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FISCAL YEAR 2013-2014 FIRST QUARTER GENERAL FUND STATUS UPDATE AND AUTHORIZATION TO AMEND THE FY 2013-2014 GENERAL FUND BUDGET
RECOMMENDATION
It is recommended that the City Council accept by motion this status report on the 2013-2014 General Fund budget, and adopt a resolution amending the Fiscal Year 2013-2014 General Fund Budget to address increased property tax appropriations of $987,000.
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Summary
Staff has conducted a review of the results of the first three months of the current fiscal year 2013-2014. Although it is too early in the year to draw precise judgments regarding year-end projections for most revenue and expenditure categories, a combination of the examination of prior year results, new information received from our outside Property Tax consultants, and a review of spending trends to date indicates that we are on track for slightly higher than budgeted Property Tax revenues ($987,000, or 0.6%). In addition, the additional unbudgeted revenues which will result in the last quarter of the year from the phase I implementation of the Measure A/B Sales Tax and related expenditures (appropriated in the budget in a separate staff report at this meeting) are reflected in these year end projections for Fiscal Year 2013-2014. Reviews have also been conducted of other funds to determine significant variances from budget or potential impacts to general fund. Further explanation of activities that are prompting projection changes are provided below.
DISCUSSSION
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. This report is being provided as part of that effort.
The City of Stockton has undergone an unprecedented fiscal emergency in our general fund resulting in insolvency at the beginning of the 2012-13 Fiscal Year; thus, forcing the City to file for Chapter 9 protection. Since 2008, the City Council has substantially reduced programs, staffing, services and employee compensation by enacting $90 million in ongoing general fund budget cuts. Despite all the prior year reductions the City was facing an additional deficit of $26 million going into the 2012-13 Fiscal Year that could only be addressed under protection of Chapter 9.
The City’s general fund budget for Fiscal Year 2013-2014 was balanced by making $22 million in reductions to creditors and retirees and was approved by Council on June 25, 2013. This budget continues the general fund Pendency Plan under Chapter 9 protection of the federal bankruptcy code and reflects the expenditure priorities pending confirmation of a plan of adjustment to exit Chapter 9.
The budgeted general fund ending available balance for 2013-2014 was projected to be $0, with the entire available balance from the prior fiscal year being dedicated to the Bankruptcy Fund. The Bankruptcy Fund was anticipated to begin the Fiscal Year 2013-2014 with a balance of $12.5 million which was accumulated over the past two year’s net activity ($5.6 million from the ending balance in Fiscal Year 2011-2012 and $6.9 million projected to come from the ending balance in Fiscal Year 2012-2013). In a separate memorandum on this agenda summarizing actual fourth quarter General Fund results, the unaudited year-end 2012-13 ending fund balance is projected at $16.1 million. In that report, staff has recommended retaining $3.1 million of that balance in the General Fund for later use for unfunded, critical infrastructure needs. Approval of that recommendation would still leave the amount to be transferred to the Bankruptcy Fund at $13.1 million, which is $6.2 million higher than previously projected. This would bring the total in the Bankruptcy Fund to $18.7 million at the beginning of FY 2013-2014.
The bankruptcy fund was separately established in the fiscal year 2013-14 adopted budget by City Council resolution 2013-06-25-1601-01. The bankruptcy fund has been committed by City Council to be used towards bankruptcy costs and dedicated to negotiating a consensual Plan of Adjustment (or bankruptcy exit plan). The Plan is intended to bring the City’s debts in line with our resources, both now and over time. The bankruptcy fund is being used specifically to cover costs for Chapter 9 including project management, ongoing litigation costs, financial advisors, and experts in support of the emergence from bankruptcy, continued negotiations with our creditors, with the remaining money available to pay our creditors as settlements for claims. After the filing of the Plan of Adjustment, one of the capital market creditors objected to the Plan which adds additional burden and litigation costs to the City. The City hopes to continue talks to mediate with this creditor prior to trial. The City anticipates these costs to continue for a number of months until the plan is confirmed by the bankruptcy court. If the objection by the creditor proceeds to trial and becomes long and protracted, these costs will continue to mount.
Present Situation
As shown in Attachment A, the Budget Office has reviewed expenditure and revenue results for the first three months of the current fiscal year. Although it is generally far too early in the year to draw precise judgments regarding year-end projections, a combination of the examination of prior year results, new information received from our outside Property Tax consultant, and a review of spending trends to date, indicates that we are on track for slightly higher than budgeted Property Tax revenues ($987,000). We have a fairly high level of confidence in this projection due to the uptick in property values being experienced, though Stockton is still trailing other regions in California. With one exception (Measure A Sales Tax revenues), projections for surpluses or shortfalls in the other revenue categories have not been included in this report, due to a lack of definitive information and volatility in those revenues. With the passage of Measure A by the citizens of Stockton, Sales Tax revenues are anticipated to increase by $6.8 million this fiscal year. These revenues were not included in the Fiscal Year 2013-2014 Adopted Budget. In a separate report on this agenda the Measure A/B detailed Implementation Plan (Phase I) is presented. In this report, expenditures for the first partial year of the Marshall Plan and supporting services are recommended to be increased in the annual General Fund budget by $1.1 million, utilizing the additional Measure A sales tax revenue.
Revenue
The net revenue gain that would result if current trends hold is the result of projections for higher than budgeted collections in Property Tax revenues ($987,000, or 0.6%).
The majority of Property Tax revenue is received in December and May. The collection estimate variances are the result of recently received updated projections by the outside consultant who provides us with detailed estimates. The primary change in their projection is updated information from the County Assessor showing improved residential property values due to the recapture of value on properties reduced in previous years under Proposition 8 and the increase in median sale prices. Property values in the City of Stockton experienced a net taxable value increase of 3.6% over the prior year resulting in a 2.9% increase in projected General Fund revenues for a total of $44.9 million. This is an increase of 0.6% from the FY 2013-14 Adopted Budget.
The Interfund Reimbursements category as of September 30, 2013 totaled $1.13 million or only 13% of the budgeted revenues. Revenues in this category are slow to come in primarily due to the nature of reimbursements. Costs incurred in the first quarter of the fiscal year are billed to other agencies for reimbursement but actual revenues are not received until the following quarter. This category also includes a payment from the Municipal Utilities Department for property rentals that will be paid in a lump sum as data for the calculation becomes available.
First Quarter revenue collections for other major General Fund categories (Utility Users Tax, Franchise Fees, Business License Tax and Program Revenues) were also all generally below the 25% pro-rated collection rate assuming collections followed an evenly timed pattern. First quarter data is of little value for projection for these sources of revenue however, since they each follow different collection timing schedules, and are almost all slated for receipt of the majority of their revenue in the latter months of the year. Collections in all categories will be carefully monitored by the Budget Office and by the time the second and third quarter reports are produced detailed projections for all of these revenue sources will be available.
Though typically, first quarter results are not usually enough to warrant budget amendments, staff recommends in this report that revenue budgets for Property Tax estimate be amended to reflect the revised projection. This trend is a continuation from last fiscal year and is also supported from multiple sources. A resolution to amend the Sales Tax estimate to include the additional Measure A/B revenue is included in a separate report on this agenda.
Expenditures
Three months of expenditure data has also been reviewed. As is the case with revenues, it is too early to draw any firm conclusions about observed trends.
Certain expenditure trends may be identified from the first quarter results, such as the amount of salary and benefit savings being experienced, if continued through the full year, would result in a higher than anticipated salary savings. The budgeted savings level is 1% of budgeted salaries and benefits. First quarter results indicate potential savings as high as 6%, When using the prior fiscal year’s quarterly trends, which consider higher salary savings in the first quarter and less savings as the year progresses, the current fiscal year may end the year around 3% (last year’s final salary savings was 4.7%). It is important to recognize that even this estimate may be overstated as several vacant positions, primarily in the Police Department, are currently being filled. As expressed earlier, however, it is too early in the year to rely upon these trends for budget adjustments. First Quarter trends can be especially unreliable in the vacancy savings category as the hiring of new positions often takes several months to complete. More precision will be made available after evaluation of vacancy savings in the second quarter budget status report. Expenditure patterns for all categories will be monitored and reported again in the mid-year report where a greater confidence level in projections should be possible.
Expenditure projections include estimates for the Measure A/B Plan including $855,836 for Police, $152,000 for the Administrative Services Department, $40,000 for the Human Resources Department and $55,000 for Tax Collection and Election account. These costs, described in more detail and recommended to be added to the budget are included in a separate staff report (Measures A & B Implementation Plan - Phase I) on this Agenda and would be funded by Measure A Sales Tax revenues and support an early implementation of the Marshall Plan along with associated support staff. Through these positions, the objectives of Measures A and B are addressed by supporting the Marshall Plan, supporting activities to end bankruptcy and making efforts to restore City services and sustain fiscal health.
In the Program Support for Other Funds category, the trend analysis indicates that most programs are on track with the budgeted subsidy levels from the General Fund.
Finally, certain programs fall far below a quarter of the budget in spending thus far in the fiscal year and can be explained as follows.
City Attorney’s Office - Similar to last year, the City Attorney’s Office is experiencing significant salary savings due to several vacancies which occurred early last fiscal year and were not filled due to workload uncertainties and the City’s bankruptcy filing. One of these vacancies was filled in November but a second is expected to remain vacant until the City exits bankruptcy. Litigation cases have declined during the City’s bankruptcy but are expected to return to pre-bankruptcy levels in the next fiscal year at which time the vacant Deputy City Attorney position will need to be filled.
City Auditor’s Office - This budget primarily consists of two audit contracts for the internal and external audit services. Funds for these contracts are fully encumbered for FY 2013-2014 but only about one month of services had been paid during the first quarter of the year. In addition, the workload for the internal audit services contract was low during the first quarter as the City and Moss Adams developed a comprehensive two-year Internal Audit Plan. That plan has now been adopted by Council and the aggressive timeline for its completion underway. As such, it is expected that the full budget for internal audit services will be spent by year end. Furthermore, because the City is undertaking an aggressive timeline in carrying out the 2012-13 external financial audit it is anticipated that the budgeted costs for these services will also be fully spent by year end.
Human Resources Office - The Human Resources Office is expending below budgeted levels due to the existence of several vacancies during the first three months of the year. Efforts are underway to fill these vacancies and expenditure levels should rise during the remainder of the year.
Tax Collection and Election expenses were 4% of the annual budget because most of these expenses are paid when the associated revenue is received. Property tax administration fees will be paid in December and May. Sales Tax administration fees will be paid quarterly starting in December. Property taxes and assessments on City owned property will start being paid in November. The election budget is for the June 2014 election so payment will not be made until after close of fiscal year.
The Other Administration category holds a variety of City wide costs that are not attributable to an individual or specific group of programs or departments. In the first quarter of the year, the most significant cost activity is the offset to indirect costs being allocated to the Fire Department in the general fund. These offset entries are necessary for proper classification and reporting of Fire District contracts, although they appear as negative costs. By year end other activities will offset all or part of these entries.
Labor Litigation - First quarter expenses reflect legal fees through August 2014. Most of the legal costs in this category will be incurred in the last half of the fiscal year when labor negotiations for employee MOUs expiring June 30, 2014 will be underway.
Debt Service payments made in the fall for the Civic Auditorium HVAC lease and the Stewart Eberhardt Parking Structure are greater than the spring payment so more than 25% of the budget was expended in the first quarter. The first quarter debt services expenses also reflect three months of debt administration costs based on the budget estimate. Costs of administering the City’s bonds are charged to the Debt Administration Fund during the year and allocated to the General Fund and other City funds with bonds. Any adjustment between the budgeted transfer and the General Fund allocation will be made at year end.
Staff will continue to monitor general fund expenditure levels, returning later in the year with reports and any appropriate budget actions that developments may require.
FINANCIAL SUMMARY
This report provides an analysis of 2013-2014 general fund first quarter results. The review of first quarter 2013-2014 General Fund performance indicates that it is on track to achieve salary savings above budget and that revenues are projected to slightly exceed budget, primarily as a result of increases for Property Tax and Measure A Sales Tax collections. The budget resolution will authorize the following adjustments to FY 2013-2014.
Increase Revenue Appropriation:
Property Taxes 010-0000-311 $987,000
Trends and potential budget variances will continue to be monitored, specifically in Administration and Debt Service categories, and staff will return to Council with future recommendations for changes where appropriate.
Attachment A - 2013-14 First Quarter Budget Update - General Fund