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Staff Report PREPARED BY: STEPHEN CONWAY FINANCE DIRECTOR Reviewed by: Town Manager and Town Attorney 110 E. Main Street Los Gatos, CA 95030 ● 408-354-6832 www.losgatosca.gov TOWN OF LOS GATOS COUNCIL AGENDA REPORT MEETING DATE: 02/21/2017 ITEM NO: 11 DATE: FEBRUARY 16, 2017 TO: MAYOR AND TOWN COUNCIL FROM: LAUREL PREVETTI, TOWN MANAGER SUBJECT: FISCAL YEAR 2016/17 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT - SIX MONTHS ENDING DECEMBER 31, 2016 A. RECEIVE FY 2016/17 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT, INCLUDING FY 2016/17 YEAR-END PROJECTIONS; B. CONSIDER AUTHORIZING BUDGET ADJUSTMENTS AS RECOMMENDED IN THE ATTACHED SECOND QUARTER BUDGET PERFORMANCE REPORT; C. RECEIVE THE TOWN’S FIVE-YEAR FINANCIAL PROJECTION FROM FY 2017/18 TO FY 2021/22; D. APPROVE A RESOLUTION TRANSFERRING $1,984,402 MILLION EXCESS BALANCE FROM THE BUDGET STABILIZATION RESERVE TO THE CALPERS RESERVE; AND E. APPROVE THE UPDATED GENERAL FUND RESERVE POLICY TO RENAME THE CALPERS RESERVE TO ENCOMPASS ALL POST-EMPLOYMENT LIABILITIES BY CHANGING ITS TITLE TO CALPERS/OPEB RESERVE. RECOMMENDATION: Staff recommends that the Town Council: A. Receive the Fiscal Year (FY) 2016/17 Mid-Year Budget Performance and Status Report, including FY 2016/17 year-end projections; B. Consider authorizing budget adjustments as recommended in the attached second quarter budget performance report; C. Receive the Town’s five-year financial projection from FY 2017/18 to FY 2021/22; PAGE 2 OF 7 SUBJECT: FISCAL YEAR 2016/17 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT - SIX MONTHS ENDING DECEMBER 31, 2016 DATE: FEBRUARY 15, 2017 S:\COUNCIL REPORTS\2017\02-21-17\Mid- Year\Staff Report FY 2016-17 2nd Quarter Budget Report FINAL.docx 2/16/2017 5:15 PM SLL RECOMMENDATION (cont’d): D. Approve a resolution transferring $1,984,402 million excess balance from the Budget Stabilization Reserve to the CalPERS Reserve; and E. Approve the updated General Fund Reserve Policy to rename the CalPERS Reserve to encompass all post-employment liabilities by changing its title to CalPERS/OPEB Reserve. EXECUTIVE SUMMARY: The purpose of this report is to provide the Town Council with a status of th e adopted FY 2016/17 Operating Budget at the mid-year point, including a brief discussion of the Town’s current year General Fund Reserve status, proposed mid-year adjustments, and a transfer of $1.9 million excess fund balance from the Budget Stabilization Reserve to the CalPERS Reserve consistent with Council direction on January 31, 2017. Staff is also requesting to rename the CalPERS Reserve to CalPERS/OPEB Reserve by updating the General Fund Reserve Policy. An update to the Town’s five-year financial projections (FY 2017/18 – FY 2021/22) is provided to give context for the FY 2017/18 budget development process and recommended budget approach. BACKGROUND: Staff provides the 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. The report provides analysis and recommendations related to the current year’s adopted budget revenues and expenditures and the projected financial condition of all Town funds. DISCUSSION: The attached Mid-Year Budget Report (Attachment 1) covers the first six months of the fiscal year beginning July 1, 2016 and ending December 31, 2016. The report presents analysis and recommendations related to the current year’s adopted budget revenues and expenditures and the projected financial condition of all Town funds. General Fund Projected Year-End Balances June 30, 2017 Current fiscal year-end projections for FY 2016/17 reflect an anticipated $1.2 million surplus of operating revenues over expenditures. As discussed in Attachment 1, revenues are tracking higher than budgeted and actual expenses typically occur lower than budgeted. PAGE 3 OF 7 SUBJECT: FISCAL YEAR 2016/17 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT - SIX MONTHS ENDING DECEMBER 31, 2016 DATE: FEBRUARY 15, 2017 S:\COUNCIL REPORTS\2017\02-21-17\Mid- Year\Staff Report FY 2016-17 2nd Quarter Budget Report FINAL.docx 2/16/2017 5:15 PM SLL DISCUSSION (cont’d): Operating Revenue Trends and Proposed Mid-Year Adjustments Overall second quarter General Fund revenues are trending favorably when compared to the second quarter of Fiscal Year 2015/16. Due to some projected revenue increases, staff is recommending a net General Fund increase of revenues, offset by expenditure increases, of approximately $1.2 million from adopted budgeted estimates. The current forecast expects a substantial increase in property tax, motor vehicle in lieu, transient occupancy tax (TOT), and business license tax due to the continued surge in the local economy as well as tourism within the Bay Area. It should be noted that while the second quarter FY 2016/17 sales tax proc eeds indicate a significant increase, the overall sales tax revenue is declining. Sales tax proceeds at mid-year FY 2016/17 include a one-time “triple flip” true-up adjustment of sales tax from prior fiscal years. Revenues such as licenses and permits, and franchise fees are all trending favorably, a strong indication that the economy remains strong. Operating Expenditure Trends and Proposed Mid-Year Adjustments General Fund expenditure totals for the second quarter are trending in accordance with forecasts, with total operational expenditures at the end of the second quarter at about 46% of the adopted budget. With six months of data now available, staff can better predict the next six months of expenditure trends, although unexpected costs can occur. Should any budget adjustments be necessary to balance operating revenue and expenditures, staff will advise the Council accordingly. Expenditure additions include increased water utility expenses, mandatory well testing expenses, increased waste management service costs, one-time sales tax discovery services, funding to provide additional emergency tree services, medical examinations, recruitment expenses, and labor negotiation expenses. GENERAL FUND RESERVE STATUS General Fund Reserves, exclusive of the Compensated Absences Fund, closed on June 30, 2016 with a balance of approximately $27.5 million in committed and assigned reserves which is in accordance with Town financial policies and operating and capital budget requirements. PAGE 4 OF 7 SUBJECT: FISCAL YEAR 2016/17 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT - SIX MONTHS ENDING DECEMBER 31, 2016 DATE: FEBRUARY 15, 2017 S:\COUNCIL REPORTS\2017\02-21-17\Mid- Year\Staff Report FY 2016-17 2nd Quarter Budget Report FINAL.docx 2/16/2017 5:15 PM SLL DISCUSSION (cont’d): The Budget Stabilization Reserve was established to serve as a transitional “bridge” funding source to mitigate or smooth out cyclical ups and downs in locally generated revenues due to fluctuations in the local economy or “one-time” revenue losses where the revenue base is likely to be restored in the near future. The Catastrophic Reserve was established to mitigate costs associated with unforeseen emergencies, such as a disaster or catastrophic event. Per the Town Council’s General Fund Reserve Policy, the combined total of these two reserves is 25% of the General Fund operating expenditures. The CalPERS Reserve was established by the Town Council in the initial amount of $300,000 to mitigate the Town’s unfunded pension liabilities in June 2016. Accordi ng to the June action, an annual payment of $300,000 is deposited from available year-end savings. On January 31, 2017 the Town Council directed the transfer of approximately $2 million from the Budget Stabilization Reserve to the CalPERS Reserve. Specifically, the required minimum Budget Stabilization Fund balance is $4,637,406, or 12.5% of the FY 2016/17 budgeted revenues as specified in the Town’s General Fund Reserve Policy. To maintain this minimum, the Budget Stabilization Fund would be reduced from $6,621,808 and $1,984,402 would be added to the committed fund balance of the CalPERS Reserve. In addition, staff recommends changing description of the CalPERS Reserve to include all post- employment liabilities by changing its title to CalPERS/OPEB Reserve. See Draft Resolution and red-lined General Fund Reserve Policy in Attachment 2 and Attachment 3. The Reserve for Capital and Special Projects, funded from annual available General Fund budget savings, serves as the primary source for replenishment to the Town’s General Fund Appropriated Reserves (GFAR), which is the Town’s Capital Improvement Fund. This Reserve Committed Budget Stabilization Reserve $6.6 Catastrophic Reserve $4.6 CalPERS Reserve $0.3 Almond Grove Reserve $8.5 Assigned Carryforward Appropriation $0.1 Strategic Planning $2.6 Capital Improvements $4.0 Open Space $0.6 Sustainability Reserve $0.1 FY 2016/17 Commitments $0.1 Total General Fund Reserves $27.5 General Fund Reserves 6/30/2016 Amount (millions) PAGE 5 OF 7 SUBJECT: FISCAL YEAR 2016/17 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT - SIX MONTHS ENDING DECEMBER 31, 2016 DATE: FEBRUARY 15, 2017 S:\COUNCIL REPORTS\2017\02-21-17\Mid- Year\Staff Report FY 2016-17 2nd Quarter Budget Report FINAL.docx 2/16/2017 5:15 PM SLL DISCUSSION (cont’d): 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). Out of the $4 million available in the Capital and Special Projects Reserve, $1.4 million is already programmed for capital projects in FY 2016/17. The availability of approximately $27.5 million in committed and assigned General Fund reserves provides the Town with resources to manage through current and/or future fiscal challenges and opportunities. The $2.6 million Strategic Planning assigned balance will be incorporated into the FY 2017/18 budget process based on Council January 31, 2017 budget priority directions. FY 2017/18 BUDGET DEVELOPMENT PROCESS Council provided direction on the preparation of the FY 2017/18 Operating and Capital budget at the January 31, 2017 budget priority setting study session. Concurrent with the direction, the update of the Five-Year Financial Plan and in anticipation of a status quo budget, staff began budget development discussions in early February 2017. This process includes the conceptual development of staffing changes, revenue enhancements, and adjustments to the User Fee Schedule. Staff is currently working on preparing the FY 2017/18 budget which will be presented to Council in May 2017. The FY 2017/18 budget will continue to fund essential public services at the current level of service. Contractual obligations and unfunded mandates will also be incorporated into the proposed budget. FIVE-YEAR FINANCIAL PLAN UPDATE The Town of Los Gatos produces a Five Year Financial Forecast and updates it regularly to evaluate the Town’s fiscal condition and to guide policy, programmatic planning, and budget decisions. Development of a financial forecast as part of the budget development process is identified as a best practice by the Government Financial Officers Association (GFOA). The key assumptions used for the current forecast period (Fiscal Year 2017/18 through FY 2021/22) include:  Conservative revenue projections with specific growth rates determined by historical data or forecasts from external sources based on economic trends,  No new revenue sources,  Status quo in program and service delivery to maintain existing service levels,  Expenditure growth in areas with built-in escalation clauses over which the Town has no control (including benefits, pension, and OPEB),  2.5% of salary growth for all Town’s employees in each FY 2016/17 and FY 2017/18 . PAGE 6 OF 7 SUBJECT: FISCAL YEAR 2016/17 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT - SIX MONTHS ENDING DECEMBER 31, 2016 DATE: FEBRUARY 15, 2017 S:\COUNCIL REPORTS\2017\02-21-17\Mid- Year\Staff Report FY 2016-17 2nd Quarter Budget Report FINAL.docx 2/16/2017 5:15 PM SLL DISCUSSION: (cont’d) Account Revenue Category 2016/17 Estimated 2017/18 Forecast 2018/19 Forecast 2019/20 Forecast 2020/21 Forecast 2021/22 Forecast 4100 Property Tax 11.1$ 11.4$ 11.7$ 12.1$ 12.3$ 12.8$ 4110 VLF Backfill Property Tax 3.2 3.3 3.3 3.3 3.4 3.4 4200 Sales & Use Tax 8.8 8.0 8.0 8.2 8.4 8.6 4250 Franchise Fees 2.2 2.3 2.4 2.4 2.5 2.6 4251 Transient Occupancy Tax 2.0 2.1 2.1 2.2 2.3 2.3 4400 Business License Tax 1.5 1.5 1.5 1.5 1.5 1.5 4400 Licenses & Permits 3.0 3.1 3.2 3.3 3.4 3.5 4500 Intergovernmental 0.7 0.7 0.7 0.7 0.7 0.7 4600 Charge for Services 2.4 2.2 2.3 2.4 2.4 2.5 4700 Fines & Forfeitures 0.7 0.7 0.7 0.7 0.7 0.7 4800 Interest 0.3 0.3 0.3 0.3 0.3 0.3 4850 Other Sources 3.1 3.1 3.1 3.2 3.2 3.3 4900 Fund Transfers In 0.4 0.4 0.4 0.4 0.4 0.4 TOTAL REVENUES 39.4 39.1 39.7 40.7 41.5 42.6 Use of Reserves Capital Reserve 9.9 0.4 0.4 0.4 0.4 0.5 Use of FY 2017/18 Salary Allocations 1.0 49.3$ 40.5$ 40.1$ 41.1$ 41.9$ 43.1$ Account Expenditure Category 2016/17 Estimated 2017/18 Forecast 2018/19 Forecast 2019/20 Forecast 2020/21 Forecast 2021/22 Forecast 5110 Salary - Regular Employees 15.0$ 15.8$ 15.8$ 15.8$ 15.8$ 15.8$ 5130 Salary -Temporary Employees 0.7 0.7 0.7 0.7 0.7 0.7 5140 Salary - Overtime 0.4 0.4 0.4 0.4 0.4 0.4 5170 Salary - Other Salary 0.1 0.1 0.1 0.1 0.1 0.1 5200 Benefits 8.1 8.6 9.4 10.3 11.0 11.8 6000 Operating Expenditures 5.7 5.6 5.7 5.9 6.0 6.1 7200 Grants & Awards 0.2 0.2 0.2 0.2 0.2 0.2 7400 Utilities 0.4 0.5 0.5 0.5 0.5 0.5 8060 Internal Service Charges 3.7 3.8 4.1 4.2 4.4 4.5 8900 Debt Service 1.9 1.9 1.9 1.9 1.9 1.9 TOTAL EXPENDITURES 36.2$ 37.6$ 38.8$ 40.0$ 41.0$ 42.0$ 9900 Operating Transfers Out - - - - - - 9900 Capital Transfers Out to GFAR 9.9 0.4 0.4 0.4 0.4 0.4 9900 GASB 45 Retiree Medical Actuarial 1.6 1.6 1.6 1.6 1.6 1.6 TOTAL BUDGETED EXPENDITURES 47.7 39.6 40.8 42.0 43.0 44.0 9900 FY 2017/18 Salary Allocations 1.0 9900 Transfer to Capital Projects Reserve - - - - - - 9900 Transfer to Stabilization Reserve - - - - - - 48.7$ 39.6$ 40.8$ 42.0$ 43.0$ 44.0$ REVENUES LESS EXPENDITURES 0.6$ 0.9$ (0.7)$ (0.9)$ (1.1)$ (0.9)$ ONGOING SHORTFALL MITIGATION -$ -$ -$ -$ -$ -$ NET REVENUES LESS EXPENDITURES 0.6$ 0.9$ (0.7)$ (0.9)$ (1.1)$ (0.9)$ TOTAL REVENUES & TRANSFERS TOTAL EXPENDITURES & ALLOCATIONS EXPENDITURES Town of Los Gatos General Fund Updated Five-Year Financial Plan PAGE 7 OF 7 SUBJECT: FISCAL YEAR 2016/17 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT - SIX MONTHS ENDING DECEMBER 31, 2016 DATE: FEBRUARY 15, 2017 S:\COUNCIL REPORTS\2017\02-21-17\Mid- Year\Staff Report FY 2016-17 2nd Quarter Budget Report FINAL.docx 2/16/2017 5:15 PM SLL Applying the above assumptions in the preparation of the financial forecast , results in an estimated $600,000 of additional revenues over expenditures at the end of the current FY 2016/17 and a $900,000 surplus in FY2017/18. From FY 2018/19 to FY2020/21, the forecast show revenue shortfalls due to the incorporation of the recently determined estimated of the increased employer pension costs due to CalPERS discount rate change in December 2016. CONCLUSION: The financial results from the prior fiscal year, coupled with the FY 2016/17 second quarter data, confirm that the second quarter financial results are stable and improving. Staff is cautious as the five-year financial plan projects shortfalls beginning in FY 2018/19. The shortfalls are due to the effect of implementing the anticipated increased employer pension costs due t o CalPERS discount rate change in December 2016. Staff is actively engaged in the 2017/18 budget process, the primary focus will continue to be on ensuring that the available Town resources are allocated to meet the priority service needs of the community. ENVIRONMENTAL ASSESSMENT: This is not a project defined under CEQA, and no further action is required. Attachments: 1. Budget Performance Report for the Three Months Ending December 31, 2017. 2. Draft Resolution of the Town Council of the Town of Los Gatos Approving Commitments of fund balance under Government Accounting Standard Board (GASB) 54 3. Proposed update to the General Fund Reserve Policy (red-lined)