HomeMy WebLinkAboutCC AG PKT 2003-01-27 #N AGENDA REPORT
DATE: January 27, 2003
TO: Honorable Mayor and City Council
THRU: John B. Bahorski, City Manager
FROM: Pamela Arends -King, Director of Administrative Services/Treasurer
SUBJECT: 2002/2003 Budget Status and Budget Projections
SUMMARY OF REQUEST:
Staff requests Council receive and file report.
BACKGROUND:
Due to the precarious financial situation the State Government is facing and due to the uncertain
economic future the City was facing at the time the FY 2002/2003 and FY 2003/2004 budgets were
adopted, City Council requested staff present the status of the City's budget and financial future. Staff has
prepared a status report of the current FY 2002/2003 budget and the FY 2003/2004 budget and also made
projections that will be discussed in this report. Also information the City has received regarding the
State's potential budget cuts will be mentioned.
At the time the FY 2002/2003 and FY 2003/2004 budgets were adopted, the City Council made enough
expenditure cuts to balance the budget for FY 2002/2003, however for FY 2003/2004 the budget had a
deficit of $390,000. At the time the budgets were adopted Council elected to implement a hiring freeze
for current vacant positions and future vacant positions unless the City Manager determined the position
must be filled to provide basic crucial services. The object was to save money through attrition and
through attrition the $390,00 deficit could be eliminated for decreased. Council also adhered to the City's
fiscal and budget policy that states the City shall maintain a reserve fund balance of a least 20% of the
General Funds expenditures. As a result of careful spending and the increase in sales tax and utility users
tax revenues from the new Target shopping center the City was able to meet this fiscal policy requirement
and set aside a fund balance reserve of 20% of the General Fund expenditures for FY 2001/2002. At the
time the FY 2002/2003 and FY 2003/2004 budgets were adopted the final figures for FY 2001/2002 were
still being estimated, however the City was able to meet the fund balance reserve of 20% of total General
Fund expenditures even with an estimated FY 2003/2004 deficit of $390,000. The fiscal years
immediately following FY 2003/2004 reflect expenditures rising and the 20% fund balance reserve fund
dropping from 21% of General Fund expenditures to 6% of General Fund expenditures by /2007.
Agenda Item / V
January 27, 2003
2002/2003 Budget Status and Budget Projections
As of today the financial outlook for FY 2002/2003 and FY 2003/2004 and the preceding two years is
brighter than expected. Due to the positive earnings from FY 2001 /2002 and the expenditure cuts made
during the budgeting process the City is able to maintain the 20% of total expenditures fund balance
reserve requirement from FY 2002/2003 through FY 2005/2006, unless of course any revenue sources are
cut due to the State budget problems. The spreadsheet below reflects the General Fund four -year budget
projections based on information staff had available.
General Fund
Four -year Budget Projections
Current Year
2002 -2003 2003 -2004 2004 -2005 2005 -2006
Budget Budget Projected Projected
Beginning Fund Balance $10,042,684 $10,173,661 $10,206,388 $9,803,627
Less: Reserves and Designations (6,542,661) (6,477,411) (6,526,963) (6,647,605)
Beginning Undesignated Fund Balance 3,500,023 3,696,250 3,679,425 3,156,022
General Fund Revenue 17,755,390 17,342,542 17,510,266 17,579,000
General Fund Expenditures 16,939,413 17,309,815 17,913,027 18,213,963
Net Revenues (Expenditures) $815,977 $32,727 $(402,761) $(634,963)
Major "Emergency" Expenditures
Emergency Pier Repair 400,000
Groin repair matching grant 250,000
GASB 34 implementation 35,000
Total Additional Expenditures 685,000
Net Revenues (Expenditures) $130,977 $32,727 $(402,761) $(634,963)
Ending Undesignated Fund Balance $3,631,000 $3,728,977 $3,276,664 $2,521,059
The current year estimated revenues are expected to be higher than budgeted due to a significant increase
in business license revenues of $500,000. The increase is due to the increase in revenues from a major
manufacturer within the City. The increase in business license revenue is not expected to repeat itself in
future fiscal years because the business license revenue for manufacturers is based on gross revenues that
can fluctuate dramatically from year to year. Sales tax revenue is expected to increase $100,000 from
what were originally estimated based on revenues already received. Revenues expected to be less than
estimated are oil royalties, barrel tax, jail fees and interest on investments totaling over $250,000.
Expenditures for FY 2002/2003 are expected to be less than originally budgeted. Since the beginning of
the fiscal year three police officers left the City's employ and the positions are vacant. This resulted in a
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January 27, 2003
2002/2003 Budget Status and Budget Projections
savings to the General Fund of around $100,000 and if the positions were not filled in the future the
savings each year would be over $225,000. Unfortunately there are three "Emergency" expenditures the
City will probably have to fund by the end of the fiscal year totaling $685,000. The City's pier is in need
of major repairs to maintain its safety. The estimated cost to repair the pier at this time is $400,000. Also
the groin needs to be rehabilitated. The City has been told by State Officials it will be awarded grant
funds to rehabilitate it but the matching funds are estimated to be $250,000. As of June 30, 2003 the City
must comply with Governmental Accounting Standards Board pronouncement 34. This pronouncement
requires a totally different way of presenting the annual financial information. It requires the listing of all
fixed assets including infrastructure such as buildings, streets, storm drains, right of ways, parks and park
equipment and depreciation must be calculated on these assets. This is a major undertaking because
government entities were never required to do this before therefore records were never kept. Due to the
time involved and the fact the Finance Department has limited staffing outside firms will be contacted to
propose bids to complete the work. Estimated cost for this service is $35,000. Even with the estimated
increase in expenditures of $685,000 the net revenues for FY 2002/2003 is expected to be $130,000.
FY 2003/2004 revenues reflect an increase in estimated revenues for sales tax, however no other revenues
are expected to increase based on the information staff has available at this time. As of July 1, 2003 the
City is required to implement the "3% at 50" retirement plan for the police department. The new Public
Employees Retirement System (PERS) rates for the police department were determined last month and
the rates were not as high as expected. The estimated expenditures for FY 2002/2003 reflects the PERS
rate and it reflects the budget assumption that the three vacant police officer positions will remain vacant.
With the correct PERS rates and not filling the vacant positions the $390,000 deficit estimated during the
budget process was eliminated.
FY 2004/2005 and FY2005/2006 reflect an increase in an operating deficit. The primary reason
operating deficits are expected for both fiscal years is due to the significant estimated increase in the
PERS rates for the police department. PERS determines the retirement contribution rate based on
earnings received two years before which unfortunately reflects the negative stock market trends. The FY
2004/2005 estimated PERS rate was provided by the PERS actuaries based on the estimated negative
return on plan earnings as of June 30, 2002. The increase in the police PERS rate is 11 %. Other local
communities such as the City of La Habra and the City of Huntington Beach will also have significant
increases in its police PERS rates due to the negative stock market earnings and the implementation of
"3% at 50" retirement plan. The revenues for FY 2004/2005 and FY 2005/2006 are not expected to
increase significantly due to the stabilization of revenues from the Target shopping center and the Kohl's
department store. The budget projections also assume vacant positions from prior fiscal years have not
been filled. The operating deficits are expected to be over $600,000 by FY 2005/2006. As a result of the
increase in expenditures and no increase in revenues the City will start to significantly use undesignated
fund balance and ultimately use its 20% fund balance reserve for reoccurring operating expenses.
The projections are based on historical trends, small inflation increases and updated information from
PERS. Revenues could change dramatically if the economy experiences a downturn and retail sales
decrease. Sales tax revenue represents about 24% of our operating budget revenues. At least 40% of the
City's sales tax is from gasoline sales therefore any negative impact on gasoline sales would have a major
impact on the City's revenues. Also expenditures could continue to increase due to the uncertainty of the
PERS annual return on investments.
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January 27, 2003
2002/2003 Budget Status and Budget Projections
The City could also be dramatically affected if the State Government decides to cut revenues to local
governments to help them balance their budget. Attached is a monthly update of hot issue from the
Orange County Division of the League of California Cities. One of the budget proposals that keep
coming back the table in Sacramento is the State cutting the Motor Vehicle In Lieu Backfill to local
governments. As the spreadsheet provided from the update points out, Seal Beach would lose about $1.4
million dollars in revenue and this loss of revenue could become permanent. Needless to say this would
have a significant impact on the City's operating budget if it were passed. Other cuts proposed that could
effect the General Fund operating budget would be the elimination of booking fee reimbursements which
could mean a reoccurring loss of about $200,000 in revenue. Other items being discussed are to require
Redevelopment Agencies to shift portions of its property tax revenues to school districts. For FY
2002/2003 the Seal Beach Redevelopment Agency is required to send $45,000 for this shift. If that
. figure should increase significantly the funds may have to come from the General Fund in order for the
Redevelopment Agency to make debt service payments. The Governor also proposes shifting any
unencumbered Low to Moderate housing funds to the State. If this were passed it would not have a
negative impact on the General Fund.
The Governor has also proposed eliminating the current year apportionments to cities and counties for AB
2928 local streets and road maintenance monies. The elimination of these special revenue funds would
affect current street improvement projects and future street improvement projects. (See the CSAC
Legislative Bulletin dated January 16, 2002 attached.)
RECOMMENDATIONS:
Staff recommends Council receive and file report. Staff also recommends Council continue with the
hiring freeze policy and be vigilant about filling vacant positions. Continuing with this policy will ensure
the City will have the necessary funds to meet the reserve requirements and have the necessary fund to
cover "Emergency" repairs such as the pier and the groin without using reserves. In regards to the State
Budget issues, staff recommends Council wait until actual budget cuts and or policies are adopted by
legislature and then make the necessary changes to the City's budget.
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