HomeMy WebLinkAboutItem 3e: Long Term Financial PlanDATE: July 20, 2010
TO: Mayor and City Council
FROM: Don Penman, City Manager
SUBJECT: LONG TERM FINANCIAL PLAN
BACKGROUND
DISCUSSION
STAFF REPORT
Office of the City Manager
During the FY 2010 -2011 budget process, the City was faced with a General Fund
Preliminary Budget that was out of balance initially by approximately $1 million. Staff
presented a number of options that would address the shortfall that included staffing
and program cuts as well as utilizing reserves and one -time funds. Ultimately the City
Council adopted a General Fund budget that included a combination of reserves,
interest earnings from unrestricted Special Funds, a loan to the Redevelopment Agency
and one time savings.
Recognizing that such a practice in the long term would not be sustainable or fiscally
prudent, the Council directed that staff prepare a long term fiscal plan to define the
problem so the City could take appropriate action. This analysis is intended to
determine if there is a structural deficit or if shorter term recession impacts will resolve
themselves with an improved economy. If the former is the case, options will need to be
identified to address this situation.
This memo is intended to present a framework for the plan for the City Council to review
to ensure that the staff concept is consistent with Council's objective.
Some experts believe the current economic climate is the "new norm'. Others believe
that the current economic situation will rebound but take a few more years to recover to
reach past levels, in particular revenue amounts. In either case there does not appear
there will be any immediate return to pre- recession levels. Based on this it is incumbent
on the City to develop a plan to assess the situation and take necessary actions to
maintain the City's current strong fiscal position.
Mayor and City Council
July 20, 2010
Page 2
The City of Arcadia like almost all local agencies and the State is faced with budget
issues. If this is a longer term problem then one would define this as a structural
deficit, meaning that the existing revenue levels are inadequate to sustain current levels
of spending and this will not resolve itself with an improved economy alone. While short
term deficits can be addressed with use of reserves, longer term or structural deficits
should not be "fixed" with reserves; we must remember that reserves can only be spent
once.
The actual financial plan can take on a number of elements, however based on City
Council direction staff is recommending a focused approach that could expand into a
more comprehensive analysis depending on the outcome of the initial plan. Specifically,
one of the objectives of the plan is to have long term financial information available prior
to the commencement of the budget process for FY 2011 -2012. Practically speaking
that would mean that the analysis should be completed sometime in late fall of 2010 in
order to provide the Council with adequate time to review, discuss and implement (if
needed) changes.
Therefore a fundamental assumption must be made in order to proceed with the
analysis and have information available in the fall of 2010. That assumption is that
expenditure projections will be based on the current high level of services provided to
the community. Should the analysis show a long term shortfall, then options would
include changes in staffing and /or service levels, but in order to complete the analysis
there must be a baseline level of expenditures and staffing.
Using existing levels of staffing and programs, expenditure estimates will be prepared
based on different growth scenarios. Staff would suggest expenditure growth scenarios
of 3% and 5 %. We do not suggest a zero growth scenario because it would be
unrealistic as even without cost -of- living increases granted though negotiations, the City
would still have increases in PERS, workers compensation, and merit increases for
employees as well as increases in operating expenses. In addition to using averages, if
we are aware of specific increases within the five year study period, such as a specific
PERS rate increase, those would be incorporated into the projections. A determination
will need to be made in terms of calculating vacant, frozen positions, which include eight
sworn police officers.
The same approach would be used for revenue projections. Staff would use 0 %, 3%
and 5% growth assumptions. Again if specific information is available regarding certain
revenue growth, such as a new significant development, that would be factored into the
projections.
In addition to the five year expenditure and revenue projections using various growth
scenarios, staff will also prepare a list of options that could address any structural in-
balance. These will include revenue options as well as expenditure /program changes.
Inherent in the expense side of the options will be personnel costs, which represent
76% of General Fund expenditures. It's a tough but simple fact: meaningful expenditure
reductions require cutting staff costs. The Financial Plan may result in the Council
directing staff to conduct organizational studies to determine if efficiencies can be found
that would result in savings. That would be on the list of options.
Mayor and City Council
July 20, 2010
Page 3
One thing that the study will not be is a City wide strategic plan. A strategic plan is a
much more comprehensive effort aimed at determining a municipality's long -term vision
and goals and developing an action plan for achieving those goals. A strategic plan
would establish priorities and resources would be allocated towards those priorities. In
its most complete form it should include an evaluation of existing operations and
assessment of the agency's ability to implement the goals and objectives.
Though perhaps not codified in the manner of an overall strategic plan, it should be
recognized that the City's annual budget process is one that establishes priorities and
allocates resources based on those priorities though only within a two year window.
Additionally several City departments have already developed individual Strategic
Plans, including the Police, Fire, Recreation and Community Services and Library and
Museum Services Departments. Additionally the General Plan for the City is a strategic
plan for the growth and development of the community. Therefore efforts have been
made to look at long term planning within a number of departments.
SUMMARY
Staff is requesting the City Council review and comment on the work program identified
above. In summary it will include the following:
• Five year revenue projections based on 0 %, 3% and 5% growth rates
• Five year expenditure projections based on 3% and 5% growth rates
• Analysis will assume existing levels of programs and staffing
• Prepare revenue increase and expenditure reduction options with dollar values
tailored to the problem identified in the forecast.
• Individual organization analysis /studies will not be part of this initial work but
could follow based on City Council direction
• Target date for completion of the Financial Plan is November 15, 2010
• Communication with employees will be an important part of the process
Staff welcomes the opportunity to discuss this outline and receive feedback from the
City Council.