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ACCEPT FISCAL YEAR 2016-17 SECOND QUARTER BUDGET STATUS UPDATE AND AUTHORIZE BUDGET AMENDMENTS
recommended action
RECOMMENDATION
It is recommended that the City Council adopt a resolution to:
1. Accept this budget status report on the results of the second quarter of Fiscal Year 2016-17 for the City’s General Fund, and selected other funds, and
2. Authorize the recommended transfers and budget amendments to the Fiscal Year 2016-17 Annual Budget in the General Fund, the Golf Fund, the Recreation Fund, the General Liability Internal Service Fund, the Retirement Internal Service Fund, and Debt Administration Fund.
It is further recommended that the City Manager be authorized to take appropriate and necessary actions to carry out the purpose and intent of the resolution.
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Summary
Staff reviewed the second quarter financial results of Fiscal Year (FY) 2016-17, and developed projected year-end results for all General Fund revenue and expenditure categories. Attachment A shows detailed General Fund activity through December 31, 2016, and year-end projections. The General Fund is projected to end the year with a fund balance of $46.7 million, or 21.5 percent of budgeted expenditures. Total year-end expenditure savings in the General Fund are projected to be approximately $7.6 million. Revenue collections are projected to end the year approximately $115,000 over the budgeted $214.7 million. Attachment B shows detailed General Fund revenue activity through December 31, 2016, and year-end projections. This report discusses significant variances in more detail below.
As has been the case for the last several years, General Fund expenditures are under budget primarily due to higher-than-expected vacancies. The largest vacancy savings continue to occur in the Police Department, both in Marshall Plan and non-Marshall Plan staffing. The Police Department continues to make progress toward the goal of filling 485 sworn positions with 430 onboard as of this report. Since the City Council approved new labor agreements the number of filled sworn positions increased from 409 on July 1, 2016 to 430 on April 10, 2017.
The projected $7.7 million savings from revenue and expenditure variances would accrue to the General Fund available fund balance at the end of the fiscal year, increasing the $39.0 million fund balance to $46.7 million. At June 30, 2017, the fund balance will be more than sufficient to fully fund the Priority 1 Working Capital Reserve of $37.0 million in accordance with the Reserve and Fund Balance policy for the General Fund. The balance of approximately $9.7 million will fund the Known Contingencies Reserve and the Risk Based Reserves consistent with the Reserve and Fund Balance policy for the General Fund.
Also included as an attachment to this report is a status update on Measure A-funded “Mission Critical Projects” that were included in the FY 2014-15 and FY 2015-16 Adopted Budgets (Attachment C).
Staff also reviewed all other City funds to determine significant budget variances. This review revealed four instances where amendments to the Adopted Budget are recommended.
|
Requesting Department |
Fund |
Budget/ Transfer Amount |
|
Community Services |
General Fund transfer to Golf Fund |
$200,000 |
|
Community Services |
Recreation Fund |
$15,000 |
|
Human Resources/ City Attorney |
General Liability Internal Service Fund |
$250,000 |
|
Human Resources/ Administrative Services |
Transfer from Retirement Internal Service Fund to Debt Fund |
$297,000 |
These amendments are described later in this report and included in the proposed Council resolution.
Staff will continue to monitor revenue and expenditure levels, returning to Council with a third quarter report. A significant emerging issue will be new policies adopted by the CalPERS Board of Trustees. The Board adopted new policies regarding the discount (or investment earnings) rate and life expectancy assumptions to lower investment risk and stabilized contribution requirements. Although the City planned for increased CalPERS costs, the increased costs resulting from the recent Board action are now projected to exceed the Long-Range Financial Plan (L-RFP) projections. Further analysis is underway and will result in updates to the L-RFP and the development of recommendations for the FY 2017-18 Budget.
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. Quarterly budget reports are part of that effort.
The FY 2016-17 annual city-wide budget of $590.1 million was adopted on June 21, 2016, and was later amended by Council to include an additional $11.3 million for employee labor agreements. The General Fund adopted expenditure budget was $203.8 million of that total and amendments from labor agreements increased that amount by $9.9 million. With the rollover of prior year encumbrances and mid-year budget adjustments, the FY 2016-17 General Fund expenditure budget is now at $217.5 million.
Present Situation
General Fund Budget Status Update
Staff reviewed General Fund expenditure and revenue results for the first six months of the current fiscal year as shown in Attachments A and B. Staff then made initial estimates of year-end results based on current trends and known actions that will affect the second half of the fiscal year. As of December 31, 2016, the General Fund was budgeted to end the fiscal year with an available balance of just under $39.0 million. As discussed above, year-end projections based on activity through December 31, 2016, indicate that revenues will end the year just slightly ahead of the budgeted level, and expenditures will be approximately $7.6 million less than budget. The available fund balance is now estimated to be $46.7 million or 21.5 percent of budgeted expenditures as shown in the table below.
|
Year-End Project (Dollars in millions) |
Approved Budget |
Q2 Year-End Projection |
Variance from Budget |
|
|
Beginning Balance |
$41.80 |
$41.80 |
$0.00 |
|
|
Revenues |
214.69 |
214.80 |
0.11 |
0.1% |
|
Expenditures |
(217.50) |
(209.92) |
(7.58) |
3.5% |
|
Ending Balance |
$38.99 |
$46.68 |
$7.69 |
|
The estimated year-end projections are preliminary and may change as additional revenue information becomes available and departments focus on hiring for vacant positions and delivery of services as planned during the remainder of the fiscal year. Staff will continue to monitor revenue collections and expenditure trends in all categories against the annual budget, the Long-Range Financial Plan, and department projections.
Two budget adjustments effective since the 1st Quarter Budget Update are shown on Attachment A. One increased the City Council budget for two new positions in the Office of the Mayor and the second increased the City Auditor Office budget for external auditor costs.
Revenue
Current information indicates General Fund revenues are likely to end the fiscal year very close to the budgeted level of $214.7 million. Revenue growth is slowing in general, and trends in specific industries are causing fluctuations in many City revenue categories. The largest variance is in the sales tax category. However, other categories of the General Fund are projected to exceed estimates, and in the aggregate, should fully offset the expected shortfall in sales tax revenues.
Property tax proceeds were minimal as of December 31, 2016, as San Joaquin County remits the majority of property tax revenue to the City in January and May, in line with the property tax due dates for property owners. Based on the January receipts and projections from our property tax consultants, property tax revenue will end the year slightly above ($186,000 or less than 0.4 percent) the budgeted growth level of 3.5 percent.
The most recent projections from our Sales Tax consultants show the 1 percent Point of Sale portion of sales tax falling below the budgeted level by $824,000, due primarily to a decline in the fuel and service station sales and the correction of a misallocation of sales tax from a major retail outlet to Stockton. Measure A Transaction and Use Tax revenues are not expected to see the same reduction because the misallocation did not impact this tax and these tax revenues are less sensitive to fluctuations in the fuel category.
Utility Users Tax (UUT) proceeds are projected to be below the $34.1 million budget by approximately $566,000. Rate increases by water, electric and gas utility companies are resulting in higher revenues than previously expected. Conversely, Cable TV and Telecommunication tax proceeds are running well below the budgeted growth rates. Cable UUT revenues are currently projected to fall below the budget by as much as 14 percent, reflecting the continuing trend being felt nationwide, as more and more consumers find ways to “cut the cord” with traditional cable service. Similarly, Telecommunication (Telecom) tax proceeds are again well below projected levels at mid-year and are projected to be under budget by as much as $553,000. Telecom UUT proceeds have declined for a number of years, primarily as the result of changes in consumer habits, and in particular the steep decline in wired residential phone services. Wireless telecom proceeds have also dropped, reflecting rapid changes in pricing models in the industry and increased competition, which has adversely affected growth rates. The continuing trend towards data (which cannot be taxed) and away from phone costs, as well as the ever-changing face of the competition in the wireless industry, is going to make projecting revenue estimates in this category increasingly difficult.
The downward trend in cable revenues is also impacting Franchise Tax revenue collections from cable providers which are projected to end the year under budget by almost $297,000. Improved collections from Waste Hauler franchise agreements will offset some of the cable revenue loss. The offsetting impact of these variances on the Franchise Tax category is a projected to end the year approximately $206,000 or 1.6 percent below the budgeted amount.
Collections for Business License Taxes primarily occur in the last six months of the fiscal year and are expected to end the year less than one percent under budget. This projection assumed no new revenue would be realized from Medical Marijuana businesses in FY 2016-17. Hotel/Motel Taxes continue to perform above projections reflecting growth in tourism and business travel. Based on collections through December 2016, revenues are likely to exceed budget by as much as $200,000.
The Interest category projection reflects the benefit of paying the full year of CalPERS employer contributions in July rather than with twice a month throughout the year. Bankruptcy debt restructuring and prior year savings gave the General Fund the cash on hand needed to prepay CalPERS and receive a $1.3 million credit.
Collections in the remaining revenue accounts within the General Fund appear to be at or slightly above budgeted levels. Staff will continue to monitor the status of these and all revenue of the City and will bring forward any appropriate adjustments to the revenue budget later in the year.
Expenditures
Departments are on track to spend at or below their budgets with a couple of exceptions described below. Overall General Fund expenditures are expected to end the year under budget by $7.6 million or 3.5 percent primarily due to continued higher-than-budgeted vacancy levels. Vacancy savings were budgeted in the General Fund in two city-wide amounts: 5 percent for the largest General Fund departments and 20 percent for Marshall Plan personnel costs in the Police Department to adjust for the time required to add 40 sworn positions throughout FY 2016-17. In total, $9.2 million was budgeted for vacancy savings in the General Fund.
Through the second quarter of FY 2016-17, vacancy savings in the non-Marshall Plan portion of the General Fund were approximately 7.0 percent. In the Marshall Plan personnel costs, overall vacancy savings are approximately 37.8 percent. At the halfway point of the year, total vacancy savings of approximately $8.5 million have been realized in the General Fund. Vacancies in the second half of the fiscal year are projected to generate another $6.7 million, for a total of $15.2, or $6.0 million more than the budgeted savings.
Vacancy Savings
|
Approved Budget |
Q2 Year-End Projection |
Variance from Budget |
Percentage Variance |
|
$9.2 million |
$15.2 million |
$6.0 million |
65% |
The largest budget variance is in the Police Department which is projected to end the year $6.5 million under budget due to vacancy savings. The Police Department continues its effort to fill sworn officer positions as fast as possible, and progress continues to be made towards the goal of filling all sworn positions. At the end of the second quarter of FY 2016-17, the Police Department had 417 sworn staff positions filled out of an authorized staffing level of 485. Hiring has remained brisk, with a total of 34 additional officers added during the 2nd quarter, resulting in a net gain of 8 officers. At mid-year, the Police Department already accrued $7.4 million in salary savings. The amount budgeted for salary savings in the department for the entire fiscal year was $7.3 million. Vacancy savings in the second half of the year are expected to be lower than the first half, and 430 sworn staff positions were filled as of April 10, 2017. The department will still end the year with savings above budget.
The savings projected for the Administrative Services Department ($377,000) are primarily the result of a number of vacancies, particularly in the Financial Services and Revenue Services Divisions. Efforts are under way to fill these vacancies including the hiring of five new Accountants in February 2017. The savings projected for the Human Resources Department ($162,000) are a combination of projected vacancy savings and savings anticipated in recruiting activities.
Savings anticipated in the City Auditor budget ($238,000) reflect the fact that the internal audit activities budgeted for FY 2016-17 will not all be completed on the timeline previously anticipated.
As discussed in previous reports, the City continues to improve its hiring and retention. Recent salary increases and improved health benefits options approved for various bargaining units should help with both efforts, and vacancy savings above the budgeted amount are considered one-time savings. It is the City’s goal that as many of the budgeted positions as possible be filled promptly to provide service to the community. It is also true that a number of positions will always be vacant due to normal turnover, including retirements and separations. The Budget Office will continue to refine the amounts budgeted for vacancy savings to reflect updated hiring trends and experience.
In the Program Support for Other Funds category, only one program that receives a General Fund subsidy is projected to require an increase in its budget. The Golf Fund is currently estimated to require an additional $200,000 over the budgeted appropriation of $550,000 from the General Fund in the current fiscal year. The increase is the result of a combination of higher-than-anticipated expenditures, mostly to repair failing infrastructure and equipment, and lower than anticipated revenues.
All other General Fund departments or expenditure categories not mentioned above are operating at budgeted levels. Staff will continue to monitor revenue and expenditure levels, returning to Council with a third quarter report, along with necessary budget adjustments.
CalPERS
A significant emerging issue will be new policies adopted by the CalPERS Board of Trustees. The Board adopted new policies regarding the discount (or investment earnings) rate assumption to lower investment risk and stabilized contribution requirements. The new CalPERS policies gradually reduce the assumed discount rate from 7.5 percent to 7.0 percent to reflect investment returns and to address the growing costs of the CalPERS system. The effect will be to phase in increased costs to all CalPERS agencies including Stockton over the next several years. The City’s L-RFP anticipated some, but not all, of these changes. Based on preliminary estimates, the City’s CalPERS costs will exceed those projected in the L-RFP in FY 2020-21 by as much as $4.2 million. When the CalPERS rate changes are fully implemented in FY 2024-25, the annual General Fund cost is estimated to be $16.5 million more than prior estimates. It would be prudent to set funds aside for future CalPERS retirement system costs based on the new discount rate assumptions recently approved by the CalPERS Board of Trustees. The Budget Office is currently revising the L-RFP to incorporate the new CalPERS policies and other new revenue and expense information for the FY 2017-18 Budget deliberations.
Recommended Budget Amendments
In addition to the detailed review of the General Fund expenditures and revenues described above, all City funds have also been reviewed as part of the preparation of this report.
Prompted by this review, four budget amendments requiring Council authorization have been identified for recommendation in the Second Quarter Report.
1. Increased General Fund support to the Golf Fund by $200,000 to cover higher expenditures and a reduction in program revenues as described above.
2. Increase Recreation Fund budget appropriation by $15,000 to support the cost of hosting the traveling Vietnam Veteran Moving Wall exhibition, which will be in Stockton in June 2017. The Recreation Fund has sufficient fund balance to make this appropriation.
3. Increase General Liability ISF appropriation by $250,000 from fund balance for legal expenses. During the bankruptcy, many pending risk claims against the City were settled or put on hold. During that time, the General Liability Internal Service Fund expenses were artificially low, which allowed the fund to build up reserves for liabilities and some fund balance. A return to a “normal” level of risk claims occurred, and a number of claims are being actively litigated. Legal costs are expected to exceed the annual budget by $250,000. The fund has sufficient balance to cover the increased appropriation for legal fees. Increased litigation costs are expected to continue and will be budgeted at a higher rate in the FY 2017-18 budget.
4. Transfer $303,900 from the Retirement ISF fund balance to the Debt Administration Fund for Assured Guaranty debt payments. The City has a settlement agreement with Assured Guaranty that replaced the Pension Obligation Bond debt service payments through the City’s Plan of Adjustment. A review of the Debt Administration fund revealed an error in the entries leading up to the July 1, 2015 payment to Assured Guaranty. Although proper payment was made to Assured Guaranty, the transfer of funds was less than the actual payment. The payment of $1,441,164 was funded from special fund contributions collected in the Retirement Internal Service Fund after suspension of debt service payments on the Pension Obligation Bonds. The funds are still in the Retirement Internal Service Fund, and it is recommended that the $303,900 be transferred to the Debt Administration Fund.
Status of Measure A Mission Critical Projects
Measure A was passed by the voters of Stockton to fund the City’s proposed Plan of Adjustment, and fund law enforcement and crime prevention services as well as other essential city services. The Measure A implementation plan included funding for mission critical needs during the first two years of the tax as additional police staffing was phases-in. In Fiscal Years 2014-15 and 2015-16, a variety of projects of critical importance were identified and funded. In response to requests for an update on projects funded either in whole or in part, from Measure A monies, Attachment C provides a summary of Mission Critical Projects and the status of these initiatives by Council Strategic Initiative. Of the 19 funded projects, ten have been completed, eight are underway, and one is in the planning stages. The largest project is the replacement of the City’s Enterprise Resource Planning (ERP) system. Measure A funded $5 million, and when combined with other City resources, the City set aside a total of $9.2 million for this multi-year project which is still in the early development stages. As shown in the Total Project Funding column, the $16.0 million in Measure A funds were combined with other City resources for total project appropriations of $23.1 million. As of February 2017, approximately $11.1 million remains to be spent on active projects with most of the remaining funds ($9.2 million) related to the ERP project.
Attachment C identifies whether projects were expended from the General Fund or transferred to other funds. Three projects, Police Radios, Police Body Cameras and IT Network Encryption Infrastructure, came in under budget leaving unspent funds totaling $900,000. The unspent funds were reflected on the FY 2015-16 Measure A and General Fund reports and contributed to the June 30, 2016 General Fund reserve. Many of these mission critical projects required funds be transferred to capital and technology funds and are currently underway. All mission critical projects tracked in other funds are expected to be fully spent. The $16 million in mission critical funding addressed many significant program and infrastructure needs that could not be afforded prior to voter approval of Measure A.
FINANCIAL SUMMARY
This report provides an analysis of FY 2016-17 second quarter budget status results. The review of the performance in the first six months plus projections for the remaining half of the year indicate expenditure savings are estimated to result in a year ending balance above that budgeted.
The recommended transfers and budget amendments to the FY 2016-2017 Annual Budget are described above and listed below.
1. Increase the General Fund (010) transfer to the Golf Fund (481) by $200,000
General Fund Contingency 010-0131-510 (200,000)
General Fund Transfer Out 010-0000-992 200,000
Golf Fund Transfer In 481-0000-492 200,000
Golf Fund Expenditure 481-3610-572 200,000
2. Increase Recreation Fund (044) appropriation by $15,000 from fund balance for Vietnam Veteran Moving Wall exhibition.
3. Increase General Liability ISF (541) appropriation by $250,000 from fund balance for legal costs.
4. Transfer $303,900 from the Retirement ISF (561) fund balance to the Debt Administration Fund (201) for debt payments made to Assured Guaranty.
Trends and potential budget variances in City’s funds will continue to be monitored, and staff will return to Council with periodic financial reports and future recommendations for changes where appropriate.
Attachment A - 2016-17 Second Quarter Budget Update - General Fund Budget Overview
Attachment B - 2016-17 Second Quarter General Fund Revenue Summary
Attachment C - Measure A Mission Critical Project Summary