11 Fiscal Year 2015-2016 Budget Presentation: Workshop #1 – General Fund and Enterprise Fund Operations.

Note from TheGardeningSnail. Part of this page may have been produced by running a PDF Image File through a program that converts Image to Text. My apologies for any Textual Gremlins that may have crept in. I may also have broken up longer paragraphs and highlighted certain items of interest.

Meeting Date MAY 05, 2015

Agenda Item #11. Fiscal Year 2015-2016 Budget Presentation: Workshop #1 – General Fund and Enterprise Fund Operations.

STAFF REPORT

AGENDA ITEM: Fiscal Year 2015-2016 Budget Presentation: Workshop#l-General Fund and Enterprise Fund Operations

MEETING DATE: May 5, 2015

PREPARED BY: Odi Ortiz, Interim City Manager/Finance Director REVIEWED BY: Odi Ortiz, Interim City Manager/Finance Director

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RECOMMENDATION:

City Council to review preliminary budget projections for fiscal year 2015-16 and provide staff with recommendations and/or direction.

BACKGROUND:

SECTION ONE: FY15-16 GENERAL FUND OVERVIEW: FISCAL IMPACT

The City of Livingston is experiencing a good level of recovery in property tax revenue areas with an 8.4% net growth in 2014-15 (see Exhibit A). Reports provided by HDL Companies in late December 2014, reflect a good number of Prop 8 parcels in Livingston recovering some pre-2007 assessed values.

Recent housing market activity has shown property values recovering at an estimated rate of 20-30% from 2012 values. The downturn of the housing market impacted over 1,600 Livingston parcels between the years 2008-2012 (see Exhibit B). Values of those Prop 8 parcels declined significantly during the downturn in our economy resulting in material impacts to City’s general fund revenues.

During 2013-14, the City of Livingston experienced a modest recove1y on property values when about 425 Prop 8 parcels were adjusted by the County. This recovery will continue through 2015 per our consultant as we expect the County to adjust over 770 Prop 8 parcels during fiscal year 2014-15 and a modest count in 2015-16.

Unadjusted Prop 8 parcels are reported at just over 650 as of December 2014. In addition to Prop 8 parcel recovery, the City has been successful in completing a few commercial developments that will contribute towards local economic development; Rancho San Miguel (70,000 square feet grocery store), Autozone, and CVS pharmacy. These new developments opened for business between January and April 2015 and should contribute towards generating property tax, franchise tax, sales tax and business license revenues.

City’s general fund property tax revenue categories are increasing by nearly $385,000 from actual revenues collected in fiscal year 2012-13.

Local sales tax activity continues to fluctuate from year to year. Reports provided by HDL reflect first two quarters in 2013 with negative growth, a positive third quarter and a negative fourth quarter. The City accomplished positive sales tax growth during first two quarters; a decline in third quarter and a great 4th quarter in 2014 with an almost 40% increase compared to same 4th quarter in 2013 (see Exhibit C). This has been the highest reported quarter increase in last three years and we hope there are no extraordinary circumstances applicable. A meeting has been scheduled with HDL Companies to review and discuss the 2014 4th quarter results in detail.

Livingston depends highly on gasoline & diesel sales activity, more than half of its annual sales tax revenues are generated through this type of activity. The City is sensitive to gas and diesel price activity when it comes to sales tax. There’s a need to diversify Livingston’s local sales tax market by bringing in more retail opportunities.

Per management’s request, HDL Companies generated a revised 2015-16 sales tax revenue projection on April 28th, reflecting a significant increase in revenues in 2015-16 by $175,000 compared to current fiscal year’s revised budget.

Franchise tax and business license fee revenues are projected to increase by almost $40,000 in the upcoming year.

Construction and building fee revenues have been modest in last two fiscal years as those commercial development projects were completed. Developer uncertainty continues to be an issue along with water drought conditions here in California. Developer uncertainties create budget challenges for finance departments. Actual construction could take a year or several years depending on each developer’s circumstances. For example, construction and building fees on completed commercial projects like Rancho San Miguel, Autozone, and CVS pharmacy were collected in two different fiscal years 2014 and 2015. Some of these development projects had been in discussion/review for several years. Our current construction/building fee projections include one possible housing project. If other development projects are approved later in 2015, those related construction fees will be incorporated during our mid-year budget revision process.

All other revenue categories have remained consistent, with the exception of one-time revenue activities like, RDA related tax increment payments, miscellaneous refunds/reimbursements,

The City made its final payment in October 2014 towards the $500,000 CDBG grant liability.

In 2013 management also communicated a possible financial impact associated with the 2011/2012 RDA/City loan payments in the amount of $700,000.

As communicated, the California Department of Finance has not honored the outstanding City to RDA loan and related financial impacts to City’s general fund were outlined in the 2012-13 financial audit.

In early June 2014, the State Controller’s office demanded City funds in the amount of $700,000 that were associated with loan payments in 2011 and mid 2012.

Those loan payments were made by the former RDA to the City and were declared by the State to be un-allowable and must be paid back to Successor Agency for distribution.

The City will make an attempt to negotiate a four year repayment agreement to minimize the financial cash impact to its general fund.

Fund Balance (Reserves)/cash (10+ year overview)

City’s records show continuous general fund operating deficits for nine straight years between 2004 through 2013 depleting its fund balance (reserves) and cash below reasonable levels.

Management made significant decisions going into fiscal year 2012-13 which included lay-offs, cost reduction measures and re-organization of City’s operations in efforts to re-adjust annual cost with new levels of revenues.

A general fund operating surplus was accomplished in 2013-14 in the amount of just under $600,000, increasing fund balance (reserves) and cash to a more comfortable level.

2014-15 revised budget projections reflect a second straight year of operating surplus at over $365,000.

Preliminary projections for 2015-16 reflect a general fund operating surplus of nearly $300,000 (assumptions apply).

Approximately $46,000 of this surplus is restricted funds which should be committed towards the City’s general plan update.

Management highly recommends dedicating a portion of anticipated operating surplus towards efforts in replenishing fund balance (reserves), currently estimated at 23% or just less than three months of annual operating expenditures by June 30, 2015 (see Exhibit D).

A reasonable level of fund balance (reserves) would be three to six months of annual operating expenditures. The City currently does not have a fund balance (reserves) policy or a "rainy day reserve" to address extraordinary, emergency situations, or to cover unfunded liabilities.

Management has dedicated great efforts on revenue sources and cost efficiencies by;

• Creating, attracting, encouraging and supporting new development in Livingston

• Reviewing and performing fee studies to update service fees

• Reviewing and considering new tax measure(s)

• Continue reviewing existing contractual engagements for improving services or cost savings (efficiency)

• Reviewing changes impacting personnel costs: union negotiations, benefits and insurance costs

• Freeze vacant positions until permanent revenue levels are sufficient to cover operating costs

• Assessing and controlling risk

• Expenditure cuts to department’s overhead operating budgets (non-personnel areas) These efforts may continue in order to address citywide financial stability.

Economic Outlook and Assumptions

Overall, the financial status in California has improved. Municipalities and counties continue to report revenue recoveries. The housing market continues to show a slow recovery. California unemployment rate is nearly 6.5% as of March 2015 and US inflation rate for 2015-16 is expected to be 2-3%.

Fluctuations on our local economy continue as reflected on our Livingston’s sales & use tax revenues. Interest yields are expected to continue low in the year ahead.

Preliminary projections attached do not reflect any possible financial impacts associated with pending union negotiations and assumes the City ending furloughs and wage reductions currently in place through June 30, 2015.

Preliminary projections do not reflect possible financial impacts associated with State & Federal actions impacting revenue levels to local governments. Currently there’s no indication of any State & Federal changes negatively impacting local revenues.

Summary of 2015-16 General Fund Revenue Projections: Our conservative projections reflect total general fund revenues of $5.17 million for 2015-16, a modest increase of $166,000 (over 3%) compared to revised 2014-15 budget (See Exhibits E & El).

Expenditures

Preliminary projections include the following assumptions; ending furloughs, pay cuts and vacation cash out freeze as of June 30, 2015; a 16% medical benefit increase until actual premium rates are received sometime in May. Preliminary projections attached do not reflect any possible financial impacts associated with pending union negotiations.

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General Fund projections reflect an overall increase in costs of $183,000 compared to the 2014-15 revised budgets (See Exhibit E). Increase is primarily in City personnel costs if the City decides to end budgetary measures mentioned above at the end of fiscal year 2015 (See Exhibit F-F).

Total Projected General Fund Expenditures for 2015-16 are $4.87 million.

Preliminary budget projections reflect an operating surplus in the General Fund area in the amount of $296,000 (Revenues exceeding expenditures: See Exhibit E).

SECTION TWO: 2014-15 Enterprise Funds: Water Operating Fund:

Per recent utility rate study and Prop 218 hearing process, new water rates were adopted on July 2014 and may remain in effect through 2018. Based on this study, operating costs, capital improvement plans and revenue requirements were outlined through end of 2018. Purpose of rate increases include; improve water quality, generate sufficient levels of revenues to cover ongoing annual operating costs, and eliminate cash deficit.

Based on the adopted new water rate schedule, user revenues were projected to increase to a more reasonable level throughout the five year period permitted on utility rate study. Revenue levels were expected to increase from $1.4 million in 2013-14 to $2.6 million by 2014-15 and to $3.0 million by 2015-16.

The new rate structure is supposed to generate enough revenues to eliminate the current cash deficit in the next two fiscal years. Revised current budget projections for 2014-15 reflect a cash operating surplus in the amount of $570,000 and a $337,000 surplus net of annual depreciation. This is the first significant surplus in last five years.

Anticipated Drought Related Impacts to Water Revenue Levels:

The State’s mandate on water conservation measures could have a significant financial impact on agencies’ revenue levels. The drought conditions could also pose a series of water supply challenges and have significant impacts to operational costs on many municipalities including the City of Livingston.

Water user fee revenues were decreased by $52,000 during the 2014-15 mid-year budget review to account for decrease in water consumption by city-wide customers. These impacts will continue through 2015-16 as the State demands compliance with the water conservation measures approved by Governor Brown on April 1, 2015 mandating a 25% water use reduction from water agencies.

City’s 2015-16 projected water sales revenues reflected on recent utility rate study are being modified down by $128,000 as a conservative estimate to account for drought related financial impacts.

2015-16 preliminary revenue projections include $2.9 million in water sales, and approximately $160,000 in other types of revenues including $147,000 from water meter replacement fees for a total of $3.1 million in water revenues (see page 11).

annual operating expenditures in the water enterprise fund are estimated at $2.96 million including depreciation (non-cash expense). Personnel cost is expected to increase by 7% or $34,000, overhead operation costs are increasing by 39% or $467,000 primarily due to recent improvements in water well treatment systems.

The City will continue its efforts at improving the quality of potable water in 2015-16. Approximately $640,000 will be invested in Water Wells Operations and Maintenance to account for media treatment system recently added on several wells.

Depreciation is expected to increase as City completes Capital Improvement Projects and begins depreciating such improvements.

Well #8 project to treat TCP is expected to be completed in April 2015 at a total cost of $2 million.

Well # 13 project to treat for Arsenic and new well#17 are expected to be completed by November 2015.

Several other water projects are expected to be completed in 2015 and will be partially depreciated in 2015-16.

Depreciation expense for 2015-16 is estimated at $331,000, an increase from $233,000 in 2014-15.

Net water fund projected operations are a modest surplus of $118,000. Some operational areas & expenditures have been modified in efforts to offset and/or minimize the financial impacts from the drought conditions.

Management’s goal is still to eliminate the cash deficits and have reasonable levels of fund balance/reserves as projected in the utility rate study.

Assumptions: City to end furloughs and wage reduction measures by June 30, 2015. Preliminary projections attached do not reflect any possible financial impacts associated with pending union negotiations.

Wastewater Operating Fund:

A new fee schedule was also adopted as a result of the recent utility rate study and Prop 218 hearing process. The new rates were effective on July 15, 2014. Primary purpose of rate increase was to comply with current debt obligations, generate sufficient levels of funding to cover ongoing operations, eliminate current cash deficit, and address minor capital improvements.

Based on the adopted wastewater rate schedule, user revenues were projected to increase by over 40% from $1.5 million in 2013-14 to $2.15 million in 2014-15.

The State’s mandate on water conservation measures could have a significant financial impact on agencies’ revenue levels.

The drought conditions could also pose a series of challenges to include increase in operational costs. Sewer user fee revenues were decreased by $78,000 during the 2014-15 mid-year budget review to account for decrease in water consumption by city-wide customers which also impacts sewer revenues and loss of a critical customer.  (Note from TheGardeningSnail. I believe this to have been Fersenius)

These impacts will continue through 2015-16 as the State demands compliance with the water conservation measures approved by Governor Brown on April 1, 2015 mandating a 25% water use reduction from water agencies.

Preliminary 2015-16 sewer revenues are projected at $2.0 million which reflect a 3% drop from revised 2014-15 projections and approximately $159,000 less than projections reflected on the recent utility rate study.

Modifications were necessary to account for possible revenue impacts associated with these water conservation measures. Preliminary projections are very conservative and further analysis will be performed as we move into the new fiscal year. Any material budget variances will be addressed during the mid-year budget process.

Personnel cost is expected to increase by 7% or $31,000 from 2014-15, overhead operating cost decreasing by 9% or $(61,000), debt service payments and annual depreciation expenses to remain consistent in 2015-16.

Projected annual expenditures are estimated at $1.96 million including depreciation.

A net sewer plant operation surplus of $212,000 is expected in 2015-16 (see pages 13-14) Conservative measures have been incorporated into these projections to account for possible financial impacts associated with water conservation measures.

Assumptions: City to end furloughs and wage reduction measures by June 30, 2015. Preliminary projections attached do not reflect any possible financial impacts associated with pending union negotiations.

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Sanitation Operating Fund:

The City adopted new garbage/sanitation rates in January 2014. These new rates have increased the level of revenues and have assisted in covering ongoing annual operational costs. Annual revenues have increased from $959,000 in 2013 to $1.29 million by 2015-16. Personnel cost is expected to increase by 9% or $15,000 in 2015-16. Overhead operating expenditures are expected to remain the same in 2015-16 as in 2014-15.

Preliminary 2015-16 annual expenditures are projected at $1.06 million with a net operating surplus of $233,000 (see page 15).

Assumptions: City to end furloughs and wage reduction measures by June 30, 2015. Preliminary projections attached do not reflect any possible financial impacts associated with pending union negotiations.

ATTACHMENTS:

Exhibits A through F2

Proposed FY15-16 Operating Budgets-First Draft

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