended by Council on September 11, 2012, to adjust for new property tax information and agreements reached with labor.
Budget Monitoring Current Fiscal Year
On June 25, 2013 staff provided the City Council with a status report on the General Fund results for the Third Quarter and Year-end Projection which identified a likely year-end positive fund balance to a range of $6.9 to $8.9 million (again depending on whether any of the $2.0 Contingency Reserve was used in the final months of the year). In that report, General Fund revenue collections were estimated to end the year above the amended budget by $1.7 million or 1.1%, and it was projected that the overall annual savings in General Fund expenditures would be approximately $4.8 million or 3.1%.
Present Situation
2012-13 General Fund Fourth Quarter Results
A review of preliminary year-end revenues and expenditures for Fiscal Year 2012-13, which includes fourth quarter results, has now been conducted. The summary of the year-end outcomes, including a comparison with the Amended Budget and Third Quarter projections is displayed on Attachment A. This analysis covers 12 months of actual activity. The City has closed its financial records and the year-end audit is in progress, however end of year totals are preliminary and unaudited in this report. Year-end results are based on the information currently available with projections to year-end. Staff does not anticipate significant changes to these amounts. Explanations and details regarding specific revenue and expenditure variances are presented in the following pages.
Revenue
Based on current information, it is expected that the General Fund revenues will end the year approximately $6.2 million greater than budgeted, which is above the estimates provided in the prior Quarterly reports. This positive variance (4.0%) from budget reflects offsetting revisions in estimates in both the tax and non-tax revenue categories. As described above the most significant variance from prior estimates reflects the unexpected receipt of $3.1 million in refunds from the County for prior year over collections of the Property Tax Administration Fee (PTAF). This results from the outcome of litigation in the City of Alhambra et al. v. County of Los Angeles case. The City of Alhambra, along with a number of other cities, sued the County of Los Angeles regarding the calculation of Property Tax Administration fees for the years from 2006-07 to 2011-12. The Cities argued that SB 1096 Triple Flip and Motor Vehicle License Fee revenues, which are now incorporated into Property Tax category in receipts received from the Counties, should be excluded from the calculation of the PTAF charged to cities. The California Supreme Court, on appeal, ruled unanimously that the methodology utilized by the County of Los Angeles, as well as the other involved counties, was illegal. Late in the year, San Joaquin County notified the City of Stockton that it would be complying with the refund of PTAF plus accumulated interest. Council approved the settlement of the City's claim against the County of San Joaquin for recovery of these fees on December 17, 2013. Subsequently the City received a payment of $3.1 million, not including interest to be received in FY 2013-14 which was under negotiation. This amount had not been anticipated in prior budget projections.
Other categories where revenue exceeded the estimates provided in the third quarter review include Sales Tax, Utility Users Tax, Interest Earnings, Refunds and Reimbursements and Rents, Leases and Concessions, offset by lower than anticipated receipts in the Indirect Cost Allocation and Program Revenues categories.
Current estimates indicate that the General Fund received $162.2 million in revenue for the 12 months of the fiscal year. Attachment B details the year-end revenue received in the General Fund by category, and indicates the variances from the Third Quarter Report as well as the Amended 2012-13 General Fund budget.
Property Taxes - Property tax revenues are received primarily in December and May. As the general economy of the City slowly improves, median home prices are trending upward. Overall property tax revenues projections of $46.7 million are $3.1 or 7.2% more than projected in the third quarter report, entirely due to the refund of the prior year Property Tax Administrative Fee (PTAF) refund described above.
Sales Tax - The final Quarter receipts came in slightly above prior estimates. As a result 2012-13 sales tax revenues are $382,000 more than the third quarter budget update presumed. This is an increase of $1.0 million (2.6%) over budget and would represent a 7% increase over Fiscal Year 2011-12 revenues. This growth is attributable to 3.7% increase in point of sale transactions and 18% increase due to a State true-up of the 2011-12 triple flip back fill. The growth in point of sales tax reflects improved automobile sales, the new Wal-Mart Supercenter, improved consumer sentiment and pent-up demand for general consumer goods, and a recovery in travel and tourism boosting sales at restaurants, hotels and car rentals.
Utility Users Tax - Total Utility Users Tax (UUT) revenues are projected to come in about 1.4% above the budget for a total of $31.9 million. Projected UUT revenues are $152,000 above that projected in the third quarter report reflecting better than anticipated Water, Electricity and Gas UUT receipts. Receipts are received monthly and monitored by an outside consultant. Cable tax revenue came in $408,000 above the Amended Budget due to a reporting change by AT&T last September which separates cable from telecommunications revenues. The result is that cable revenue reports higher than projected while the telecommunications revenue reports lower. Telecommunication UUT revenues were $107,000 below the budget. Both Cable and Telecommunications UUT revenues, however, came in slightly below Third Quarter estimates. Receipts from Comcast Cable ended the year at the budgeted level of three percent less than prior year. For AT&T, growth in wireless telecommunications revenues from rate increases, additional wireless customers and prior year catch up payments found by the City's consultant offset most of the loss due to AT&T reporting corrections.
Franchise Tax - Overall Franchise revenue is projected to be $416,000 or 3.7% more than budgeted. This is approximately $81,000 higher than anticipated in the Third Quarter report. The improved collections are primarily due to improvements in the commercial and industrial sectors leading to increased volume and need for services provided by waste hauler companies. PG&E franchise revenues came in 1% below budget as anticipated in the third quarter report. Cable/video franchise revenues improved $22,000 in the fourth quarter to exceed the amended budget by 3.7%.
Business License Tax - The majority of the Business License tax is received in the last five months of the fiscal year. In the third quarter update, the Administrative Services Department projected that it would achieve $9.1 million by fiscal year end which was $225,000 more than projected in the second quarter budget update, but still below the budgeted level by $110,000. Final collections were slightly above that level at $9,168,000, which was under budget by $67,000 (0.7%). The growth over prior year collections can be attributed to improved overall compliance and an 11.7% increase in the number of licenses including 261 new and 1,423 renewed licenses.
The General Fund pooled interest earnings were greater than anticipated in the original budget. This resulted from the higher ending fund balance and cash in FY 2011-12, only made possible due to the bankruptcy. This category also includes interest received from the Stormwater Enterprise Fund in repayment of a prior year loan. Collections for the year exceeded the budgeted level by $271,000.
Program Revenues
• Fire contracts - Four local fire districts contract with the City for services and reimburse the City based on a percentage of the City's total actual Fire Department operating costs. Fire contract revenues were $3.3 million or $583,000 or 14.9% less than the budgeted amount due to the reduction in fire personnel expenditures implemented as part of the 2012-13 Pendency Plan. That result was unchanged from the projection included in the Third Quarter report.
• Code Enforcement - Final collections were consistent with third quarter projections at $2.8 million, but still under budget by $378,000 or 11.9%. Code Enforcement revenues were lower than the budgeted $3.2 million due to the impact of the discontinuation of the Teeter Plan by San Joaquin County. Previously, under the Teeter Plan, the City was reimbursed for all amounts owed through the lien process, regardless of what had been collected. Under the new system, the City is reimbursed only when and if monies are collected by the County. It was very difficult to estimate the impact of the change going into this fiscal year absent information on collection rates under the Teeter Plan. Police Department staff used what was thought to be a conservative estimate that the City would collect 40% of the amount liened.
• Fines & Forfeitures - The third quarter report projected this category would end the year $365,000 below budget due to reductions in traffic and parking citations, criminal fines and a prior year correction in DUI fines by San Joaquin County. Higher than expected payments brought on by increased collection activities in the final quarter of the year resulted in revenue receipts almost equal to the budget of $1.5 million. In addition, a change in the recording of accounts receivable not previously projected added $518,000 to this category, bringing the total to just over $2.0 million or $543,000 over budget. In FY 2012-13 the full parking ticket accounts receivable was recorded with a separate allowance for uncollectible accounts reducing the receivable instead of recording the allowance net of uncollectible accounts as in previous fiscal years. The $518,000 increase in the receivable is offset by a $(395,000) allowance for uncollectible accounts in the Misc. Other Revenues category.
• The allowance for uncollectible accounts, shown as a reduction to revenues in the Misc. Other Revenues category was greater than the budget estimate of $200,000.
Indirect Cost Allocation - Indirect costs (City-wide administrative overhead) recovered by the General Fund in FY 2012-13 were less than projected by $329,000 or 6.8% because federal programs were not charged as budgeted, and capital project expenses were 14% lower than previous years. The City is in the process of preparing a request for proposal in order to solicit firms experienced in preparing basic cost allocation plans that are in compliance with guidelines and to provide further review of costing methods used in order to improve the distribution and recovery/reimbursement of these costs.
Reimbursements - As projected in the third quarter update, Police Reimbursements are well above budgeted levels ($370,000) as a result of several multi-agency enforcement missions and the ability to receive reimbursement for overtime hours incurred. These revenues from agencies such as the FBI and ATF are offset by an increase in overtime expenses within the Police Department, particularly in the Special Investigations Section.
Rents/Leases/Concessions - The Municipal Utilities Department (MUD) pays rent for use of properties and office space purchased and maintained by the General Fund. The rent is adjusted annually based on market value, depreciation and City overhead costs. A true up for Fiscal Year 2011-12 rent was processed during the fourth quarter increasing the revenue in this category by $258,000 over the amount projected in the Third Quarter report.
Expenditures
The General Fund continued to experience savings in the fourth quarter of 2012-13 primarily due to lower than anticipated Bankruptcy expenses, reduced support needed by the Successor Agency and vacant staff positions. These savings were only partially offset by a small, previously anticipated increase in debt service administration costs. Preliminary year-end results show General Fund expended $148.8 million or 94% of the budgeted expenditures as summarized in Attachment A. This represents an additional $2.6 million in expenditure savings over what was projected in the Third Quarter report.
The 2012-13 Labor Litigation budget of $2 million was based on the assumption that all labor agreements would have to be renegotiated before they expired on June 30, 2013. Since only minimal modifications were made to most of the labor agreements, attorney and consultant costs were only $360,000. Of the remaining $1.7 million, $825,000 was used for Chapter 9 costs that exceeded the approved budget. The resulting Labor Litigation unused budget is $828,000. As reported in the Third Quarter report, the savings from the Labor Litigation budget was applied to help support the General Fund's share of bankruptcy costs which were projected at that time to be $1.5 million greater than the budget at $5.7 million. In FY 2012-13 the City spent a total of $7.0 million on the Chapter 9 filing. Not all of this funding came from the General Fund. This was greater than the original budget due to the creditor's aggressive litigation strategy. The General Fund's share of actual 2012-13 bankruptcy costs ended the year at $5.0 million which was below the Third Quarter projection by $724,000.
The projected General Fund subsidy for administration of the Successor Agency has been reduced by an additional $219,000 since the Third Quarter report based on actual expenses related to the winding down of redevelopment activities. The Successor Agency subsidy was approximately half of the budgeted $1.1 million subsidy because potential legal expenses did not materialize. The dissolution of the former Redevelopment Agency made it difficult to project in 2012 what legal and litigation expenses might be incurred by the new Successor Agency.
The adopted General Fund budget included $975,000 for anticipated vacancy savings. Actual savings from vacant positions throughout FY 2012-13 was approximately $5.0 million, with the majority occurring in the Police and Fire Departments. The Police Department expenditures were slightly higher than the $79.1 million projected in the third quarter report, but still represented savings of $3.4 million from the budgeted level, reflecting the high level of vacancies experienced by that department. The Fire Department experienced additional vacancy savings in the fourth quarter bringing expenses down to $34.6 million, $637,000 less than projected in the third quarter report, and $1.7 million below the budgeted level. The Fire Department had 11 vacancies toward the end of the fiscal year, up 5 from February. Vacancies were filled slower than anticipated due to the complex re-hire process from the lay-off list. The increase in the savings level from that estimated in the Third Quarter report reflected the fact that that projection assumed that a spike in overtime expenses which occurred last year in the fourth quarter would be repeated. Overtime in the fourth quarter was actually 17% below what had been projected. In the third quarter report Public Works was projected to come in on budget but actually experienced savings of approximately $152,000 at year end.
The City Council, City Auditor, Peacekeeper Program, Arts Commission and Other Administration expenses all came in close to the third quarter projections with less than $25,000 in additional savings realized. The City Manager, City Attorney, City Clerk, and Economic Development Departments experienced marginal additional savings of $25,000 to $35,000 each. The City Manager's Office came in 3.4% under budget saving $35,000. The City Attorney's Office experienced significant savings compared to budget ($384,000 or 41.2%) due to several vacancies occurring early in the fiscal year which were not filled for most of the fiscal year due to workload uncertainties and the City's bankruptcy filing. The City Clerk's Office came in 4.8% below budget with $34,000 in savings. The Economic Development Department was under budget by $92,000 also due to vacancies that were filled late in the fiscal year and due to attrition of additional staff in the last half of 2012-13.
Administrative Services ended the fiscal year $279,000 below budget primarily due to continued vacancy savings. The primary sources of these savings came from the vacancies, in a number of positions throughout Accounting, Revenue Services and the Administrative Services Office. Though substantial efforts were made to fill vacancies as fast as possible, the department continued to experience increased turnover towards the end of the year including several retirements. Much of this can be attributed to substantial cuts that were made to compensation in prior years and the huge demands placed on staff due to the bankruptcy and changes within the organization.
The third quarter report projected that Human Resources would save $385,000 due to vacancies, postponed training and recruitments, reduced legal service needs and cost savings on pre-employment screening services. Savings in Human Resources exceeded this estimate by $193,000 with total expenses of $1.3 million. Additional vacancy savings, legal service savings and a Leadership Development Academy budgeted at $85,000 but not being implemented until next fiscal year accounts for the additional savings.
As noted above, two budget amendments require Council resolutions. The first amendment authorizes adding $58,059 to increase the General Fund contribution to Debt Service Administration. Staff and overhead costs related to management of City bonded debt is distributed between assessment districts and City funds based on their share of bond issuances. The General Fund's share was underestimated in the Fiscal Year 2012-13 budget. The third quarter report projected this increase would need to be $68,000 but this amount has been reduced to $58,059 based on actual debt service administration expenses and allocation of costs to all bond issuances. The second amendment authorizes the retention of the $3.1 million in PTAF refund revenue in the General Fund Ending Fund Balance as an exception to the Budget Resolution number 2013-06-25-1601-01, Section 7. This action would help provide a start in building a source of funding for the many unfunded infrastructure maintenance needs facing the City. This is also consistent with the City's long term financial forecast. The remainder of the additional General Fund ending fund balance would go, as previously authorized, to the Bankruptcy Fund to help offset ongoing expenses required for the Chapter 9 process.
The Contingency Reserve was not spent in Fiscal Year 2012-13. This $2 million contingency funding is intended for unexpected expenditures or emergencies that, by their very nature, are impossible to predict. The same level of Contingency Reserve funding was included in the Adopted 2012-13 General Fund Budget.
All other General Fund departments not mentioned above ended the year at or slightly below previously projected levels.
The projected $3.1 million General Fund ending balance, after the $13 million is transferred to the Bankruptcy Fund per Council direction, is just under 2% of the City's General Fund revenues for that year. This is significantly below the Government Finance Officers Association recommended levels. Again, though, it must be noted that this balance was only achievable because of the $26 million of reductions made to creditors and retirees through the Pendency Plan assuming the protection of Chapter 9 Bankruptcy and deferral of critical expenditures.
FINANCIAL SUMMARY
Based on the current projections and unaudited year-end data, it is estimated that the City's General Fund ended the Fiscal Year 2012-13 with a $16.1 positive balance of which $13 million will be transferred to the Bankruptcy Fund per Council direction. This information will continue to be updated as additional data becomes available.
The following Budget Amendment is recommended to address a shortfall of funding in the Debt Service Administration fund as described above:
Increase General Fund Transfer to 201 Debt Administration Fund
010-0000-992 General Fund Transfer Out $58,059
201-0000-492 Debt Administration Transfer In $58,059
201-2001-510 Debt Administration Expense $58,059
Attachment A - 2012-13 Fourth Quarter Budget Update - General Fund
Attachment B - 2012-13 Revenues - General Fund