10 Staff Report - 2004/05 Mid-Year BudgetMEETING DATE: 2/7/05
°w N ITEM NO. 10
„ s COUNCIL/AGENCY AGENDA REPORT
Og Gh
DATE: February 3, 2005
TO: MAYOR AND TOWN COUNCIL/
CHAIR AND MEMBERS OF THE REDEVE MENT AGENCY
FROM: TOWN MANAGER/EXECUTIVE DIRECT
SUBJECT: 2004/05 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-
SIX MONTHS ENDING DECEMBER 31, 2004.
A. ACCEPT 2004/05 MID-YEAR SECOND QUARTER BUDGET
PERFORMANCE STATUS REPORT, INCLUDING FY 2005-10 FIVE-
YEAR FINANCIAL PROJECTIONS.
B. AUTHORIZE BUDGET ADJUSTMENTS AS RECOMMENDED IN
THE ATTACHED SECOND QUARTER BUDGET PERFORMANCE
REPORT
RECOMMENDATION:
1. Accept 2004/05 Mid-Year Budget Performance and Status report.
2. Authorize budget adjustments as recommended in the attached second quarter budget
performance report.
PURPOSE:
The purpose of this report is twofold, the first is to inform the Town Council on the status of the
Town's FY 2004/05 adopted budget at the mid year point, the second is to provide the Town Council
with staff's most recent information regarding the evolving budget situation for FY 2005/06 and
PREPARED BY:
SC:pg
N:\1\4GR\AdminWorkFi1es\Annua1 Budget\04-05 Mid Year.wpd
Reviewed by: 2~ELAssistant Town ManagerTown Attorney Clerk Administrator
Finance Community Development Revised: 2/3/05 4:30 pm
STEPHEN CONWAY
Finance & Administrat' ervices Direc
Reformatted: 5/30/01
PAGE 2
MAYOR AND TOWN COUNCIL/
CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY
SUBJECT: 2004/05 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX
MONTHS ENDING DECEMBER 31, 2004.
FEBRUARY 3, 2005
• A mid-year FY 2004/05 budget update focusing on revenue and expenditure trends and
financial projections for the current fiscal year.
• An update to the Town's five year financial projections (FY 2005-10) to provide a
framework for understanding the estimated size of the budget challenges in future years that
underlie the necessity for budget recommendations that are being developed for discussion
with Town Council on March 7, 2005.
THE REPORT:
This report comprehensively examines the current year budget status for FY 2004/05, expected fiscal
outlook and the evolving process of budget development for FY 2005/06 and beyond. Items for
Town Council consideration include:
• A review of the Town's FY 2004/05 Mid Year Budget Performance and Status Report;
• An update to the Town's five-year financial projections through FY 2009/10;
• An historical briefing of the Town's budget reduction efforts to date that have been
implemented since FY 2001/02;
• A briefing on the budgetary actions taken to date, and a conceptual discussion of preliminary
budget proposals for FY 2005/06 that will be reviewed with the Town Council on March 7,
2005 to meet FY 2005/06 budget challenges.
DISCUSSION:
FY 2004/05 MID YEAR BUDGET STATUS:
The attached Budget Performance Report (Attachment 1) is the mid year report covering the six
months beginning July 1, 2004 and ending December 31, 2004. The Budget Performance Report
presents analysis and recommendations related to key General Fund revenues by category and
expenditures by fund.
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
primarily on the Town's General Fund. Though the financial results are limited to the first six
months, staff has more information available than at the time of the first quarter report presented to
Council on October 18, 2004, allowing an update based on revenue trends for the current fiscal year.
Information is provided regarding vital revenues to the Town such as Sales Tax, Property Tax,
PAGE 3
MAYOR AND TOWN COUNCIL/
CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY
SUBJECT: 2004/05 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX
MONTHS ENDING DECEMBER 31, 2004.
FEBRUARY 3, 2005
Transient Occupancy Tax, Vehicle License fees (Car Tax), Business License Tax, Fees and Charges
and.Interest Income. This information aids staff in providing the status of the revenues adopted to
support the FY 2004-05 operating budget. Furthermore, the Town Council is advised of any
recommended changes to estimated revenues or expenditure appropriations included in the Town's
FY 2004/05 adopted budget.
There are some favorable developments in the Town's General Fund adopted revenues. Overall,
total General Fund estimated operating revenues, excluding reserve funds, for the current year are
anticipated to be higher by a net of $767,745 than the adopted budget estimates. Highlights of some
of these changes include a recommended $200,000 budget increase in estimated Sales Tax from
$6,900,000 to $7,100,000. Property tax receipts are also trending ahead of estimates, resulting in
a recommended in an $148,775 increase in this vital source from $4,952,000 to $5,101,668 for the
current year. Additionally, building permits are recommended to be increased $200,000 for the
current year. Other revenue with recommendations for increase combine in total for the remaining
$428,970 of net increases to General Fund revenues for the fiscal year. Included in the gain in other
revenues are in the category of Intergovernmental Revenues whereby the Car Tax (VLF) backfill is
recommended to be adjusted by a $172,000 net increase from prior year estimates. Also, the
Supplemental Law Enforcement Grant (SLESF) revenue is recommended to by $138,870. Partially
offsetting but not eliminating the gains mentioned above are recommended reductions to estimates
in other General Fund revenues totaling approximately $210,000. The decrease is derived from a
number of key revenues experiencing declining revenue. The estimate for planning permits is
recommended to be lowered by approximately $100,000 due to lower than expected planning activity
for the year. Transient Occupancy taxes are also recommended to be adjusted slightly lower by
$20,000 from $900,000 to $880,000. The attached Budget Performance and Status Report provides
additional details and analysis regarding revenue and expenditure activity and the recommended
budget adjustments for principal General Fund revenue sources. The mid-year budget projections
contained in Attachment A reflect the revised revenue projections as described in this report.
On a positive note, staff is encouraged by the fact that expenditures in many Town departments are
trending 3% below the expected 50% of budget level (expected level halfway through the fiscal
year). If this trend continues, there may be potential for departmental budget savings to be an
additional resource available for budgetary balancing or designation for specific purposes such as
future capital needs.
PAGE 4
MAYOR AND TOWN COUNCIL/
CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY
SUBJECT: 2004/05 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX
MONTHS ENDING DECEMBER 31, 2004.
FEBRUARY 3, 2005
Though the trends at mid- year are positive overall netting a $767,745 increase in operating revenues,
there may be additional revenue impacts that need to be addressed in the remaining six months.
Additionally, there always remains a looming threat of additional State revenue "takes." At this
time, there is no verifiable information of proposed additional state takes beyond the scheduled
second year of the two year "take" of approximately $480,000 in property taxes slated for
implementation in FY 2005/06. This means that state revenues such as booking fees and
supplemental law enforcement grant monies, among others, which were not specifically protected
by Proposition 1A may still be vulnerable to future state revenue "takes."
The availability of excess balances resulting from fiscal year expenditure reductions or increases in
revenue estimates is one important part of potential funding for future budgets that the Town is
describing as "bridge funding." Bridge funding is conceptualized as a funding source to be used as
dollars available to move to more efficient organizational structures, ferret out and understand new
service delivery options, and allow time for new initiatives and programs to become more fully
formed. Bridge funding will allow more time to ramp up or bring new programs "on-line,"
providing some resources for "start-up" costs until the programs can be sustained by operating
revenues. Normally, the Town's policies provide that any excess revenues over expenditures in the
fiscal year not specifically designated for other uses is set aside in a reserve for future capital
improvements. This year, as in years past, the staff will recommend that Council consider some or
all of these revenues be used as potential sources of bridge funding for next fiscal year, if warranted.
The availability of bridge funding provides the Town a longer planning horizon to develop
appropriate organizational structures that align with the new fiscal reality, to inform the Town's
employees of potential reductions in the workforce, inform the community about potential service
level impacts, and to establish appropriate service levels that balance with revenues projected for
next fiscal year.
Sources of potential bridge funding include:
• Excess Revenues Over Expenditures. As discussed above, if there are excess balances at the
close of the fiscal year, the balances not designated by Town Council for specific purposes
are designated for future capital improvements by Town policy. This year the Town may
desire to designate some of this potential funding for bridging purposes. This strategy is
being used for backfill revenues for the two year State property tax "take."
• General Fund Reserves. FY 2004/05 beginning fund balance consists of approximately
$10.6 million of total "available" reserves. The bulk of these reserve are "committed" or
designated for specific purposes like parking, open space, and other uses. Included in this
PAGE 5
MAYOR AND TOWN COUNCIL/
CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY
SUBJECT: 2004/05 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX
MONTHS ENDING DECEMBER 31, 2004.
FEBRUARY 3, 2005
total is the Reserve for Economic Uncertainty intact at $3,678,000. However, there are some
funds labeled as undesignated ($1.7 million), the bulk of which is likely to be committed to
capital needs, but some portion of these funds could be used for bridge funding.
• Internal Service Fund Reserves. Staff believes there may be a moderate amount of additional
capacity to absorb some additional transfers from these funds to repay the General Fund for
prior year overcharges. Staff believes each fund is adequately funded, and there remains
some modest ability to tap some of this surplus for appropriate bridging uses.
• Public Employees Retirement System (PERS) Set-Aside. The Town has accumulated
approximately $3 million in its General Fund liability account to be used to buffer future
Retirement System rate increases by continuing to charge itself the Non-Sworn employer
PERS contribution of 7% even when the official PERS rate charged to the Town was 0% due
to the Town's surplus at PERS . This prudent fiscal decision which we have been continuing
since 1999 is proving to be very valuable now with PERS rates rising rapidly due to stock
market losses and in light of a forecast received by the Town in January 2005 from PERs
actuaries in which employer costs for FY 2005/06 are expected to be increased
approximately $310,000 above the expected rate built into the Financial Plan in the fall of
2004.
Using reserves or other sources of bridge funding needs to be done strategically, ensuring that these
funding sources are not used to fund ongoing cost and service delivery structures that are not
eventually supported by forecasted future operating revenues.
FIVE YEAR FINANCIAL PROJECTIONS UPDATE:
Setting the stage for FY 2005/06 budget development, staff recently updated the Town's Five Year
Financial Plan spanning fiscal years 2005/06 through 2009/10. The updated scenarios continue to
demonstrate the need for the Town to take action to maintain the Town's fiscal health. Projected FY
2005/06 revenue shortfalls prior to any budget actions taken to align operating costs to operating
revenues are forecasted to be $928,000 net of use of authorized reserves. The shortfall is based upon
conservative revenue growth estimates in key revenue categories, forecasted expenditure increases
in expected salary and benefits, including the unexpected increase in employer PERS retirement
benefit costs, and conservative estimates for increases to supplies and services and utilities operating
costs based upon current year actual expenditure activity. The predicted shortfall is dependent upon
the level of recovery in local economically sensitive revenues such as sales tax and the confirmation
that the additional State revenue "take" remains at $480,000 as agreed in the State two-year budget
agreement between the State of California and local government.
i
PAGE 6
MAYOR AND TOWN COUNCIL/
CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY
SUBJECT: 2004/05 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX
MONTHS ENDING DECEMBER 31, 2004.
FEBRUARY 3, 2005
The updated five year forecast as presented in the following pages assumes approximately $480,000
in additional State "takes" of property tax in FY 2005/06 similar to the amount the Town
experienced this fiscal year. This scenario also assumes that the State property tax swap or "back-
fill" of approximately $1.2 million in Car Tax for local property tax will continue in future years as
promised by the State to be implemented "permanently" in the FY 2004/05 budget bill. Revenues
are optimistically presented with varying growth rates, on average 5% 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 fixes made to the _ budget to eliminate the
revenue shortfall in FY 2005/06 and beyond are "permanent" fixes, thereby reducing the level of
shortfall in the following fiscal years. The amounts fixed permanently in the Town's operating costs
are assumed to carry forward cumulatively each year, lessening the reduction required in subsequent
years. It is possible to make some adjustments through one-time solutions or prudent use of bridge
funding on a year-to-year basis. However, these solutions recognize that problems that are truly
structural should be addressed eventually with new revenue sources or reduced expenditures in an
ongoing way.
The following pages present the plan. A terminology guide follows as an aid to understanding the
Updated Five Year Financial Projections data that is presented in each scenario.
PAGE 7
MAYOR AND TOWN COUNCIL/
CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY.
SUBJECT: 2004/05 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX
MONTHS ENDING DECEMBER 31, 2004.
FEBRUARY 3, 2005
Town of Los Gatos
Five Year Financial Plan FY 2005/06 Through FY 2009/10
Summary Data ACTUAL ADOPTED PROJECTED PROJECTED PROJECTED PROJECTED PROJECTED
Revenue Summary 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Sales Tax
Property Tax
Charges for Services
Car TaxNLF Prop Tax Swap
Other Lic. and Permits
Intergovernmental Rev.
Business Licenses
Franchise Tax
Investment Earnings
Hotel/Motel Tax
Transfers
Miscellaneous
Fines & Forfeitures
Total Revenues
Town Expenditures
Salaries
Benefits
Temporary Sal & Ben.
Paid Overtime
Total Sal. & Ben.
Grants & Awards
Training
Employee Retiree Med.
Animal Control Oper.
Supplies and Services
Utilities
Capital Purchases
Internal Service Funds
Debt Service/Transfers
Storm Drains
Road Maintenance/Rep.
Total Expenditures
*Authorized Use of Reserves
Ongoing Shortfall Mitigation
Revenues Over (Under) Exp.
6,914,526
6,900,000
7,245,000
7,607,250
7,987,613
8,386,993
8,806,343
5,207,381
5,428,893
5,754,627
6,099,904
6,465,898
6,853,852
7,265,083
2,526,198
2,758,725
2,837,846
2,997,484
3,172,418
3,306,118
3,446,503
1,298,455
1,700,000
1,796,334
1,898,165
2,005,808
2,119,597
2,239,885
936,313
1,276,055
1,314,337
1,353,767
1,394,380
1,436,211
1,479,297
1,914,766
1,194,135
1,299,730
1,803,727
1,833,633
1,865,120
1,897,657
1,071,865
1,080,000
1,112,400
1,145,772
1,180,145
1,215,550
1,252,016
930,997
957,000
1,005,655
1,055,938
1,108,735
1,164,171
1,222,380
37,407
931,836
912,619
932,974
953,838
980,145
1,007,232
829,026
900,000
870,000
913,500
959,175
978,359
997,926
1,425,019
809,920
605,938
454,076
364,738
325,448
314,994
194,445
473,078
488,682
513,416
539,337
566,504
594,979
214,232
144,950
150,858
157,020
163,450
168,955
174,656
23,500,630
24,554,592
25,394,025
26,932,993
28,129,167
29,367,022
30,698,951
11,469,874
12,143,287
12,820,561
13,375,535
13,898,008
14,429,285
14,961,480
3,277,273
4,290,300
5,196,506
5,607,872
5,984,094
6,430,348
6,501,127
428,163
331,300
397,781
411,286
425,396
439,573
454,949
341,814
346,800
417,461
438,334
460,250
480,710
504,746
15,517,124
17,111,687
18,832,308
19,833,026
20,767,748
21,779,916
22,422,302
186,431
175,380
175,380
175,380
175,380
184,149
193,356
104,511
190,625
196,344
202,234
208,301
218,716
229,652
131,586
153,100
211,000
290,000
363,000
381,150
400,208
173,553
168,200
185,020
203,522
223,874
235,068
246,821
2,424,379
3,123,170
3,216,865
3,313,371
3,412,772
3,583,411
3,762,581
402,503
380,215
351,477
369,051
387,503
406,879
427,223
90,378
20,400
21,012
21,642
22,292
23,406
24,577
3,056,215
2,699,700
2,780,691
2,864,112
2,950,035
3,097,537
3,252,414
1,203,947
1,152,265
1,152,265
1,152,265
1,152,265
1,231,626
1,236,684
23,290,627 25,174,742 27,122,362 28,424,603 29,663,170 31,141,857 32,195,818
620,150 800,150
928,188 563,423 970,580 804,225
210,003 - (928,188) (563,423) (970,580) (804,255) (692,642)
PAGE 8
MAYOR AND TOWN COUNCIL/
CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY
SUBJECT: 2004/05 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX
MONTHS ENDING DECEMBER 31, 2004.
FEBRUARY 3, 2005
Terminology Guide in Reviewing Five Year Financial Plan
Total Revenues - Total of principal General Fund revenues, FY 2003/04 presents revenue actuals,
FY 2004/05 the adopted revenue budget, and the other years use an average 3-6% growth rate from
adopted budget levels for economically sensitive revenues such as Sales Tax.
Total Expenditures - Total of principal General Fund expenditures by expenditure type, FY
2003/04 uses expenditure actuals, FY 2004/05 the adopted expenditure budget and the other years
use an average 3-5% growth rate in future years depending on the expenditure type.
Ongoing Shortfall Mitigation 05-06 (Assumes Permanent Fix) - A dollar amount appears first
in FY 2006/07. This amount is added back to revenues in that year because it assumes that the fixes
the Town makes to its operating cost structure are fixed permanently, thereby reducing costs on an
ongoing basis in future years. The degree of fix needed depends on whether operating revenues like
property taxes or VLF property tax backfill are intact or lost and whether a full permanent fix is
made each year. It is in this situation where staff :will need to evaluate whether partial offsets with
excess reserves could be used to buy the time needed to implement solutions that save costs yet
require time to implement.
Revenues Over (Under Expenditures) - Compares General Fund Operating Revenues plus
Permanent Fix dollars minus General Fund Operating Expenditures.
Revenue Shortfall as a % of Operating Revenues - In FY 2005/06, the projected reduction
percentage required to align operating expenditures with revenues. In FY 2006/07 and beyond, the
percentage reductions required take into account the Permanent Fix occurring in the prior year.
Both updates to the long term Five Year financial scenarios indicate the Town was wise to begin
strategic cost reductions dating back to FY 2001/02, with cumulative reductions of approximately
$4.5 million in Town operating expenditures since that time. These efforts have been a multi-
pronged approach to achieve operational efficiencies, cost reductions, and exploration of alternative
methods of service delivery options by the Town.
PAGE 9
MAYOR AND TOWN COUNCIL/
CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY
SUBJECT: 2004/05 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX
MONTHS ENDING DECEMBER 31, 2004.
FEBRUARY 3, 2005
Continuing Vulnerabilities
The Town continues to be impacted by operating revenue and expenditure challenges that must be
monitored and addressed. Progress or lack thereof in these vulnerabilities will unavoidably affect
Town-wide service delivery goals in future years. Staff sees challenges in both the ongoing revenue
and cost structure as described below:
Revenues
Recovery in Economically Sensitive Revenues. The financial projections assume that a modest
recovery and growth will be experienced by the Town in revenues such as Sales Tax, Business
License Tax and Hotel Tax, among others. If this recovery does not materialize, then the revenue
shortfall could exceed the forecasted amounts under both scenarios.
The Town's Sales Tax collections are of continuing concern. Though the FY 2004/05 projections
are encouraging, the sales tax mix continues to be a concern. An example is the Town's auto
dealerships which experienced an average 9% decline in annual sales tax collections in the past year,
compared to the average I % growth state-wide dealerships experienced in the same time period. The
Town's auto dealerships account for approximately 30% of the Town's total annual Sales Tax.
Another concern is the importance of retaining the technology sector businesses which contribute
to the Town's collections, one of which is now. one of our largest providers of sales tax annually.
The importance of having a well balanced sales tax base continues to be an important objective.
State Budget Impacts to the Town are also unknown. The Governor's budget delivered in January
2005 retains the Car Tax "back-fill" but proposes a property tax shift (ERAF) of approximately
$400,000 from the Town and approximately $303, 000 from the Redevelopment Agency in FY
2005/06. No additional state "takes" are known are expected at this time for FY 2005/06, but that
threat is a constant reality for local government. A significant mitigating factor to preserve the
Town's revenues from further takes was the successful November ballot measure passed
overwhelmingly by California voters to protect local tax revenues for local services.
Drivers of Town Cost
Salary & Benefits-Town government is in the business of providing services which depend on people
to deliver. Consequently, the most significant driver of cost for service delivery is the cost of labor.
Salaries and benefits of employees comprise the largest share of the Town's General Fund operating
expenditures (approximately 70%). In order for the Town to remain competitive in the labor market
PAGE 10
MAYOR AND TOWN COUNCIL/
CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY
SUBJECT: 2004/05 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX
MONTHS ENDING DECEMBER 31, 2004.
FEBRUARY 3, 2005
in a high cost region, the Town's labor costs have continued to grow. In particular, significant public
safety salary increases throughout the region have influenced the Town's public safety labor costs.
In addition, consistent with public safety statewide, Los Gatos sworn public safety employees were
provided an enhanced retirement formula (3% @ 50) in 2000 under the State Public Employees
Retirement System (PERS).
As mentioned earlier, the Town recently received unanticipated negative news from the PERS
actuaries. The Town was informed that costs associated with the new retirement formula and several
years of negative investment returns in the pension system have resulted in significant changes in
retirement contributions required to be paid by the Town. Based upon estimates obtained in the
summer of 2004 from PERS and the Town's actuarial consultant, the Town's contribution toward
retirement for Sworn Personnel was expected to rise from the current FY rate of 28.3% for sworn
and 8.0% for non-sworn to 30.3% and 10.1% respectively. The new rate now forecasted by PERS
actuaries anticipates the rate to be 32.5% for sworn and 13.8% for non-sworn payroll in FY 2005/06.
More recent information factored into the Five Year Forecast indicates this cost may rise to 35% of
covered safety payroll and up to 15% for non-sworn miscellaneous employees in FY 2009/10. The
negative development in employer PERS costs alone have added approximately $3 50,000 in benefit
costs for FY 2005/06, causing the revenue shortfall projected for FY 2005/06 to increase from
approximately 2.66% to 3.66%.
Health care costs are also trending upward, with increases of 16-20% annually over the past several
years. Recent agreed upon changes in labor contracts and with non-represented groups such as
management are"holding the line" against automatic escalation of health costs, leading to progress
in capping maximum cash back allowances that were based upon health premiums, providing for
expected significant savings in future years of the plan. The Town will need to continue to explore
ways to contain the escalation of salary and benefit cost while concurrently remaining competitive
to attract and retain a qualified workforce.
Energy Costs-Town-wide cost increases have exceeded the general inflation rate. This increase is
due in part to the rise in electric and gas charges resulting from the recent Statewide energy crisis
and,global fluctuations in gasoline prices. Energy costs continue to be monitored by staff. Steps are
already underway to examine Town-wide energy costs and look for ways to manage energy use and
control costs.
PAGE 11
MAYOR AND TOWN COUNCIL/
CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY
SUBJECT: 2004/05 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX
MONTHS ENDING DECEMBER 31, 2004.
FEBRUARY 3, 2005
Internal Service Charges-The Town prudently charges itself on an annual basis internal services
charges that provide funds used to replace rolling stock, provide information services and technology
replacements, perform building maintenance, and maintain workers compensation and general
liability programs, among others. Though the Town could eliminate this practice and go on a "pay-
as-you-go" basis, staff believes this would not be a best practice in financial management. However,
we should continue to ensure that our internal rate setting practices are in line with projected internal
service funding needs.
Performance Measures-The Town is actively developing and implementing service delivery
performance measures linked to key program services that aim to measure the results of providing
the service. This information will aid the Town in better aligning scarce resources with service
delivery outcomes, providing a more efficient organization with increased accountability to the
public.
REVENUE ENHANCEMENTS AND COST CONTAINMENT:
Realizing the vulnerabilities in the Town's ongoing stream of revenues and its limited revenue base,
it is essential that the Town ensure that it is charging adequate fees and charges to recover the cost
of services so as not to create public subsidies for private development and other specialized services
provided to the Town's customer base. In that regard, staff is examining and bringing forward for
Town Council approval a comprehensive fee review and update as part of the FY 2005/06
preliminary budget process scheduled for March 7, 2005. The Town is also evaluating internal costs
related to Town support of special events and will discuss with the Council the desired policies
regarding objectives of cost recovery. The Town is also monitoring developments in neighboring
communities regarding the viability of implementing a 911 system fee.
Review of the FY 2005/06 budget proposals will reveal some new revenue opportunities that the
Administration will be bringing forward for discussion with the Town Council in an creative
approach to develop additional appropriate and sustainable revenue streams for Town services. In
looking forward to future years, management intends to review with the Town Council other revenue
options such as tax measures, assessments or bond issues that could provide funding for community
assets such as a police facility, a new library, and/or ongoing street surfacing and other infrastructure
needs. Since proceeding with any such measure would need to be carefully analyzed, early education
and review of options would be an important first step in this decision process.
On the cost side, many ideas are being explored and analyzed by the Town and will continue to
evolve through the budget cycle and employee bargaining process.
J
PAGE 12
MAYOR AND TOWN COUNCIL/
CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY
SUBJECT: 2004/05 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX
MONTHS ENDING DECEMBER 31, 2004.
FEBRUARY 3, 2005
BUDGET REDUCTION EFFORTS TO DATE:
Since FY 2000/01 the Town has been actively addressing the budget challenges facing the Town in
recent years. The Town has been pro-actively taking steps that have kept the Town's operating
revenues in balance with operating expenses since that time. These steps included:
• In early FY 2001/02 the Town began expenditure reductions across all departments in
response to the developing recession, including -strategically delaying or slowing down
operating expenditures, de-funding authorized positions, enacting selected hiring freezes, and
extending equipment replacements, where practical. To date, approximately 15 full time
equivalent positions have been de-funded from the Town's budget totaling nearly $1.7
million dollars to date, comprising a substantial part of the approximately $3.0 million
cumulative cost reductions made through this fiscal year.
• In February 2003, the Town implemented expenditure reductions across all Town services
of nearly $1.5 million dollars of expenditure reductions (approximately 6% of General Fund
FY 2002/03 budgeted expenditures). The objective was to limit the effects on service
delivery to the public by utilizing, where available, salary savings due to vacancies and hiring
freezes, salary step savings and selected departmental cost saving initiatives.
• The Town's adopted budget for FY 2003/04 was developed in an environment where flat
revenue growth of economically-sensitive revenues was conservatively projected.
Specifically, the adopted budget incorporated approximately $1.3 million of additional
reductions (internally referred to as "Tier I" and described in the FY 2003/04 adopted budget
transmittal message) from the prior year's adopted budget to balance operating expenditures
with operating revenues.
PAGE 13
MAYOR AND TOWN COUNCIL/
CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY
SUBJECT: 2004/05 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX
MONTHS ENDING DECEMBER 31, 2004.
FEBRUARY 3, 2005
• The Town's adopted budget for FY 2004/05 incorporated approximately $800,000 in
reductions Town-wide, and $700,000 in revenue enhancements to align revenues more
closely with the cost of service. Staff also prepared a second round of reduction proposals
(internally referred to as "Tier N' and also described in the FY 2004-05 adopted budget
transmittal message) of approximately $1.2 million in Town-wide expenses in anticipation
of any further reductions made necessary by additional State takes due to the possible failure
of the ballot measure protecting local revenues and its attendant potential for unanticipated
further state "takes," or other unanticipated reductions in economically sensitive revenues
such as Sales Tax or Transient Occupancy Tax. These reduction proposals have been
developed with the same strategies used to arrive at the FY 2004/05 Tier I reductions, but to
a deeper level.
The measures taken in prior years have contributed to a cumulative savings or revenue enhancements
of to the Town of approximately $4.5 million to date.
As stated earlier, operational savings in FY 2004/05 can be used to mitigate projected revenue
shortfalls in economically sensitive revenues such as Sales Tax, and Transient Occupancy Tax (Hotel
Tax) beyond that anticipated for remainder of the fiscal year. Expenditure savings and any excess
revenue obtained this fiscal year can also be used as a funding source necessary to bridge the
organization to its recommended adopted budget levels in FY 2005/06, which are respectively
targeted at a level of approximately four per cent below the FY 2004/05 adopted budget levels
adjusted for salary and benefit cost increases, partially offset by any revenue enhancements that are
implemented next year.
PROPOSED BUDGET REDUCTIONS & REVENUE ENHANCEMENTS FY 2005/06
As presented earlier in the Five Year Financial Plan, the projections for next year indicate the need
for approximately $988,000 or 4% permanent budget reductions or revenue enhancements to align
the Town's services with its forecasted ongoing stream of revenues depending upon the Town's local
economic fortunes and developments at the state level.
PAGE 14
MAYOR AND TOWN COUNCIL/
CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY
SUBJECT: 2004/05 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX
MONTHS ENDING DECEMBER 31, 2004.
FEBRUARY 3, 2005
Many of the reductions taken in the past two years have resulted from selected hiring freezes and
other operational efficiencies departments have been able to develop. These reductions, though
difficult, were achieved with increases in efficiency and productivity by Town staff so that the
implementation of these reductions was made fairly seamless to the community in terms of service
level impacts. The planning for FY 2005/06 reductions is made more difficult because most of this
operational "low hanging fruit" has in large measure been harvested in the cumulative $4.5 million
dollar cost reductions or revenue enhancements already implemented by the organization over the
past four fiscal years.
Staff is in the process of crafting a comprehensive response to the budget FY 2005/06 budget
challenges as presented in the Five Year Financial Plan update. Preliminary budget proposals will
be brought forward for Town Council review and direction on March 7, 2005. In staff's judgment,
a prudent course of action is for Town departments to begin developing budget reduction and
revenue enhancement proposals sufficient to address a range of forecasted revenue shortfalls in FY
2005/06 of approximately $988,000 or 4%.
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 2004/05.
Upon approval of the recommended budget adjustments by Town Council, current projections
forecast a small surplus of operating revenues over operating expenses for the fiscal year ending
June 30, 2005 (excluding a one-time use of General Fund reserves for the two year budget agreement
between the state and local governments, and one-time costs such as capital costs for the San'Jose
animal shelter and continuing start- up costs for the new Parking Enforcement program). As detailed
in this report, staff is currently engaged in FY 2005/06 budget development process which
incorporates plans for a 4% overall expenditure reduction and/or revenue enhancements depending
on the performance of the local economy and any further actions taken by the State of California to
balance its budget deficit.
Attachments:
Budget Performance Report for the Three Months Ended December 31, 2004
TOWN OF LOS GATOS
MID-YEAR BUDGET PERFORMANCE REPORT
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004
February 07, 2005
FINANCIAL OVERVIEW-EXECUTIVE SUMMARY
Status of FY 2004/05 Adopted Budget:
As discussed in the First Quarter Budget Performance Report presented to Town Council on October 14, 2004,
financial results for the first six months are more solid than earlier in the year and indicate some positive
movement in the Town's economically sensitive revenues such as Sales Tax and Property Tax. Sales Tax
collections through December are trending positively, with our current forecast to exceed revenue estimates by
approximately $200,000 for this fiscal year. The increase is due to increases in the general retail category, led by
continued growth of NETFLIX, an internet commerce company, now the Town's largest provider of sales tax
revenues. The gain in this area helped offset the average 9% decline in sales tax collected from the Town's auto
dealers in the third quarter of calendar year 2004. The decline is a concern because auto dealers constitute
approximately 30% of the Town's total Sales Tax. Other positive trends were seen in the License & Permits,
Intergovernmental and Other Revenue categories. While General Fund revenues are recommended to be
increased overall, certain other key revenues are recommended to be adjusted lower. For example Transient
Occupancy Tax (Hotel Tax) second quarter collections are trending lower than second quarter collections
received in the prior year, leading staff to recommend a $20,000 dollar reduction from the adopted budget
estimate.
It should be noted that revenues for FY 2004/05 included approximately $520,000 of transfers to the Town's
General Fund from Internal Service Fund excess balances that the Town is using to supplement revenues until
operating revenues align with operating expenditures. Unfortunately, these transfers cannot be sustained on an
ongoing basis. The Town's five-year plan assumes decreasing amounts of this revenue available through FY
2009/10. If these transfers were reduced, operating revenues would be reduced accordingly. Scheduled labor
cost increases, including the unanticipated increase in PERS benefit costs and other operating expenditure
increases forecast for FY 2005/06 and future fiscal years will continue to require an improvement in the Town's
economically sensitive revenues to offset the cost increases likely to occur. The FY 2005/06 budget proposals
and revenue enhancement efforts now being developed for discussion with the Town Council will aid in
balancing ongoing revenues with the Town's organizational structure and its accompanying cost of providing
services and potentially provide discretionary funding for other initiatives such as funding future capital
improvements.
Another positive development since the presentation of the First Quarter Budget Performance Report was the
successful passage of the Local Taxpayers Revenue Protection Proposition lA in November by a large majority
of California voters. Unless a financial emergency is declared by the Governor, property tax revenues and sales
taxes are now protected from additional state "takes" beyond the two-year "one-time" take of additional
property taxes in FY 2004/05 and FY 2005/06. The success of this measure greatly aids the Town in making
more realistic long-range financial projections as more stability is built into the revenue structures that deliver
local government services to the community.
GENERAL FUND KEYREVENUEANALYSIS FY2004105
The following presentation provides a recap of significant General Fund revenue sources as of the second
quarter ending December 31, 2004. Staff is monitoring each revenue source closely, and at this time are most
concerned about two revenue sources: Transient Occupancy Tax and Business License Fee Tax Income, which
are recommended to be adjusted lower for the fiscal year. Property Tax appears to be tracking favorably at
nearly 6% growth, outperforming estimates of 4% growth used for the adopted budget estimates for FY
2004/05. The current year's growth in property tax estimates reflects the 6-8% growth rate experienced a few
years ago. As stated in the agenda item attached to this report, there is no verifiable information of proposed
additional state revenue "takes" beyond the scheduled second year of the two year "take" of approximately
$480,000 in Property Taxes slated for implementation in FY 2005/06. This means that State revenues such as
Booking Fees and Supplemental Law Enforcement Grant monies, among others, which were not specifically
protected by Proposition 1A may still be vulnerable to future State Revenue "takes".
FINANCIAL OUTLOOK FY 2004/05
♦ Sales Tax Revenue
Description
Sales Tax is collected on taxable sales and
services by merchants and remitted to the State
for distribution to schools, counties, and local
government entities. The Sales Tax revenue
received by the Town is our largest General
Fund revenue source, comprising slightly more
than 28% of FY 2004/05 total budgeted General
Fund revenues. Sales Tax revenue receipts are
classified as General Fund revenue for
unrestricted use.
Under Proposition 57, known as the California
Economic Recovery Bond Act, the legislature
enacted provisions, known as the "triple flip"
that changes how sales and use taxes are
distributed effective July 1, 2004. These
changes will remain in effect until the State's
bond obligations are satisfied.
With the implementation of the "triple flip," the
portion of the 1 cent allocated to local
government will decrease by '/4 of 1 cent, and
the State's portion will increase by 1/4 of 1 cent.
In turn, the State is replacing the reallocated
Sales Tax monies with Property Tax to local
governments. The Town's remaining 3/4 of the 1
cent of local sales tax revenue continues to be
remitted to the Town on a monthly basis;
while the reclassified '/4 of 1 cent portion known
as "Sales Tax in Lieu" is remitted with other
Property Tax on a semi-annual basis.
Analysis
Staff continues to analyze the Town's Sales Tax
receipts in conjunction with our research
consultant, MBIA. Quarterly tax revenues and
business sector earnings are monitored to
determine revenue trends and vulnerabilities. Of
particular note is that while total Sales Tax
revenues continue to increase (primarily due to
one highly successful enterprise), the continued
drop in auto sector revenues remains a specific
concern as this sector is a large proportion of the
business mix.
Another vulnerability is the Town's increasing
dependency (currently 14% of Sales Tax
revenue) on this one business. While the
business continues to grow at a phenomenal rate
(compelling staff to recommend a $200,000
budget increase at mid-year), economic vitality
efforts are focused on strengthening the Town's
overall business base.
Quarterly and Annual Revenues
5-Year History
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
0 2nd Quarter
Actual
Revenues
❑ Fiscal Year
Total Actual
Revenues
® Fiscal Year
Budgeted
Revenues
FY 2001
FY 2002
FY 2003
FY 2004
FY 2005
2nd Quarter Actual Revenues
$ 4,759,276
$ 3,288,885
$ 3,237,902
$ 3,217,070
$ 3,179,238
Fiscal Year Total Actual Revenues
$ 9,429,256
$ 6,953,880
$ 6,928,817
$ 6,914,526
Fiscal Year Budgeted Revenues
$ 6,900,000
2nd Quarter Percent of Total
50.47%
47.30%
46.73%
46.53%
46.08%
Recommended Budget Revision
$200,000 Increase
FY 2001 FY 2002 FY 2003 FY 2004 FY 2005
FINANCIAL OUTLOOK FY 2004/05
♦ Property Tax Revenue
Description
Property Tax is one of the Town's largest revenue
sources, accounting for 20.2% of the Town's
budgeted General Fund revenue for FY 2004/05.
Tax distributions are largely received in the third
and fourth quarters of the fiscal year, meaning
revenue receipts are not reflected proportionately in
the chart below, by quarter.
Property Tax is levied at one percent of the assessed
value of the property, of which the Town currently
receives approximately 9.5 cents on each dollar
paid to the County Assessor's Office.
With the passage of Proposition 13 in 1978, voters
amended the state constitution to limit property tax
rates to 1% of the property's 1975/76 market value
and restricted valuation growth to not more than a
2% inflation factor per annum. When property
changes hands or new construction occurs, property
is reassessed to its current market value, and also
adjusted by a two percent inflation factor thereafter.
As a result, real property values critically impact
revenues: the higher the aggregate property value,
the higher the revenue generated.
Analysis
According to the County Assessor's FY 2004/05
assessed valuations, Los Gatos experienced an
overall 6.53% growth in assessed value from the
prior year tax rolls. This larger than expected rise
in property values will increase current year tax
revenues approximately $150,000 more than
previously projected, therefore staff is
recommending an adjustment at mid-year.
In addition to the increased valuation revenues, the
State's "permanent" realignment of VLF backfill
funding to property tax induces a reclassification of
revenues from VLF Fees to Property Tax and is
reflected in the recommended adjustment below.
Quarterly and Annual Revenues
5-Year History
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
2nd Quarter Actual Revenues
Fiscal Year Total Actual Revenues
Fiscal Year Budgeted Revenues
2nd Quarter Percent of Total
Recommended Budget Revisions:
FY 2001 FY 2002 FY 2003
$ 2,450,173 $ 2,127,714 $ 2,246,511
$ 4,472,583 $ 4,784,476 $ 4,977,119
0 2nd Quarter Actual
Revenues
0 Fiscal Year Total
Actual Revenues
® Fiscal Year
Budgeted Revenues
FY 2004 FY 2005
2,297,420 $ 2,497,953
5,207,381
$ 4,952,893
54.78% 44.47% 45.14% 44.12% 50.43%
Property Tax Revenue Increase $148,775 Increase
"Permanent" Realignment of VLF to Property Tax $421,542 Increase
Total Recommended Budget Revisions: $570,317 Increase
4
FY 2001 FY 2002 FY 2003 FY 2004 FY 2005
FINANCIAL OUTLOOK FY 2004/05
♦ Transient Occupancy Tax Revenue
Description
The Town of Los Gatos levies a Transient
Occupancy Tax in the amount of ten per cent (10%)
of the rent charged by the hotel/motel operator
within Town limits. This tax helps to fund Town
services provided to transient lodgers.
Analysis
According to Smith Travel Research, the leader in
lodging industry tracking, industry occupancy was
up 3.7 percent in 2004 nationwide. However, the
Town's Transient Occupancy Tax revenues received
through the second quarter of the fiscal year
continue to reflect an ongoing occupancy slump for
nearly all Town hotels and motels.
While receipts trail last year's revenues at mid-point,
expectations for the remainder of the year remain
conservatively optimistic based on mild
strengthening in some of the Town's other local
economic indicators. A small revenue decrease of
$20,000 is recommended to adjust the budget to
revised expectations
Quarterly and Annual Revenues
5-Year History
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
2nd Quarter Actual Revenues
Fiscal Year Total Actual Revenues
Fiscal Year Budgeted Revenues
2nd Quarter Percent of Total
M 2nd Quarter Actual
Revenues
0 Fiscal Year Total
Actual Revenues
B Fiscal Year
Budgeted Revenues
FY 2001 FY 2002 FY 2003 FY 2004 FY 2005
$ 572,874 $ 334,858 $ 293,570 $ 312,998 $ 301,725
$ 1,286,276 $ 788,408 $ 713,064 $ 829,025
$ 900,000
44.54% 42.47% 41.17% 37.75% 33.53%
Recommended Budget Revisions: $20,000 Decrease
5
FY 2001 FY 2002 FY 2003 FY 2004 FY 2005
FINANCIAL OUTLOOK FY 2004/05
♦ 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 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.
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
The Town's Interest Income earnings have been
impacted negatively in recent years by both a
decrease in cash balances from the Town's
aggressive Capital Improvement Program and from
historically low interest rates.
There are encouraging indicators however as Local
Agency Investment Fund (LAIF) has risen to
2.134% at December 31 st, 2004 from its record low
of 1.42% in May of 2004. In addition, short term
treasury bills have risen to their highest level in
more than three years. The Town's Interest Income
is following along projected levels, therefore no
change to budget is recommended at this time.
Quarterly and Annual Revenues
5-Year History
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
❑O 2nd Quarter Actual
Revenues
❑Fiscal Year Total
Actual Revenues
® Fiscal Year Budgeted
Revenues
FY 2001 FY 2002 FY 2003 FY 2004 FY 2005
2nd Quarter Actual Revenues $ 1,461,312 $ 1,220,984 $ 562,609 $ 594,001 $ 513,339
Fiscal Year Total Actual Revenues $ 2,835,006 $ 2,267,979 $ 1,336,711 $ 1,027,554
Fiscal Year Budgeted Revenues $ 931,836
2nd Quarter Revenue Percent of Total 51.5% 53.8% 42.1% 57.8% 55.1%
Recommended Budget Revision No Change
6
FY 2001 FY 2002 FY 2003 FY 2004 FY 2005
FINANCIAL OUTLOOK FY 2004/05
♦ 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.
Analysis
Business License Tax revenue received in the
second quarter is primarily comprised of renewal
fees. "Gross Receipt" based revenues comprise
approximately 40% of the Business License Tax
fees while "Flat Fees" make up the other 60% of tax
revenue.
Tax receipts are tracking behind last year's
revenues at December 31 st, however strong January
receipts have reduced the shortfall. Although the
local economy is strengthening and indicates this
revenue will grow, staff conservatively
recommends a $65,000 revenue budget decrease to
more accurately align budget with revised
projections under current receipt levels.
Quarterly and Annual Revenues
5-Year History
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
O 2nd Quarter Actual
Revenues
❑ Fiscal Year Total
Actual Revenues
MFiscal Year
Budgeted R
FY 2001
FY 2002
FY 2003
FY 2004
FY 2005
2nd Quarter Actual Revenues
$ 428,772
$ 499,446
$ 450,284
$ 458,003
$ 396,773
Fiscal Year Total Actual Revenues
$ 1,000,281
$ 995,699
$ 970,554
$ 1,041,865
Fiscal Year Budgeted Revenues
$ 1,050,000
2nd Quarter Revenue Percent of Total
42.87%
50.16%
46.39%
43.96%
37.79%
Recommended Budget Revision $65,000 Decrease
7
FY 2001 FY 2002 FY 2003 FY 2004 FY 2005
FINANCIAL OUTLOOK FY 2004/05
♦ Franchise Fee
Description
Franchise Fees are collected by the Town for the
privilege of operating a utility service within Town
limits, and in lieu of collecting a 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.
Analysis
Second quarter results are trending moderately
higher than the prior year, another encouraging
indicator in the recovery of the local economy as
franchise fees are collected as a percentage of total
sales for garbage, cable television, electric and gas
utilities.
No change to budgeted revenue is recommended as
fees are tracking as expected.
Quarterly and Annual Revenues
5-Year History
$1,000,000
$900,000
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
s
p
~
a
E
i
o
,c`- M,
e
P,~ .
6
Fir
FY 2001 FY 2002 FY 2003 FY 2004 FY 2005
O 2nd Quarter Actual
Revenues
❑ Fiscal Year Total
Actual Revenues
® Fiscal Year Budgeted
Revenues
FY 2001
FY 2002
FY 2003
FY 2004
FY 2005
2nd Quarter Actual Revenues
$ 245,116
$ 267,296
$ 200,819
$ 239,294
$ 246,980
Fiscal Year Total Actual Revenues
$ 929,865
$ 990,861
$ 897,157
$ 930,997
Fiscal Year Budgeted Revenues
$ 957,000
2nd Quarter Revenue Percent of Total
26.36%
26.98%
22.38%
25.70%
25.81%
Recommended Budget Revision
No Change
8
RECOMMENDED BUDGET ADJUSTMENTS
FY 2004/05
General Fund budget adjustments are recommended for the following revenues and expenditures:
GENERAL FUND
FY 2004/05
Recommended
FY 2004/05
Current
Adjustment
Revised
Budget
Increase (Deer.)
Budget
Revenue:
Sales Tax
$ 6,900,000
$ 200,000
$ 7,100,000
Property Tax
4,952,893
148,775
5,101,668
Motor Vehicle In Lieu (State)
1,133,390
421,542
1,554,932
VLF Property Tax Backfill (State)
566,610
(249,542)
317,068
Hotel Tax
900,000
(20,000)
880,000
Passport Revenues
60,000
(25,000)
. 35,000
Business License
1,050,000
(65,000)
985,000
Building Permits
1,084,045
200,000
1,284,045
Planning Permits
540,000
(100,000)
440,000
SLESF funding
61,130
138,870
200,000
Insurance Claim Reimbursement
-
31,100
31,100
Encroachment Permits
60,000
70,000
130,000
Below Market Price Housing
48,100
17,000
65,100
Total Revenue Adjustments
Expenditures:
Legal Expenses (Burke Contr)
Transfer to Parking Management
Personnel Recruitment
Labor Relations Service
Insurance Claim Reimbursement
Below Market Price Housing
Total Expenditure Adjustments
Net General Fund Adjusted Budget
Recap of General Fund Revenue Adjustments:
$ 519,645
The suggested adjustments to Sales Tax, Property Tax, and Hotel Tax were explained earlier in this report.
Adjustments to other revenues shown above are explained below:
Motor Vehicle In Lieu (State) & VLF Property Tax Bacl~fzll (State): This adjustment is necessary to properly
reflect the division of the approximate $1.8 million of total Car Tax received by the Town into its two
categories, the Car Tax and the property tax "backfill" paid by the State. The State is using a portion of the
Town's remaining 1/3 of the Car Tax for county realignments, thereby lessening the amounts of VLF Car tax
revenue received but the loss is replaced by a equal increase in property tax "backfill" revenue.
$ 17,356,168 $ 767,745 $ 18,123,913
- 25,000
25,000
124,150 100,000
224,150
- 40,000
40,000
- 35,000
35,000
- 31,100
31,100
11,900 17,000
28,900
$ 136,050 $ 248,100 $ 384,150
9
Passports: The Town Clerks office recommends reducing this revenue estimate. Much of this reduction is due
to the US Postal Service now offering the same service to the community.
Business Licenses: The lowered estimate reflects activity for the first six months indicating a slower than
expected recovery to many gross receipts businesses located in the Town.
Building & Planning Permits: There is a recommended increase in these revenues to reflect increased revenue
received by the Community Development Department due to some larger projects coming on line in this fiscal
that have exceeded earlier staff estimates. Another factor was the adjustment to valuations used to establish fees
which was adjusted closer to actual construction costs as part of the 2004 Town User Fee update process.
Supplemental Law Enforcement Grant (SLESF): Staff anticipated the State would make a large reduction to this
grant funding source for public safety. Due to the efforts of local government officials, this vital source of funds
for public safety was restored to levels in the prior year of $200,000. This amount is composed of $100,000 for
Los Gatos and $100,000 for Monte Sereno.
Insurance Claim Reimbursements. Encroachment Permits. Below Market Price Housing. Each adjustment
recommended here for increase is due to receipts trending above staff estimates made in the FY 2004/05
adopted budget process.
Recav of General Fund Expenditure Adiustments:
Le gal Expense Buske Contract: Staff recommends this increase to appropriations of $25,000 which is necessary
to assist in the re-organization planning for the KCAT Board of Directors. Funds are available from a prior year
cable television lawsuit settlement.
Transfer to Parkin Program: Citation revenue is trending lower than staff estimates for FY 2004/05. Lower
revenues in this program necessitate a corresponding increase in General Fund subsidy, as this fund is on a self
balancing basis from year to year.
Personnel Recruitment and Labor Negotiations: These adjustments are necessary to fund the recruitment of the
Economic Vitality Manager and Human Resources Director positions. Additionally the Town utilized an
outside labor negotiator to reach a successful conclusion in the fall of 2004 approving Memorandums of
Understanding with two of the Town's employee bargaining units.
Below Market Priced Housing and Insurance Reimbursements: This adjustment is necessary to reflect
unanticipated legal and administrative costs associated with the repossession of a below market priced home
(108 Sierra Linda) and insurance claim expenditures. There is a matching offset in revenues that is
recommended to be increased to provide funding for this adjustment to expenditures.
10
Recap of Other Fund Revenue Adiustments:
FY 2004/05
Recommended
FY 2004/05
Current
Adjustment
Revised
OTHER FUNDS
Budget
Increase (Deer.)
Budget
Parking Management Fund:
Parking Citation Revenues
$
500,000
$
(100,000)
$
400,000
Transfer Revenue from Gen. Fund
$
124,150
$
100,000
$
224,150
Library Trust Fund:
Hooked on History Donations
$
-
$
50,000
$
50,000
Hooked on History Project Expenses
$
50,000
$
50,000
Grant Fund.
State Park Grant Revenues
$
-
$
597,331
$
597,331
Traffic Mitigation Fund:
Traffic Mitigation Revenues
$
-
$
70,000
$
70,000
Parking Management Fund: Citation revenue is trending lower than staff estimates for FY 2004/05. Lower
revenues in this fund necessitate a corresponding decrease in citation revenue estimates and a corresponding
increase in General Fund subsidy, as this fund is on a self balancing basis from year to year.
Library Trust Fund: The Town received unanticipated donations to the Library Trust for the Hooked on History
project. Staff recommends adjusting budget to reflect increased revenue from this source and an increase to
budgeted expenditures in like amount to fund the Hooked on History project.
Grant Fund: The increase in revenues reflects carry-forward necessary to bring forward State parks grant
revenues remaining from the prior fiscal year.
Traffic Mitigation Fund: Staff recommends increasing revenues recognized in this fund from deposits made to
the fund to fund Town-wide staff efforts in administering the traffic mitigation program.
11
FINANCIAL SUMMARIES, PROJECTIONS AND RECOMMENDATIONS
General Fund
As stated earlier in this report, the attached Schedule of FY 2004105 General Fund Operating Revenues vs.
Operating Expenditures presents budget to actual data for the second 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 trends observed through the second quarter.
Town of Los Gatos
Schedule of General Fund
Operating Revenues vs. Operating Expenditures
December 31, 2004
FY03/04
FY03/04
FY03/04
FY03/04
FY04/05
FY04/05
FY04105
FY04/05
FY04/05
Final
Adjusted
2nd Qtr
%
Adopted
Adjusted
2nd Qtr
%
Finance
Balance
Budget
Actuals
YTD,
Budget
Budget
Actuals
YTD
Projection
Revenues
General Property Tax
5,207,381
5,338,006
$ 2,297,420
43%
$ 4,952,893
$ 4,952,893
$ 2,497,953
50%
$ 5,101,668
Prop Tax Car Tax Backfill
-
-
-
-
$ 1,133,390
-
0%
$ 1,554,932
Sales & Use Tax
6,914,526
6,650,000
3,217,070
48%
6,900,000
6,900,000
3,179,238
46%
$ 7,100,000
Franchise Fees
930,997
896,400
239,295
27%
957,000
957,000
246,980
26%
$ 967,000
Transient Occ Tax
829,026
830,000
312,998
38%
900,000
900,000
301,725
34%
$ 880,000
Business License Tax
1,041,865
1,035,000
458,003
44%
1,050,000
1,050,000
396,773
38%
$ 985,000
Licenses & Permits
980,242
974,000
603,823
62%
1,317,055
1,317,055
910,289
69%
$ 1,567,050
Motor Vehicle In Lieu
1,298,455
1,232,000
572,331
46%
1,700,000
566,610
251,898
44%
$ 317,068
Intergovernmental
1,914,766
1,878,252
728,946
39%
1,670,135
1,754,135
715,639
41%
$ 1,912,293
Charges for Services
2,526,197
2,310,186
1,434,071
62%
2,734,725
2,734,725
1,977,825
72%
$ 2,585,855
Fines & Forfeitures
211,232
168,900
66,923
40%
174,950
174,950
66,252
38%
$ 151,055
Interest
1,027,554
1,153,000
594,001
52%
931,836
931,836
513,339
55%
$ 931,836
GASB investment to market per audit
(990,147)
-
-
Miscellaneous/Other
180,515
133,000
72,711
55%
156,078
156,078
156,623
100%
193,774
Find Transfers
368,322
318,820
300,326
289,920
289,920
285,119
329,920
Total Revenues
22,440,931
22,917,564
10,897,917
48%
23,734,592
23,818,592
11,499,652
48%
24,577,451
Authorized Use of Reserves
273,770
274,580
-
620,150
920,150
920,150
1,020,150
PERS Liability Reserve
-
-
-
300,000
300,000
300,000
300,000
Use of Internal Service Reserves - Yr 3
650,000
650,000
650,000
520,000
520,000
520,000
520,000
Total Use of Reserves
923,770
924,580
650,000
1,440,150
1,740,150
1,740,150
1,840,150
Total Revenues plus Reserves
$ 23,364,701
$ 23,842,144
$ 11,547,917
$ 25,174,742
$ 25,558,742
$ 13,239,802
$ 26,417,601
Expenditures (includes Of but no encumbrances)
Mayor & Council
136,865
143,700
65,159
45%
143,500
143,500
63,514
44%
140,630
Clerks
333,185
363,160
161,025
44%
335,410
335,410
165,219
49%
328,702
Attorney
221,414
230,060
114,547
50%
232,550
232,550
97,113
42%
227,899
Treasurer
76,668
56,560
24,097
43%
89,360
89,360
39,644
44%
87,573
Manager
1,839,812
1,911,740
923,562
48%
1,844,900
1,844,900
881,116
48%
1,908,002
Comm Development
2,263,190
2,455,768
1,200,451
49%
2,743,110
2,743,110
1,251,322
46%
2,688,248
Parks & Public Works
4,638,683
4,945,684
2,324,112
47%
4,441,290
4,446,290
2,116,607
48%
4,388,364
Police
9,160,567
9,062,584
4,510,103
50%
9,928,675
9,928,675
4,688,556
47%
9,730,102
Community Services
931,909
978,263
548,584
56%
934,430
934,430
379,668
41%
927,941
Library
1,833,387
1,805,470
918,429
51%
1,816,365
1,816,365
826,297
45%
1,780,038
Total Dept Expenses
$ 21,435,680
$ 21,952,989
$ 10,790,070
49%
$ 22,509,590
$ 22,514,590
$ 10,509,054
47%
$ 22,207,498
Non-Dept Expenditures and other uses
General Government
1,918,358
2,197,221
576,545
26% 2,665,152
2,960,152
709,171
24%
3,060,152
Total Non-Dept Expenses
$ 1,918,358
$ 2,197,221
$ 576,545
26% $ 2,665,152
$ 2,960,152
$ 709,171
24%
$ 3,060,152
Total Operating Expenditures
$ 23,354,038
$ 24,150,210
$ 11,366,615
47% $ 25,174,742
$ 25,474,742
$ 11,218,225
44%
$ 25,267,650
Net Operating Revenues Before Capi
tal Trsfrs
& Budgeted Beg Fund Balance
$ 10,663
$ (308,066)
$ 181,302
$ -
$ 84,000
$ 2,021,577
N/A
$ 1,149,951
Authorized Use of Reserves
-
2 Yr One-time State Take
-
-
-
421,000
421,000
421,000
421,000
Parking Management Program
198,770
199,580
124,150
124,150
124,150
224,150
Capital Projects
75,000
75,000
75,000
75,000
75,000
75,000
Animal Shelter
300,000
300,000
300,000
Total Budgeted Use of Reserves
273,770
274,580
-
620,150
920,150
920,150
1,020,150
Net Surplus or (Use) of Reserves
(263,107)
(582,646)
181,302
(620,150)
(836,150)
1,101,427
129,801
12
All Other Funds
Guide to Presentation:
Each of the following presentations groups financial summaries by governmental 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. 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 2004105.
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.
As discussed in the adopted budget, FY 2004/05 is the third year of implementation of the parking program.
Citation revenues are trending below estimates, necessitating an approximate $100,000 increased subsidy from
the Town's General Fund. Staff is continuing to evaluate and fine-tune 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
Sewer
Operating
Fund
Waste
Grants
Source
Maint.
LIDs
Grants
Beginning Fund Balance (Pre-audit)
-
319,109
1,014,995
170,019
-
81,726
22,047
Budgeted Revenues
669,750
149,585
135,416
158,570
543,590
44,050
9,496
Actual Revenues - 2nd Qtr
191,314
63,964
15,074
156,573
543,590
37,975
14,160
Budgeted Expenditures
669,750
331,738
336,716
158,570
543,590
52,713
42,535
Total Actual Expenditures - 2nd Qtr
291,557
120,377
42,469
85,301
292,597
25,356
9,259
2nd Quarter Ending Fund Balance
(100,243)
262,696
987,600
241,290
250,993
94,345
26,948
Capital Proiects 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 CIF's Fund, Storm Drains Fund,
Utility Undergrounding Fund, and the Gas Tax Fund. Capital Project Funds are tracking in accordance with the
FY 2004/05 adopted budget. Staff is recommending no changes at this time.
In developing the FY 2004/05 capital program, staff reviewed 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 $75,000 commitment to
the Town's Capital Improvement Plan for this year.
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). Traffic Mitigation fund deficits will be
erased by recognition of revenues held on deposit used for Town-wide traffic mitigation activities.
13
Capital Project Funds
Budget to Actuals Comparisons
Beginning Fund Balance
Budgeted Revenues
Actual Revenues -2nd Qtr
Budgeted Expenditures
Total Actual Expenditures - 2nd Qtr
2nd Quarter Ending Fund Balance
GFAR
Traffic
Grant Fund
Storm
Utility
Gas
Fund
Mitigation
CIP's
Drains
Undergd
Tax
4,002,603
40,704
35,403
780,312
1,873,570
498,238
156,500
5,000
805,000
132,400
102,000
442,000
70,201
-
-
98,301
39,614
292,103
1,606,467
50,000
1,596,035
127,574
-
550,475
307,387
58,860
342,271
-
-
123,183
3,765,417
(18,156)
(306,868)
878,613
1,913,184
667,158
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 2004/05 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.
Internal Service Funds
Budget to Actuals Comparisons
Equipment
Workers
Self
Office
MmgtInfo
Vehicle
Building
Replacemt
Comp
Insurance
Stores
Systems
Maint.
Maint.
Beginning Fund Balance
3,268,727
1,719,090
1,822,304
218,253
2,225,583
165,812
750,811
Budgeted Revenues
442,165
575,515
472,200
92,000
755,300
459,100
1,028,400
Actual Revenues - 2nd Qtr
221,100
286,979
250,511
40,981
410,949
229,550
497,143
Budgeted Expenditures
1,013,940
696,024
591,100
92,000
1,211,900
459,245
1,028,530
Total Actual Expenditures - 2nd Qtr
536,594
447,622
479,328
32,990
231,599
206,295
359,253
2nd Quarter Ending Fund Balance
2,953,233
1,558,447
1,593,487
226,244
2,404,933
189,067
8889701
Trust and Akency Funds - Town Trust and Agency Funds have fund balances as of June 30, 2004 of $301,302
for Parking District #88 and $249,376 in the Library Trust Funds. One budget adjustment was recommended
for the Library Trust Fund for donations to the Hooked on History project.
Redevelopment Agency - The Agency's FY 2004/05 and FY 2004/05-2008/09 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 $2.4 million dollars of
remaining unexpended funds from the Agency's $10.7 million dollar 2002 COP issue. The remaining 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 Downtown Street Reconstruction ($1.6 million), Downtown Parking
Management Plan ($240K), Alley Improvements ($150K) and Santa Cruz Avenue/Wood Road Gateway
($50K).
14
Redevelopment Agency Funds
Budget to Actuals Comparisons
Capital
Debt
Low/Mod
Total
Projects
Service
Housing
RDA Funds
Beginning Fund Balance
3,500,385
4,144,431
3,356,098
11,000,914
Budgeted Revenues
590,750
3,360,970
972,165
4,923,885
Actual Revenues - 2nd Qtr
305,397
1,403,517
460,154
2,169,068
Budgeted Expenditures
3,000,752
3,518,184
261,650
6,780,586
Total Actual Expenditures - 2nd Qtr
477,385
957,156
194,410
1,628,951
1st Quarter Ending Fund Balance
3,328,397
4,590,792
3,621,842
11,541,031
Since 1992 redevelopment agencies across the state have been required to make Educational Revenue
Augmentation Fund (ERAF) payments to the State. In accordance with the State budget agreement, the ERAF
payment was increased for FY 2004/05 & FY 2005/06. The Agency's ERAF payment for this year and next
year is estimated to be $303,000 annually, compared to $209,975 due to the State the prior year. The ERAF
payment is anticipated to be made from RDA fund balance.
Proposition lA did 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. There still exists however the potential for the State to
reallocate revenues at its sole discretion, though agencies would probably raise a legal challenge were the State
to implement additional "takes." Some experts have speculated that the estimated payments currently at
$303,000 could escalate to nearly $700,000 annually in the years following FY 2005/06.
It is important that the Town continue to monitor developments in the state budget process to discourage 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 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
Second Quarter 2004/05 revenue trends are certainly encouraging, with net revenues forecast to add a small
surplus at year end. However, based on the recent update of the Town's Five-Year Financial Plan the Town is
once again facing a challenge in aligning FY 2005/06 operating revenues and expenditures. The Town
anticipates using a multi-pronged effort involving cost reduction, revenue enhancements, bridge-funding for
"one-time" uses, and potential re-structuring of service delivery/program cost centers to achieve cost efficiencies
and potentially increasing service levels to the community. The Town continues to possess strong reserve fund
balances in the General Fund with $10.6 million in designated reserves, including the Reserve for Economic
Uncertainty which remains intact in the amount of $3,678,000.
The Town's overall financial strength enables it to effectively manage the current economic downturn and its
associated revenue reductions through careful monitoring of revenue and expenditure trends and acting pro-
actively before a financial crisis presses upon the Town. Staff continues to closely monitor all current year
revenue and expenditure activity, mindful of the necessity to balance operating revenues with operating
expenditures. The Town must also be aware of the need to develop appropriate revenue sources for on-going
operating and capital needs of the community for the future.
15