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15a Staff Report - 2002/03 Second Quarter Budget Performance and Status ReportMEETING DATE: 02/18/02 ITEM NO. h 1C �J k-� COUNCIL AGENDA REPORT DATE: February 18, 2003 TO: MAYOR AND TOWN COUNCIL FROM: DEBRA J. FIGONE, TOWN MANAGER SUBJECT: 2002/03 SECOND QUARTER BUDGET PERFORMANCE AND STATUS REPORT -SIX MONTHS ENDING DECEMBER 31, 2002. A. ACCEPT 2002/03 SECOND QUARTER BUDGET PERFORMANCE STATUS REPORT. B. AUTHORIZE BUDGET ADJUSTMENTS AS RECOMMENDED IN THE ATTACHED SECOND QUARTER BUDGET PERFORMANCE REPORT. RECOMMENDATION: 1. Accept 2002/03 mid -year budget performance and status report. 2. Authorize budget adjustments as recommended in the attached second quarter budget performance report. BACKGROUND: The attached Budget Performance Report is the mid -year report covering the six months beginning July 1, 2002 and ending December 31, 2002. The Budget Performance Report presents analysis and recommendations related to key General Fund revenues by category and expenditures by fund. A mid -year Capital Improvement Plan Status Report that provides an update on capital project activities through the second quarter, will be presented on this meeting's agenda as a separate agenda item. 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 six PREPARED BY: STEPHEN D. CONWAY., Finance & Administrative Services Dir• or Reviewed by: V5S Assistant Town Manager J Town Attorney Clerk ;[.Finance Community Development Revised: 2/14/03 9:38 am Reformatted: 5/30/0l PAGE 2 MAYOR AND TOWN COUNCIL SUBJECT: 2002/03 SECOND QUARTER BUDGET PERFORMANCE AND STATUS REPORT -SIX MONTHS ENDING DECEMBER 31, 2002. February 18, 2003 months, staff is able to see more clearly the revenue trends for the current fiscal year. This information aids staff in developing plans to address projected revenue shortfalls and advising Town Council of planned actions recommended by staff to balance operating revenues with operating expenditures. DISCUSSION: This year's mid -year budget report reflects the continuing economic recession experienced locally and nationally. With the continued decline in economically -sensitive revenue, the goal of the mid- year budget is to adjust expenditures to meet the declining revenue projections and achieve a balanced budget. Specifically, the mid -year report recommends revenue estimate reductions totaling $1.5 million in key revenue sources including sales tax, transient occupancy tax, motor vehicle license in -lieu fees, interest income, and franchise fees. This results in an adjusted revenue budget of $23.7 million, a six percent (6%) reduction from the FY 2002/03 adopted budget of $25.2 million. Accordingly, the mid -year report recommends reductions in General Fund expenditures to match this revenue shortfall. The six percent (6%) budget reduction was achieved without tapping into the $3.7 million Reserve for Economic Uncertainty. In balancing the mid -year budget, our goal was to identify savings that would have the least impact on Town services and on the organization's workforce. The recommended expenditure reductions were achieved through a combination ofoperational efficiencies, salary savings due to vacancies and overtime reductions, service and supplies reductions, training reductions, and equipment replacement postponements. While these reductions do not have major impacts on services and the organization, the reductions will affect operations overall. Holding vacancies and reducing overtime will result in the current workforce absorbing more of the workload, and thus limiting flexibility to respond to new opportunities and/or increased service demands. Response times associated with non-public safety requests may increase, and maintenance cycles may be reduced, as well. Limited training funds will mean that employees will forego some opportunities for enhancing knowledge and skills; however, we are keeping a pool of funds in tact for priority training opportunities. Over the longer -term, these types of reductions are not sustainable without incurring more significant impacts on services. Building the FY 2003-04 budget presents a greater challenge, as the potential for State take-aways of local funds will significantly compound the effects of the Town's current slow economy. Due to the State's estimated $35 million deficit, the Governor is proposing to eliminate the Motor Vehicle License Fee (VLF) backfill to local jurisdictions. This would result in a loss of $1.15 million in next year's revenue, a reduction of an additional seven percent (7%) of total revenue on top of expected continued declines in other revenue sources. Given the uncertainty of State actions, we are approaching the FY 2003-04 budget process using two planning scenarios assuming two different levels of revenue projections. It is likely that we will need PAGE 3 MAYOR AND TOWN COUNCIL SUBJECT: 2002/03 SECOND QUARTER BUDGET PERFORMANCE AND STATUS REPORT -SIX MONTHS ENDING DECEMBER 31, 2002. February 18, 2003 to adopt the FY 2003-04 budget prior to the State's budget decisions; however, our planning will enable the Town to take subsequent action to balance the budget should the State eliminate the VLF backfill or other local funds. To meet next year's budget challenge, we are encouraging all employees to generate ideas for operational efficiencies, expenditure reductions, and revenue enhancements. Ongoing communication with all departments, employees and the Town's bargaining units is being undertaken to increase understanding of the fiscal situation and to solicit ideas. The goal is to minimize the impact on Town services and to keep Town employees employed in providing services to the community. In addition to general expenditure reductions, strategies may include reorganizing service delivery, retraining employees, and a modest use of reserves to bridge the gap to avoid making drastic cuts in services. Our overaching principle, however, will be to direct limited resources to providing services to the community . For both the proposed adjustments to the FY 2002-03 budget and the FY 2003-04 budget, we are using conservative estimates for economically -sensitive revenue projections. If the economic rebound is sooner or stronger than projected, we will re-evaluate our expenditure reductions to identify priorities for restoring funding. FORMAT OF THE REPORT The attached Budget Performance Report includes a financial overview comprised of: a brief discussion of the Town's financial condition; the FY 2002/03 financial outlook; a summary of the performance of the Town's primary General Fund revenue sources and necessary budget adjustments; FY 2002/03 budget reduction plans by department; and an overview of the FY 2003/04 budget process. Included in the report is a Schedule of General Fund Operating Revenues vs. Operating Expenditures for FY 2002/03 that was prepared under an assumption that the budgeted revenues have been adjusted downwards as described in the report and that the recommended departmental expenditure reductions will be implemented immediately. The report explains the Jepartmental expenditure reduction plans recommended to balance revenues and expenditures for the current year. The report also describes the FY 2003/04 budget process now taking place. ENVIRONMENTAL ASSESSMENT: This budget report is not a project defined under CEQA, and no further action is required. FISCAL IMPACT: The Second Quarter Budget Performance Report includes a number of recommended budget adjustments necessary to balance operating revenues with operating expenditures for FY 2002/03. PAGE 4 MAYOR AND TOWN COUNCIL SUBJECT: 2002/03 SECOND QUARTER BUDGET PERFORMANCE AND STATUS REPORT -SIX MONTHS ENDING DECEMBER 31, 2002. February 18, 2003 Upon approval of the recommended budget adjustments by Town Council, current projections forecast a small excess of operating revenues over operating expenses for the fiscal year ending June 30, 2003 (excluding a one-time use of General Fund reserves for parking to pay for start up costs for the new Parking Enforcement program). As detailed in the report, staff is currently engaged in FY 2003/04 budget development process which incorporates plans for a five and ten per cent overall expenditure reduction depending on the actions taken by the State of California to balance its budget deficit. Attachments: Budget Performance Report for the Six Months Ended December 31, 2002 TOWN OF LOS GATOS BUDGET PERFORMANCE REPORT FOR THE SIX MONTHS ENDED DECEMBER 31, 2002 February 5, 2003 FINANCIAL OVERVIEW At the mid -year point of FY 2002/03, the Town's financial results through December 31, 2002 indicate that additional corrective action is required to balance this year's General Fund operating budget. The FY 2002/03 adopted budget was prepared with conservative assumptions about revenue growth based upon economic forecasts last spring that predicted a modest recovery in the fall of 2003 and an overall annual economic growth rate of 4%. Unfortunately, the predicted modest growth failed to materialize this fall leading to further reductions in our economically sensitive revenue estimates for the current fiscal year. Revenue declines in economically sensitive revenues such as Sales Tax, Transient Occupancy Tax, Franchise Taxes, Interest Income and Motor Vehicle License Fees are leading staff to recommend an approximately $1.5 million dollar combined reduction in estimates for these revenues for the fiscal year. The local revenue problem is compounded by the State of California's budget deficit deliberations and the very real possibility of a State take -away of up to $523,000 of FY 2002/03 and $1.15 million in FY 03/04 Motor Vehicle License Fee revenues. Though the FY 2002/03 budget was based on some modest recovery in revenues, staff balanced this optimism by carrying forward into the current year a variety of cost reduction strategies implemented in mid -year FY 01/02 to control operating costs, including de -funding of authorized positions, strategic hiring freezes, delaying where practical, equipment purchases/replacements and strategic expenditure reduction/slowdown opportunities. These pro -active steps taken last year have mitigated some of the effects of the continued downturn in revenues, but it is clear that more cost savings are necessary to balance current year revenues with operating expenditures. In response to the revenue declines, we are continuing a six per cent reduction from the FY 2002/03 adopted General Fund expenditure budget appropriations for the current year. Early in January 2003 staff began the very difficult work of proposing departmental six per cent reductions to meet this goal totaling almost $1.5 million in overall General fund reductions. The objective for these reductions was to limit the effects on service delivery to the public and Town employee layoffs by utilizing where available, salary savings due to vacancies and hiring freezes, salary step savings, and other cost savings. Vacancy savings available are an interim tool for this year's balancing efforts, but the current vacancies have impacted departments in terms of workload and service delivery to the public. The recommended departmental reductions and their service level impacts are discussed in this report. Staff has also prepared contingency plans for the current year for deeper cuts should the State take $523,000 of Motor Vehicle License Fee revenues in FY 2002/03. Staff's latest information is that the proposed take -away of these license fees in the Governor's mid year budget proposal is not going to occur as it was rejected by state legislators. Staff is also developing a FY 2003/04 recommended budget that incorporates levels of five and ten per cent reductions from FY 2002/03 adopted budget levels to respond to the continuing local economic downturn and State take-aways. The possible loss of up to $1,150,000 of Motor Vehicle License Fee revenues if the State is successful in taking local government revenues in FY 2003/04 to balance the State 1 budget deficit is a very real threat to the Town's financial health and plans are being actively developed to address it. The five and ten per cent reductions plans for FY 2003/04 will be very difficult to achieve and may involve some very painful cuts to the public in terms of service delivery. Staff is making every attempt to mitigate these impacts, but revenue losses of this magnitude are very difficult to sustain while still providing the excellent service levels now provided to the public. Staff is considering a number of cost containment strategies within the salary and benefits component of the FY 2003/04 budget. These strategies include, but are not limited to, voluntary reduced work weeks. job -sharing, voluntary furloughs, personnel re -structuring opportunities, selected hiring freezes, de - funding of authorized positions, and cost -sharing with employees on rising benefit and retirement costs. These reduction plans will attempt to mitigate service impact to the public, but it cannot be over emphasized that a permanent loss of over one million dollars per year in operating revenues on top of the budget reductions due to a protracted recession, will seriously impact Town service levels. The Motor Vehicle License fee revenue loss alone next year would equal a permanent loss of funding of approximately nine Police Officers or a reduction in Library operations from seven days a week to two or three days a week. On a positive note, the Town's General Fund Reserve for Economic Uncertainty remains intact at $3,678,000. The Town is in a fortunate position because in spite of the downturn the FY 2002/03 budget did not use this reserve as a potential funding source and so it remains a tool available to be used judiciously by Town Council as necessary. Staff believes the recession and downturn in local revenues is not permanent. It is anticipated that in future years, when recessionary forces reverse, dollars can be added to the Town's Reserve for Economic Uncertainty to provide funding alternatives for the next downturn. In addition, with the reductions made in FY 2002/03 there is an opportunity to re -direct some or all of any potential excess revenues over expenditures at year-end to be used in FY 2003/04 budget balancing. This would involve a change from the Town's normal policy of directing all of this excess to the Town's Reserve for Capital Improvements. Staff believes that, in addition to the revenue declines and threats by the State to seize local government revenues, the Town must also fine tune its cost structures and develop on -going revenue streams which provides balanced operating revenues and expenditures. This "structural" challenge can be addressed pro -actively, in cooperation with Town employees, as the largest component of the Town's operating expenditures is the salary and benefits component. Town departments and the Town Manager's office are currently developing strategies to look at all categories of on -going costs. Staff will be updating its user fees to reflect current costs to ensure the recapture of service delivery costs. Staff will also be exploring opportunities for future revenue streams that can be dedicated to Town service delivery in areas such as infrastructure maintenance, public safety and library/community services. FINANCIAL OUTLOOK FY 2002/03 As stated in the Financial Overview, financial receipts through the second quarter ending December 31, 2002 reflect the national and regional economic slowdown's impact on certain economically dependent revenues. This downturn and its associated revenue reduction recommendations are discussed in the following Financial Outlook projections: 2 FINANCIAL OUTLOOK FY 2002/03 Quarter Ending December 7/ ;UN_ • Sales Tax Revenue Description The State Board of Equalization allocates one (1.0) cent of the eight (8.25) cents of local sales tax collected by merchants on retail sales and taxable services transacted within the Town to the Town of Los Gatos 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 economic recovery and $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $- in consultation with MBIA, (the Town's sales tax consultant), staff programmed an increase in this revenue source from the $7 million collected in FY 01/02 up to $7.5 million for FY 02/03. However, collections through mid -year suggest that recovery has not materialized to anticipated levels, indicating that this revenue source will again total $7 million for the fiscal year, requiring an adjustment to budgeted revenues. Staff is encouraged that one local interne based business continues its sales growth and is reflected in its contribution to the Town's sales tax collections. The latest forecast for economic recovery by the UCLA Anderson School of Business calls for modest economic growth in the fall of 2003. Quarterly and Annual Revenues 5-Year History FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 2nd Quarter Actual Revenues Fiscal Year Total Actual Revenues Fiscal Year Budgeted Revenues 2nd Quarter Percent of Total p 2nd Quarter Actual Revenues p Fiscal Year Total Actual Revenues ■ Fiscal Year Budgeted Revenues FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 $ 2,712,934 $ 3,245,945 $ 4,759,276 $ 3,288,885 $ 3,237,902 $ 5,688,125 $ 7,932,104 $ 9,429,256 $ 6,953,880 47.69% 40.92% $ 7,500,000 50.47% 47.30% 43.17% Recommended Budget Revision Revise Downward to $7,000,000 3 FINANCIAL OUTLOOK FY 2002/03 Quarter £ndrne December 31 2002 • 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 Revenues received in the second quarter of the fiscal year continues to reflect 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 as well as a decline in business travelers seeking lodging stemming from the general economic recession. $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 Staff continues to monitor Transient Occupancy Tax revenues closely and recently met with representatives from five of the Town's hotel/motels to explore ideas to increase the Town's visitation and occupancy rates. While the Town expects the occupancy rates to improve with the re- establishment of more normal business activity and the opening of one new hotel in November 2002, current year hotel/motel receipts continue to be lower than anticipated. Second quarter receipts do not include revenues from the new hotel as they will be submitted in the third quarter, however year-to-date receipts reflect a significant decrease from the prior year. Staff is recommending a downward revision in this revenue source from the adopted budget of $1.1 million to $800,000. Quarterly and Annual Revenues 5-Year History FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 2nd Quarter Actual Revenues Fiscal Year Total Actual Revenues Fiscal Year Budgeted Revenues FY 1999 $ 396,149 $ 1,025,042 2nd Quarter Percent of Total 38.65% FY 2000 $ 415,824 $ 1,215,702 FY 2001 $ 572,874 $ 1,286,276 ❑ 2nd Quarter Actual Revenues ❑ Fiscal Year Total Actual Revenues ■ Fiscal Year Budgeted Revenues FY 2002 FY 2003 $ 334,858 $ 293,570 $ 788,408 $ 1,100,000 34.20% 44.54% 42.47% 26.69% Recommended Budget Revisions: Decrease to $800,000 4 FINANCIAL OUTLOOK FY 2002/03 Quarter f:.ru/ur,e December {/ 2002 • 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 the 1992 Certificates of Participation. $2,000,000 $1,500,000 $1,000,000 $500,000 ♦ Analysis MVLF revenue is an historically stable revenue for the Town, representing approximately 7% 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. However, second quarter year-to-date receipts of $816,000 demonstrate an unexpected decline in this year's revenues, which prompts a conservative revision to revenues to $1,632,000. The best information the Town has is that this revenue source will not be taken by the State this fiscal year, but is still a target in the Govenor's budget plans for FY 2003/04. The Town continues its efforts to protect this vital funding source for public services such as police, public works, library and other community services. Quarterly and Annual Revenues 5-Year History FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 2nd Quarter Actual Revenues Fiscal Year Total Actual Revenues Fiscal Year Budgeted Revenues 2nd Quarter Revenue Percent of Total FY 1999 FY 2000 $ 606,728 $ 692,974 $ 1,297,326 $ 1,478,990 FY 2001 $ 757,519 $ 1,597,247 ❑ 2nd Quarter Actual Revenues ❑ Fiscal Year Total Actual Revenues IIFiscal Year Budgeted Revenues FY 2002 FY 2003 $ 773,837 S 815,923 $ 1,600,588 S 1,749,000 46.8% 46.9% 47.4% 48.3% 46.770 Recommended Budget Revision Revise Downward to $1,632,000 5 FINANCIAL OUTLOOK FY 2002/03 Quarter Farling IV(ember3/ 200' • 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 - .ed in the Investment Policy approved by the Town Council. The Town's goal is to achieve a competitive rate of return 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. Analysis As mentioned in the First Quarter Budget Performance Report, the Town's cash balances were scheduled to reflect a decrease 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). However, General Fund interest earnings the Town has earned on this lower cash balance was significantly impacted from record low interest rates not seen since the 1960s. Reflecting this, Bloomberg reports on February 5, 2003 that 10- year Treasury notes are yielding 3.97%, a long- time low. These lower interest rates lead staff to recommend reducing Interest Income earnings by $293,000 this fiscal year. Quarterly and Annual Revenues 5-Year History $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 -/1 $- AN FY 1999 2nd Quarter Actual Revenues Fiscal Year Total Actual Revenues Fiscal Year Budgeted Revenues 2nd Quarter Revenue Percent of Total FY 2000 FY 2001 FY 2002 FY 2003 0 2nd Quarter Actual Revenues ❑ Fiscal Year Total Actual Revenues ■ Fiscal Year Budgeted Revenues FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 $ 714,664 $ 882,081 $ 1,461,312 $ 1,220,984 $ 638,036 $ 1,635,137 $ 2,126,766 $ 3,415,358 $ 2,071,129 $ 1,596,850 43.7% 41.5% 42.8% 59.0% 40.0% Recommended Budget Revision Revise Downward to $1,303,850 6 FINANCIAL OUTLOOK FY' 2002/03 Quarlrr Eneh t•K I)rrrmhr, : NII_' • Property Tax Revenue Description Property Tax is one of the Town's largest revenue sources, accounting for almost 21% 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. Although Property Tax is levied at one percent of the assessed value of the property, the Town is allocated approximately twelve cents per dollar paid to the County Assessors Office. In addition, the assessed value of real property appraised by the County Assessor is based on the 1975/76 assessment role value, and adjusted by a two percent inflation factor thereafter. When property changes hands or new construction occurs, property is then reassessed at its current market value, therefore, real property values critically impact revenues. $5,000,000 $4,000,000 $3,000,000 $ 2,000,000 $1,000,000 $- 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. It appears from the second quarter receipts that the turnover of older pre -Proposition 13 housing stock is 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. Staff is proposing no change to the property tax estimate at this time. Quarterly and Annual Revenues 5-Year History Air rr111M1 FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 2nd Quarter Actual Revenues Fiscal Year Total Actual Revenues Fiscal Year Budgeted Revenues 2nd Quarter Percent of Total 0 2nd Quarter Actual Revenues ❑ Fiscal Year Total Actual Revenues ■Fiscal Year Budgeted Revenues FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 $ 1,881,857 $ 2,1 10,478 $ 2,450,173 $ 2,127,714 $ 2,246,511 $ 3,414,762 $ 3,724,022 $ 4,1 14,196 $ 4,483,521 S 4,806,000 55.11% 56.67% 59.55% 47.46% 46.74% Recommended Budget Revision No Change 7 FL'VANCL-1L OUTLOOK FY 2002/03 (hurter Endhrtg nccernher 7; :IIN' • 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 2nd 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 S400,000 $200,000 7 /' Analysis The second quarter of FY 2002 reflects a small decrease from the same quarter in the prior year, another indicator of continued softening in the local economy. Of note though, is that 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 FY 2002/03 budget. staff anticipated the softening economy would affect Business Tax fees based on gross receipts. (These revenues comprise approximately 40% of the Business License fees while flat fees make up the other 60% of revenue.) Budgeted revenues were established at a small amount above actual amounts received in FY 2001/02 Quarterly and Annual Revenues 5-Year History FY 1999 FY 2000 0 FY 2001 0 FY 2002 FY 2003 O 2nd Quarter Actual Revenues 0 Fiscal Year Total Actual Revenues ■ Fiscal Year Budgeted Revenues FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 2nd Quarter Actual Revenues $ 287,882 $ 400,413 $ 428,772 $ 499,446 $ 451,029 Fiscal Year Total Actual Revenues $ 956,710 $ 1,000,281 $ 995,699 $ 978,298 Fiscal Year Budgeted Revenues $ 1,000,000 2nd Quarter Revenue Percent of Total 30.09% 40.03% 43.06% 51.05% 45.10% Recommended Budget Revision No Change 8 FINANCIAL OUTLOOK FY 2002/03 Quarter' Flu I)'e'enrher 31 00 • Franchise Fees Description Franchise Fees are collected by the Town for the privilege of operating a utility service within Town limits. Franchise Fees are currently received from AT&T/Comcast for cable television, PG&E for gas and electric service, and Green Valley for Solid Waste Collection services. Analysis FY 2002/03 Franchise Fee Revenues are trending below budget estimates. Primarily this $1,200,000 $1,000,000 S800,000 $600,000 $400,000 -, $200,000 / $- is due to the decrease in the Solid Waste franchise fees. Solid Waste Franchise fees are trending lower because of the economic downturn leading to lower construction and demolition activity, thereby leading to gross revenues for solid waste and lower franchise fees paid to the Town. Staff recommends the current year estimate for franchise fees be lowered by $82,000 - from $1,039,000 to $957,000. Quarterly and Annual Revenues 5-Year History /"' FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 2nd Quarter Actual Revenues Fiscal Year Total Actual Revenues Fiscal Year Budgeted Revenues 2nd Quarter Revenue Percent of Total FY 1999 $ 217,774 $ 803,127 27.12% ❑ 2nd Quarter Actual Revenues ❑ Fiscal Year Total Actual Revenues • Fiscal Year Budgeted Revenues FY 2000 FY 2001 FY 2002 FY 2003 $ 217,466 $ 245,116 $ 267,296 $ 200,819 $ 836,489 $ 929,865 $ 990,861 $ 1,039,000 26.00% 26.36% 26.98% 19.33% Recommended Budget Revision Revise downward to $957,000 9 RECOMMENDED BUDGET ADJUSTMENTS FY 2002/03 Estimated Revenues Recommended revisions to FY 02/03 budgeted revenues, as explained in the Financial Outlook reports just discussed, are presented in the summary table below: Adopted Revenue Adjusted Budget Revision Budget Sales Tax Revenues 7,500,000 (500,000) 8,000,000 Transient Occupancy Tax 1,100,000 (300,000) 800,000 Motor Vehicle License Fee 1,749,000 (117,000) 1,632,000 Interest Income Revenue 1,596,850 (293,000) 1,303,850 Franchise Fees 1,039,000 (82,000) 957,000 Other (misc.) revenue reductions (200,000) Total Revenue Budget Revision: (1,492,000) FY 2002/03 Budgeted Expenditures Departmental Spending Reduction Plans To meet the decline in local revenue collections, staff is recommending immediate implementation of a six per cent reduction of Town General Fund operating expenditures taken from total Town departmental expenditures. Departments worked diligently to re -assess their operating budgets, evaluate program service levels and remaining resources, and to recommend operational efficiencies and expenditure reductions where available. The departments have achieved this goal through a combination of cost saving measures which include, but are not limited to: salary savings, service and supplies reductions, delayed training expenditures, and equipment replacement postponements. Salary savings from budgeted staffing levels are obtained throughout the Town departments by the prudent use of staffing resources, lower actual salary rates than budgeted rates (known as step savings), and staffing vacancies. Additional savings in overtime costs are generated through the judicious use of staff time throughout the year. While allowing for savings in this budgeted expense, overtime reductions do limit staffs adaptability and flexibility in addressing events outside of scheduled work hours. In addition, staff recognizes that while vacancy reductions are able to contribute significant savings this fiscal year, these reductions are not long-term solutions as they are not sustainable over the long term under normal operating conditions. In a number of programs, salary and benefits savings were available due to the selected strategic hiring freezes implemented by Town management last fiscal year as part of the Town's strategy to deal with the current economic downturn. Fully staffed departments where turnover has not occurred did not have these savings available, meaning their reductions came from the service and supplies portions of their budgets resulting in a greater impact to current service levels. The following is a departmental breakdown of the proposed reductions: Town Offices — The four Town Offices found reductions in their budget through salary savings and expenditure reductions in services, supplies, and training. The Town Council budget exemplifies this effort through miscellaneous administrative reductions in supplies, travel, and training expenditures through the remainder of the year. The Town Clerk's Office budget will provide reductions through salary and overtime savings, and with reductions in office supplies expenditures. The Town Treasurer 10 has also reduced office supplies and training, and the Town Attomey's Office eliminated budgeted overtime and reduced its supplies and minimized outside contract legal services as much as prudent. Town Manager's Department — Through reductions in budgeted salary, overtime savings, and decreases in supplies, outside services, and training expenditures, the Town Manager, Human Resources, and Finance and Administration Services significantly reduced the Town Manager's department budget. The Accountant position vacancy in Finance for nine months allowed sizable salary savings this fiscal year, and the continued slowdown of the economy coupled with the threat of further State takeaways has postponed most staff recruitment activities, resulting in significantly reduced Human Resource expenditures. Strategic utilization of outside services allowed for further budget reductions throughout the Manager's Department this fiscal year, and assorted budgeted administrative supplies were evaluated and reduced as available. As these cuts will impact flexibility in operational resources, staff will look for alternate options to maintain planned service levels. Community Development Department — This department has significant salary and overtime savings to help meet the Town's budget reduction goal through two partial year vacancies (Administrative Analyst and Planner), a temporary intern position vacancy, and numerous position rate savings from staffs lower actual step level versus budgeted levels. These salary savings are in addition to the defunded Plan Check Engineer and Planner positions already in place in the current budget year. These salary savings are providing considerable reductions in the current fiscal year and additional savings in FY 2003/04 through continued step savings and job -sharing an Administrative Analyst/Accountant position between the Finance and Community Development departments into the next fiscal year. Staff has determined that filling the planner position is necessary to maintain acceptable Town development service levels, and will be filled as soon as possible. Police Department — Staff faced a substantial challenge in the development of departmental reductions. As the department is fully staffed and budgeted at close to actual step levels, position step savings are not available. Some budget salary savings were obtained however, through reduced temporary hours, the retirement of a Records Specialist position, reclassification of a staff position out on disability, and significant overtime reductions. Program services have been assessed and restructured to accommodate these changes with as little impact as can be achieved. As negotiated labor costs bind approximately 80% of the overall police budget, the majority of the department's reductions are limited to supplies and training expenditures. Approximately 15% of the Police Department's services and supplies budget was reduced through careful evaluation of resources and operational efficiencies. Patrol vehicle replacements were also postponed thus lowering internal service charges to the Police programs. Parks and Public Works Department — This department has had significant salary savings this fiscal year. These savings consist of reductions in budgeted salaries for two maintenance vacancies in the Parks program, two maintenance vacancies in the Streets program, and a partial year (3 months) Engineer position vacancy in Engineering/Capital Programs. Department wide step savings and a reduced use of overtime is also contributing to the Town's 6% reduction goal. While the salary savings have provided needed budget reductions this fiscal year, a continued hold on the vacancies will impact service levels and may not be a prudent strategy in following years. Staff continues to monitor program services to ensure appropriate program performance levels are adequately maintained, however further assessment of the maintenance workers vacancies is needed to determine staffing reduction levels into next fiscal year. Community Services - Through reductions in overtime, external services, and administrative expenditures the Community Services department was able to reduce their budget without significant impact to their services. The department is reducing contract services expenses for the senior case management program by shifting part of the responsibilities to Town staff and re -negotiating for the remaining senior services. Additional budget cuts include postponement of staff training and reductions in budgeted overtime. Although overtime reductions will not have an impact on service delivery based on existing work plans, it will limit the availability of staff for unanticipated events outside of normal working hours. Further cost savings include reductions agreed to by the Chamber of Commerce to reduce funding for public 11 information and marketing outreach efforts that had not yet been earmarked for specific projects, and a reduction in the Philip Lange art grant resulting from lower installation costs. Library Department - Through artful scheduling of staff and savings generated from step levels, the Library was able to reduce budgeted salary and overtime. These reductions are not anticipated to impact current service levels to Library patrons as normal working hours will not be affected, however the utilization of temporary staff will be more limited for the remainder of the fiscal year. Cuts to the services and supplies portion of the Library budget include reductions in supplic-. IT services, and training, as well as in collection materials (books/magazines/audio). These reductions will impact the Library's ability to offer the full amount of planned up-to-date materials and services to the public, however staff determined a level of reduction which will be acceptable to the Library community in wake of the economic situation. The expenditure reductions are summarized by department in the following table: General Fund Expenditure Budget Reduction Proposals Department FY 2002/03 Budget Adjusted Adj Budget Reductions Budget Town Council 160,000 $ (9,600) 150,400 Town Clerk 383,400 $ (24,004) 359,396 Town Treasurer 63,300 $ (3,798) 59,502 Town Attorney 250,500 $ (14,030) 236,470 Town Manager's Dept 3,893,350 $ (232,057) 3,661,293 Community Development 2,641,853 $ (175,000) 2,466,853 Police Department 9,657,507 $ (518,137) 9,139,370 Parks & Public Works 2,052,630 $ (370,000) 1,682,630 Community Services 1,039,676 $ (56,072) 983,604 Library Department 1,888,561 $ (87,814) $ 1,800,747 Total Budget Reduction: S (1,490,512) Other Expenditure Adjustments Parking Program — The parking program as initially proposed to Town Council in December of 2001 had as one of its key assumptions that the program would be self-sustaining. This means citation revenues would offset the cost of parking enforcement and the related administration costs of the program. Citation revenues are not meeting revenue estimates for FY 2002/03, which may need to be lowered for FY 2003/04. It is estimated that current revenue shortfall projections will require increasing the year-end General Fund transfer from $53,500 to $162,700. Parking Program staff believes there are some initial start-up costs that contributed to this projected revenue shortfall that were necessary to bring the program on-line and that should be more appropriately funded from the General Fund Reserve for Parking Program as one-time costs. Staff is working actively to address this shortfall and anticipates future discussions with the Town Council encompassing more reliable revenue assumptions based upon the Town's citation experience in this first year of the new parking program. Staff intentions are to recommend a future parking enforcement cost structure that does not rely on draws from the General Fund reserves to fund on -going operating expenditures for the Parking Enforcement program. The Town is also recommending a budget transfer be approved by the Town Council from the General Fund's Parking Reserve in the amount of $27,300 to the Town's Parking Management Fund to provide 12 funding for the Town's 2002 Holiday Parking program. This program included various enhancements to the downtown's holiday environment including downtown parking ambassadors and brochures. Manager's Productivity Enhancements Reserve - As the Town finds itself in challenging economic times, management will be looking to all employees to suggest innovative and cost-effective solutions for service delivery to the public. Staff recommends appropriating the Town Manager's existing Productivity Enhancements Reserve in the amount of $100,000 to be available for use in the current year. This amount would serve as a potential funding source for productivity initiatives that will provide long term cost savings and efficiency improvements with an initial short-term investment. Revised FY 2002/03 Projections The revised revenue estimates and departmental expenditure estimates reflecting the expenditure budget reductions proposed as part of the mid -year balancing effort are presented and incorporated into the General Fund Operating Revenues vs. Operating Expenditures Schedule presented as Attachment 1 at the end of this report. As noted in the Schedule of General Fund Operating Revenues vs. Operating Expenditures, with the spending reduction plans in place, the General Fund revenues and expenditures are anticipated to be balanced for FY 2002/03. Prudent steps taken by staff such as selected hiring freezes, expenditure reductions and efficiencies, and cost containment actions, have mitigated impacts to service levels and enabled the Town to navigate the local economic challenge this year through departmental savings and efficiencies. As noted earlier, the cuts in many cases were derived from vacancy savings, but these vacancies have impact on existing departmental staff as they strive to continue delivery of high quality service with reduced staffing levels. In light of these continued vacancies and other cost reduction measures, FY 2003/04 budget development will still call on existing staff to deliver service with restricted resources resulting from a projected continuing economic downturn and the very real possibility of a State revenue take -away on the horizon. We will need to ensure that service levels are aligned with available resources. Revenues & Expenditures: Balancing FY 2003/04-Budget Process Update The Town is making certain assumptions in approaching the FY 2003/04 budget development. Staff is assuming that the local recessionary downturn in revenues will continue with either zero or very flat revenue increases to the Town next year. We are also assuming for planning purposes some impact from the State budget deficit from as yet unspecified reductions. As the State budget process unfolds reductions could include elimination of reimbursements and grants in addition to more significant takes such as Motor Vehicle License Fees or Redevelopment Agency revenue takes. It is also assumed that the Town will be impacted by at least moderate but possibly severe State revenue takes in FY 2003/04. Staff will also be taking steps to ensure revenue growth in user fees to match current costs of service to the extent possible. Town management believes a modest use of reserves may be necessary to bridge the gap between FY 2003/04 operating revenues with expenditure. It is anticipated that to the extent possible, the modest use of reserves should be dedicated for one-time "transition" costs, not ongoing expenditures. Expenditure forecasting for next year will include salary and benefit estimates for MOU's in place for all Town bargaining units except AFCSME, who will be negotiating this year with the Town. Staff will be looking closely at driver of cost in the personnel area, looking for opportunities for cost savings through creative steps such as re -structuring, cost sharing with employees, and lastly the Town's fiscal structural issues. 13 With the recent veto by the Governor of the bill to restore vehicle license fees to the 1998 level, the Town must make prudent plans to address the possibility of this funding source either being eliminated or drastically reduced in next year. Although staff and the Town's elected officials are working very diligently to protect this revenue source, it is in extreme jeopardy at this time. Accordingly, staff is preparing budgets based on five and ten per cent reductions from FY 2002/03 adopted budget levels. The five per cent plan assumes a moderate State takeaway of Town revenues ($400,000) and flat General Fund revenue growth. The ten per cent plan is based on flat General Fund revenue growth and a more severe take by the State ($1.1 million dollars) of Town revenue as part of the State's FY 2003/04 budget balancing. Departments will be challenged in developing the 5 and 10 per cent reduction plans because their proposed budgets for FY 2003/04 must include previously bargained for labor cost increases that will become effective next fiscal year, yet the plans developed must still come in 95% and 90% respectively of budget amounts approved and adopted for FY 2002/03. As part of the FY 2003/04 budget development, the Town will be exploring many different options, including service level reductions, cost containment strategies and revenue enhancements. This effort will include all Town employees in a team effort to meet the challenge of continued revenue losses and taking steps to mitigate the loss of service to the public. However, due to the magnitude of these potential cuts, it may be necessary to make painful cuts in service levels and staffing if the State continues on its track to seize local government revenues. Staff is currently forecasting that at the time of the FY 2003/04 budget adoption (June 2003) the State will not have completed its budget deliberations. Some observers of the legislative process believe we may not have a State budget adopted until November 2003. Staff anticipates recommending adopting its five per cent reduction expenditure budget in June, which assumes a $400,000 State revenue take. If necessary, staff will also have its 10 per reduction plan ready to implement in the event the State budget is adopted with greater impacts on Town revenues. Staff recommends using reserve 'unds to cover any transition costs between the five and ten per cent reduction implementations that may result if the ten per cent reduction plan is required to be put into place. These transition costs would be one-time in nature and staff believes could be appropriately funded from the use of General Fund reserves. Long Term Planning In evaluating costs reductions for FY 2002/03, staff did consider projects underway that require a current cash outlay but will pay dividends in terms of public service delivery, long term efficiencies and cost savings, asset preservation, and technology utilization. Each of these initiatives were funded as one-time expenditures through the Town's budget process or Capital Improvement Plan and all are underway. Key projects currently under way include the Town's Library/Civic Center Master Plan, the Town -wide Infrastructure Assessment, and the Town's Information Systems Master Plan. The information provided through these long term planning processes will lead to better future decision making in all of these vital areas. FINANCIAL SUMMARIES, PROJECTIONS AND RECOMMENDATIONS General Fund As stated earlier in this report, the attached Schedule of FY 02/03 General Fund Operating Revenues vs. Operating Expenditures reflects the recommended reductions to revenue estimates where the FY 2002/03 General Fund projections based on mid -year results are presented. All Other Funds 14 Guide to Presentation: Each of the follow presentations groups financial summaries by fund type - the types being Special Revenue Funds, Capital Projects Funds, Internal Service Funds, and Redevelopment Agency Funds. In each of the following projections a similar format is presented. For illustration purposes, the following annotated presentation of the Solid Waste Fund provides insight on how each of the following presentations can be read and understood by the reviewer: Solid Waste Fund Beginning Fund Balance Budgeted Revenues Actual Revenues - 2nd quarter Budgeted Expenditures Total Actual Expenditures - 2nd Quarter 2nd Quarter Ending Fund Balance $ 432,528 Audited Fund Balance July 1, 2002 169,400 Total Budgeted revenues for the FY 200 2:03 45,028 Actual revenues collected through December 31. 2002 193,100 Total Budgeted expenditures for all accounts FY 2002/03 92,132 Total Actual expenditures by fund through December 31. 2002 Beginning Fund Balance plus actual revenues less total $ 385,424 expenditures 2nd Quarter Special Revenue Fund - Special Revenue Funds, which account for the proceeds derived from specific revenue sources that are legally restricted to special purposes include the Town's Parking Fund, Solid Waste Fund, Community Development Block Grant Fund, Non Point Source Fund, Sewer Maintenance Fund, Landscaping and Lighting District Funds, and the Operating Grants Fund. Of special note here is the new Parking Fund, a new program and fund which was created to account for parking enforcement revenues and expenditures to provide specific data regarding that activity. As previously discussed citation revenue is lagging expenditures for the fiscal year-to-date. Current projections anticipate a shortfall of $167,800 this fiscal year based on lower citation revenues then originally projected and the current cost structure of the program. As mentioned earlier, FY 2002/03 is the first year this program was brought on-line so there are some one-time start-up costs that required funding in the current year which contributed to the revenue shortfall. Staff is continuing to fine tune evaluate this area, as any shortfall in this fund must be covered at year-end with a transfer from the Town's General Fund. Beginning Fund Balance Budgeted Revenues Actual Revenues - 2nd Qtr Special Revenue Funds Budget to Actuals Comparisons Parking Solid CDBG Non Point Fund Waste Grants Source 432,528 1,144,573 227,288 1,206,250 169,400 337,146 153,360 298,019 45,028 8,620 150,660 Budgeted Expenditures 1,185,620 193,100 506,868 150,660 Total Actual Expenditures - 2nd Qtr 351,288 92,132 200,999 93,758 Sewer Maint. Operating LIDs Grants 122,620 580,600 41,482 44,772 580,600 38,548 44,772 580,600 46,300 44,772 353,707 36.948 4,723 2nd Quarter Ending Fund Balance (53,269) 385,424 952,194 284,190 226,893 124,220 40,049 Capital Projects Funds - Capital Projects Funds are utilized to account for resources used for acquisition and construction of capital facilities by the Town. Funds included in this category are the GFAR Fund 15 (General Fund Appropriated Reserve), Traffic Mitigation Fees Fund, Grant Funded CIP's Fund. Storm Drains Fund, Utility Undergrounding Fund, and the Gas Tax Fund. Capital Project Funds are tracking in accordance with the FY 2002/03 adopted budget. Staff is recommending no changes at this time. In developing the FY 03/04 capital program, staff will be reviewing scheduled projects for potential strategic slowdowns of expenditure activity. This slowdown will aid cash balances available for General Fund investment earnings, in light of the aggressive capital -spending plan over the past two years. If operating revenues will support it, staff still intends to maintain the General Fund's current year commitment to the Town's Capital Improvement Plan. Capital Project Funds Budget to Actuals Comparisons GFAR Traffic Grant Fund Storm Utility Gas Fund Mitigation CIP's Drains Undergd Tax Beginning Fund Balance 8,297,503 201,200 19,711 638,232 1,677,111 1,108,517 Budgeted Revenues 675,432 70,000 1,284,970 106,131 129,800 616,700 Actual Revenues - 2nd Qtr 591,164 - 180,776 81,966 52,675 308,840 Budgeted Expenditures 5,931,067 193,100 506,868 150,660 580,600 46,300 Total Actual Expenditures - 2nd Qtr 2,053,770 50,816 184,130 601,210 2nd Quarter Ending Fund Balance 6,834,897 150,384 16,357 720,198 1,729,786 816,147 Internal Service Funds - Internal Service Funds are used to finance and account for special activities and services performed by a designated Town department for other departments on a cost reimbursement basis. Included in this fund type are the Equipment Replacement Fund, Worker's Compensation Fund, General Liability Self Insurance Fund, Stores Fund, Management Information Systems Fund, Vehicle Maintenance Fund, and the Building Maintenance Fund. 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 some potential for further operating transfers in future years from these funds as excess balances exist in amounts needed for funding in a number of these funds. Beginning Fund Balance Internal Service Funds Budget to Actuals Comparisons Equipment Workers Self Office Mmgt Info Vehicle Building Replacemt Comp Insurance Stores Systems Maint. Maint. 3,483,330 2,151,508 1,858,074 193,318 1,826,403 41,691 384,333 Budgeted Revenues 558,400 533,400 806,800 83,250 775,100 539,000 1,085,250 Actual Revenues - 2nd Qtr 303,275 252,928 392,732 43,204 390,247 269,500 528,481 Budgeted Expenditures 1,061,990 728,000 948,800 83,250 1,245,900 538,950 1,085,250 Total Actual Expenditures - 2nd Qtr 760,871 345,318 672,890 36,701 679,537 223,429 449,306 2nd Quarter Ending Fund Balance 3,025,735 2,059,118 1,577,916 199,820 1,537,112 87,762 463,507 16 Trust and .-1genct' Funds - Town Trust and Agency Funds have fund balances as of June 30, 2002 of S284,396 for Parking District #88 and S 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 S10.7 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 interest rate of 4.55 per cent provides very favorable financing 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. Redevelopment Agency Funds Budget to Actuals Comparisons Capital Debt Low/1lod Total Projects Service Housing RDA Funds Beginning Fund Balance (303,607) 2,581,561 2,075,926 4,353,879 Budgeted Revenues 9,037,100 3,433,444 813,212 13,283,756 Actual Revenues - 2nd Qtr 10,638,047 1,497,113 356,370 12,491,531 Budgeted Expenditures 7,897,967 728,000 948,800 9,574,767 Total Actual Expenditures - 2nd Qtr 2,039,796 249,894 62,264 2,351,954 2nd Quarter Ending Fund Balance 8,294,645 3,828,780 2,370,031 14,493,456 Even prior to the announcement of the State budget deficit, redevelopment agencies across the state were required to make Educational Revenue Augmentation Fund (ERAF) payments to the State for FY 2002/03. The Los Gatos Redevelopment Agency's ERAF payment for this year is $104,597 and will be paid from fund balance. Once the State budget deficit was announced at the end of 2002, a preliminary proposal from the Governor was to take the unencumbered redevelopment agency affordable housing funds. The proposal indicated that funds not encumbered by December 1, 2002 would be subject to take. In the case of the Los Gatos Redevelopment Agency, this take would amount to approximately $1.9 million. However, the latest proposal from the State no longer proposes taking the unencumbered housing funds. This is not to say that the funds are safe in the long term, but they are preserved for the current fiscal year. For next fiscal year, FY 2003/04 and beyond, the State is presently considering increasing the ERAF payments from redevelopment agencies. Based on preliminary information, the estimated payments from the Los Gatos Redevelopment Agency could range between $350,000 and $685,000 annually. It is anticipated that the State may allow redevelopment agencies to borrow at least a portion of the payment from their housing funds in order to help make the payment. It is important that the Town continue its lobbying efforts to prevent the legislature from further State takes from Redevelopment Agency Tax Increment. It is essential to preserve the Agency's tax increment revenue as any take from this source will reduce the annual revenue stream. If the revenue take is enacted, the lowered revenue stream will reduce the total amount of bonds the Agency can issue in the future. 17 CONCLUSION Mid -year 2002/03 results confirmed the early trends first reported to Town Council in the First Quarter Budget Performance Report, reflecting the economic uncertainties the economy is facing this year. The Town is immediately implementing a coordinated and Town -wide six per cent spending plan reduction to balance its operating revenues with operating expenditures. The Town has strong reserve fund balances in the General Fund with its Reserve for Economic Uncertainty at $3,678,000 which ...main intact to provide some flexibility to provide management time to make strategic decisions on _,ustainable future cost structures in light of the revenue downturn and potential State revenue raids. 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 expenditure reduction plans 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. Now more than ever, with downturns and State budget takes, we also need to be aware of the need to develop appropriate revenue sources for on -going operating and capital needs of the community. 18 Revenues General Property Tax Sales & Use Tax Franchise Fees Transient Occ Tax Business License Tax Licenses & Permits Motor Vehicle In Lieu Intergovernmental Charges for Services Fines & Forfeitures Interest GASB investment to market adjustment per auditors Miscellaneous/Other Authorized Use of Reserves (Downtown Parking Pgm) Fund Transfers Total Revenues Expenditures (includes encumbrances & carryovers) Mayor & Council Clerks Attorney Treasurer Manager Comm Development irks & Public Works . olice Community Services Library Total Dept Expenses Non -Dept Expenditures and other uses General Government Total Non -Dept Expenses Total Operating Expenditures Net Operating Revenues Before Capital Transfers & Budgeted Beginning Fund Balance U ATTACHMENT 1 Town of Los Gatos Schedule of General Fund Operating Res enues vs. Operating Expenditures For the period ended December 31, 2002 FYO I /02 Adjusted Budget $ 4.551,100 7,000,000 940,000 900,000 1,100,000 829,200 1,680,000 1.280.050 2,026,950 968,970 1,700,000 208,890 289,810 FY01 /02 2nd Qtr Actuals S 2.225,874 3.288.885 267,596 334,858 499,446 362,405 773,836 794.096 924,308 241,374 915,695 -353,086 71,240 229,370 FY01,02 FY02/03 FY02/03 Adjusted 2nd Qtr Budget Actuals 49% $ 5,106,000 $ 2,246.511 47% 7,500,000 3,237,900 28% 1,039,000 200,820 37% 1,100,000 293,570 45% 1.000,000 450.280 44% 761,500 504.144 46% 1.749,000 815,920 62% 1,212,700 705,983 46% 2,099,975 1,263,195 25% 78.500 49,750 54% 1,596,850 638.036 0 34% 266,857 253,622 79% 1,088,700 1,078.543 $ 23,474,970 $ 10,575,897 45% $ 24,599,082 5 11,738,274 157,600 50,244 325,600 151,543 418.135 135,971 65,100 25,826 2,120,800 918,160 2.559,170 893.156 5,128,570 2.119.720 9,932,340 4,578,320 1,020,110 348,437 1,849,560 808.826 $ 23,576.985 $ 10,030,204 3,515,645 S 3,515.645 S 32% 47% 33% 40% 43% 35% 41% 46% 34% 44% 160,000 383,400 250,500 63,300 2,183,400 2,612,188 5,119,682 9,844,917 1,069,341 1,888,561 63,104 176,877 101.458 24.489 976.844 1.295,680 2,493,850 4.945,500 656.630 859,771 43% $ 23,575.289 $ 11,594,203 391,889 11% 1,502,092 764,438 391,889 11% $ 1.502,092 S 764,438 $ 27,092,630 $ 10.422,093 38% $ 25,077,381 5 12,358,641 FY02/113 FY02/03 Finance Projection 44°0 430° 19°0 27°0 45% 66°0 47°0 58°a 60% 63°0 40% 95% 99% 39% 46% 4I% 39% 45% 50% 49% 50% 61% 46% $ 5.132,170 7,000.000 957,000 800,000 980,000 809.800 1,632.000 1.159,590 2,201,900 112.000 1,303,850 535,950 188.300 1,107,200 S 23.919.760 126,133 352,785 212.383 57,296 1,893,449 2,383,756 4.610,183 9.810.912 981,565 1.712,054 49% S 22,140,516 51% 1,737.661 51% $ 1,737,661 49% $ 23.878.177 $ (3,617,660) $ 153,804 -4% S (478,299) $ (620.368) N/A S 41,583 19