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ACCEPT FISCAL YEAR 2016-17 THIRD 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 third quarter of Fiscal Year (FY) 2016-17 for the City’s General Fund, and selected other funds, and
2. Authorize the recommended transfers and budget amendments to the FY 2016-17 Annual Budget in the General Fund, Debt Fund, Successor Agency Debt Fund and the Downtown Marina 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 third quarter financial results of FY 2016-17 and projected year-end results for all General Fund revenue and expenditure categories. Attachment A shows detailed General Fund activity through March 31, 2017, and year-end projections. The General Fund is projected to end the year with an unrestricted fund balance of $49.2 million, or 22.6 percent of budgeted expenditures, which is an increase of approximately $2.5 million from the second quarter update. Total year-end expenditure savings in the General Fund are projected to be approximately $9.3 million. Revenue collections are projected to end the year approximately $984,000 over the budgeted $215.0 million. Attachment B shows detailed General Fund revenue activity through March 31, 2017, and year-end revenue 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 its goal of filling 485 sworn positions with 445 onboard as of May 15, 2017. Since the City Council approved new labor agreements the number of filled sworn positions increased from 409 on July 1, 2016, to 445 as of May 15, 2017.
The projected $10.2 million savings from increased revenue and expenditure variances will accrue to the General Fund available fund balance at the end of the fiscal year, increasing the fund balance to $49.2 million. At June 30, 2017, the fund balance is anticipated to be more than sufficient to fully fund the Priority 1 Working Capital Reserve of $36.2 million in accordance with the Reserve and Fund Balance policy for the General Fund. The $13.0 million remainder will then go towards the Known Contingencies Reserve, which will still be short of the $69.0 million target. The Known Contingencies reflect items that are either future expenditures or items that are appropriately budgeted today as the final cost is not available. Per Council policy, the Known Contingency Reserve is being used for recruitment and retention, the Enterprise Resource Program, pension costs and a future City Hall location. Because there is insufficient funding for the Known Contingencies, no additional funds will be provided towards the Risk-Based Reserve, which will remain at $5 million.
Staff reviewed all other City funds to determine significant budget variances. This review revealed two instances where amendments to the Approved Budget are recommended.
|
Requesting Department |
Fund |
Budget/ Transfer Amount |
|
Economic Development |
General Fund transfer to Downtown Marina Fund |
$50,000 |
|
Administrative Services |
Increase in Debt Service Fund transfer in from Successor Agency and expenditures |
$10,956,000 |
These amendments are described later in this report and included in the proposed Council resolution.
The FY 2017-18 Annual Budget document, budget study session, and public hearing incorporated the third quarter revenue projections. This report includes a minor increase of $463,000 in the year-end revenue projections due to receipt of one-time payments. Expenditure projections have been updated since the FY 2017-18 budget deliberations to incorporate additional savings of $1.4 million. Staff will continue to monitor revenue and expenditure levels as final year-end transactions are posted.
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 ($203.8 million General Fund) was adopted on June 21, 2016, and was later amended by Council to include an additional $11.3 million ($9.9 million General Fund) for employee labor agreements. With the rollover of prior year encumbrances and mid-year budget adjustments, the FY 2016-17 General Fund expenditure budget is now at $217.8 million.
Present Situation
General Fund Budget Status Update
Staff reviewed General Fund expenditure and revenue results for the first nine months of FY 2016-17 as shown in Attachments A and B. Staff then updated estimates of year-end results based on current trends and known actions that will affect the last quarter of the fiscal year. The General Fund was originally 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 March 31, 2017, indicate that revenues will end the year $984,000 ahead of the budgeted level, and expenditures will be approximately $9.3 million less than budgeted levels. The available fund balance is now estimated to be $49.2 million or 22.6 percent of budgeted expenditures as shown in the table below.
|
Year-end Projection (Dollars in millions) |
Approved Budget |
|
Q2 Year-end Projection |
|
Q3 Year-end Projection |
|
Variance from Budget |
|
Beginning Balance |
$ 41.80 |
|
$ 41.80 |
|
$ 41.80 |
|
$ 0.00 |
|
|
Revenues |
214.96 |
|
214.80 |
|
215.94 |
|
0.98 |
0.5% |
|
Expenditures |
(217.77) |
|
(209.92) |
|
(208.49) |
|
(9.27) |
4.3% |
|
Ending Balance |
$ 38.99 |
|
$ 46.68 |
|
$ 49.24 |
|
$10.25 |
|
The estimated year-end projections are preliminary and may change as additional revenue information becomes available and departments focused on filling vacant positions and delivering 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.
Three budget adjustments made to the General Fund Budget since the second quarter report are reflected in Attachment A and include:
1. A $238,000 increase in Fire Department wildfire reimbursement revenues and corresponding expenditures.
2. A $200,000 increase in the transfer to the Golf Fund to cover Golf operations costs as approved in the second quarter report.
3. A $57,000 increase in Fire Department for fireworks enforcement expenses as approved by Council on March 28, 2017.
Revenue
Current information indicates General Fund revenues are likely to end the fiscal year approximately $1 million higher than the budgeted level of $215.0 million. Revenue growth is slowing in general, and trends in specific industries are causing fluctuations in many revenue categories. The largest variances are in sales tax revenues and interest earnings. Attachment B includes a brief update explaining the variances in revenue categories.
Property Tax proceeds were 53.8 percent of the budget as of March 31, 2017, with San Joaquin County remitting approximately half of the annual property tax revenues in January 2017. Based on the January receipts and projections from our property tax consultants, property tax revenue will end the year just 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 $2.0 million, due primarily to a correction of a multi-year 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 they are not impacted by the misallocation.
Utility Users Tax revenue projections improved since the second quarter report, with revised projects below the $34.1 million budget by only $77,000. Revenue from Cable and Telecom services remain lower than prior years for the same reasons discussed in the second quarter report with revenues from water, electric and gas utility rate increases making up for some of the loss.
Business License Tax collections primarily occur in the last six months of the fiscal year and are expected to end the year over the $11.0 million budget by 2.3 percent. Hotel/Motel Taxes continue to perform above projections reflecting growth in tourism and business travel. Based on collections through March 2017, revenues are likely to exceed budget by as much as $262,000 or 9.7 percent.
Revenues from Other Agencies are projected to be above the $2.0 million budget by approximately $425,000 due to an increase in the City’s share of Redevelopment Property Tax Trust Fund monies. Miscellaneous Other Revenues will end the year $351,000 or 10.42 percent above the budgeted amount mainly due to the Accounting Division recently completing a thorough analysis of the Miscellaneous Agency Clearing Fund and transferring $363,000 of idle and aged revenues to the Miscellaneous Revenue account in the General Fund. Charges for Services are projected to be higher than budgeted by $283,000 due mainly to $196,000 for debt issuance reimbursement and $67,000 of additional San Joaquin County contracts.
As described in the second quarter report, the Interest category projection reflects the benefit of paying the full year of CalPERS employer contributions in July rather than 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 are consistent with second quarter projections and are projected to be at or slightly above budgeted levels. Staff will continue to monitor the status of all City revenues.
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 budgeted levels by 4.3 percent primarily due to continued higher-than-budgeted vacancy levels. Salary 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 addition of 40 sworn positions in FY 2016-17.
Through the third quarter of FY 2016-17, vacancy savings in the non-Marshall Plan portion of the General Fund continued at 6.9 percent. In the Marshall Plan personnel costs, overall vacancy savings are running at 34.7 percent. Through the third quarter, total vacancy savings of approximately $12.2 million have been realized in the General Fund. The last quarter is projected to generate another $3.7 million in vacancy savings for a total of $6.7 million more than the budgeted savings. The estimated savings has increased by $700,000 since the second quarter report.
Vacancy Savings Summary
|
Approved Budget |
Q3 Year-End Projection |
Variance from Budget |
Percentage Variance |
|
$9.2 million |
$15.9 million |
$6.7 million |
73% |
The largest budget variance is in the Police Department which is projected to end the year $6.7 million under budget due to vacancy savings. The Police Department continues to fill sworn officer positions as fast as possible and make progress towards the goal of filling all sworn positions. At the end of the third quarter of FY 2016-17, the Police Department had 427 sworn staff positions filled out of an authorized staffing level of 485. At this same time last year, the filled position total was 394. Hiring has remained brisk, with a total of 46 additional officers added. Since July 1, 2016, 37 officers separated, including 11 retirements, eight lateral transfers to other agencies and 18 failing probation. By the end of the third quarter, the Police Department has accrued $9.8 million in salary savings. This amount does not reflect the budgeted salary savings of $7.3 million in the department for the entire fiscal year. Vacancy savings will continue to decline in the last few months of the fiscal year as evidenced by the 445 filled positions as of May 16, 2017.
The Fire Department, is now projecting savings of $861,000. This savings is a combination of two factors. The academy scheduled to be held in April was postponed due to unforeseeable reasons and will now be held in FY 2017-18. Second, the projected assistance for flood-related events that would have resulted in substantial overtime was not realized as the State did not utilize the services of the Stockton Fire Department.
The savings projected for the Administrative Services Department ($271,000) are primarily the result of a number of vacancies, particularly in the Financial Services and Revenue Services Divisions. The department made great strides in filling key vacancies in the department and now has a fully staffed Accounting division. The savings projected for the Human Resources Department ($425,000) are a combination of projected salary savings and savings 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.
The City Attorney, while projected to be on budget, is being carefully monitored by staff. The City Attorney’s office litigation and code enforcement efforts have created increased outside attorney fees. While most of these fees are reimbursable, there is a timing delay between incurring the expense and fee collection. If the department is unable to absorb the outside attorney costs, staff will bring to Council a recommendation to allocate additional funding based on reimbursements already received to cover the expenses.
As discussed in previous reports, the City continues to improve its hiring and retention. Recent salary increases and improved health benefit options should help with both efforts, and vacancy savings above the budgeted amounts 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 Downtown Marina Fund is currently estimated to require a $50,000 increase to its $170,000 General Fund subsidy. The increase is needed to address several safety and maintenance issues as well as increased security efforts at the Marina. Since the departure of the marina operator, City staff replaced fire extinguishers, gate locks, a torn sail and an emergency pump. Unanticipated costs were incurred for the salvage and removal of two abandoned boats and a broken water pipe. At the same time, the Redevelopment Successor Agency will not require the $200,000 General Fund subsidy in FY 2016-17 based on sufficient tax increment revenues to cover its administration and debt obligations. The net effect of these two items results in a $150,000 General Fund savings.
All other General Fund departments or expenditure categories not mentioned above appear to be running at or slightly below budgeted levels. As the close of the fiscal year begins, staff continues to monitor revenue and expenditure levels and has found that certain expenses projected in the third quarter may not be incurred by June 30, 2017, but are expected to occur in FY 2017-18. The budget for some operating expenses may need to be carried over from FY 2016-17 to the FY 2017-18 Budget which may require Council action. As part of the FY 2016-17 year-end Budget Update report, a list of these expenses will be brought to City Council for approval, along with any another final budget adjustments needed.
Recommended Budget Amendments
In addition to the detailed review of the General Fund expenditures and revenues, staff also reviewed all City funds as part of the preparation of this report and recommend two budget amendments requiring Council authorization.
The first will increase the General Fund transfer to the Downtown Marina Fund by $50,000 to cover unanticipated repair and security expenditures as described in the General Fund section.
The second budget amendment is a technical clean-up item from the bond refinancing approved last fall for the City and Successor Agency. With the refunding of the Certificates of Participation 2003 Series A and B - Redevelopment Affordable Housing Program, payoff expenses of $10,956,000 occurred in the Debt Service Fund with an offsetting transfer from the Successor Agency Debt Fund. As part of the refunding, bond funds were moved from the new bond issue recorded in the Successor Agency Debt Fund (231) to the Debt Service Fund (201) to combine with the reserve holdings on the prior issue and facilitate the payoff of the 2003 bonds. The refunding actions were approved by the City Council and Successor Agency, but budgetary approval for the transfer of funds and final pay off expenses was not included in the City resolution.
FINANCIAL SUMMARY
This report provides an analysis of FY 2016-17 third quarter budget status results. The review of the performance in the first nine months plus projections for the remaining quarter 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 2016-17 Annual Budget are described above and listed below.
1. Increase the General Fund (010) transfer to the Downtown Marina Fund (460) by $50,000.
General Fund Contingency 010-0131-510 (50,000)
General Fund Transfer Out 010-0000-992 50,000
Downtown Marina Fund Transfer In 460-0000-492 50,000
Downtown Marina Fund Expenditure 460-4820-571 50,000
2. Increase the Debt Service Fund (201) expenditure appropriation by $10,956,000; offset by $10,237,000 transferred in from the Successor Agency Debt Fund (231) and $719,000 from fund balance.
Revenues
Debt Service Fund Transfer In 201-0000-492 10,237,000
Expenditures
Debt Service Fund Housing COPS 2003B 201-2003-711 10,019,000
Debt Service Fund Housing COPS 2003A 201-2002-711 936,000
Trends and potential budget variances in City funds will continue to be monitored, and staff will return to Council with financial reports and future recommendations for changes where appropriate.
Attachment A - FY 2016-17 Third Quarter Budget Update - General Fund
Attachment B - FY 2016-17 Third Quarter General Fund Revenue Summary