19 Staff Report - 2002/03 First Quarter Budget PerformanceCOUNCIL AGENDA REPORT
DATE: October 16, 2002
TO: MAYOR AND TOWN COUNCIL
FROM: DEBRA J. FIGONE, TOWN MANAGER
SUBJECT:
MEETING DATE: 10/21/02
ITEM NO. 9
2002/03 FIRST QUARTER BUDGET PERFORMANCE AND STATUS
REPORT -THREE MONTHS ENDING SEPTEMBER 30, 2002.
A. ACCEPT 2002/03 FIRST QUARTER BUDGET PERFORMANCE
STATUS REPORT.
B. AUTHORIZE BUDGET ADJUSTMENTS AS RECOMMENDED IN
THE ATTACHED FIRST QUARTER BUDGET PERFORMANCE
REPORT.
RECOMMENDATION:
1. Accept 2002/03 mid -year budget performance and status report.
2. Authorize budget reserve utilization as recommended in the attached first quarter budget
performance report.
INTRODUCTION/DISCUSSION:
This item will include a staff presentation on the status of the Town's financial condition as of the
end of the first quarter of the fiscal year. Staff provides to Town Council periodic updates on the
status of the current year's adopted budget revenues and expenditures and the projected financial
condition of Town funds, concentrating most importantly on the Town's General Fund. Though the
financial results are limited to the first three months, staff is able to see revenue trends developing
and advise Town Council as to possible future courses of action that may be necessitated by the need
to balance operating revenues with operating expenditures during the fiscal year. The attached
report includes a financial overview which begins with a brief discussion of last years financial
results, followed by the FY 2002/03 financial outlook, a summary of the performance of the Town's
primary General Fund revenue sources, and recommends a budget authorization of excess beginning
fund balance for Council consideration.
PREPARED BY: STEPHEN D. CONWAY
Finance & Administrative Services Director
Reviewed by: P.SAssistant Town Manager ,CAI i Town Attorney Clerk Finance
Community Development Revised: 10/18/02 3:13 pm
Reformatted: 5/30/01
PAGE 2
MAYOR AND TOWN COUNCIL
SUBJECT: 2002/03 FIRST QUARTER BUDGET PERFORMANCE AND STATUS
REPORT -THREE MONTHS ENDING SEPTEMBER 30, 2002.
October 16, 2002
The final balances (subject to audit) as of June 30, 2002 indicate that the Town finished the year
ahead of expectations, with the General Fund fund balance at approximately $9.9 million dollars,
or nearly $400,000 ahead of the mid -year FY 2001/02 balance forecast of $9.5 million presented to
Town Council in February 2002. The favorable results for FY 2001/02 were achieved primarily
with a combination of operating budget expenditure savings and salary and benefit savings.
In the accompanying First Quarter Budget Performance Report, staff presents current fiscal year
operating revenue and expenditure trends as they are developing through the first quarter.
Additionally, the report outlines the steps staff is recommending to address the potential for revenue
shortfalls from the estimated budget amounts. Because it is early in the fiscal year, we are not
recommending any formal change in revenue estimates at this time. However, given the current
economic climate, we are providing operating revenue and expenditure projections in the report to
develop scenarios and estimate the potential for and magnitude of any revenue shortfalls. Included
in the report is a Schedule of General Fund Operating Revenues vs. Operating Expenditures for FY
2002/03 that was prepared under a scenario of these potential reductions in revenues materializing,
but Town Council should be aware that this is a very early estimate and the estimates provided are
preliminary at this point. If the early estimates are confirmed by developing revenue trends, the
scenario presented -indicates a possibility of the Town needing to provide -revenues or expenditure
reductions of approximately $400,000 to balance operating revenues with operating expenditures
for the current year. The report identifies a number ofpotential steps that Town staff can implement
to address this need, including further strategic expenditure slowdowns, revenue enhancement
opportunities and the use of contingency reserves for a short term basis if necessary. Based upon
current estimates and barring no major State revenue take-aways, it is very likely that the Town's
current year strategic expenditure reduction efforts along with salary and benefit savings may be
enough to bring operating revenues in line with operating expenditures.
Staff will continue monitoring all major revenues closely and recommend adjustments as required
as the Town moves through the next nine months of FY 2002/03.
BACKGROUND:
The attached Budget Performance Report is for the three months beginning July 1, 2002 and ending
September 30, 2002. The Budget Performance Report presents analysis of key General Fund
revenues by category and expenditures by fund and recommendations thereon. The report also
includes the audited ending fund balances for the prior fiscal year ending June 30, 2002. A Capital
Improvement Plan Status Report that provides an update on capital project activities through the first
quarter, will be presented on this meeting's agenda as a separate agenda item.
ENVIRONMENTAL ASSESSMENT:
This budget report is not a project defined under CEQA, and no further action is required.
PAGE 3
MAYOR AND TOWN COUNCIL
SUBJECT: 2002/03 FIRST QUARTER BUDGET PERFORMANCE AND STATUS
REPORT -THREE MONTHS ENDING SEPTEMBER 30, 2002.
October 16, 2002
FISCAL IMPACT:
The First Quarter Budget Performance Report advises Town Council of early revenue and
expenditure trends for FY 2002/03. Because it is early in the fiscal year, Town Council is provided
a presentation of revenues and expenditures that is prepared as one potential scenario for planning
purposes only. Because it is early in the fiscal year and the revenue picture may change leading to
different scenarios, no revisions to adopted revenues or expenditures are recommended at this time.
It is anticipated that by mid -year with more revenue data available to the Town, it is probable that
certain revenue estimates such as Sales Tax, Interest Income, Transient Occupancy Tax, and
Business License revenues may need to be revised downward as explained in the First Quarter
Budget Performance Report. Staff will bring forward formal recommendations to adjust revenue
estimates at a later date this fiscal year, the most likely timing for this is as part of the FY 2002/03
mid -year report. Council authorization is requested to dedicate $400,000 of excess beginning fund
balance for potential use to fund "one-time" operating or capital expenditures, thereby alleviating
some demand on current year operating revenues. Under present financial policies the $400,000 of
excess beginning fund balance would be reserved for future capital improvements. The authorization
requested allows staff to program these funds for either one-time capital or operating use. Any
appropriation of these reserve funds would be brought back to Town Council for approval on a
separate item during the year.
Staffintends to once again implement a combination of strategic expenditure reductions/slowdowns,
and to assess, and if possible, implement certain revenue enhancements to meet this potential
revenue shortfall. These actions should mitigate any negative impact on Town services, mindful
in FY 2002/03 that due to the economic slowdown , the Town must remain vigilant in ensuring
balance between on -going expenditures with on -going revenues.
Attachments:
Budget Performance Report for Three Months Ended September 30, 2002
TOWN OF LOS GATOS
BUDGET PERFORMANCE REPORT
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
October 14, 2002
FINANCIAL OVERVIEW
Upon close of FY 2001/02 ending June 30, 2002, the Town's preliminary financial results for the
year ended slightly ahead of forecasted fund balances. The preliminary General Fund total fund
balance (subject to audit) of approximately $9.9 million, was nearly $400,000 ahead of the
projected ending fiscal year balance of $9.5 million, presented to Town Council on February 14,
2002 at its mid -year FY 2001/02 Budget Performance and Status Report. The excess balances
were the result largely of operating expenditure savings due to a combination of salary and
benefit savings in authorized positions and departmental strategic expenditure slowdowns.
Total fund balances, including the Town's Redevelopment Agency, of $40.4 million for all
Town funds decreased by approximately $2.5 million from the prior year amount of $42.9
million.
20,000,000
18,000,000
16,000,000
14,000,000
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
❑ FY 00/01 ❑ FY 01 /02
General
Fund
Special Capital
Revenue Project
Funds Funds
Debt
Service Service
Funds Funds
Intemal Fiduciary
Funds
The FY 2001/02 reductions in the General Fund and Capital Projects fund balances are indicative
of the major investments made to the Town's infrastructure during the fiscal year. Looking
closely at funds where decreases occurred, the drop in fund balances resulted from the significant
activity in FY 2001/02 capital assets investment (i.e. Street Repair & Resurfacing, Town Plaza,
Fiesta Way property purchases, and other improvements). It should be noted that the decrease in
the General Fund's fund balance was not the result of operating expenditures exceeding
operating revenues, but instead was due to capital activity during the fiscal year. For instance,
the $3.7 million decline in General Fund balances can be explained by two large investments
made by the Town in FY 01/02. The first being an approximately $1.95 million investment in
strategic real estate located on Fiesta Way, and the second a transfer of approximately $1.9
million dollars to the Town's GFAR Fund to be used for the FY 01/02 Street Repair and
Resurfacing Projects.
The $3.2 million decrease in the Town's Capital Projects fund balances was the result of the
improvements scheduled in the second year of the two-year phasing of significant capital
projects constructed during FY 01/02. Chief among these improvements was an approximately
$5.2 million dollars in expenditures for the Town's Street Repair and Resurfacing Project. This
project was funded by a combination of GFAR fund balances and a FY 01/02 budgeted transfer
of approximately $1.9 million dollars from the Town's General Fund.
In recent years the Town had accumulated significant reserves in the Town's General Fund and
Capital Projects fund (GFAR) to provide funding for these critical capital improvements and
land acquisitions. If not for this prudent action, the Town would not have been able to fund the
high level of capital activity that was accomplished in FY 01/02.
Due to the lack of growth in revenues in FY 01/02, the Town implemented a series of steps such
as strategic freezing or "de -funding" of unfilled positions, implementing departmental
efficiencies, and other measures to limit expenditure growth in the Town's General Fund so that
operating expenditures did not exceed operating revenues for the fiscal year. These measures led
to the Town's final fund balances exceeding estimates by approximately $400,000. By closing
the year approximately $400,000 ahead of expectations, the Town is fortunate to have some
flexibility upon its final close of books to set aside reserve dollars to be utilized to address some
one-time funding requirements for FY 02/03. By doing so, the Town can then potentially reduce
some of the demand upon current year revenues to fund all current year General Fund
expenditures.
FINANCIAL OUTLOOK FY 2002/03
First quarter results ending September 30, 2002 continue to affirm that the general economic
slowdown of 2001/2002 and the after-effects of the events of September 11, 2001 are still
combining to negatively impact the Town's operating revenues, most notably Sales Tax and
Transient Occupancy Tax. The Town had budgeted modest recoveries in these revenues for FY
2002/03 from the prior year. As initial forecasts indicate in the major General Fund revenue
projections, the revenue will most likely exceed the amounts received for FY 2001/02, though
they may not increase at the amounts projected. This is illustrated further in the following
Financial Outlook projections:
FINANCIAL OUTLOOK FY 2002/03
• Sales Tax Revenue •
Description
The State Board of Equalization allocates
one (1.0) cent of the eight (8.0) cents of
local sales tax collected by merchants on
retail sales and taxable services transacted
within the Town of Los Gatos. Revenues
are remitted to the Town on a monthly basis.
This revenue is placed in the General Fund
for unrestricted uses.
Analysis
In developing the Town's FY 2002/03
budget last spring, the general economic
slowdown had reduced sales tax
significantly from levels received in prior
years. Economists were forecasting a
recovery to begin in 2002, with a general
growth rate of approximately 4%. Based
upon forecasts for recovery and in
consultation with the Town's sales tax
$10,000,000 /
$9,000,000
$8,000,000 /
$7,000,000
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000 r
$1'000,000
$-
consultant (MBIA) staff programmed a
small increase in this revenue source, from
$7,000,000 to $7,500,000. The recovery has
not materialized to levels forecasted earlier
in 2002. It may be necessary to revise this
revenue source downwards. The best
estimates at this point in the year indicates
the amount is more likely to be
approximately $7,200,000. Staff is not
proposing a formal change in estimates until
more information becomes known.
Staff is encouraged that one local internet
based business is gaining momentum and its
growth is reflected in its contribution to the
Town's sales tax collections. The October
2, 2002 Wall Street Journal reports that car
sales rose nationally at a rate of 2.9% in
September, another hopeful sign for the
local auto dealers who represent nearly 30%
of the Town's sales tax collections.
Quarterly and Annual Revenues
5-Year History
FY 1999 FY 2000 FY 2001 FY 2002 FY 2003
1st Quarter Actual Revenues
Fiscal Year Total Actual Revenues
Fiscal Year Total Estimated Revenues
1st Quarter Percent of Total
FY 1999
$ 1,282,765
$ 5,688,125
22.55%
FY 2000
$ 1,358,059
$ 7,932,104
17.12% 25.46°%
• 1st Quarter
Actual
Revenues
O Fiscal Year
Total Actual
Revenues
• Fiscal Year
Total Estimated
Revenues
FY 2001 FY 2002 FY 2003
$ 2,400,559 $ 1,490,292 $ 1,336,124
$ 9,429,256 $ 6,953,880
$ 7,500,000
21.43% 17.81%
Recommended Budget Revision No Change
3
FINANCIAL OUTLOOK FY 2002/03
• Transient Occupancy Tax Revenue
Description
The Town of Los Gatos levies a 10 per cent
Transient Occupancy Tax on all hotel/motel
rooms within Town limits to help fund
Town services provided to transient lodgers.
Analysis
The Transient Occupancy Tax Revenues
received in the first quarter of the fiscal year
reflects the drop in occupancy rates for
nearly all Town hotels and motels. This
decrease is due in large measure to the
disruption in travel caused by the tragic
events of September 11, 2001 and the
decline in business travelers due
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
$-
seeking lodging as a result of the general
economic slowdown. The Town expects the
occupancy rates to improve with the re-
establishment of air travel and normal
business activity.
The first quarter of FY 2002/03 reflects a
decrease from the prior year. As a result, we
may be recommending a downward revision
in this revenue source at mid -year. An
encouraging sign is that a new hotel is
schedule for opening in late November,
early December of 2002, which should aid
this revenue source to better track with the
revenue amounts estimated for the fiscal
year.
Quarterly and Annual Revenues
5-Year History
a
FY 1999 FY 2000 FY 2001 FY 2002 FY 2003
1st Quarter Actual Revenues
Fiscal Year Total Actual Revenues
Fiscal Year Total Estimated Revenues
1st Quarter Percent of Total
• 1st Quarter Actual
Revenues
O Fiscal Year Total
Actual Revenues
IN Fiscal Year Total
Estimated Revenues
FY 1999 FY 2000 FY 2001 FY 2002 FY 2003
$ 152,764 $ 144,362 $ 154,501 $ 122,227 $ 113,874
$ 1,025,042 $ 1,215,702 $ 1,286,276 $ 788,408
$ 1,100,000
14.90% 11.87% 12.01% 15.50% 10.35%
Recommendell Budget Revisions: No Change
4
FINANCIAL OUTLOOK FY 2002/03
• Motor
Vehicle In -Lieu Fees •
Description
The State of California imposes an annual
Motor Vehicle License Fee (MVLF) on the
ownership of a registered motor vehicle,
based on the vehicle's sales price. This fee
is "in -lieu" of a personal property tax on the
vehicles. For those vehicles brought into
California from out of state, the fee is based
on the vehicle's market value at the time of
California registration.
After the Department of Motor Vehicles
collects this fee, the State remits the funds to
the cities and counties on a monthly basis.
The State allocates the MVLF revenue, less
a small allocation for administrative costs,
by way of a complex formula involving
population and property tax revenues.
The Town has pledged this revenue as
collateral for repayment of the 1992
Certificates of Participation.
$1,800,000
$1,600,000
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
$-
Analysis
MVLF revenue is historically stable revenue
for the Town, representing approximately
6% of annual General Fund revenues each
year. The five-year history shown in the
chart below illustrates a steady increase in
fees, aided by the small increase in local
population and the continued escalation in
vehicle sales prices. First quarter receipts of
$458,164 further supports this trend of
increasing revenues.
Revenues for the remainder of the fiscal
year are expected to match budgeted
projections however, there is concern that
State deficits may prompt cuts to this
local government revenue source,
especially after the November general
elections. The Town must continue its
efforts at the State level to protect this
vital funding source.
Quarterly and Annual Revenues
5-Year History
FY 1999 FY 2000 FY 2001 FY 2002 FY 2003
1st Quarter Actual Revenues
Fiscal Year Total Actual Revenues
Fiscal Year Total Estimated Revenues
FY 1999
$ 339,663
$ 1,297,326
1st Quarter Revenue Percent of Total 26.2%
FY 2000
$ 375,723
$ 1,478,990
FY 2001
$ 401,646
$ 1,597,247
25.4% 25.1
■ 1st Quarter Actual
Revenues
❑ Fiscal Year Total
Actual Revenues
• Fiscal Year Total
Estimated Revenues
FY 2002 FY 2003
$ 423,699 $ 458,164
$ 1,600,588
$ 1,749,000
26.5% 26.2%
Recommended Budget Revision
No Change
5
FINANCIAL OUTLOOK FY 2002/03
• Interest Income Revenue
Description
The Town earns Interest Income revenue by
investing cash not immediately required for
daily operations in a number of money
market instruments. These investments are
made within parameters as stated in the
Investment Policy approved by the Town
Council. The Town's goal is to achieve a
competitive rate of retuvi while protecting
the safety of those funds.
Interest Income revenue for the Town is
primarily dependent upon two factors: the
cash balance in the Town's investment
portfolio, and the yield on those funds.
$3,000,000
$2, 500,000
$2,000,000
$1, 500, 000
$1, 000, 000
$500,000
$-
♦
Analysis
As mentioned in the First Quarter Budget
Performance Report, the Town's cash
balances have decreased this fiscal year in
accordance with the Town's planned two-
year phasing of its Capital Expenditure
program (more than $6 million in GFAR
project expenditures), leading to a lower
cash balance on which interest is earned.
The adopted budgeted interest revenue is
lower than the prior year, but may need to be
revised lower due to record low interest
rates not seen since the 1960's.
Quarterly and Annual Revenues
5-Year History
FY 1999 FY 2000 FY 2001 FY 2002 FY 2003
1st Quarter Actual Revenues
Fiscal Year Total Actual Revenues
Fiscal Year Total Estimated Revenues
1st Quarter Revenue Percent of Total
FY 1999 FY 2000 FY 2001
$ 160,444 $ 64,097 $ 725,385
$ 1,183,306 $ 1,491,173 $ 2,835,006
13.6% 4.3% 25.6%
• 1st Quarter Actual
Revenues
❑ Fiscal Year Total
Actual Revenues
■ Fiscal Year Total
Estimated Revenues
FY 2002 FY 2003
$ 90,608 $ 290,191
$ 1,572,781
$ 1,400,000
5.8% 20.7%
Recommended Budget Revision No Change
6
FINANCIAL OUTLOOK FY 2002/03
• Property Tax Revenue •
Description
Property Tax is one of the Town's largest
revenue sources, accounting for 20.76% of
the FY 02/03 budgeted General Fund
revenue.
Property Tax distributions are largely
received in the third and fourth quarters of
the fiscal year, meaning revenue receipts are
not reflected proportionately in the chart
below, by quarter.
Property Tax is levied at one percent of the
assessed value of the property, of which the
Town receives approximately thirteen cents
per dollar paid to the County Assessors
Office. The assessed value of real property
appraised by the County Assessor is the
1975/76 assessment role value, adjusted by a
two percent inflation factor thereafter.
When property changes hands or new
construction occurs, property is reassessed at
its current market value.
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$-
Real property values critically impact
revenues. With the passage of Proposition
13, voters in California limited the tax rate
that can be imposed by the Town on
property. With this limitation on rates, the
higher the aggregate property value, the
higher the revenue generated.
Analysis
The County of Santa Clara indicated to the
Town during development of the FY
2002/03 budget process that a number of
assessment appeals had been filed on
properties located in Los Gatos. [t appears
from the first quarter receipts that the
turnover of older pre -Proposition 13 housing
stock is still sustaining some property tax
growth so that the revenue estimates of
moderate growth appear at this early point in
the fiscal year to be valid.
Quarterly and Annual Revenues
5-Year History
FY 1999 FY 2000 FY 2001 FY 2002 FY 2003
1st Quarter Actual Revenues
Fiscal Year Total Actual Revenues
Fiscal Year Total Budgeted Revenues
1st Quarter Percent of Total
FY 1999 FY 2000
$ 7,862 $ 83,784
$ 3,414,762 $ 3,724,022
0.23% 2.25%
■ 1st Quarter Actual
Revenues
❑ Fiscal Year Total
Actual Revenues
■ Fiscal Year Total
Budgeted Revenues
FY 2001 FY 2002 FY 2003
$ 84,218 $ 95,160 $ 126,035
$ 4,114,196 $ 4,114,196
$ 4,806,000
2.05% 2.31% 2.62%
Recommended Budget Revision No Change
7
FINANCIAL OUTLOOK FY 2002/03
• Business License Tax Revenue •
Description
The Town of Los Gatos requires businesses
to obtain a business license if a business is
located within Town limits, or if an agent of
a business conducts operations within Town
limits.
The Business License Tax is based on the
type of business activity. Activities such as
retail sales, wholesale, and manufacturing
are based on estimated gross receipts, on a
sliding scale. Other Business License Tax
revenues are based on flat fees as set forth in
the Town Code.
Annual business license renewals are due
and payable in advance on January 2"d of
each year. New business license applications
for flat -fee based businesses are pro -rated by
quarter, from the date of application to the
end of the year.
$1,200,000
$1,000,000
$800,000
$600,000
$400, 000
$200,000
$-
Analysis
The first quarter of FY 2002 reflects a small
decrease from the same quarter in the prior
year, another indicator of weakness in the
local business sector. Of note though, is that
Business License Tax revenue received in
the first quarter is primarily comprised of
new Business License fees. The majority of
Business License revenue is received in the
second and third quarters of the fiscal year
for the annual Business License renewal
fees.
During preparation of the budget, staff
anticipated the softening economy would
impact gross receipt Business Tax fees.
These revenues comprise approximately
40% of the Business License fees while flat
fees make up the other 60°A) of revenue.
Budgeted revenues were therefore
established at a small amount above actual
amounts received in FY 2001/02.
Quarterly and Annual Revenues
5-Year History
7'
din
7
AIR
mil• 4.■11
FY 1999 FY 2000 FY 2001 FY 2002 FY 2003
1st Quarter Revenues
Fiscal Year Total Revenues
Fiscal Year Total Estimated Revenues
1st Quarter Revenue Percent of Total
■ 1st Quarter
Actual Revenues
O Fiscal Year Total
Actual Revenues
■ Fiscal Year Total
Est imated
Revenues
FY 1999 FY 2000 FY 2001 FY 2002
$ 52,330 $ 59,002 $ 44,720 $ 50,655
$ 956,710 $1,000,281 $ 995,699 $ 978,298
5.47% 5.90% 4.49% 5.18%
FY 2003
$ 41,428
$ 1,000,000
4.14%
Recommended Budget Revision No Change
8
As shown in the Sales Tax revenue projections, early estimates for FY 2002/03 project
collections of $7.2 million - an increase from the prior year amount of $6.9 million, but less than
the FY 2002/03 budgeted amount of $7.5 million. Because it is still early in the fiscal year and
three months of revenue data is not sufficient for reliable projections, staff is not recommending
a change in this revenue estimate at this time. However, we will watch this very closely and may
propose a change in estimates at mid -year if needed, once more information becomes available.
The Town's Transient Occupancy Taxes continue to reflect the general slowdown in
business/holiday travel in Silicon Valley experienced in 2001 and 2002. Staff will continue to
monitor Transient Occupancy Tax revenues closely and will recommend any modifications to
revenue estimates upon receipt of more information, most likely at mid -year.
Intergovernmental revenues, most notably the Town's budgeted $1,749,000 of Motor Vehicle
License In -Lieu fees are also threatened by the continuing State of California budget deficit.
Though the adopted State of California budget passed recently did not include any takes of this
revenue source, Town staff has been advised by the officials from the League of California Cities
that this revenue source remains in jeopardy as it could be seized by the State to help balance its
current budget deficits. This threat is believed to increase after the November elections. If this
revenue source were to be dramatically impacted, Town staff will bring to the Town Council its
recommendations on how the budget will need to be revised to accommodate this negative
impact on Town operating revenues.
It is likely also that the General Fund interest income estimates will need to be lowered.
Contributing to this potential reduction are lower overall investment balances due to the
aggressive capital program carried out by the Town in FY 2001/02 and FY 2002/03. Also, the
interest rates the Town can achieve on its invested funds are at rates not seen since the sixties.
According to the Federal Reserve Bank of New York, current 6-month CD rates are at 1.75%,
and the 10-year Treasury yields are currently 4.57%.
On a positive note, Town staff anticipates the opening of a new hotel by late November or early
December 2002 which should help the Town's Transient Occupancy Tax revenue collections.
Other positive news is that Property Tax collections appear to be tracking with FY 2002/03
budget forecasts. Additionally, the Wall Street Journal reported that nationwide car sales rose
2.9% in September 2002, a positive sign for the Town's local auto dealers and the associated
sales tax revenue generated by this activity. Staff is also reviewing revenue enhancements to fill
in gaps in the Town's current revenue structure. These enhancements would most probably be
implemented in the FY 2003/04 proposed budget.
The first quarter actuals and early revenue estimate scenarios are incorporated into the General
Fund Operating Revenues vs. Operating Expenditures Schedule presented in the following
Financial Summaries, Projection and Recommendations section of this report. Under this
declining revenue scenario, the schedule reflects a projected operating revenue shortfall of
approximately $400,000 for FY 2002/03. The projection is an early estimate scenario, and as
indicated earlier, Finance staff does not recommend formal revision of any operating revenue
budgeted amounts until revenue trends become more evident.
9
FY 2001/02 :ketosis &
FY 2002/03 Projections
Town of Los Gatos
Schedule of General Fund
Operating Revenues versus Operating Expenditures
For the period ended September 30,2002
Final 1st Qtr •/. of Adopted Adjusted 1st Qtr '/. of FY02/03
Balance Budget Actuals Budget Budget Budget Actuals Budget Finance
FY 01/02 FY 01/02 FY 01/02 FY 01/02 FY 02/03 FY 02/03 FY 02/03 FY 02/03 Projection
Revenues
General Property Tax S 4,784.476 5 4,551.100 S 141,085 3% S 5,106.000 S 5,106,000 S 126,035 2% S 5.106,000
Sales & Use Tax 6,953,880 7,000,000 1,490,292 21% 7,500,000 7.500.000 1,336,124 18% 7.200.000
Franchise Fees 990.861 940.000 82,327 9% 1,039.000 1,039.000 76,398 7% 1.040.000
Transient Occ Tax 788,408 900.000 122,227 14% 1,100.000 1.100.000 113,874 10•/ 900.000
Business License Tax 978.350 1.100.000 50,655 5% 1.000.000 1,000,000 40,68.3 4 % 980.000
Licenses & Permits 719,635 829.200 182,985 22% 761,500 761.500 290,511 38% 750.500
Motor Vehicle In Lieu 1.600.588 1.680.000 423,69% 25% 1,749.000 1,749,000 458,164 26% 1.749,000
Other Intergovernmental 1,392.465 1.280.053 269,527 21% 1,212,700 1.212.700 252,926 21% 1.212.700
Charges for Services 2.049.022 2.026.950 391,507 19% 2.099.975 2,099,975 481,853 23% 2.099,975
Fines & Forfeitures 532,680 968.970 106,84E I I% 78,500 78,500 12,670 16% 78.500
Interest 1.925.867 1,700,000 443,694 26% 1.596.850 1,596,850 290,191 18% 1.200.000
GASB inv to market adj per auditors -353.086 -353,086 - -
Miscellaneous/Other 292.533 208,890 49,070 23% 266.857 266,857 186$40 70% 277.857
Authorized Use of Reserves
Fund Transfers 283,165 289.810 114047 39% 1.088.700 1.088,700 149,076 14% 1.088.700
Total Renews, $ 22,93/1,845 S 23,474,473 S 3,514,877 15% S 24,599,042 S 24,599,082 5 3,815,345 16% S 23,683,232
Expenditures (includes enc & carryovers)
Mayor & Council 121.312 157.600 22,616 14% 160.000 160.000 27,001 17% 156.800
Clerks 337,696 325,600 65,0611 20% 383,400 383,400 83,711 22% 375,732
Attorney 289,921 399.000 53,476 15% 250,500 250,500 45,222 18% 245.490
Treasurer 55.833 65,100 10,523 16% 63.300 63,300 9,907 16% 62,034
Manager 1,854,024 2.064.500 362,793 18% 2,153,400 2.153.400 407,460 190/. 2,110,332
Comm Development 1,983.197 2,453,850 364,67E 15% 2.548.250 2,548,250 445,933 17% 2.497285
Parks & Public Works 4,377,541 5,034,990 925,61, 18% 5,032,685 5,032,685 1420,534 20% 4,932,031
Police 9,739,700 9,885.023 2,008,430 20•/. 9,595.590 9.595.590 1990,400 21% 9,403.678
Community Services 912,394 1,020,080 ' 146,475 14% 1,007,676 1,007,676 160,146 16% 987,522
Library 1.684,125 1,774.200 373,019 21% 1,882,600 1.882.600 378,782 20% I,844.948
Total Dept Expenses S 21,355342 S 23.179,943 S 4337640': 19°/. 23.077,401 S 23,077,401 S 4,569,09E 20% S 22.615.852
Non -Dept Expenditures and other uses
General Government 3,111,517 3,515.645 233679 7% 1,354.250 1,354,250 296,202 22% 1.457.365
Total Non -Dept Expenses S 3.111,517 S 3.515.645 S 2336791 7% S 1,354,250 S 1,354,250 S. 296,202. 22% S 1.457.365
TWA Operating Eap iS ots S 24,467,259 S 26695,588 S 4,571,319 17% S 24,431,651 S 24,431,651 S 4,865,299 20%. S 24,073,217
Piet Operettas Ravens. (RekreCapied $ (1,528,415) $ (3,220.615) S (1.056442),:-, 33%.,:.1 167,43E S 167,431 S (1.049.954)
Tresdo & Brdaered Be0ode8 Paid Balance
Budgeted BegFund Balance Revenue
Budgeted Use of Reserves for Capital Project!
Total Budgeted Use of Reserves
Pia 1 (389,9115)
Total Available for Capital Projects (1,528.415) (3,220,615) (1.056,442) 167,431 167,431 (1,049,9541 1389,9851
Budgeted Capital Trfrs-Per 5 Yr CIP 1.863350 1,863.750 - 207,857 207.857 207.858 100°/, 279,507
Net Simples/Use UabadgeM Reams S (3,392,165) S (5,084.365) S (1,056,442) , 33% S (40,426) S (40,426) S (1,257.812) ra S (669,492)
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This information aids staff in the development of contingency plans and pro -active steps to
address the potential for revenue shortfalls on a timely basis. The Financial Summaries,
Projections, and Recommendations section provides a discussion of Town major funds at a
summary level. Also included is a discussion of the Town's strategies implemented to mitigate
the potential downturn in revenues that may be experienced this fiscal year.
FINANCIAL SUMMARIES, PROJECTIONS AND RECOMMENDATIONS
General Fund
s stated earlier in this report, the Schedule of FY 02/03 General Fund Operating Revenues vs.
Operating Expenditures reflects a scenario of potential downturns in revenue estimates. These
adjustments are presented below, but staff does not propose formal amendment by Town Council
until mid -year once more revenue data is available to more clearly see the revenue trends
develop.
Sales Tax
Transient Occupancy Tax
Tax
Interest Income
Business License
GENERAL FUND REVENUES
FY 20020/03
Adopted Budget
$ 7,500,000
$ 1,100,000
$ 1,596,850
$ 1,000,000
FY 2002/03
Potential Revisions
$ (300,000)
$ (200,000)
$ (396,850)
$ (20,000)
FY 2002/03
Revised Scenario
$ 7,200,000
$ 900,000
$ 1,200,000
$ 980,000
The early estimates of potential downturns are incorporated into the Schedule of Operating
Revenues vs. Operating Expenditures on page 10 as one potential scenario of FY 2002/03 results
based on these early forecasts.
If the continuing revenue trends continue to support the declining revenue scenario, and
operating revenues do not materialize as was estimated in the FY 2002/03 adopted budget, staff
anticipates implementing the following steps to address this scenario on a pro -active basis.
Expenditure Slowdowns/Reductions and Projected Salary & Benefit Savings-FY 2002/03
The FY 02/03 budget was prepared in an uncertain economic climate. Though economists were
forecasting economic growth of 4% for the Bay Area for calendar year 2002, staff was
conservative in its revenue estimates used to fund the FY 02/03 budget. Despite the conservative
approach, this report indicates that revenues may still need to be adjusted for the lag in the
recovery that was projected for 2002. The FY 02/03 budget plan did acknowledge the
uncertainty of the future and therefore laid out contingency plans staff would commence upon
operating revenue reductions.
In addressing funding needs, Town staff began reviewing operations for possible strategic
expenditure slowdowns/reductions. The Town Manager and each department will be reviewing
these potential slowdowns/reductions with the priority to limit the impact to Town services.
Additionally, the Town conservatively budgets its personnel costs assuming top pay step and
zero position vacancies during the year. At the time of this report, actual salary and benefit
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reports indicate that all employees are not at their top step, and 6 vacant authorized positions
remain to be tilled. Savings through strategic expenditure reductions and salary and benefit
savings are currently projected to be nearly $500,000 for the fiscal year. These savings alone
may be sufficient to balance operating revenues with operating expenditures.
Other pro -active steps that staff will be utilizing to address any revenue shortfalls include the
following:
Surplus Beginning Fund Balance
After establishing all reserves to their required levels, the available budgeted beginning fund
balance after audit is established at approximately $400,000. In past years, this amount was
usually reserved for future capital improvements according to Town Financial Policy. Because
of the reduced revenue scenario for FY 02/03, staff requests the flexibility to utilize this funding
to address one-time capital or operating funding needs. Any potential appropriation of this
surplus will be brought forward to Town Council for approval as part of an approved budget
adjustment on a separate agenda item.
De funding of Authorized Positions
Part of the Town's FY 02/03 budget development strategy was to de -fund certain identified
authorized positions. Staff is recommending continuing that strategy through the current fiscal
year and possibly implementing it upon certain vacancies occurring in staff positions as they are
identified in the current year.
Internal Service Fund Balance and User Charges
As part of the FY 02/03 budget development, staff conducted a detailed review of the
approximately $8.9 million of Fund Balances in the Town's Internal Service Funds. These funds
provide resources for MIS services, equipment replacement, building and vehicle maintenance,
and Town -wide supplies by charging a rate to the General Fund to pay for these services. Staff
was able to reduce Internal Service fund rates charged to the users (primarily the General Fund
departments) thereby lowering General Fund costs. Staff believes there are adequate balances in
these funds to maintain lower rates in the future to help address potential revenue shortfalls.
Economic Vitality Efforts
An important component in the steps the Town can take on a pro -active basis to address its long-
term funding needs, is an active economic vitality effort. Though the Town has strong reserves,
these are one-time sources of funding designated for one-time needs. The Town is not
particularly strong in reliable, stable, on -going revenues that can support the Town's annual
operating costs. The Town's sales tax base needs to be retained and enhanced for the future.
With the addition in January 2002 of the Redevelopment Manager, the Town is continuing to
implement the development of a business retention strategy, and a sales tax diversification effort.
Reserves for Economic Uncertainty
In adopting the FY 02/03 budget, staff was able to achieve a balanced budget without accessing
this funding source. The adopted budget however did specify that if necessary, this reserve
could be drawn upon for a short term basis until more permanent steps could be put in place to
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address operating revenue shortfalls. Staff would make efforts to use this reserve for
expenditures that are more "one-time" in nature, as opposed to using them for normal operating
expenditures. It should be noted that in response to the economic downturn and the events of
Sel,;ember 11 th, many local governments in the local area utilized their contingency reserves to
balance their FY 02/03 budgets as a short-term measure until the forecasted recovery begins to
take effect or operations can be effectively set at levels supported by operating revenues.
All Other Funds
Special Revenue Funds
Of special note here is the new Parking Fund, which was created to . account for parking
enforcement revenues and expenditures to provide specific data regarding that activity. Staff is
aware that citation revenue is lagging expenditures for the fiscal year to date. Staff believes
there was a downturn in revenues due to the testing period of the new mobile citation
technology. Police Department staff expects revenues to be brought in line with budget
estimates as the year progresses. Town staff will continue to monitor this revenue source. No
revision to adopted revenues or expenditures is required at this time.
SPECIAL REVENUE FUNDS FINANCIAL PROJECTIONS
FY 2002/03
Parking Solid Sewer
Management Waste CDBG Non Point Maint. LID's
BEGINNING FUND BALANCE - 432,528 1,144,573 227,288 - 122,620
ANNUAL REVENUE BUDGET 1,206,250 169,400 337,146 153,360 580,600 41,482
Actuals 1st Quarter 141,145 26,670 3,237 150,660 580,600 36,968
ANNUAL EXPENDITURE BUDGET 1,185,620 193,100 506,868 150,660 580,600 46,300
1st Quarter Expenditures (Actuals by Category)
Salary Expense 79,121 9,737 1,213 13,770 67,783 -
Fringe Benefits 21,032 1,452 145 4,097 14,351 -
Materials & Supplies 34,569 6,473 2,905 933 14,757 13,263
Internal Service 20,137 782 124 10,346 21,213
Transfers 4,120 4,374 22,200 85,600 6,400
Total Expenditure Actuals 1st Qtr. 154,859 22,564 8,761 51,346 203,704 19,663
1ST QUARTER ENDING FUND BALANCE * (13,714) 436,634 1,139,049 326,602 376,896 139,925
*Based on actuals
Capital Projects Funds
Capital Project Funds are tracking in accordance with the FY 2002/03 adopted budget. Staff is
recommending no changes at this time, however staff will be reviewing, in concert with the
Town Manager and Town Council, some of the projects scheduled for FY 02/03 for potential
strategic slowdowns of expenditure activity to aid in cash balances available for General Fund
investment earnings in light of the aggressive capital spending plan in the past two years. If
operating revenues will support it, Staff intends to maintain the General Fund's current year
commitment to the Town's Capital Improvement Plan.
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CAPITAL PROJECT FUNDS FINANCIAL PROJECTIONS
FY 2002/03
BEGINNING FUND BALANCE
ANNUAL REVENUE BUDGET
Actuals 1st Quarter
ANNUAL EXPENDITURE BUDGET
1st Quarter Expenditures (Actuals by Category)
Engineering Design
Construction Engineering
Constrution
Transfers
Total Expenditure Actuals 1st Qtr.
GFAR Traffic Grant Funded Storm Utility Gas
Fund Mitigation CIP's Drains Underground Tax
8,297,503 201,200 19,711 638,232 1,677,111 1,108,517
675,432 70,000 1,284,970 106,131 129,800 616,700
86,253 4,374 53,342 14,006 110.406
5,931,067 193,100 506,868 150,660 580,600 46,300
40,425
745,573
23,780
26.868
2,980
339
54,929
809,778 26,868
2,980 - 55,268
1st QUARTER ENDING FUND BALANCE* 7,573,978 174,332 21,105 691,574 1,691,117 1,163,655
*Based on actuals
Funding for the Town's capital portion of a skatepark has been projected at approximately
$125,000. Funding is currently assumed to be provided through the Town's State Park Bond
funding allocation which staff would apply for at the time the project plan is finalized. An
alternative to this source would be to utilize GFAR reserves which could be programmed and
appropriated in the Town's FY2003-08 Capital Improvement Plan. The funding for skatepark
annual operations and maintenance is currently estimated to be approximately $50,000 per year.
These costs will need to be funded from an on -going operating revenue source on an annual
basis, once a park is in operation.
Internal Service Funds
Internal Service Funds are tracking in accordance with the adopted FY 2002/03 adopted budget.
No revision to adopted revenues or expenditures is required at this time. Staff believes there is
still potential for further operating transfers in future years from these funds as excess balances
are still available in greater amount than present needs for funding in a number of these funds.
INTERNAL SERVICE FUNDS FINANCIAL PROJECTIONS
FY 2002/03
BEGINNING FUND BALANCE
ANNUAL REVENUE BUDGET
I st Quarter Actuals
Equipment Workers Self Mmgt Info Vehicle Building
Replacement Comp. Insurance Stores Systems Maint. Maint.
3,483,330 2,157,428 1,914,634 193,318 1,826,403 41,426 384,333
558,400 533,400 806,800 83,250 775,100 539,000 1,085,250
151,425 115,806 176,428 17,080 251,594 134,750 265,853
ANNUAL EXPENDITURE BUDGET 1,061,990 728,000 948,800 83,250 1,245,400 538,950 1,085,250
1st Quarter Expenditures (Actuals by Category)
Salary Expense 6,283 17,136 41,473 43,627 14,556
Fringe Benefits 1,363 3,469 - 8,754 10,678 3,930
Materials & Supplies 1,476 644 14,114 12,380 143,081 37,141 185,181
Program Costs/Capital Purchases 91 112,495 419,035 19,823 864
Transfers - 175,000
Total Expenditure Actuals 1st Qtr. 1,567 120,785 453,754 12,380 388,131 91,446 204,531
1st QTR ENDING FUND BALANCE* 3.633,188 2,152,449 1,637,308 198,018 1,689,866 84,730 445,655
*Based on actuals
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Trust and Agency Funds
Town Trust and Agency Funds have fund balances as of June 30, 2002 of $284,396 for Parking
District #88 and $193,396 in the Library Trust Funds. No budget revisions are contemplated at
this time for these funds.
Redevelopment Agency
The Agency's FY 02/03 and FY 2002-07 Capital Improvement Plan adopted budgets are
incorporated into the Redevelopment Agency's financial statements and year-to-date actuals as
presented below. Note that the beginning negative balance in the capital projects fund is a
timing issue, the capital projects fund incurs the expense and then reimburses itself from the
proceeds of the $10.7 million dollar 2002 COP issue that was finalized in July 2002. The true
interest cost to the Agency for that issue was at an average rate of 4.55 per cent provides a very
favorable financing rate for Agency capital projects. The proceeds of the bond issue are being
used and appropriated for their intended purpose, eligible capital projects in the downtown
project area such as the Town Plaza Reconstruction Project, Downtown Street Repair and
Streetscape Projects and Downtown Parking Improvements.
TOWN OF LOS GATOS REDEVELOPMENT AGENCY
FINANCIAL PROJECTIONS
FY 2002/03
Capital Debt Low &
Projects Service Moderate Total
BEGINNING FUND BALANCE (317,250) 2,581,561 2,053,720 4,318,030
ANNUAL REVENUE BUDGET 9,037,100 3,433,444 813,212 13,283,756
1stQuarter Actuals 1,141,441 154,409 6,811 1,302,661
ANNUAL EXPENDITURE BUDGET 7,897,967 728,000 948,800 9,574,767
1st Quarter Expenditures (Actuals by Category)
Salary Expense 74,505 4,842 79,347
Fringe Benefits 8,930 998 9,928
Materials & Supplies 9,979 1,008 10,987
Internal Services 5,024 409 5,433
Debt Service 249,895 249,895
Capital Improvements 1,326,926 - 1,326,926
Total 1st Quarter Expenditure Actuals 1,425,364 249,895 7,257 1,682,516
1st QUARTER ENDING FUND BALANCE (601,173) 2,486,075 2,053,274 3,938,175
*Based on actuals
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CONCLUSION
As demonstrated in the First Quarter Budget Performance Report, the Town is in a sound overall
financial position despite the economic uncertainties the economy is facing this year. It is this
overall financial strength that enables the Town to effectively manage the current economic
downturn and its associated revenue reductions through careful monitoring of revenue and
expenditure trends and reacting to them pro -actively before a financial crisis presses upon the
Town. The steps identified in this report when incorporated will aid the Town's ability to
weather the downturn in revenues without causing an immediate disruption to Town services or
the current year's capital improvement program. Staff will continue to closely monitor all
current year revenue and expenditure activity, mindful of the necessity to balance operating
revenues with operating expenditures. We also need to be aware and vigilant in developing
appropriate revenue sources for on -going operating and capital needs of the community.
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