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FISCAL YEAR 2014-2015 SECOND 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 second quarter of Fiscal Year 2014-2015 for the City’s General Fund.
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Summary
Staff has conducted a review of the second quarter financial activity in all City funds for the Fiscal Year (FY) 2014-2015 and evaluated the cumulative results. This evaluation of the first six months of the fiscal year has prompted revised year end projections as described below and depicted in the attachment to this report. Year end projections for all other City Funds are presented in the upcoming FY 2015-16 Proposed Budget report.
Although it is still too early in the year to draw precise judgments regarding year-end results, an examination of General Fund revenue receipts recorded through December indicate that total revenues could end the year above the amended budget by approximately $4.1 million (2.1%), primarily from property taxes, if current trends continue through the remainder of the year.
General Fund expenditures are generally running under budgeted levels due to continued hiring delays which have caused higher than budgeted salary savings, most significantly in Marshall Plan positions funded by the Measure A Transaction and Use Tax. Savings are currently anticipated in most departments. The status of funds with subsidies from the General Fund is discussed as part of the General Fund expenditure section.
Reviews have also been conducted of all other City funds to determine significant variances from budget or potential impacts to the General Fund. The resulting year end projections are included in the FY 2015-16 Proposed Budget which was released on May 14, 2015.
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 report is being provided as part of that continuing effort.
Since the beginning of the “Great Recession” in 2008, the City of Stockton experienced an unprecedented fiscal emergency in the General Fund which spiraled into insolvency. Since 2008, the City Council continually and substantially reduced programs, staffing, services and employee compensation, enacting over $90 million in ongoing General Fund budget cuts. Finally, facing projected additional deficits far into the future and recognizing that the amount of additional budget cuts that would be required would result in unsustainable service levels and a dangerous threat to the City’s public safety and welfare, the City was forced to file for Chapter 9 bankruptcy protection on June 28, 2012. Eligibility for bankruptcy status was confirmed by the court on April 1, 2013. In FY 2012-13, FY 2013-14, and in the current year FY 2014-15, the General Fund deficits were only closed through the protection of the bankruptcy status which allowed Pendency Plan reductions to creditors and retirees (FY 2012-13 $26 million, FY 2013-14 $23.8 million and FY 2014-15 $24.5 million).
Voter approval of Measure A Transaction and Use Sales Tax increased General Fund budgeted revenue by an estimated $27.9 million, and has provided desperately needed funding for the Marshall Plan on Crime (“Marshall Plan”) initiative in public safety, emerging from bankruptcy and sustaining other city services. With this year’s budget, the City has begun the implementation of major service improvements, primarily in the Public Safety area, through the Marshall Plan.
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 by Judge Klein of The City’s Plan of Adjustment (“Plan”) to exit Chapter 9. A major change in the FY 2014-15 Annual Budget took place when Judge Klein ruled in the City’s favor and confirmed the Plan effective February 25, 2015. Although one of the City’s creditors has appealed the decision, the City is legally obligated to and has moved forward with implementation of the Plan, including making payments to its creditors and retirees as ordered by Judge Klein.
Through the combination of implementation of the Plan and the much needed funding provided by the voter approved Measure A Transaction and Use Tax, improvements to public safety and other City services will position the City of Stockton to return to a fiscally sound, safe and well-governed city.
Present Situation
General Fund
Staff has reviewed General Fund expenditure and revenue results for the first six months of the current fiscal year as shown in Attachment A. From that review, staff has made projections for likely year-end results based on current trends and known actions that will affect the second half of the fiscal year.
Revenue
Based on current information, it is projected that the General Fund revenues will end the year approximately $4.1 million or 2.1% greater than the current Approved Budget. Many of the General Fund revenue line items are expected to produce small variances at year end with only Property Tax and Program Revenues providing the largest variances from the FY 2014-15 Approved Budget.
Of the projected variances in General Fund revenue, the largest is from Property Taxes. Property taxes are levied on October 1 and are payable by the property owners in two installments to the County in November and in February of each year. The County processes the payments and remits them to the City twice per year generally in January and June. As a result, very little Property Tax revenue is received in the first half of the fiscal year due to the timing of semiannual property owner payments. However, Property Tax is projected to increase by approximately $2.5 million over the current budget of $46.4 million based on an analysis by our consultant HdL company.
Property tax revenue can be explained by reviewing how the County charges property owners and what property value is used to calculate the charge. In 1978, Proposition 13 was established which set the residential property value base back to the 1975 level and limited annual growth to 2% or the rate of inflation, whichever is lower. Each year after the initial 1975 Proposition 13 valuation, the property value grows by this calculation or when properties are sold. The annually adjusted property assessed value (AV) is called the Proposition 13 value. As the housing market declines the value of residential property decreases and can go below the Proposition 13 value. The County reassesses the value of the property on the tax roll as authorized by Proposition 8 which was passed by the voters in 1978. As the market improves or when properties are sold, property values are reassessed upward which is called the Proposition 8 recapture, until they return to Proposition 13 values
In San Joaquin County, over 65% of the City’s single family residential properties were reassessed as allowed under Proposition 8 during the Great Recession when foreclosures reached an all-time high. These properties have been regaining their values in the last two years as properties have turned over and home sale prices have started to increase.
Property values were expected to increase through market driven reassessments over the course of several years. However, the recovery is occurring faster than originally contemplated, and the current trend is that property value assessments are quickly rising. These County reassessments of property values are the majority of the $2.5 million budget variance in property tax revenues remitted to the City and described above. Growth in Property Tax revenue was budgeted at 3.4% and is now anticipated to be closer to 6.4% per the City’s consultant. The County Assessor has announced a possible 9.4% increase in Stockton’s assessed property values based on the FY 2014-15 property tax roll. As of the 2014 property tax roll, only 28.6% of the City’s residential properties remain below their Proposition 13 value with potential value. Staff will continue to monitor the fluctuations in property tax revenues and periodically report back to Council.
Sales tax continues to grow slowly consistent with the local economic recovery. The FY 2014-15 Annual Budget assumed a growth of 3.1% for sales tax revenue. The current projection shows sales tax revenues to be fluctuating slightly between categories, including minimally lower Measure A Transaction and Use Tax receipts, but overall is expected to finish the fiscal year at or near the same growth level as budgeted.
Revenues from Other Agencies exceeded budget by approximately $500,000 and includes reimbursement from the State of California for State Wild Fire mutual aid assistance on three major fires in the Sierras and two in Southern California. This category is difficult to budget as fire conditions vary every year. However, the revenue received for State wild fires is offset by increases in Fire Department staffing costs and therefore has no impact on the General Fund balance.
In summary, revenue projections through the second quarter anticipate approximately $4.1 million, or 2.1% higher than budgeted collections, primarily due to earlier than anticipated increases to Property Taxes. Because these increases were previously anticipated to occur in future years in the Long-Range Financial Plan (L-RFP), this year’s increase is considered one-time. Future increases are expected to taper off earlier in the L-RFP and will occur at a much slower pace once the Proposition 8 recapture to the Proposition 13 values is complete.
Staff will continue to monitor the status of all revenue of the City and will bring forward any appropriate adjustments to the revenue budget later in the year.
Expenditures
Six months of expenditure data for all departments and programs has also been reviewed. As was reported in the first quarter status report, vacancy trends across all departments result in annual projections that will be significantly higher than the budgeted vacancy savings.
The FY 2014-15 Annual Budget included an overall vacancy savings of 3% and a Marshall Plan vacancy savings of 24% due to staggered hiring throughout the year and the time required to recruit and fill those positions. Projections of closer to 8% overall are anticipated with the greatest variance in Police Department sworn officer vacancies, followed by the Fire Department, Office of Violence Prevention, City Attorney, Human Resources and Administrative Services.
While the Police Department has made significant progress toward filling sworn positions and is on track to hire 40 new sworn officers by July 1, 2015, significant vacancy savings have occurred due to the phase-in schedule for these positions. While the recruitment plan has been to hire 40 officers over the course of the fiscal year, all 40 positions were budgeted for the full fiscal year, resulting in savings for each position until it is filled. At current expenditure levels the department projects ending the fiscal year with approximately $7.6 million or 10% in vacancy savings.
In addition, as of the end of the second fiscal quarter, other departments were also experiencing vacancy savings over budgeted levels including the Fire Department with 17 full-time vacancies (15 sworn and 2 non-sworn), the City Attorney’s Office (45%) and the Administrative Services Department (24%). It is worth noting that since the end of the second fiscal quarter, the majority of positions in the City Attorney’s Office have been filled and a number of positions have been filled in Administrative Services. Furthermore, hiring conditions are expected to improve now that the City’s Plan has been confirmed, resulting in a slowing of vacancy savings that are realized. It is also important to realize that vacancy savings are one-time savings because all positions are expected to be filled in the near future and coming fiscal year and that those savings will diminish.
Program Support for Other Funds
Two programs, Golf and Entertainment Venues, are projected to require higher than budgeted General Fund support by year end as they continue to experience the effects of the slow local economy. The Golf Fund has seen a significant decline in activity and number of rounds played at both City golf courses. Despite cost cutting measures that have been implemented; current projected operations indicate that this fund will need additional General Fund support of $200,000 by year end. The Entertainment Venues operating performance has not hit its budgeted levels for ticket sales. Some of this shortfall has been offset by a reduction in expenditures. However, at current rates, an additional $120,000 in General Fund support would be required to fund operations through the end of the fiscal year. Mission critical funding for Information Technology ISF and Radio ISF is continuing as planned in the adopted budgeted with transfers made evenly throughout the year to these programs. Staff has been meeting with program personnel to monitor results and will provide budget adjustment recommendations as part of its next quarterly reports to City Council.
Administration
Fluctuations within the Administration section of the budget reflect variances in multiple administrative offices offset by the vacancy savings pool and labor relations professional services. Costs associated with professional services in support of labor negotiations are anticipated to reach only about half of the budgeted amount because the timeline for the labor negotiation process has been extended and anticipated expenditures will not occur in the current fiscal year.
All other General Fund departments not mentioned above appear to be running at or slightly below budgeted levels.
Projected Ending Available Balance
The overall FY 2014-15 net annual activity in the General Fund is now projected to be $20.5 million which is $12 million more than the adopted budgeted and the L-RFP. Should these projections materialize by year end, the General Fund would end the year with a positive fund balance estimated at $32.9 million or 18.5% of expenditures. The Government Finance Officers Association (GFOA) recommends a minimum fund balance of two months of expenditures or 16.67%. The L-RFP anticipated that the City would reach this goal by 2033. Achieving the GFOA minimum balance early appears to be possible because of one-time vacancy savings, primarily from Marshall Plan sworn officer positions funded by Measure A Transaction and Use Tax, and from savings in City Administration. However, the City is not likely to maintain this reserve level as ongoing costs to operate the City, including but not limited to PERS, increase. The FY 2015-16 Budget will provide a more comprehensive analysis and revised L-RFP.
Other City Funds
All City funds have been reviewed including Community Development, Capital and Municipal Utility Department. These are performing within budgeted expectations and are not expected to require budget adjustments at year end.
FINANCIAL SUMMARY
This report provides an analysis of FY 2014-15 second quarter budget status results. The review of the first six months performance plus projections for the remaining half of the year indicates that Property Tax increases and vacancy savings is estimated to create a General Fund reserve sufficient to meet the recommended GFOA minimum fund balance. No budget amendment is recommended until the projections are confirmed against year end results. The City’s budgets will continue to be monitored and necessary revisions will be brought to Council as additional information becomes available.
Attachment A - 2014-15 Second Quarter Budget Update - General Fund