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HomeMy WebLinkAboutItem 11b - Fiscal Year 2018-19 Mid-Year Budget Review DATE: February 5, 2019 TO: Honorable Mayor and City Council FROM: Dominic Lazzaretto, City Manager By: Hue Quach, Administrative Services Director Michael Bruckner, Assistant to the City Manager SUBJECT: FISCAL YEAR 2018-19 GENERAL FUND MID-YEAR BUDGET REVIEW RESOLUTION NO. 7242 MAKING CERTAIN FISCAL EMERGENCY FINDINGS WITH RESPECT TO THE GENERAL FUND MID-YEAR BUDGET REVIEW AND LONG RANGE FINANCIAL FORECAST PLAN Recommendation: Adopt SUMMARY On June 19, 2018, the Arcadia City Council adopted Resolution No. 7224 adopting a budget for Fiscal Year 2018-19 and Resolution No. 7225 adopting a Capital Improvement and Equipment Plan for Fiscal Years 2018-19 through 2022-23. At the time of budget adoption, all funds totaled $120.5 million in expenditures, of which the City’s General Fund budget was $62.4 million (excluding transfers). Once fund transfers were included for the long-term viability of the Capital Improvement and Equipment Replacement Funds, the General Fund Operating Budget was projected to end the Fiscal Year with a $3.1 million operating deficit. As a standard of the mid-year review process, a thorough analysis of expenditures and revenues was conducted to determine if there are any significant events or changes that would alter the outcome of the Adopted General Fund Budget. The results of this analysis determined that expenditures are projected to be approximately $231,000 above the Adopted General Fund Budget. Revenues received to date have not come in as forecasted; specifically, in the Tax category and Building Construction Permits. As a result, revenues are projected to be lower by approximately $1.2 million than the Adopted General Fund Budget. It is important to note that the revenue analysis is based on receipts received to date, and without the benefit of actual receipts for certain revenues for the full six-month period due to the timing of this mid-year report. The revised revenue estimates should be viewed as a conservative position for the actual results by Fiscal Year-end. With revenues below original estimates, the projected Fiscal Year 2018-19 Mid-Year Budget Review February 5, 2019 Page 2 of 2 operating budget deficit at the beginning of the year is expected to increase from $3.1 to $4.5 million. Historically, due to the City’s strong financial management practices and conservative estimates, the General Fund typically ends the Fiscal Year below budgeted expenditures and with improving year ending results. As is practice, expenditures and revenues will continue to be monitored and future City Council action may be requested to adjust the budget as needed should significant developments arise that would further deteriorate the General Fund’s balance. With revenue projections below estimates, despite the City’s careful fiscal management, the City continues to be on an unsustainable path in the General Fund, as evidenced by the Citizens Financial Advisory Committee Report adopted by the City Council on January 15, 2019. In light of financial realities, it will soon become impossible for the City to maintain 911 emergency response times, police and fire protection at current levels, let alone address property crimes like home break-ins, thefts, and burglaries unless significant changes occur. Therefore, it is recommended that the City Council adopt Resolution No. 7242 making certain fiscal emergency findings with respect to the General Fund mid-year budget review and Long Range Financial Forecast plan, and direct staff to begin preparing the Fiscal Year 2019-20 budget options to include budget reduction scenarios to balance the City’s General Fund. BACKGROUND The annual mid-year budget review is an essential element in maintaining financial stability. The mid-year budget process provides the City Council with an opportunity to review the General Fund (and other funds); make adjustments to achieve a more accurate budget for the current Fiscal Year; and obtain a context for the development of next year’s budget. As we review our course this year, and before we look forward to next year’s budget, it is first helpful to understand the underlying fundamental economic outlook that serves as the basis for revenue and expenditure projections for the foreseeable future. The United States economy advanced at an annualized 3.4% in the third quarter of 2018, slightly below earlier estimates of 3.5% growth. It follows a 4.2% expansion in the second quarter which was the highest since the third quarter of 2014. Current fourth quarter estimates project growth around 2.7%. While recent stock market volatility at the end of 2018 has shown the soft underbelly of investor confidence and interest rate sensitivities, there is no indication that the economy will dip into a recession during the first and second quarter of 2019. Unemployment remained at a 49-year low of 3.7% in November 2018, while the Consumer Price Index for All Urban Consumers was unchanged on a seasonally adjusted basis, rising 2.2% over the last 12 months. Further, after years of monetary policy accommodation from the Federal Reserve, the path to normalization appears to be upon us, with interest rates beginning to return to Fiscal Year 2018-19 Mid-Year Budget Review February 5, 2019 Page 2 of 2 their natural levels. These policy changes may have unsettling effects on the US economy over the next several years. California’s economy continues to be buoyed by a strong tech sector and direct foreign investment and migration from the Asian-Pacific rim; however, many businesses are continuing to relocate outside of California to avoid high taxes and burdensome regulations. These include businesses like Nissan, Toyota, Carl’s Jr., Jamba Juice, Occidental Petroleum, Numira Biosciences, and Omnitracs, which took thousands of jobs and billions of dollars of sales to more favorable tax states. In addition, according to a November report from the U.S Census Bureau, the Golden State has had 142,932 more residents exit to live in other states than people arriving from other states. This domestic outmigration was the second largest outflow in the U.S. behind New York and New Jersey. Still, a recent report issued on behalf of the Southern California Association of Governments (“SCAG”) by the Los Angeles Economic Development Corporation (“LAEDC”), shows that southern California continues to experience strong economic growth, but technology, shifting demographics, and an unrelenting affordable housing shortage are changing the way the region does business. The report also shows employment in Los Angeles County growing by 65,000 jobs this year and 234,000 over the next five years. This will create a tightening in the labor market that should force wages up, particularly in those occupations requiring higher levels of educational attainment. Healthcare is expected to drive the most new jobs (92,000) in Los Angeles County over the next five years, followed by hospitality and food services (32,000), information (26,000) and transportation and warehousing (25,000). The continued overall growth in employment has sharply reduced the poverty rate in Los Angeles County, from 19.1% in 2012 to 14.9% today. Even so, the highest number of job openings in the coming years will be in occupations that require a high school diploma or less, and pay less that the County’s median annual wage of $40,340. The study further noted that one fifth of adults with less than a high school education live below the poverty line. Locally, Arcadia’s economy has remained stable and is a reflection of the economic conditions of the state. The City has benefitted from new migration and direct investment, particularly in housing, which further supports the City’s broad tax base during one of the longest economic expansions in the post-war period. Tax revenue makes up approximately 65% of the City’s total General Fund budget; however, where the City differs from the state is that our tax revenues are more diversified to include: Property Tax (27%), Sales Tax (19%), and Utility Users Tax (12%). Each percentage noted represents the share to the General Fund’s total revenue. Along with the diversification of the tax base, other revenues such as: Licenses and Permits, Charges for Services, and Other Governmental Agency revenue help further diversify revenue to the General Fund. While Arcadia has enjoyed a robust recovery since the Great Recession, there are signs that indicate that the extended recovery period has reached its maturity stage. Projected growth in the Tax category, especially those that follow the Fiscal Year 2018-19 Mid-Year Budget Review February 5, 2019 Page 2 of 2 condition of the economy, are showing slower growth, including Property Taxes and Sales Taxes. Slowing revenue growth combined with the rising costs of services are presenting budget challenges and concerns. DISCUSSION The City of Arcadia has historically operated on limited yet sufficient resources to ensure the quality of life Arcadians have come to expect and appreciate. Since 1998, the City has taken a number of actions to reduce the cost of its operations by nearly $3.4 million annually without sacrificing the quality of service to the community. In addition to changes in service delivery, the City implemented pension and benefit reforms in 2011, one of the first cities in the state to do so. While the City continues to be well-managed and service levels are currently sufficient to address the needs of the community, the City can no longer maintain these services in the foreseeable future based on current revenue and expenditure levels. This is further evidenced by the adoption of a deficit budget, the first in many years, in Fiscal Year 2018-19, and projections continue to show that the General Fund is facing an $8.0 million structural deficit through the 10-year term of the Long Range Financial Forecast. Unless new revenue is generated, there will have to be significant cuts to important City services that will affect neighborhood police patrols, 911 emergency response times, fire protection and life-saving services; in fact, nearly two dozen police officers, firefighters and paramedics may need to be cut in Fiscal Year 2019-20 to achieve a balanced budget. Arcadia residents have expressed the importance of maintaining police protection and the number of Arcadia officers at current levels. The City currently has five fewer police officers than it did in 2008. In 2017, Arcadia had the highest number of home break-ins and neighborhood property crimes in recent history, public safety services cannot tolerate cuts to service. On February 20, 2018, the City Council adopted Resolution No. 7202 establishing a Citizen’s Financial Advisory Committee (“Committee”) to review the City’s long-range financial forecast and provide recommendations for potential cost containment and/or revenue enhancement strategies to address the City’s projected $8.0 million structural deficit in the General Fund in FY 2024-25. On December 13, 2018, the Committee issued its Final Report which was presented to and adopted by the City Council at its meeting on January 15, 2019. Included in the Committee’s financial sustainability plan, was the recommendation to adopt a Resolution (Attachment 1) declaring a fiscal emergency and begin preparing for a ballot measure to raise the City’s sales tax. On June 19, 2018, the Arcadia City Council adopted Resolution No. 7224 adopting a budget for Fiscal year 2018-19 and Resolution No. 7225 adopting a Capital Improvement and Equipment Plan for Fiscal Years 2018-19 through 2022-23. At the time of budget adoption, all funds totaled $120.5 million in expenditures, of which the City’s General Fund budget was $62.4 million (excluding transfers). Once fund transfers Fiscal Year 2018-19 Mid-Year Budget Review February 5, 2019 Page 2 of 2 were included for replenishment of the Capital Improvement and Equipment Replacement Funds, the Adopted General Fund Budget was projected to end the fiscal year with a $3.1 million operating deficit. As a standard practice of ensuring that the budget plan in place does not deviate or worsen unexpectedly, a mid-year review is customarily conducted each year as we approach the halfway point of the Fiscal Year. This mid-year review is no different from prior years where a thorough review of expenditures and revenues, by all departments, is conducted to identify significant variances that may develop and could detour unfavorably from the Adopted General Fund Budget. In summary, shown in the table below, it is projected that Fiscal Year 2018-19 Adopted General Fund Budget will end the year with a higher projected operating deficit, from $3.1 to $4.5 million. The cause of the increase is largely due to the lower projected revenue. A more detailed discussion of the expenditure and revenue adjustments is given further in this report. FY2018-19 Adopted Budget Projected Budget Beginning Fund Balance $8,929,381 $8,292,381 Revenue $61,094,800 $59,899,800 Expenditures $62,386,800 $62,618,260 Revenue over Expenditure $(1,292,000)$(2,718,460) Fund Transfers Transfers-In from other funds $3,295,000 $3,295,000 Transfers-Out to other funds $(901,800)$(901,800) Net Transfers $2,393,200 $2,393,200 Subtotal Operating Balance $1,101,200 $(325,260) Transfer to Equipment Replacement Fund $(1,400,000)$(1,400,000) Transfer to Capital Improvement Fund $(2,800,000)$(2,800,000) Operating Surplus (Deficit) (3,098,800)(4,525,260) Ending Fund Balance 5,191,581 3,767,121 Fiscal Year 2018-19 Mid-Year Budget Review February 5, 2019 Page 2 of 2 Expenditure Review Based on department analyses of their operating budgets, the mid-year review identifies the various adjustments shown in the table on the next page for the remainder of the Fiscal Year. Operational budget adjustments total $231,460. The larger part of the adjustment comes from prior year carryover, or re-appropriations, totaling $149,760. These are budgeted items from the prior year but due to timing and accounting procedures, have been approved to be carried over into the current Fiscal Year. Of substance, the budget adjustment increases for unplanned expenditures, overages, or operational efficiencies and savings is $81,700, or 0.13% of the Adopted General Fund Budget. Department Adjustment Carryover Description City Manager $10,000 - Vacation Buyback City Manager - $147,750 Consulting Services Admin. Services $25,000 - Personnel Attorney Services Fire Department $110,400 - Overtime and Vacancy Savings Police Department $(82,600)- Operational and Vacancy Savings Library & Museum $5,000 - Unplanned HVAC Repair Recreation - $2,010 Equipment & Supplies Public Works $13,900 - Greenscape Maintenance/Facility Maintenance Contracts Total $81,700 $149,760 $231,460 Revenue Review As of the writing of this report, revenues receipts have not come in as forecasted, specifically in the Tax category and Building Construction Permits; however, it should be noted that the revenue analysis is based on receipts received to date and the forecast is without the benefit of actual receipts for the full six-months of the Fiscal Year. For example, fourth quarter 2018 Sales Tax receipts have not been remitted to the City. Sales Tax receipts are usually three months delayed after the end of a quarter. Effectively, these revised revenues and their projections should be viewed as a conservative position versus the actual results by the end of the Fiscal Year. A more detailed revenue analysis summary is shown on the table on the next page of this report. Respectively, overall revenues are projected to be lower by $1.2 million than the Adopted General Fund Budget. Within the Tax category, the assumptions used for this forecast show ongoing moderate growth which has slowed from the previous forecast used during budget adoption. Property Taxes are projected to lag behind by $228,800 or 1.5% from the Adopted General Fund Budget estimate. In addition, Sales Fiscal Year 2018-19 Mid-Year Budget Review February 5, 2019 Page 2 of 2 Taxes are also projected to be less by $278,100, or 2.4% from the Adopted General Fund Budget estimate. Transient Occupancy Taxes (Hotel Tax) and Utility Users Tax are also projected to be moderately less by $40,800, or 1.3% and $121,600, or 1.7%, respectively. The largest revenue reduction is in the Licenses and Permits category. Building activity has slowed more substantially than previously forecasted showing an overall projected decline of $594,200 or 11.2% from the Adopted General Fund Budget estimate. This is especially striking because the Adopted Budget already anticipated slowing activity in this area. Variances like these are uncommon and it is important to note that during the time the Fiscal Year 2018-19 budget was prepared in April 2018, the economic landscape in the housing market has not only changed dramatically but also abruptly. Housing sales have slowed and are assumed to be caused by high property values, increase mortgage rates, and curtailed foreign investments from the Asian-Pacific Rim. Revenue Original Budget Projected Budget Variance ($) Variance (%) Property Tax $15,706,600 $15,477,800 $(228,800)-1.5% Sales Tax $11,553,100 $11,275,000 $(278,100)-2.4% Hotel Tax $3,190,800 $3,150,000 $(40,800)-1.3% Utility User Tax $6,998,800 $6,877,200 $(121,600)-1.7% MVLF $7,182,300 $7,250,000 $67,700 0.9% Franchise $984,600 $984,600 - 0.0% Licenses & Permits $5,292,500 $4,698,300 $(594,200)-11.2% Services $4,507,400 $4,507,400 - 0.0% Miscellaneous $5,678,700 $5,678,700 - 0.0% Total $61,094,800 $59,899,900 $(1,195,800)2.0% With the unanticipated reduction of overall revenue and combined with the slight increase in expenditures, the initial Adopted General Fund Budget deficit of $3.1 million is expected to grow to $4.5 million. This deficit can be absorbed in the short-term, but structural changes are needed to ensure the long-term fiscal health of the organization. It is also important to note that, historically, due to conservative budget projections and departmental monitoring of expenditures, the General Fund has typically ended the Fiscal Year under budget and therefore improved its fund balance position. Additionally, as a standard practice, staff will continue to monitor both expenditures and revenues, and will bring back recommendations to the City Council to adjust the budget plan should significant developments arise that would worsen or deteriorate the General Fund’s balance. Fiscal Year 2018-19 Mid-Year Budget Review February 5, 2019 Page 2 of 2 ENVIRONMENTAL ANALYSIS The proposed action does not constitute a project under the California Environmental Quality Act (“CEQA”), and it can be seen with certainty that it will have no impact on the environment. Thus, this matter is exempt under CEQA FISCAL IMPACT The result of a thorough mid-year budget review has shown expenditures are expected to increase by $231,460. This includes $147,760 in carryover or re-appropriations of unspent funds previously approved by the City Council for use in the prior Fiscal Year. Revenues are projected to be $1,195,800 lower than the Adopted General Fund Budget estimate largely due to a slowing housing market and downward trending Sales Tax receipts. As a result, the Fiscal Year 2018-19 Adopted General Fund Budget operating deficit is projected to increase from $3.1 million to $4.5 million. While the City continues to be well-managed and service levels are sufficient to address the current needs of the community, the City can no longer guarantee these services over the long-term without making long-term structural changes to the organization. This is further evidenced by the growing deficit in the General Fund which is expected to increase to $8.0 million through the 10-year term of the Long Range Financial Forecast. Unless immediate action is taken to address the structural deficit, there will have to be significant cuts to important City services that will affect neighborhood police patrols, 911 emergency response times, fire protection and life-saving services, recreation and library programs, road quality, and infrastructure maintenance and improvements beginning in Fiscal Year 2019-20. RECOMMENDATION It is recommended that the City Council adopt Resolution No. 7242 making certain fiscal emergency findings with respect to the General Fund mid-year budget review and Long Range Financial Forecast plan, and direct staff to begin preparing the Fiscal Year 2019- 20 budget options to include budget reduction scenarios to balance the City’s General Fund. Attachment: Resolution No. 7242