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11 Staff Report - Status Report for 2007/08I r MAYOR AND TOWN COUNCIL! CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY DATE: TO: FROM: SUBJECT: MEETING DATE:10/15/07 ITEM NO: COUNCIL/AGENCY AGENDA REPORT OCTOBER 15,2007 f8ttJ!J~ PAMELA JACOBS,INTERIM TOWN MANAGER/EXECUTIVE DIRECTOR FISCAL YEAR 2007/08 FIRST QUARTER BUDGET PERFORMANCE AND STATUS REPORT FOR THE PERIOD JULY 1,2007 -SEPTEMBER 30,2007 A.ACCEPT 2007/08 FIRST QUARTER BUDGET PERFORMANCE STATUS REPORT. B.AUTHORIZE BUDGET ADJUSTMENTS AS RECOMMENDED IN THE ATTACHED FIRST QUARTER BUDGET PERFORMANCE REPORT. RECOMMENDATION: 1.Accept Fiscal Year 2007/08 first quarter budget performance and status report. 2.Authorize budget adjustments as recommended in the attached first quarter budget performance report. PURPOSE: The purpose of this report has three primary goals.First,the report informs the Town Council on the status of the Town's FY 2007/08 Adopted Budget and status of the local economy at the first quarter.Second,staff provides the Town Council an update on the preliminary General Fund financial results (unaudited)as of June 30,2007.Third,the report includes staffs most recent five year budget forecast which informs the evolving budget status for FY 2008/09 and beyond. BACKGROUND: The attached Budget Performance Report covers the first three months of the fiscal year begilming July 1,2007 and ending September 30,2007.The report presents analysis and recommendations related to key General Fund revenues by category and expenditures by fund. PREPARED BY: )/.J"._._.....~~----S ND NWAY Finance and ministrative Services Director N:\MGR\AdminWorkFiles\2007 Council Reports\Town Council 1st Qtr Report 1O-15-07.doc Reviewed by:__Assistant Town Manager/Deputy Director ~-I- Counsel __Clerk Administrator/Secretary ~Finance __Community Development Attorney/General PAGE 2 MAYOR AND TOWN COUNCIL/CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY SUBJECT:FISCAL YEAR 2006107 FIRST QUARTER BUDGET PERFORMANCE AND STATUS REPORT FOR THE PERIOD JULY 1,2007 -SEPTEMBER 30,2007 OCTOBER 15,2007 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 on the Town's General Fund.Though financial results are limited to the first three months,staff is able to provide an update based on early revenue trends for the current fiscal year,and to advise on potential future revenue and expenditure challenges which may materialize during the fiscal year. DISCUSSION: The attached first quarter budget report reflects a mix of positive news about last year's fiscal results,and a concern that the recovery in the Town's economically-sensitive operating revenues such as the sales tax,transient occupancy tax,and property tax will be negatively impacted from the effects of slowdowns in the local real estate market.In August 2007,the California Association of Realtors reported existing home sales were down 27.8 %statewide from the prior year.Average home prices decreased 5.1 %from the year before.Economists point out that declines in housing prices tend to have a dampening effect on consumer spending.Any significant further rise in energy costs also has the potential to impact the Town's local economically-sensitive revenue base.National economists predict that as fuel prices rise,the buying power of consumers is eroded,leaving fewer dollars available for discretionary spending. If this occurs,the moderate recovery which appeared to be materializing in the Town's operating revenues last year and early this fiscal year may become stalled at some point. Service delivery in FY 2007/08 In the FY 2007/08 "status quo"budget,staff conservatively forecasted continuing recoveries in local revenues and incorporated modest revenue growth in economically-sensitive revenues such as sales tax,franchise fees,business license and transient occupancy taxes.While avoiding another consecutive year of service level reductions in FY 2007/08,the reductions carried over from the prior year continue to have effects on operations overall.Holding vacancies and reducing staffing and overtime result in the current workforce absorbing more of the workload, thus affecting the capacity to deliver services and limiting the flexibility to respond to new ideas andlor increased service demands.Response times associated with non-public safety requests have increased.Parks and public works related maintenance cycles have been extended or reduced,as well.Over the longer-term,staff s goal of achieving the highest quality of service levels possible is constrained by available resources to fund them. FY 2008/09 and Beyond:Continuing Challenges Ahead Staff remains attentive to the goal of preserving the Town's economic vitality.The most recent update to the Town's Five-Year Financial Plan presented on the following page continues to project potential revenue shortfalls developing in future years.However,the current update indicates two important points:The first is that the efforts the Town has accomplished in the PAGE 3 MA YOR AND TOWN COUNCIL/CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY SUBJECT:FISCAL YEAR 2006/07 FIRST QUARTER BUDGET PERFORMANCE AND STATUS REPORT FOR THE PERIOD JULY 1,2007 -SEPTEMBER 30,2007 OCTOBER 15,2007 past four years have generated positive fiscal results in spite of a lingering soft local economy and the closing of three automobile dealerships in the past two fiscal years.Second,if recoveries continue in economically-sensitive revenues and service delivery costs are contained,the projected shortfalls will be reduced accordingly.However,downward adjustments to the Town's operating budget are expected to be necessary to avoid the future shortfalls forecast for FY 2010111. The updated Five-Year Financial Plan is based upon estimated costs of labor and benefits which represent approximately 70%of General Fund operating costs,and assumptions for modest increases in revenues associated with a gradual economic recovery from the downturns experienced in recent years.The plan currently projects revenue shortfalls ranging from $574,000 to $1.0M in future years that must be managed pro-actively by the Town.To address this,the Town is continuing its multi-prong efforts to achieve operational efficiencies,cost reductions,reductions in non-vital services,and revenue enhancement efforts.An analysis of fees for cost recovery levels will also be undertaken as in years past.As the budget tightens each fiscal year,the ability to reduce operational expenditures without service impacts becomes increasingly challenging. The Five-Year Forecast assumes that the State property tax swap or "back-fill"of approximately $1.2 million in Car Tax for local property tax will continue to be implemented permanently in each annual budget bill as promised by the State.Revenues are presented optimistically with varying growth rates,5%on average for tax revenues and 3%for charges for services. Expenditures are derived from a database using actual costs and adjusting for future known increases in labor costs if multi-year labor agreements are in effect,and actuarial updates for retirement and other benefit costs as provided by PERS or other information sources available to the Town. Each of the years presented in the plan assume that adjustments made to the budget to eliminate the revenue shortfall in FY 2007108 and beyond are "permanent"adjustments,thereby reducing the level of shortfall in the following fiscal years.It is possible to make some adjustments through one-time solutions or prudent use of bridge funding on a year-to-year basis.The Revenue Stabilization Reserve is available for this purpose.However,problems that are truly structural should be addressed eventually with new revenue sources or reduced expenditures in an ongomg way. PAGE 4 MA YOR AND TOWN COUNCIL/CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY SUBJECT:FISCAL YEAR 2006/07 FIRST QUARTER BUDGET PERFORMANCE AND STATUS REPORT FOR THE PERIOD JULY 1,2007 -SEPTEMBER 30,2007 OCTOBER 15,2007 TOWN OF LOS GATOS -GENERAL FUND Five-Year Financial Plan FY 2007/08 Through FY 2011/12 ACTUAL ACTUAL ACTUAL ADOPTED PROJECTED PROJECTED PROJECTED PROJECTED Revenue Summary 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Sales Tax 57,904,129 58,655,566 59,253,891 58,231,I00 58,490,400 58,745,100 59,007,400 59,277,600 Property Tax 5,302,061 5,831,822 56,594,056 56,727,220 56,976,200 57,244,500 57.523,900 57,814,300 Charges for Services 2,920,356 3,006,634 53,967,735 53,37 I ,470 53,026,000 53,060,300 53,097,100 53,136,I 00 Business Licenses 1,056,814 1,019,386 51,176,422 5I ,920,400 51,015,000 51,030,200 51,045,700 51,061,400 Car TaxlVLF Prop Tax Swap 1,554,932 2,096,704 52,003,271 52,030,360 52,069,900 52,1 I 1,300 52,153,500 52,218,1 00 Intergovernmental Rev.2,316,962 2,606,356 52,252,682 52,168,025 52,234,085 52,273,563 52,319,650 52,367,575 Other Lic.and Permits 1,360,390 1,584,662 51,503,014 51,050,000 51,754,800 5 1,788,500 5I ,823,000 5 1,858,200 Investment Earnings 905,704 1,385,266 52,576,062 51,498,300 51,639,900 51,657.300 51,674,800 51,692,500 Franchise Tax 942,648 1,130,190 51,162,038 51,603,180 51,618,400 5 I ,66 I ,500 5 1,705,800 51.751,400 Hotel/Motel Tax 868,908 1,028,664 5 I,I 08,257 51,000,000 5 I ,030,000 5 I ,060,900 51,092,700 5 1,125,500 Fines &Forfeitures 580,937 210,888 5214,565 5525,405 5465,300 5473,800 5482,500 5491,500 Transfers &lise of Reserves 494,165 430,839 5114,470 5400,500 5221,700 5223,200 5224,700 5226,200 IVliscelianeous 247,958 2,738,297 5599,015 5545,I00 5 I ,406,450 5 I ,406,450 5 I,206,450 5 l,706,450 Total Revenues 26,455,964 31,725,274 32,525,478 31,071,060 31,948,135 32,736,613 33,357,200 34,226,825 Town Expenditures Salary 11,415,065 11,439,231 11,126,609 13,113,656 14,482,650 14,636,889 15,183,718 15,698,356 Elected Officials 22,590 23,340 23,340 23,200 23,340 23,340 23,340 23,340 Temporary Employees 353,871 437,250 674,865 465,193 496,579 513,959 531,948 550,566 Overtime 494,170 542,624 663,992 442,900 436,476 45U53 467,564 483,916 Other Salary 572,258 571,011 755,638 396,899 201,591 206,955 213,414 218,968 Benefits 4,10 I ,626 4,764,717 4,698,961 5,560,532 5,855,647 6,222,903 6,626,042 7,094,757 Supplies,Materials,&Services 3,256,678 3,287,777 4,763,774 5,107,209 4,278,725 4,402,850 4,564,200 4,739,000 Grants &Awards 177.578 178,359 184,329 150,326 176,410 176,410 176,410 176.4 I0 Utilities 409,6 I0 428,744 458,385 200,522 370,600 386,960 404.200 422,410 Fixed Assets 192,343 46,556 Internal Service Charges 2,820,428 2,849,969 3,091,387 3,312,300 3,347,500 3,447,925 3,55L363 3,657,904 Deht Service 930,710 932,122 931,078 930,790 931,850 931,100 929,050 932,100 Operating Transfers Out 182,876 67,673 230,827 610,000 610,000 610,000 610,000 GFAR Capital Transfers Out 75,000 475,000 4,194,094 989,370 650,000 650,000 650,000 650,000 Total Expenditures 24,812,461 26,190,160 31,843,835 30,692,897 3I ,861 ,368 32,66 1,044 33,931,249 35,257,727 Net Revenues Less Expenditures 1,643,503 5,535,114 681,643 378,163 86,767 75,569 (574.(Hq)(],u,'30,9(2) Special Consideration -Governmental Accounting Standards Board Statement #45 Effective FY 2008/09,the Town will be required to fully accrue its actuarial determined liability for the Town's contribution to retiree health care premiums under the provisions of the Governmental Accounting Standards Board (GASB)Statement #45-0ther Post Employment Benefits.The Town has historically budgeted and expensed these benefits on a "pay-as-you-go" basis,a standard procedure for most local governments under generally accepted accounting principles. Under GASB's new accounting standard,the Town is required to accrue a liability for the cost of post-retirement benefits,using actuarial methods to estimate expected future costs for a calculated portion of the current workforce that will retire under the Town's retirement benefit program.Assumptions will be made about the level of benefits and the number of eligible employees who will eventually retire from the Town.This will be offset by future accrued investment earnings expected to be earned in a separate irrevocable trust account that is usually recommended by actuarial consultants to be established by local governments to provide a funding account for these benefits. PAGES MAYOR AND TOWN COUNCIL/CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY SUBJECT:FISCAL YEAR 2006/07 FIRST QUARTER BUDGET PERFORMANCE AND STATUS REPORT FOR THE PERIOD JULY 1,2007 -SEPTEMBER 30,2007 OCTOBER 15,2007 Since the actuarial study is not yet completed,the Five-Year Financial Plan does not reflect these benefit costs on an actuarially determined basis (the Town expects the study to be completed by December 2007).With the understanding there would be potentially significant increases in future years,a 25%annual retiree benefit cost increase was built into the Five-Year Forecast; however,until the study is completed true liability estimates are unknown.Although accrued expenses will increase,actual cash payments to retirees are expected to trend much as they have in the "pay-as-you-go"basis.The difference between the accrued annual expense and the actual cash payments made annually by the Town will likely be phased-in over a period of approximately 10 to 20 years until the full annual actuarial accrual of this expense is achieved. Until then,the difference between amounts set aside by the Town and the actuarial liability will be booked at year-end either as a liability or asset on the Town's financial statements.As a result of GASB 45,the future updates of the Five-Year Financial Plan will include potential increases to the annual expenditures for cash payments made to the post retirement trust account used to fund post retirement benefits. Conclusion The Town has managed very effectively through the budget challenges in recent years. Shortfalls were dealt with,priority services maintained,and General Fund contingency reserves are intact.However, with the most current update to the Town's Five-Year Financial Plan indicating projected shortfalls beginning in FY 20010/11,the need to remain fiscally aware continues to be a high priority for Town staff.Key goals are to minimize the impact on Town services,maintain the community's quality of life,and remain a competitive employer while sustaining the Town's fiscal health. 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 2007/08 financial outlook;a summary of the performance of the Town's primary General Fund revenue sources and necessary budget adjustments;and a look ahead at the FY 2008/09 budget process. ENVIRONMENTAL ASSESSMENT: This budget report is not a project defined under CEQA,and no further action is required. FISCAL IMPACT: The attached First Quarter Budget Performance Report includes a section providing a detailed list of recommended expenditure and revenue budget adjustments recommended for the first quarter of FY 2007/08.Upon approval of the recommended budget adjustments by Town Council,the adopted appropriations for the fiscal year will be adjusted accordingly. Attachments: Budget Performance Report for the Three Months Ended September 30,2007 TOWN OF LOS GATOS BUDGET PERFORMANCE REPORT FOR THE THREE MONTHS ENDED SEPTEMBER 30,2007 October 15,2007 FINANCIAL OVERVIEW -EXECUTIVE SUMMARY Status of FY 2007/08 Adopted Budget: First Quarter results are trending positively overall,with revenue collections on pace with amounts collected the prior year.Despite the loss in recent years of three automobile dealerships, sales tax receipts for the first quarter are trending slightly ahead of collections for the prior year. The chief reasons for this are the continued success of one internet commerce retailer and a solar energy retailer,whose continued growth has allowed the Town to sustain the loss of three of top ten businesses in the Town's portfolio of sales tax generators.Another favorable trend is the continued economic recovery of the downtown.Sales tax collections,excluding new car sales,for the quarter ending June 30,2007 (the most recent quarter available)were up approximately 1.5 % for the prior year.Restaurant sales taxes for the period were the highest generated in the past two years,up 6.5 %from the prior year. Department expenditure totals for the first quarter FY 2007/08 are also trending favorably,with spending at the end of the first quarter averaging 21 %expended,or 4%below the 25% benchmark level used for three months of 12 months operations.With only three months of data available,it is difficult to predict revenues and expenditures for the whole year.The uncertainty of the economic effects of potential rises in energy costs or a more dramatic downturn in the local real estate market may impact consumer behavior.In light of this uncertainty and being fully aware that the local economy's recovery remains vulnerable,staff continues to be cautiously optimistic while monitoring fiscal developments very closely.Consequently,further adjustments may be necessary during the fiscal year.Any mid-year course corrections or budget adjustments necessary to balance operating revenue and expenditures will be brought to Town Council's attention at the earliest opportunity. State Budget Fiscal Impacts to Town for FY 2007/08: Highlights from the FY 2007/08 state budget package are the following: No Additional State Property Tax Shifts Enacted -Proposition IA and its Influence on the State Budget Process -With the successful passage in November 2004 of Proposition lA restrictions exist on future legislative authority to reduce or reallocate local revenues from the sales tax,property tax,or vehicle license fee (VLF).Namely,the state is prevented from: •Reducing local sales tax rates or altering the method of allocation •Shifting property taxes from the Town to fund other state programs •Decreasing VLF revenues without providing replacement funding •Enforcing unreimbursed mandates (with certain exceptions) Proposition lA prohibits further state revenue "takes"from local government as itemized above.However,Proposition lA contains provisions for additional state revenue "takes." Specifically,starting in FY 2008/09,in an emergency and by a vote of two-thirds of both houses of the Legislature and the approval of the Governor,the Town's share of property tax could be "taken"or shifted to state programs.It must be repaid,with interest,within three years.The state could also approve voluntary exchanges of sales and property tax revenues among local governments within a county.These transfers of taxes and funds would not need voter approval.With this in mind,it is important to note that currently the State is facing a projected $3.4 billion shortfall for FY 2008/09 and another $2.5 billion for FY 2009/10. Property Taxes Shift to K-14 District -While the FY 2006/07 state budget bill ended the two year $1.3 billion property tax shifts from cities,counties,special districts,and redevelopment agencies to K-14 district schools for the fiscal benefit of the state,the FY 2007/08 budget was balanced without a recommended property tax shift.The state continues to project future budget deficits,so local government finance should never be considered immune from the potential of future state revenue takes. Status of Proposition 42 Transportation Funding -The FY 2007/08 state budget bill provides no Proposition 42 funds for local streets and roads because cities received funding in two prior fiscal years when other state transportation programs did not.On a positive note, beginning in FY 2008/09,cities and counties will receive approximately double their allocations if Proposition 42 is funded in the state budget.The Town's share is estimated to be approximately $297,000 in FY 2008/09. State Mandates -The FY 2007/08 does not include funding for mandated claims incurred by the Town this fiscal year.However,a trailer bill was passed appropriating the full payable amount in the annual state budget for mandates for which costs were incurred in the prior year. Thus,claims for FY 2007/08 will be paid in the state FY 2008/09 budget.The cost reimbursements are for Town costs related to state mandated activities such as certain public safety regulations,investment reporting,and Open Meetings Act,among others. Restores Booking Fee Authority and Reimbursements -The State budget bill appropriated $35 million for county sheriffs,for local detention facilities and prohibits counties from charging jail booking fees to cities or other local agencies.Counties will have the authority to charge a new "jail access fee"for bookings in excess of an agency's three year average for low-level offenses. Effects of State Budget Package on FY 2007/08 Operating Revenues: The changes to Town revenue structure first implemented as budget adjustments in FY 2004/05 are recapped below for purposes of clarification and comparison: Sales Tax The Sales Tax revenue estimate is $8.2 million for FY 2007/08.The state's Economic Recovery Bonds,approved by the voters in March 2004,were secured by a pledge of revenues from an increase in the state's share of the sales and use tax of one-quarter cent beginning July 1,2004.The Town's one per cent local share of the tax was reduced by one quarter and,in exchange,the Town receives an equal amount of property shifted from state property tax collections during the term the one-quarter cent is being used by the State to payoff the bonds (estimated to be between 9 and 14 years).Effects on the current year budgeted amounts are shown below: 2 FY 2007/08 Post State Budget Revenue FY 2007/08 After Implementation of "Triple Flip" Type Adopted Effective 7/1/2004 Sales Tax $5,920,200 Rate of 1%of 8.25%changed under budget bill to (.75%of 8.25%sales tax rate)for a period of between 9 and 14 years. Sales Tax $2,310,900 (.25%of 8.25%sales tax rate)This amount now Replaced is dedicated to the state,but the "triple flip" With provisions of the state budget bill (SB 1096) Property Tax replaces the lost Town sales tax with additional state property tax to make the Town "whole." The amounts are paid twice annually by County of Santa Clara with a final settlement paid in August following the fiscal year. Totals $8,231,100 Total Sales Tax and Replacement Property Tax Motor Vehicle License Fees <yLF-"Car Tax")-The budget package permanently replaces the Town's backfill revenues with an equal amount of property taxes paid out of the state General Fund. FY 2007/08 Post State Budget Revenue FY 2007/08 After Implementation of "Triple Flip" Type Bud2eted Effective 7/1/2004 Car Tax-$163,200 Rate reduced legislatively to 1I3 rd of the former Remaining rate (2.0%).This tax is constitutionally dedicated Town to local government.The Town continues to Share receive the tax collected,but at the reduced 1I3 rd level (.65%). Car Tax $2,030,360 The budget package permanently replaces the Backfill Town's VLF backfill revenues with an equal Eliminated amount of property taxes paid "in lieu"of car tax and Replaced revenue out of the property taxes forwarded by By an Equal the County to the State's General Fund. Amount of Property Tax Totals $2,193,560 Total VLF and Replacement Property Tax Prior Fiscal Year Closing Results: The FY 2006/07 closing fmancial results continue to affirm the positive effects of the Town's pro-active budgetary actions taken in response to the continuing flat revenue growth or downturns in key operating revenues the Town experienced since FY 2001102.In developing the FY 2006/07 "status quo"budget,Town Council approved a combination of budgetary initiatives that held the line on service level delivery coupled with revenue adjustments in the Town's "Charges for Services"category.The bulk of these fees are to recover costs related to private development activity aligning fees charged for services with the current cost incurred by the Town.This strategy coupled with the effect of Town-wide expenditure reduction strategies continued from prior years and other revenue gains like continued strong perfonnance by Netflix sales tax generated a favorable General Fund closing balance of approximately $4.8 million of available revenues over expenditures at fiscal year end June 30,2007.This balance was reduced by 3 approximately $4.2 million to provide funding for approved capital projects,resulting in excess revenue above expenditures for FY 2006/07 of approximately $680,000. The Town's General Fund reserves closed the year (unaudited)at a total of approximately $19.0 million (including the Town's Reserve for Economic Uncertainty intact at $3,678,000),compared to $18.1 million balance upon the close of the prior year,an increase of approximately $900K in total General Fund reserves. The following factors were key in contributing to the $4.8 million in General Fund revenues above expenditures for the fiscal year,before this amount was reduced by $4.2 million to fund approved capital projects: •Sales tax revenue final collections exceeded mid-year estimates by approximately $1.1 million due primarily to stronger than expected performance by Netflix. •Plan check and building permit fees were approximately $795,000 above estimates made at mid-year FY2006/07.Revenues collected last year for work to be performed in this fiscal year were recorded as unearned revenue,earmarked as such in the General Fund, and accordingly were not included in the determination of revenues available for reserve designation at fiscal year end. •Investment earnings exceeded mid-year estimates by approximately $935,000 largely due to increases in the overall interest yield market. •General fund expenditures were approximately $530,000 below the approved adjusted budget levels for FY 2006/07. •Property taxes collected exceeded mid-year estimates by approximately $125,000 due to continued turnover of Town properties and their attendant new valuations. It should be emphasized that operating revenues for FY 2006/07 included $300,000 in funds which had accumulated as a liability from prior years but were not used for PERS costs.These revenues were used to offset the large PERS increases which have occurred during the recent downturn in the economy.Currently the Town's strategy is to use these accumulated PERS rebate funds to establish a cost/revenue smoothing effect over the next 5 to 10 years. In each fiscal year it is likely that the Town's cost of services will be impacted by scheduled labor and benefit cost increases and other operating expenditure increases.It is reasonable to anticipate these costs to trend upward in the future if for no other reason than inflationary pressures.This reality will continue to require strong performance in the Town's economically-sensitive revenues to offset the cost increases likely to occur.The Town's efforts over the past five years, including expenditure reductions,alignment of user fees to cost of service delivery,operational reviews and service level adjustments,along with ongoing efficiency efforts have allowed the Town's revenue base to keep pace with the cost of providing services and provide funding for much needed capital improvements such as road resurfacing,sidewalk repairs,retaining walls, and trail and park facility refurbishments. General Fund Reserve Status -June 30,2007 General Fund reserves are classified into two categories -Restricted and Designated.Restricted reserves are those which are restricted in use by accounting standards or legal agreements and are not considered as available for use for another purpose.Designated reserves are established by Council policy for an intended purpose.Currently Restricted Reserves in the General Fund are approximately $4.7 million as presented below. 4 Restricted General Fund Reserves:Amount Reserved forRDA Loan $4,220,000 Reserved for LT Notes Receivable 512,394 Reserved for Grant Funds &Catr'Yovers (5,818) Total Restricted General Fund Reserves $4,726,576 As stated earlier the total General Fund Reserves closed at a balance of approximately $19.0 million at June 30,2007.In addition to the approximate $4.7 million of General Fund Reserves set aside for restricted purposes,the Town has approximately $14.3 million in designated reserves established in accordance with Town financial policies and operating and capital budget requirements.The Designated Reserves presented below include the newly established Revenue Stabilization Reserve created by the Town upon the adoption of the FY 2005/06 budget. Desirmated Reserves: Designated for Revenue Stabilization $4,817,445 Designated for Capital &Special Projects 4,325,011 Designated for Economic Uncertainty 3,678,001 Designated for Civic Center Improvements 663,086 Designated for Open Space 562,000 Designated for Mgr's Contingency &Prod.200,000 Designated for Authorized CatrYforwards 31,910 Total Desi2nated Reserves $14,277,453 The Reserve for Capital and Special projects,whose source is derived from half of the annual available General Fund budget savings,serves as the primary source for replenishment to the Town's Capital Improvement Fund (GFAR)in addition to the annual budgeted transfer from the General Fund's operations of $150,000.As such,it represents the source for a large number of unfunded needs identified during the annual capital improvement plan process.This reserve also functions as a potential funding source for new capital projects or augmentations to authorized projects funded through the Town's Five Year Capital Improvement Program (CIP).The Town continues to be challenged in identifying an ongoing source of funds to meet the annual $1.5 million recommended for the street repair and maintenance program and other priority infrastructure improvements such as 'Sidewalk repair and replacement. The Revenue Stabilization Reserve was established to serve as a transitional or "bridge"funding source that could be used to mitigate or smooth out cyclical ups and downs in locally generated revenues due to temporary downturns in the local economy or "one-time"revenue losses where recovery of the revenue base is deemed likely to be restored i~the near future. In its public communications,staff refers to the $14.3 million in Designated General Fund reserves as the Town's "reserves"since these are established by Council policy for their intended purpose.The availability of approximately $14.3 million in Designated General Fund reserves provides the Town with resources to manage through future fiscal challenges and opportunities, mindful of the many competing priorities for resource allocation,ranging from restoration of core services to the community to a large amount of unfunded capital improvements. 5 GENERAL FUND -KEY REVENUE ANALYSIS FY 2007/08 The following provides the status of significant General Fund revenue sources as of the first quarter ending September 30,2007.Staff monitors each revenue source closely and at this time recommends certain revenue adjustments based on revenue actuals or state budget actions. Adjustments necessary (if any)will be brought forward to Town Council for approval at mid-year (approximately February 2008),when more revenue data is available. 6 FINANCIAL OUTLOOK FY 2007/08 •Sales Tax Revenue • Los Gatos Sales Tax Revenue receipts are a result of a formula that allocates 1.0 cent of the 8.25 cents of local sales tax collected per $1 dollar of sales by merchants on retail sales and taxable services transacted within the Town of Los Gatos. Under the "triple flip"allocation now in effect,the State Board of Equalization reallocates .25 cents of the 1.0 cents share Los Gatos receives,and replaces it with an equal amount of property tax revenue. Sales Tax revenues are remitted to the Town on a monthly basis and placed in the General Fund for use in general operations. Quarterly Analysis According to California's Department of Finance, California's economy is showing signs of slowing with the cooling of the housing market.A fall-off in real estate activity is expected to trickle down to decreases in the State's related labor and retail markets.In addition,the decrease in gasoline prices since August is reflected in lower than expected receipts for the State.More data will become available as the fiscal year progresses. First quarter Sales Tax revenues are slightly above last year's 151 quarter receipts,however as revenue timing is inconsistent from year to year,1sl quarter receipts do not provide sufficient data for annual revenue analysis.Because of strong performance by other tax generators like Netflix,this revenue category has absorbed the loss of three automobile dealers in recent years.However,this revenue continues to be vulnerable to the loss of other large Sales Tax generating businesses located in the Town. To offset the vulnerability resulting from one vendor responsible for a sizeable portion of the Sales Tax Revenue,the Town should continue to seek a more balanced portfolio of business sectors to generate sales tax. $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $- Quarterly and Annual Revenues 5-Year History FY 03/04 FY 04105 FY 05106 FY 06/07 FY 07/08 •1st Qualter Actual Revenues o Fiscal Year Total Actual Revenues •Fiscal Year Budgeted Revenues FY 03/04 FY 04/05 FY 05106 FY 06/07 .FY 07/08 $1,515,570 $1,514,045 $1,392,150 $1,407,997 $1,568,805 $6,914,526 $7,904,130 $8,655,565 $9,253,891 I st Quarter Actual Revenues Fiscal Year Total Actual Revenues Fiscal Year Budgeted Revenues FY 1004105 forward will reflect the Sales Tax In Lieu paid by Santa Clara County $8,231,100 1st Quarter Percent of Total Recommended Budget Revision 21.92% 7 19.16%16.08%15.22%19.06% No Change FINANCIAL OUTLOOK FY 2007/08 •Property Tax Revenue • Property Tax Revenue accounts for 21.7%of the Town's budgeted General Fund revenues for FY 2007/08.As Property Tax distributions are largely received in the third and fourth quarters of a fiscal year,the revenue receipts are not reflected proportionately in the chart below,by quarter. The passage of California's Proposition 13 in 1978 limited both the tax rate that can be levied on property to 1%rate of a property's assessed value (plus voter approved bonds,service fees, improvement bonds,and special assessments)and established a property's original tax base as its 1975/76 assessed value.The assessed value is subsequently adjusted by no more than a two percent inflation factor thereafter until the property changes hands or new construction occurs; The Town currently receives approximately 9.5 cents of each dollar paid to the Assessor's Office. Once ownership changes,property is reassessed to its current market value,meaning real property values critically impact revenues. Quarterly Analysis First quarter tax receipts do not provide enough data for analysis as the majority of property tax revenues are received later in the fiscal year.Of note however,is that the Santa Clara County Assessor continues to provide a positive growth outlook in its FY2007/08 Annual Report,even with the expectation that the housing market is cooling.All cities continued to show positive growth over the last year,with Los Gatos experiencing an overall 8% increase in assessed value in FY 2006/7 Quarterly and Annual Revenues 5-Year History $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $- • I st Quarter Actual Revenues o Fiscal Year Total Actual Revenues •Fiscal Year Budgeted Revenues FY 03/04 FY04/05 FY 05106 FY06/07 FY 07/08 1.59% $8,757,580 FY 07/08 $138,916 FY 06/07 $75,831 $8,584,612 FY 05/06 $105,271 $7,755,200 FY 04105 $102,035 $6,856,993 FY 03/04 $86,045 $5,207,381 1st Quarter Actual Revenues Fiscal Year Total Actual Revenues Fiscal Year Budgeted Revenues FY 2004105 forward will reflect an increase in Property Tax due to "Permanent"Realignment of VLF 1st Quarter Percent ofTotal 1.65%1.49%1.36%0.88% Recommended Budget Revision No Change 8 FINANCIAL OUTLOOK FY 2007/08 •Transient Occupancy Tax • The Town of Los Gatos levies a 10 per cent Transient Occupancy Tax (TOT)on hotel/motel rooms within Town limits as a funding source for Town services and infrastructure provided to transitory lodgers and visitors. Quarterly Analysis FY 2007/08 budget projections were decreased from the prior year due to the closure of two hoteliers in recent years (Village Inn and Villa Felice).Staff expects that TOT revenues will meet budgeted levels by year end.FY 2006/07 year end results supports recent market research that both business and leisure travel continue to recover in California.Research data suggests high gas prices led more Californians to vacation closer to home during the summer months. For the remainder of the fiscal year,the Town expects occupancy rates to remain as projected in line with seasonal changes. Quarterly and Annual Revenues 5-Year History $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $_JAI~"LI"'LI_LJ"''' FY 03/04 FY 04/05 FY 05106 FY 06/07 FY 07/08 I I •I st Quarter Actual Revenues '10 Fiscal Year Total Actual Revenues I.F·I IIIscaYearTotalI•. Budgeted Revenues i FY 03104 FY 04105 FY 05106 FY 06/07 FY 07/08 I st Quarter A,tual Revenues $91,170 $87,668 $107,529 $116,118 $90,367 Fiscal Year Total Actual Revenues $829,025 $868,908 $1,028,664 $I,I 08,257 Fiscal Year Total Budgeted Revenues $1,000,000 I st Quarter Revenue Percent of Total 11.00% 10.09%10.45% 10.48%9.04% Recommended Budget Revision No Change 9 FINANCIAL OUTLOOK FY 2007/08 •Interest Income Revenue • The Town earns interest revenue through the investment of cash not immediately required for daily operations in various money market instruments.Investments are overseen by the Elected Town Treasurer,within parameters as stated 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. The Town's Interest Income revenue is primarily dependent upon two factors:the cash balance in the Town's investment portfolio,and the yield received on those funds. Quarterly Analysis Interest Income earnings have been impacted positively in recent years by both a significant increase in the Town's cash balances,and a general improvement in interest rates from investments. Current year interest revenues reflect significantly higher first quarter earnings than in previous years due to increases in investment returns and the Local Agency Investment Fund (LA IF)rate.LAIF yields have risen to an average yield of 5.231 %in September 2007,from 5.023%in September of last year,and from its record low of 1.42%in May 2004. Quarterly and Annual Revenues 5-Year History $2,000,000 $1,500,000 $1,000,000 $500,000 $- FY 03/04 FY 04105 FY 05106 FY 06/07 FY 07/08 .Ist Quarter Actual Revenues 10 Fiscal Year I Revenues I ! I.Fiscal Year Total !I Budgeted Revenues I FY 03/04 FY04105 FY 05106 FY 06/07 FY07/08 Ist Quarter Actual Revenues $242,485 $276,278 $272,325 $489,730 $461,635 Fiscal Year Revenues $795,488 $884,203 $1,439,685 $1,977,233 Fiscal Year Total Budgeted ~evenues $1,348,300 1st Quarter Revenue Percent of Total 30.5%31.2%18.9%24.8%34.2% Recommended Budget Revision No Change 10 FINANCIAL OUTLOOK FY 2007/08 •Business License Tax Revenue • The Town of Los Gatos requires businesses to pay an annual Business License Tax if a business is located within Town limits,or if an agent of a business conducts operations within Town limits. The Business License Tax fees are based on the type of business activity.Retail sales,wholesale,and manufacturing businesses are charged on a sliding scale based on their annual gross receipts,and comprise approximately 40%of the Business License Tax revenue.Other businesses,such as contractors,professionals,and services,are based on flat fees as set forth in the Town Code,and make up the remaining 60%of revenue. 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. Quarterly Analysis The Business License Tax revenue received in the first quarter is largely comprised of prorated tax fees charged on new businesses,and assessments stemming from business tax audits.The majority of the business tax revenue comes from the annual renewals,which are primarily received in the second and third quarters of the fiscal year. First quarter receipts are tracking comparably with the same period in the prior year.No significant deviations from annual projections are expected at this point. Quarterly and Annual Revenues 5-Year History 1,200,000 1.000,000 800,000 600,000 400,000 200,000 FY 03/04 FY 04/05 FY 05106 FY 06/07 FY 07/08 i_I st Quarter I I Actual Revenues 1 i I10FiscalYearTotal II Actual Revenues 'I_Fiscal Year Total Budgeted I Revenues FY 03/04 FY 04/05 FY 05106 FY 06/07 FY 07/08 I st Quarter Actual Revenues 45,619 56,632 42,402 63,057 55,900 Fiscal Year Total Actual Revenues $1,041,865 $1,056,814 $1,019,386 $1,176,422 Fiscal Year Total Budgeted Revenues $1,050,000 1st Quarter Revenue Percent of Total 4.38%5.36%4.16%5.36% 5.32% Recommended Budget Revision No Change 11 FINANCIAL OUTLOOK FY 2007/08 •Franchise Fee • The Town collects franchise fees on privately owned utility companies for the privilege of using Town streets and right-of-ways,and as a fee in lieu of the business license tax.Franchise Fees are currently received from Comcast for cable television services, PG&E for gas and electric service,and Green Valley for solid waste collection services. Quarterly Analysis Franchise Fees revenues are received at varying times throughout the year.PG&E pays an annual fee in the 4th quarter,Comcast pays quarterly,with actual receipts received following quarter end, and Green Valley is scheduled to pay monthly.Receipts shown in this report are for the first two months, July and August and the September remittances will be received during October. First quarter receipts reflect 11 %increase over the same period last year.This increase is a result of a rate change for garbage.This increase was built in at the time the budget was developed.It does not represent additional or incremental revenue. Future cable television franchise fees may be impacted as a result of the adoption of AB 2987,the Digital Infrastructure and Video Competition Act of 2006,This bill allows telephone and cable companies to enter into state franchise agreements in lieu of local agreements.Currently,local agencies are authorized to charge a local franchise fee of up to 5%of the cable operator's gross revenues as rent for the commercial use of the public right-of-way.AB 2897 replaces this local franchise fee with what is essentially a state tax that will be paid to local agencies (at least for the time being).The Town is working with AT&T who now has a small cable customer base in Town.The revenue from this segment is not expected to be significant in the short term.Comcast who is the Town's cable provider is yet to apply to the Public Utilities Commission for state franchise.Staff estimates that once a state franchise agreement is reached between the state and Comcast,the Town's franchise receipts will be reduced by at least $30,000. $2,000,000 $1,500,000 $1,000,000 $500,000 $- Quarterly and Annual Revenues 5-Year History FY 03/04 FY 04/05 FY 05/06 FY 06/07 FY 07/08 I Ii •1st Quarter Actual I Revenues I o Fiscal Year Total Actual Revenues •Fiscal Year Total , I 'I Budgeted Revenues i 1st Quarter Actual Revenues $66,174 $74,273 $22,702 $28,661 $215,985 Fiscal Year Total Actual Revenues $930,997 $942,647 $1,030,189 $1,162,037 Fiscal Year Total Budgeted Revenues $1,603,180 FY 2005106 Total Actual Revenues reflect increased revenue based on Auditfor Prior Years performed by Town 1st Quarter Revenue Percent of Total Recommended Budget Revision 7.11% 12 7.88%2.20% 2.47%13.47% No Change RECOMMENDED BUDGET ADJUSTMENTS FY 2007/08 Expenditure Appropriations Adjustments Budget adjustments are recommended for the following revenues and expenditures at the first quarter as described below: Financial Systems Upgrade Project (GFAR Fund)-$50,000 Staff is anticipating a spring 2008 implementation of a significant part of the Town's new financial system (Pentamation Plus).The project had been suspended during the vacancy of the Finance Manager position,but now is ready to begin again.To better serve the Town's customers,one of the primary goals is to provide a mechanism for e-business through the web. To facilitate this goal,Pentamation has advised staff to upgrade its current Pentamation servers. This upgrade was not a part of the original project budget.The recommended budget adjustment will be funded through a $50,000 transfer of available fund balance in the Town's MIS fund. Finance Department:Finance System Upgrade Temporary Help (General Fund)-$10,000 To assist the implementation goals of this project,staff recommends an increase in temporary staff dollars to provide assistance during the financial system conversion.Temporary support will be utilized to provide a variety of support tasks,including counter coverage during staff training sessions on the new system,database setup,data conversion,and user training. FY 2007/08 Estimated Revenues Recommended Adjustments: Grants Fund Program (Grants Fund)-$4,444 Staff recommends grant revenues and the related grant expenditure budget be increased to recognize additional federal Homeland Security Grant Funds made available to the Town in FY 2007/08. FINANCIAL SUMMARIES,PROJECTIONS AND RECOMMENDATIONS General Fund The following page presents the Schedule of FY 07/08 General Fund Operating Revenues vs. Operating Expenditures for the first quarter and comparison information from the prior year.In the last column,the Finance Department projects final balances for the fiscal year based upon the early trends observed through the first quarter. 13 Town of Los Gatos Schedule of General Fund Operating Revenues vs.Operating Expenditures For the period ended September 30,2007 l'naudited FY06/07 FY06/07 FY06/07 FY06/07 FY07/08 FY07/08 FY07/08 FY07/08 FY07/08 Final Adjusted IstQtr %Adopted Adjusted lst Qtr %Finance Balance Budget Aetuals YTD Budget Budget Aetuals YTD Projection Rev£'oues General Property Tax 6.594.058 6.469.900 75.830 I ~"o 6,727.220 6.727,220 138.917 2u o $6.727,220 Prop Tax Car Tax:Backfill 1.990.555 1.990.550 2.030.360 2.030.360 0°,'0 $2.030.360 Sales &Use Tax 9.253.891 8.1 00.140 1.407.996 17%J 8.231.100 8.231.100 1.568.805 19%$8.231.100 Franchise Fees 1.162.038 1.238.940 28.661 2%1.603.180 1.603.180 215.985 13°~Q $1.603.180 Transient Dce Tax 1.1 08.257 1.000.000 116.118 12%1.000.000 1.000.000 90.368 9%$1.000.000 Business License Tax 1.176.442 1.000.000 62.705 6(%1.050.000 1.050.000 55.900 5%$1.050.000 Licenses &Permits 1.541,302 1.616.000 959.973 59%1.930.400 1.930.400 928,493 48%$1.930.400 ~1otor Vehicle In Lieu 194.104 152.700 80.110 52%163.200 163.200 42.577 26%$163.200 Intergovernmental 2.058.576 2.062.432 305.127 15%2,004.825 2.004.825 320.168 16%,$2.004.825 Charges for Services 3.967.735 3.221,390 770.093 24%3.371.470 3.371.470 675.772 20"/0 $JJ71.470 Fines &Forfeitures 561.665 455.900 96.280 21%525.405 525.405 66,107 13°'0 $525.405 Interest 2.127.234 1.705.700 467.731 27%1.498,300 1.498.300 461.635 31°'0 $1.498.300 GASB investment to market per audit 448.828 \1isceJlaneous,'Other 320.614 206.800 148.272 72%267.230 267.230 164,953 62°'0 267.230 Fund Transfers 114,471 221.850 44.515 20%184.110 184.110 37.793 184.110 Total Revenues 32.619.770 29,442.302 4.563,411 150,/0 30.586,800 30.586,800 4,767,472 16°'0 30.586.800 Use of Other Funding Sources: Reserves 4.179.094 318,710 525,000 525.000 525.000 525.000 PERS Liability Account 300.000 300.000 300.000 300.000 300.000 300,000 300.000 Use of [nternal Service Reserves -Yr 3 Total Other Funding Sources 4,479.094 300.000 618,710 825.000 825.000 825.000 825.000 Total Revenucs plus Resenes $37.098,864 $29,742,302 5.182.121 $31,411.800 $31.411.800 5.592,472 $31,411.800 EXpt'nditures (includes cjf but no encumbranccs) }"1ayor &Council 150.379 161,130 33.311 21%169.500 169,500 34.541 2U%169500 Treasurer 102.713 98.150 17,222 18%106.650 106.650 20,735 19%106.650 Attorney 234.828 245,450 52.972 22%257.750 257,750 48.388 19%1 257.750 Administrative Services 2.307.354 2,338,010 552.573 24%2,442,300 2,442,300 542.155 22%2,442.300 Comm Development 2,936,351 3.246,500 796,875 25%3.656,585 3,656,585 574,651 16%3.656.585 Police 11.628.108 11.625.576 2.836.257 24%11.958.720 11.966.180 2.678,313 22%11 .966.180 Parks &Public Works 4.988.746 4.967,350 1.342.078 27%5.255,750 5,255.750 1,118,653 21%5,255.750 Community Services 1,943.843 982.065 190,213 19%·1.032.772 1.032.772 216.561 21%1.032,772 Libnuy 1.914.247 1.989,660 499.401 25%2.056.810 2,066.260 460.138 ")iO/2.066,260.;....-'0 Total Dept Expenses $26,206,569 $25,653.891 6,320.901 25%$26,936,837 $26,953,747 5,694.135 21%1 $26.953,747 Non-Dept Expenditures and other uses General Government 6.031.556 6.659,148 812.085 12%3.571,800 3.586,800 843,550 24%3.586.800 Total Non-Dept Expenses 6,031.556 6,659.148 812.085 12%3,571.800 3.586.800 843.550 24%3.586.800 Total Operating Expenditures $32.238.125 $32,313.039 7.132.986 22%$30.508,637 $30,540.547 6.537.685 21%$30.540.547 Net Operating Revenues Before Capital Trsfn &Budgeted Beg Fund Balance $4.860,739 $(2.570.737)$(1.950.865)903,163 871,253 (945.213)N!A 871.253 Authorized Use of Reserves Capital Projects 4.179,094 318,710 525,000 525,000 525.000 525.000 Total Budgeted Use of Reserves 4.179,094 318.710 525,000 525.000 525.000 525.000 Net Surplus or (Use)of Reserves 681,645 (2.570,737) (2.269.575)378,163 346,253 (1,470,213)346.253 Guide to Presentation: Each of the following groups offinancial summaries present data by governmental fund type -the types are Special Revenue Funds,Capital Projects Funds.Internal Service Funds,and Redevelopment Agency Funds.In each ofthe following projections a similar fonnat is presented. The fund information starts with beginning fund balances and adds current year revenues and subtracts current year expenditures resulting in ending fund balance.Budget amounts are also provided for revenues and expenditures,useful for comparing actual amounts received or spent to date versus budget for FY 2007/08. 14 Special Revenue Fund -Special Revenue Funds,which account for the proceeds derived from specific revenue sources that are legally restricted or assigned to special purposes including the Town's Parking Fund,Solid Waste Fund,Community Development Block Grant Fund,Non Point Source Fund,Landscaping and Lighting District Funds,and the Operating Grants Fund. Of special note,here is the Parking Fund,which continues to indicate revenue shortfalls wherein costs of parking administration and enforcement are exceeding citation revenues.Citation revenues have been reduced due to personnel injuries,other public safety support priorities which have pulled staffing off parking enforcement,and an unanticipated length of time to successfully fill a Parking Control Officer vacancy.The department expects revenue citation revenue to be restored to more normal levels in the near future.The budgeted General Fund subsidy for this program for the fiscal year is $184,260 to balance operating revenues with operating expenditures.Staff is continuing to evaluate this program,as any shortfall in this fund must be covered at year-end with a transfer from the Town's General Fund. Special Revenue Funds Budget to Actuals Comparisons Parking Solid CDBG Non Point Operating Fund Waste Grants Source LIDs Grants Beginning Fund Balance (Pre-audit)338,850 802,076 108,289 97,491 (5,818) Budgeted Revenues 555,860 346,384 210,643 172,010 36,170 Actual Revenues -1st Qtr 23,009 15,000 6,890 166,660 33,557 4,445 Budgeted Expenditures 555,860 396,384 421,293 180,940 43,290 Total Actual Expenditures -1st Qtr 92,927 34,906 3,281 61,072 12,071 1st Quarter Ending Fund Balance (69,918)318,943 805,685 213,878 118,977 (1,373) 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 (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 2007/08 adopted budget.Staff is recommending no changes at this time. If operating revenues will support it,the FY 2007/08 budget includes a General Fund's current year transfer of designated Future Year's Capital &Special Projects reserves in the amount of $525,000 in support of the first year of the Town's adopted Five-Year Capital Improvement Plan. The Grant Funded CIP fund displays a deficit balance because this grant fund expends Town dollars first,then provides documentation of these expenditures to the State of California or other granting agencies and is reimbursed for those costs,which eventually should result with the fund "breaking even"or a zero·fund balance (Dollars expended equal dollars received back in grant reimbursements). 15 --------------- Capital Project Funds Budget to Actuals Comparisons GFAR Traffic Grant Fund Storm Utility Gas Fund Mitigation CIP's Drains Undergd Tax Beginning Fund Balance 6,245,816 93,491 (141,453)805,284 2,269,147 903,833 Budgeted Revenues 1,210,240 50,000 3,864,244 132,470 140,220 565,710 Actual Revenues -lst Qtr 679,111 45,908 12,929 98,044 Budgeted Expenditures 8,853,060 50,000 3,956,895 301,930 1,057,447 Total Actual Expenditures -1st Qtr 2,195,809 9,683 68,702 21,139 1st Quarter Ending Fund Balance 4,729,1l7 83,808 (210,155)851,192 2,282,076 980,738 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 2007/08 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,if needed,from these funds as excess balances exist in amounts needed for funding in a number of these funds. Internal Service Funds Budget to Actuals Comparisons Equipment Workers Self Office Mmgtlnfo Vehicle Building Replacemt Comp Insurance Stores Systems Maint.Maint. Beginning Fund Balance 3,161,526 2,393,460 2,125,032 241,342 2,085,760 190,878 738,656 Budgeted Revenues 414,100 613,500 506,800 86,000 925,530 611,600 1,189,500 Actual Revenues -1st Qtr 101,740 165,447 145,078 14,498 228,656 152,900 292,699 Budgeted Expenditures 641,910 604,440 541,400 84,600 1,381,800 597,050 1,179,600 Total Actual Expenditures -lst Qtr 161,089 185,743 328,750 12,482 230,463 117,533 205,237 Ist Quarter Ending Fund Balance 3,102,176 2,373,165 1,941,359 243,359 2,083,953 226,245 826,118 Trust and Agency Funds -Town Trust and Agency Funds have fund balances as of June 30, 2007 of $319,716 for Parking District #88 and $313,424 in the Library Trust Funds.No budget revisions are contemplated at this time for these funds. Redevelopment Agency -The Agency's FY 07/08 and FY 2007-12 Capital Improvement Plan adopted budgets are incorporated into the Redevelopment Agency's financial statements and year-to-date actuals as presented below.The Capital Projects Fund balances include approximately $372,000 dollars of remaining unexpended funds at September 30,2007 from the Agency's $10.7 million dollar 2002 COP issue.Approximately $98,000 of the remaining proceeds are encumbered to be spent on the Elm Street Reconstruction project,and $80,000 for 16 Almond Grove Concrete Rehabilitation Pilot project.The other remammg funds of approximately $194,000 (including accrued interest earnings)are available for their planned purpose including eligible capital projects in the downtown project area such as the Santa Cruz AvenuelWood Road Gateway design ($65,000)and the North Santa Cruz Lighting Project ($55,000). Redevelopment Agency Funds Budget to Actuals Comparisons Capital Debt Low/Mod Total Projects Service Housing RDA Funds Beginning Fund Balance 4,316,921 4,307,048 6,556,978 15,180,947 Budgeted Revenues 600,000 6,597,990 1,676,800 8,874,790 Actual Revenues -lst Qtr 10,113 180,677 7,540 198,330 Budgeted Expenditures 3,658,091 5,034,400 497,420 9,189,911 Total Actual Expenditures -lst Qtr 1,156,195 752,120 19,655 1,927,970 1st Quarter Ending Fund Balance 3,170,839 3,735,605 6,544,863 13,451,307 Since 1992 redevelopment agencies across the state have been required to make Educational Revenue Augmentation Fund (ERAF)payments to the State.Last year's State budget In accordance with the State budget agreement,the ERAF payment was increased $303,000 for FY 2004/05 &FY 2005/06.Since passage of the FY 2006/07 state budget,the increased ERAF payments have not been approved by the legislature,allowing the Agency to retain this amount of tax increments to be used for important future Agency projects. Proposition 1A approved in 2004 does not contain specific protections for redevelopment agencies.They were not included because there are existing legal opinions that conclude that redevelopment agency tax increment revenue is constitutionally protected from state revenue takes. It is important that the Town continue to monitor developments regarding Redevelopment Agencies to discourage the legislature from further State takes from Redevelopment Agency Tax Increment.Protecting Redevelopment Agency funds for all cities is also a strategic priority for the League of California cities.It is essential to preserve the Agency's tax increment revenue as any take from this source will reduce the annual revenue stream.If a larger revenue take is enacted,the lowered revenue stream will reduce the total amount of bonds the Agency can issue in the future. CONCLUSION The financial results from the prior fiscal year coupled with the FY 2007/08 first quarter data point towards a cautious optimism that the Town's economically-sensitive revenues will continue their positive trends.Thi,s is especially important in light of the loss of three top ten sales tax providers in the past two years.Though the Five-Year Financial Plan continues to project future revenue shortfall challenges,these challenges will be made less so if the Town's economically- sensitive revenues can sustain their momentum and the cost core service delivery can be kept in check. 17