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FISCAL YEAR 2014-2015 FIRST QUARTER GENERAL FUND BUDGET STATUS UPDATE
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RECOMMENDATION
It is recommended that the City Council accept by motion this budget status report on the results of the first quarter of Fiscal Year 2014-2015 for the City's General Fund.
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Summary
Staff has conducted a review of the financial results of the first quarter of Fiscal Year (FY) 2014-15. The results of our expenditure review for the first three months for the General Fund indicates that the fund expenditures are generally on track to achieve the budgeted results. The most significant variance is in the Police Department where vacancies remain relatively high as the City continues the hiring process to fill new officer positions funded by the Measure A Transaction Sales Tax. Due to the rate of attrition and few qualified sworn officers in the applicant pools, the timeframe to fill the positions is occurring slower than anticipated. Though hiring improvements from prior years are reflected, the vacancy savings impact on Marshall Plan on Crime ("Marshall Plan") expenditures is approximately $1.3 million during the first quarter.
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. This quarterly report is provided as part of that effort.
Since the beginning of the "Great Recession" in 2008, the City of Stockton experienced an unprecedented fiscal emergency in our General Fund resulting in insolvency at the beginning of FY 2012-13. Since 2008, the City Council has substantially reduced programs, staffing, services and employee compensation by enacting $90 million in ongoing General Fund budget cuts. With the City's structural imbalance, growing deficits and lack of cash, the City filed for chapter 9 bankruptcy protection on June 26, 2012. For the next three fiscal years, the City Council adopted a Pendency Plan Budget under bankruptcy protection that made sizable reductions in payments to creditors, bondholders, and retirees; FY 2012-13 $26 million, FY 2013-14 $23.8 million and FY 2014-15 $24.5 million. Eligibility for bankruptcy status was confirmed by the court on April 1, 2013.
The FY 2014-15 Annual Budget continued the General Fund Pendency Plan under chapter 9 protection of the federal bankruptcy code and reflected the expenditure priorities pending confirmation of a plan of adjustment to exit chapter 9. A major change in the FY 2014-15 Annual Budget was the approval of Measure A by the City of Stockton voters which increased General Fund budgeted revenue by $27.9 million. The additional Measure A Transaction Sales Tax has provided funding for the Marshall Plan for improved public safety, emergence from bankruptcy, rebuilding General Fund reserves to an acceptable level, and sustaining other city services. The citizens supported this direction through their approval of the advisory Measure B. The City has initiated implementation of service improvements, primarily in the Public Safety area, through the Marshall Plan.
The Bankruptcy Court has ruled against objections by creditors and for the City on a number of significant issues in the last several months. In addition, the judge has provided his support of Stockton's plan of adjustment to exit bankruptcy which became effective on February 25, 2015. The combination of an approved plan of adjustment predicated on a Long Range Financial Plan ("LRFP"), the passage by the Stockton voters of the Measure A Transaction Tax, and the resulting improvements to public safety and other city services, allows us to begin returning Stockton to a fiscally sound and safe community.
Present Situation
As shown in Attachment A, revenues and expenditures results for the first three months of the current fiscal year have been reviewed and though it is too early in the year to draw precise conclusions and judgments regarding year-end projections. As a result, projections for year-end results have not been included. The conclusions below indicate our best analysis of the trends evident within the first few months of available data. Revenue collections and expenditure trends in all categories are continuing to be carefully monitored against the annual budget, the LRFP and with the Departments. Year-end projections will be included in subsequent quarterly reports for FY 2014-15 as we continue monitoring throughout the year.
Revenue
First Quarter revenue collections for significant General Fund categories (Sales Tax, Property Tax, Utility Users Tax, Franchise Fees, Business License Tax, Hotel/Motel Tax and Program Revenues) were all below the 25% pro-rated collection rate expected if collections followed an evenly timed pattern versus a cyclical pattern throughout the year. First quarter data cannot be projected for these sources of revenue since collections do not follow an even pattern. For example, the majority of property tax is collected twice in the year in January and May from the County of San Joaquin. Each major category has different collection schedules, and almost all of our larger revenue sources are received in the later months of the year.
Sales Tax revenue received from the State in the first quarter are actually revenues related to the prior fiscal year and are accrued to the prior year appropriately. Thus the first quarter Sales Tax revenue recording includes an advance payment from the State for one month's estimated revenue. The City does not accrue its sales tax revenue quarterly.
Similarly, the majority of Property Tax revenue is received from the County in January and May, in line with the December 10 and April 10 due dates for property owners to pay their annual taxes. Thus, only $75,000 of an expected $46.4 million total was collected in the first three months of the year. Early property tax data from San Joaquin County and the City's property tax consultants indicate that FY 2014-15 property tax revenues are likely to exceed the 3% growth assumed in the budget. In July 2014, the County Assessor announced a 9.4% increase in Stockton's assessed property values based on the 2014-15 property tax roll. Over 94% of the property value growth is due to the recapture of value on properties reduced in previous years under Proposition 8 and the increase in median sale prices. During the recession, the assessed value on over 65% of the City's single family residential properties was reduced under Proposition 8 based on market conditions. These properties have been regaining their values in the last two years as sale prices increase. As of the 2014 only 28.6% of the City's residential properties on the property tax roll remain below their Proposition 13 value with potential value to be recaptured. This recovery of property values is occurring earlier than originally anticipated in the LRFP. However further validation of these assumptions will need to be accomplished after further Property Tax revenues are collected and reported in the next budget status update. No budget adjustments are being proposed as of this report.
Interfund Reimbursements as of September 30, 2014 totaled $1.3 million, which is approximately 15% of the budgeted revenues. (Interfund Reimbursements consists of billings to outside agencies, indirect cost recovery, and payments from the Municipal Utilities Department for property rentals that are paid in a lump sum later in the year). 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 or later.
At this time, year to date collection and information from the City's revenue consultants indicated that the General Fund revenues are likely to achieve the budgeted revenue of $194 million. Further information will be gathered to produce year-end projections which will be reported in future quarterly reports.
Expenditures
Staff has reviewed the first three months of General Fund expenditure data reported in Attachment A. As is the case with revenues, it is too early in the fiscal year to draw firm conclusions or judgments about observed trends, especially in salaries and benefits as vacancies often take months to fill. However, expenditure trends in many departments are running close to or just below budgeted expectations due to anticipated vacancies.
Although most departments on an overall basis are running below the 25% expenditure level on a strictly pro-rated level, savings being experienced are generally in line with expectations that consider a citywide budgeted salary savings of 3%.
The Police Department accrued significant savings in the first quarter. Vacancy levels for Measure A funded positions remain high, as the Marshall Plan hiring process is gearing up. At the end of the first quarter, the Police Department had filled 370 sworn positions out of 405 authorized or 91.1%. Although hiring for sworn and non-sworn personnel in the Police Department was expected to occur throughout the year, the first quarter hiring was slower than had been anticipated. As a result, just over $1.3 million savings has been reflected in Marshall Plan as compared to budgeted expenditures for the first three months. A number of recruitment activities are underway throughout the City, especially in public safety. The Department Recruiting Team participated in 10 different recruiting events including two national hiring events outside of the State. The department was also able to enroll 15 police officer trainees in the newly established San Joaquin Delta College Police Academy, which is a six month program. The level of vacancy savings in this department should diminish over the remainder of the year as a result of these hiring efforts. Also during the quarter, several equipment purchases were initiated in anticipation of filling 40 new police officer positions during the fiscal year. These purchases included patrol vehicles, mobile data computers, radios and other related safety equipment which require substantial lead time from the placement of the order to putting these assets into use.
The Fire Department also accrued significant salary savings during the first quarter. The Department had 14 full-time vacancies in the General Fund (10 sworn and four non-sworn), resulting in net personnel savings of approximately $440,000. The vacancy savings are however offset by overtime expenditures of approximately $400,000 which were mainly due to deployments of Stockton Firefighters for assistance at various State wild land fires. The City will be reimbursed by the State's Office of Emergency Services for these costs under the terms of the California Fire Assistance Agreement. Savings were also realized in supplies and services, as well as the Fire Training Academy that had not yet been initiated. It is anticipated that the majority of purchases will take place later in the year.
Three administrative departments are accruing savings over and above the budget: Administrative Services, City Attorney and the Human Resources departments. The excess savings in the Administrative Services and City Attorney departments are the result of higher than anticipated vacancy levels. The savings in the Human Resources department is partially due to vacancies, delays in billings for police and fire recruiting costs, and training that is delayed due to slower than anticipated hiring.
Keeping in mind that some level of salary savings is expected each year and that it is frequently unpredictable which positions will be vacant in any given year, the City budgeted a city-wide salary savings of 3% in FY 2014-15. This budget, in addition to Marshall Plan salary savings budgeted in the Police Department, are combined in the City's General Fund. The city-wide budgeted salary savings amount was raised from the prior year to respond to the difficult hiring conditions being faced by the City which as we emerge from the uncertainties of the bankruptcy should begin to diminish. Specific projections regarding departmental net savings levels will be possible after an evaluation of vacancy savings in the second quarter.
Program Support for Other Funds show that expenditures follow a quarterly allotment for each program area unless the General Fund program support levels prove to be under or over budgets. The lack of activity in the Grant Match category is due to timing of grant awards.
Tax Collection and Election expenditures are negative due to prior year accruals that reversed in the first quarter of this year. The accrual reversal will offset payments made in the second quarter of this year. All of the expenditures in this category are made later in the year as follows:
· Property tax administration fees will be paid in December and May.
· Sales Tax administration fees will be paid quarterly starting in December.
· Payment for property taxes and assessments on City owned property will begin in November.
· The election budget anticipates costs that are generally billed to the City once a year. The budget includes the estimated November 2014 election costs.
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. By far the largest amounts are offsets to expenditures in other areas of the budget, such as city-wide vacancy savings pool and indirect costs allocated to the Fire Department for reimbursement by the Fire districts. The Fire Department offset entries are necessary for proper classification and reporting of Fire District contracts, although they appear as negative costs.
First quarter labor litigation expenses reflect the small amount of legal fees paid 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 will be fully underway.
Debt Service payments made in the fall for several city facilities are greater than the spring payment as the fall payment generally includes principle and interest payments whereas spring is only interest payments. This is reflected in the first quarter expenditures of 52% of budget. The first quarter debt service expenditures 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 final allocation based on actual costs are made at year end.
Staff will continue to monitor General Fund expenditure levels throughout the year, returning later in the year with quarterly reports which will include year-end projections, as well as any necessary budget adjustments.
FINANCIAL SUMMARY
This report provides an analysis of FY 2014-15 General Fund first quarter results. The review indicates that the City is on track to achieve salary savings above budget and that revenue may necessitate budget amendments later in the fiscal year. Trends and potential budget variances will continue to be monitored, and staff will return to Council with future recommendations for changes where appropriate.
Attachment A - FY 2014-15 First Quarter Budget Update - General Fund