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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.