Loading...
10 Staff Report - 2005/06 Mid-Year BudgetMEETING DATE:3/06/06 ~°WN 0 ITEM NO. 10 COUNCIL/AGENCY AGENDA REPORT DATE: MARCH 6, 2006 TO: MAYOR AND TOWN COUNCIL/ CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY FROM: TOWN MANAGER/EXECUTIVE DIRECTOR SUBJECT: 2005/06 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT- SIX MONTHS ENDING DECEMBER 31, 2005. A. ACCEPT 2005/06 MID-YEAR SECOND QUARTER BUDGET PERFORMANCE STATUS REPORT, INCLUDING FY 2006-11 FIVE- YEAR FINANCIAL PROJECTIONS. B. AUTHORIZE BUDGET ADJUSTMENTS AS RECOMMENDED IN THE ATTACHED SECOND QUARTER BUDGET PERFORMANCE REPORT RECOMMENDATION: 1. Accept the 2005/06 Mid-Year Budget Performance and Status report, including FY 2006/11 Five Year Financial Projections. 2. Authorize budget adjustments as recommended in the attached second quarter budget performance report (Attachment 1). PURPOSE: The purpose of this report is threefold. First, to inform the Town Council on the status of the Town's FY 2005/06 adopted budget at the mid -year point. Second, to provide the Town Council with staff's most recent 5 year budget forecast which is being used to inform the evolving budget status for FY 2006/07 and beyond. Third, to recognize the prior budgetary actions that have led to the Town's present positive fiscal condition, with forecasts projecting operating revenues above expenditures for the next three years assuming the projection models hold. Although this is very good news, this report also acknowledges and discusses the Town's longer term fiscal challenges and potential vulnerabilities. PREPARED BY: NWAY Finance & Administrative Services Director SC:pg NAMGR~AdminWorkFiles\Annual Budget\2005-06 Mid Year.wpd Reviewed by: Assistant Town ManagerTown Attorney Clerk Administrator Finance Community Development Revised: 3/3/06 2:32 pm Reformatted: 5/30/01 PAGE 2 MAYOR AND TOWN COUNCIL/ CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY SUBJECT: 2005/06 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX MONTHS ENDING DECEMBER 31, 2005 MARCH 3, 2006 THE REPORT: The report includes the following: • A mid-year FY 2005/06 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 2006-11) to provide a context for FY 2006/07 budget development. • A briefing on staff's rationale used in recommending to Town Council that the Town prepare a "status quo" budget scenario for FY 2006/07, and an explanation of how staff is defining "status quo" for the Town's operating budget. • A discussion of the Town's current positive financial condition, including a brief review of past Town budgetary decisions which have contributed to a positive revised financial forecast over the next couple of years. • As requested during the Town Council's January 2006 retreat, a review of the Town's fiscal vulnerabilities, including two future revenue reduction scenarios and their potential impacts to the Town's operating budget should these scenarios ever become a reality. The report also includes a discussion of the challenges in finding a dependable revenue source to maintain the Town's infrastructure and capital program into the future. DISCUSSION: FY 2005/06 MID YEAR BUDGET STATUS: Budget Performance Report The Budget Performance Report (Attachment 1) is a mid-year report covering the six months beginning July 1, 2005 and ending December 31, 2005. 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 of the fiscal year, staff has more information available than at the time of the first quarter report presented to Council on October 17, 2005, 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, Transient Occupancy Tax, Vehicle License fees (Car Tax), Business License Tax, Fees and Charges and Interest Income. This information aids in providing the status of the revenues PAGE 3 MAYOR AND TOWN COUNCIL/ CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY SUBJECT: 2005/06 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX MONTHS ENDING DECEMBER 31, 2005 MARCH 3, 2006 adopted to support the FY 2005/06 operating budget. Furthermore, the Town Council is advised of any recommended changes to estimated revenues or expenditure appropriations included in the Town's FY 2005/06 adopted budget. General Fund Revenue Increases There are some additional favorable developments this fiscal year in the Town's General Fund adopted revenues. Overall, total General Fund estimated operating revenues for the current year are continuing to track ahead of the adopted budget estimates. Highlights of new mid-year recommended budget adjustments to reflect these positive revenue changes include: • A $487,000 increase in estimated Sales Tax from $7,313,000 to $7,800,000. • A $208,730 increase in estimated property tax from $5,459,780 to $5,668,510. • Other revenue increases combine for the remaining $363,350 of net increases to General Fund revenues for the fiscal year. Included are adjustments of $291,270 for the Car Tax (VLF) property tax backfill. • Transient Occupancy Taxes are also increased by $80,000 from $870,000 to $950,000. More detailed information and analysis of each of the above revenue highlights is presented in the Budget Performance Report (Attachment I). General Fund Operating Revenue Declines Though there is a recommended increase to the General Fund operating revenues this fiscal year, there are also some recommended decreases to General Fund revenues. Highlights of revenues recommended for decrease include: • The Police Department fingerprinting fees will be revised downward by approximately $173,0000 due to lower levels of fingerprinting services provided by the department than expected, reducing the estimates for the year from $214,200 to $42,000. Fortunately, staff expects an associated $113,200 reduction (of the $173,000 total reduction) to the Town's Department of Justice fingerprinting expenditures for the year as this revenue is a "pass through" revenue where expenditures occur only if fees are collected. • $84,000 in state booking fee reimbursement will be reduced due to a State budget decision to eliminate its booking fee' reimbursement program for local governments this year. In eliminating the book fee revenue to local governments, the State did offer some cost savings to the Town by lower the-booking fees charged by the County to the Town. The fees will be $42,000 which is half the amount billed to the Town last fiscal year. PAGE 4 MAYOR AND TOWN COUNCIL/ CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY SUBJECT: 2005/06 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX MONTHS ENDING DECEMBER 31, 2005 MARCH 3, 2006 General Fund Operating Budget Current Year Trends Staff is encouraged by the fact that expenditures in many Town departments are trending 4-5% 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 at year end above and beyond increases to operating revenue estimates. Though the trends at mid-year indicate the potential for a positive increase in operating revenues, there may be additional revenue impacts that are not known at this time for the remaining four months of this fiscal year. The attached Budget Performance and Status Report (Attachment 1) 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 1 reflect the revised revenue projections as described in this report. Status o State Bud epactsefor FY 2006107 Known at Mid-Year The Governor's January 2006 proposed state budget did not envision any additional state takes from local governments for FY 2006/07, but until a final budget is approved, the potential for them exists. In addition, the Governor's budget also proposes to fund some revenues lost or threatened to be lost such as the Citizen's Options for Public Safety (COPS) grant in FY 2005/06, which was initially de- funded by the State but restored due to strong efforts made by local governments in the prior year's state budget funding decisions. Examples for state funding proposed in the Governor's FY 2006/07 budget include the COPS grant, a change in the administration of County booking fees, State Mandated Cost reimbursements, and fall funding for Proposition 42 transportation funds. The proposed restoration of funding for these intergovernmental revenues is good news. Nonetheless, supplemental state revenues such as the COPS grants, supplemental law enforcement grant monies, and Prop 42 funds among others, which are not specifically protected by Proposition lA remain vulnerable to State "takes" each budget year. Regarding Prop 42 gas taxes, a petition drive for a State ballot initiative to protect Proposition 42 funds is currently underway. The Town Council has an agenda item requesting Council support of the initiative on its March 6, 2006 meeting agenda. Status of FY 2005106 Adopted Budget Police Positions Deferred Item When the Town Council adopted the FY 2005/06 budget, a funding decision regarding two vacant de-funded Police Officer positions was deferred until the mid-year FY 2005/06 for further Council consideration. During this fiscal year, the Police Department implemented a significant change in staffing shifts. Early feedback regarding the shift change indicates that no immediate action is required at mid year to address these positions. A workload and shift review currently underway will help to inform any future funding considerations as part of the recommended FY 2006/07 budget process. PAGE 5 MAYOR AND TOWN COUNCIL/ CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY SUBJECT: 2005/06 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX MONTHS ENDING DECEMBER 31, 2005 MARCH 3, 2006 Status ofProiected FY 2005/06 General Fund Year End Balances As in the previous fiscal year, the projections for this fiscal year shown in the FY 2005/06 "Estimated" column of the Five Year Financial plan anticipate an excess of operating revenues above operating expenditures of approximately $182,000, not including the use of reserves or "one-time" revenues. This is a very positive projection for the General Fund as the adopted budget called for using "one-time" reserves to fill a prof ected budget gap of approximately $1.1 million. If projections at mid-year hold true, the filling of the projected gap will not require reserve funding but can be funded through fiscal year operating revenues. The ability to use operating revenues versus reserves is explained largely by sales tax collections exceeding estimates -($487, 000), property taxes collections exceeding estimates ($208,000), and Car Tax property tax backfill collected by the State exceeding estimates made last spring ($292,000). PRIOR YEAR BUDGET BALANCING RESULTS AND RESERVE POLICIES Budget reduction efforts to date: The positive financial forecast is in part due to the fact that since FY 2000/01 the Town has been actively addressing the budget challenges facing the Town. 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: Since 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, cumulative expenditure reductions or revenue enhancements of approximately $4.5 million dollars have been made. • Part of the total cumulative savings was obtained from approximately 29 full time equivalent positions that were either de-funded or deleted from the Town's operating budget totaling nearly $2.9 million dollars to date. Excess of Operating Revenues Above OperatingEExpenditures As Council is aware, the availability of excess balances resulting from fiscal year expenditure reductions or increases in revenue estimates beyond the adopted budget is one important funding source for future operating and capital budgets. The current Town reserve policy deposits half of the excess balances into the Reserve for Future Capital and Special Projects and half to the Reserve for Revenue Stabilization. The current balances at mid-year are approximately $2.4 million and $1.9 million, respectively. PAGE 6 MAYOR AND TOWN COUNCIL/ CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY SUBJECT: 2005/06 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX MONTHS ENDING DECEMBER 31, 2005 MARCH 3, 2006 The Revenue Stabilization Reserve was established in the FY 2005/06 budget as a funding source for the Town to pro-actively implement more efficient organizational structures, explore new service delivery options, provide partial "bridge" funding during short term transitions of businesses that may temporarily reduce sales taxes until a new use is in place, and to allow time for new initiatives and programs to become more fully formed. This budget development year, staff will likely recommend that Council consider some use of Revenue Stabilization reserves as potential sources of bridge funding for next fiscal year. The availability of bridge funding from the Revenue Stabilization Reserve enables the Town to use a longer planning horizon to bring services in line with ongoing available resources. This strategy has been used by the Town the last four years and has served as a vital tool in preserving basic services to the community while simultaneously making incremental organizational adjustments to align services with revenues over time. The Town's guiding philosophy is that the use of reserves or other sources of bridge funding needs to be done strategically, ensuring that these funding sources are not used to fund the ongoing cost of services that are not eventually supported by ongoing operating revenues. FIVE YEAR FINANCIAL PROJECTIONS UPDATE: Setting the stage for FY 2006/07 budget development, staff recently updated the Town's Five Year Financial Plan spanning fiscal years 2006/07 through 2010/11. The updated plan forecasts a balanced scenario for the next three years and revenue shortfalls approaching approximately $400K in FY 2010/11 and approaching $1 million in FY 2011/12 in year six of the plan (only the most recent five years are presented in this report). The future shortfall projections are based upon conservative but realistic revenue growth estimates in key current revenue categories and forecasted increases in the costs to deliver current services to the community based upon actual expenditure patterns. As in every year, the forecast is dependent upon the stability of economically sensitive local revenue sources such as sales tax, and assumes no significant loss of major sales tax contributors during the forecast period, other than those reasonably planned for in the projections based upon current information. The updated five year forecast of revenues is presented optimistically with varying growth rates, on average 5% for tax revenues and 3% for fees for services, with some provisions made for changing dynamics in the Town's local economic revenue base. Expenditures are derived from a database using actual costs adjusted 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. PAGE 7 MAYOR AND TOWN COUNCIL/ CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY SUBJECT: 2005/06 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX MONTHS ENDING DECEMBER 31, 2005 MARCH 3, 2006 In any given year of the plan where a shortfall is projected the plan assumes that budget actions will be taken to eliminate the revenue shortfall beginning in FY 2009/10 and then into FY 2010/11 through the use of "permanent" fixes. A permanent fix would reduce the level of shortfall in the following fiscal years on an ongoing basis. It is possible to make some adjustments through one- time solutions or prudent use of bridge funding on a year-to-year basis. However, as has occurred over the last four years, 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 five year plan is presented below. A presentation guide is attached as Exhibit A that can be used as an aid to understanding the projections data that is presented in each fiscal year. Town of Los Gatos General Fund Five Year Financial Plan FY 2006/07 Through FY 2 010111 Summary Data ACTUAL ADOPTED ESTIMATED PROJECTEC PROJECTED PROJECTEC P ROJECTED PROJECTED Revenue Summary 2004-05 2005-06 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Sales Tax $7,904,129 $7,313,000 $7,800,000 $7,646,000 $7,875,300 $8,111,600 $8,354,900 $8,605,600 Property Tax 5,302,061 5,459,780 $5,668,510 6,369,900 6,614,200 6,868,000 7,131,900 7,405,200 Charges for Services 2,920,356 2,973,570 $2,932,010 3,113,400 2,889,400 2,928,200 2,970,000 3,014,400 Business Licenses 1,056,814 1,000,000 $1,000,000 1,000,000 1,015,000 1,030,200 1,045,700 1,061,400 Car Tax/VLF Prop Tax Swap 1,554,932 1,632,110 $1,923,380 1,879,500 1,935,900 1,994,000 2,053,800 2,115,400 Intergovernmental Rev. 2,316,962 2,135,750 $2,235,250 2,087,683 2,111,585 2,148,263 2,191,350 2,236,075 Other Lic. and Permits 1,360,390 1,577,180 $1,580,600 1,612,500 1,643,400 1,675,000 1,707,300 1,740,200 Investment Earnings 905,704 1,018,750 $1,128,750 1,205,700 1,241,800 1,279,100 1,311,000 1,343,800 Franchise Tax 942,648 983,450 $983,450 998,500 875,850 902,700 930,400 959,000 Hotel/Motel Tax 868,908 870,000 $950,000 930,000 957,900 986,600 1,016,200 1,046,700 Fines & Forfeitures 580,937 566,700 $462,300 462,500 464,500 466,500 468,500 470,600 Transfers 494,165 492,710 $358,430 256,450 256,450 256,450 256,450 256,450 Miscellaneous 247,958 228,500 $287,600 225,300 226,700 228,100 229,600 231,100 Total Revenues 26,455,964 26,251,500 27,310,280 27,787,433 28,107,985 28,874,713 29,667,100 30,485,925 Town Expenditures Salary 11,415,065 12,274,900 12,274,900 12,577,123 13,280,31.1 13,788,238 14,308,996 14,820,514 Elected Officials 22,590 23,300 23,300 23,340 23,340 23,340 23,340 23,340 Temporar Emplo ees v 353,871 366,800 366,800 380,204 400,908 421,640 442,371 463,102 Overtime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 494,170 . . . . . . . . . 364,400 364,400 401,498 413,427 432,188 451,400 471,500 Other Salary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 572,258 . . . . . . . . . 219,500 219,500 144,134 148,337 155,502 162,512 169,872 Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,101,626 . . . . 5,262,700 5,262,700 5,000,704 5,206,614 5,473,839 5,744,602 6,042,925 Supplies, Materials, & Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,256,678 . . . . . . . . . 4,077,762 3,810,562 3,887,700 3,720,100 3,807,900 3,901,900 4,003,400 Grants & Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177,578 176,415 175,415 176,400 176,400 176,400 176,400 176,400 Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409,610 . . . . . . . . . 371,510 371,510 394,400 418,800 444,700 472,300 501,700 Fixed Assets - 176,000 176,000 - - - - - Internal Service Charges 2,820,428 2,843,200 2,843,200 2,901,500 2,961,100 3,022,100 3,084,400 3,148,100 Debt Service _ T mm 930,710 931,800 931,800 931,800 931,850 931,100 929,050 932,100 Operating Transfers Out m 182,876 157,500 157,500 - - - - - ^ GFAR Capital Transfers Out 75,000 150,000 150,000 150,000 150,000 150,000 150,000 150,000 Total Expenditures 24,812,461 27,395,787 27,128,587 26,968,802 27,831,186 28,826,946 29,847,270 30,902,953 Net Revenues Less Expenditures * 1,643,503 (1,144,287) 181,693 818,631 276,799 47,767 (180,170) (417,028) **Authorized Use of Reserves 657,784 1,219,650 607,650 450,000 450,000 450,000 450,000 450,000 Ongoing Shortfall Mitigation Revenues Over(Under)Exp. 1,643,503 75,363 789,343 1,268,631 726,799 497,767 269,830 32,972 Revenue Shortfall as a % of Operating Revenues -0.60% -1.35% * In FY 2004/05 actuals, excess of revenue over expendit ures result of "one-time" revenue recoveries and revenue exceeding estimates. FY 2005/06 Adopted budgeted a revenue shortfall filled by use of reserves for "one-time" expen ditures or revenue loss. FY 2005/06 revenues are now estimated to to be sufficient to eliminate need for use of "one-time" reserves as portrayed in FY 2005/06 Estimated column. Use of reserves for "one-time" use in e xpenditures. Examples in FY 2005/06 Adopted include $476,000 in Reserves for State 2 Yr. Prop-Tax Take and scheduled rebates of Internal Service Fund from prior years ($312,000), and revenue for PERS market related spike ($300,000). PAGE 8 MAYOR AND TOWN COUNCIL/ CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY SUBJECT: 2005/06 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX MONTHS ENDING DECEMBER 31, 2005 MARCH 3, 2006 FIVE YEAR PLAN UPDATE IMPLICATIONS-TRENDS & CHALLENGES The update to the Five Year financial forecast confirms the Town was wise to begin strategic cost reductions dating back to FY 2001/02, with cumulative expenditure reductions and revenue enhancements (fee for service) of approximately $4.5 million. The efforts have taken a multi- pronged approach to achieve operational efficiencies, cost reductions, and exploration of alternative methods of service delivery options by the Town. Though the Town remains strong fiscally, challenges still exist as explained in the following discussion of available operating revenues and the cost of delivering services to the community. Revenues Recovery in Economically Sensitive Revenues. The financial projections assume modest growth will be experienced by the Town in revenues such as Sales Tax, Business License Tax and Hotel Tax, among others. If this scenario does not materialize, then the revenue shortfall could exceed the forecasted amounts. The Town's Sales Tax base diversity are of continuing concern. Though the FY 2005/06 projections are encouraging, the Town's current lack of diversity in the sales tax mix continues to be a concern. The current sales tax generators by category are presented in the pie chart below: Town Sales Tax Mix Annual Sales Tax Total $ 7.3 Million Others, 39% Netflix, 18% A uto Dealers, 23% Dow ntow n 20% ®NetFlix $1.3M Auto Dealers $1.7M p Dow ntow n (Excluding gas stations) $1.5M mothers $2.9M PAGE 9 MAYOR AND TOWN COUNCIL/ CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY SUBJECT: 2005/06 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX MONTHS ENDING DECEMBER 31, 2005 MARCH 3, 2006 Another way to portray the sales tax contributors is to present them in terms of their relative share of the Town's General Fund operating budget as depicted below: Sales Tax Contributors Expressed as a %ofTotal General Fund Operating FY 2005/06 Budget $26.3 Million Others Netflix 4.89% 10.97% Q~) Auto Dealers 6.30% Dow ntow n 5.61% A challenge to the sales tax base is the portion attributable to the Town's auto dealerships, two of which announced recently they were closing. As depicted in the first chart, the Town's auto dealerships account for approximately 23% 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 our largest provider of sales tax annually, contributing nearly 20% of the Town's sales tax collections. Having a well balanced sales tax base continues to be an important objective so the Town can better weather the effects of economic cycles and their impact on the ability to deliver services to the community. State Budget Impacts to the Town are also unknown. The Governor's budget delivered in January 2006 did not propose any additional state "takes" in the State's FY 2006/07 budget; which is positive news for local government. But the threat they may occur is a constant reality for the Town each fiscal year. As stated earlier, Proposition 42 state gasoline taxes were proposed in Governor's January 2006 budget to be fully funded in 2006/07, but they continue to be subject to potential suspension by the State to balance any future General Fund operating budget deficits. A significant mitigating factor to preserve the Town's revenues from further takes was the successful approval of Proposition IA, passed overwhelmingly by California voters to protect local tax revenues for local services. Fees & Charges- 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 to recover the cost of specialized services. This will ensure that public subsidies are not created for private development and other specialized services provided to the Town's customer base. In that regard, staff annually examines and brings forward for Town Council approval of a comprehensive fee review as part of the budget process. Staff will also continue its evaluation of internal costs related to Town support of special events and will discuss with the Council the desired policies regarding objectives of cost recovery. PAGE 10 MAYOR AND TOWN COUNCIL/ CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY SUBJECT: 2005/06 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX MONTHS ENDING DECEMBER 31, 2005 MARCH 3, 2006 Costs to Deliver Town Services While the Town's operating revenues are starting to show improvement and modest growth in most categories, the update to the Five Year Plan continues to point out that the costs to provide services to the community must continue to be managed effectively with an eye to the future. Salary & Benefits-Town government is responsible for providing services to residents which depend on people to deliver them whether through Town employees or service contracts. As typical in either the public or private sectors, a large percentage of the costs in a service industry is attributable to labor. Labor costs 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 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 recent years, the Town, like all California cities, has experienced a significant increase in the employer's share of its public retirement system contributions. The adoption in 2000 of a new safety employees retirement formula (3% at 50) and several years of negative investment returns in the State of California PERS pension system have resulted in increases in retirement contributions paid by the Town. Based upon estimates obtained in the summer of 2005 from PERS and the Town's actuarial consultant, the Town's contribution toward retirement for Sworn Personnel was expected to remain at historically high levels. Rates anticipated for non-sworn employees are forecasted to be slightly lower than the current year, declining from 13.813% of covered payroll to 12.663%. Conversely, the rates for sworn are expected to rise next year from 32.557% to 33.990% of covered payroll. The Five Year Forecast assumes these higher rates into the foreseeable future, which is an important factor in the Town's inability for operating revenues to keep pace with operating expenditures. Again consistent with national trends, health care costs continue their upward trend, with increases of 16-20% annually over the past several years. Recent agreed upon changes in labor contracts between the Town and its represented employees and with non-represented groups such as management are "holding the line" against automatic escalation of health costs. This is reflected by the capping of 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 a competitive employer in order to attract and retain a qualified workforce. PAGE 11 MAYOR AND TOWN COUNCIL/ CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY SUBJECT: 2005/06 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX MONTHS ENDING DECEMBER 31, 2005 MARCH 3, 2006 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 have been and will continue to be taken to examine Town-wide energy costs and look for ways to manage energy use and control costs. 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. Infrastructure- An important point to note is that the Five Year Plan includes a yearly transfer of $150,000 from the General Fund for the Town's capital program. This annual transfer and the current $3.5 million accumulated in the General Fund Appropriated Reserve for capital are programmed already for fixture capital projects. This level of funding does not support the Town's need for infrastructure maintenance or new facilities. For example, the street resurfacing program requires an approximate annual investment of $1.5 million dollars to keep the Pavement Condition Index from declining. However, the Town's only ongoing source of street maintenance funding is the Town's Gas Tax fund. Gas taxes produce approximately $500,000 per year which is not sufficient to maintain the Town's street condition at acceptable levels. A dedicated source of funding for basic capital improvements beyond these means remains a goal for the Town. 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 is an important first step in this decision process. PROPOSED STATUS QUO BUDGET TARGETS FY 2006/07 As presented in the Five Year Financial Plan, the projections for next year indicate a moderate excess of operating revenues over expenditures. Consequently, staff is recommending the Town prepare a "status quo" budget for FY 2006/07. This recommendation is the result of recent positive economic developments, coupled with a proactive Town effort to reduce operating budget costs, retain and protect vital revenue sources, and to align organizational services with projected revenue streams. While much has been accomplished, the updated five year financial plan indicates that more must be done to ensure a balance between the cost of service delivery and the revenues needed to accomplish that service delivery going into the future. PAGE 12 MAYOR AND TOWN COUNCIL/ CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY SUBJECT: 2005/06 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX MONTHS ENDING DECEMBER 31, 2005 MARCH 3, 2006 The recommended "status quo" budget scenario means that departments will be developing proposed budgets for FY 2006/07 that fund the current levels of service now in place. Inflationary-related increases to contractual services per long term agreements between the Town and its vendors will be incorporated into the budget to accommodate their costs. Any requests for enhancements to service levels beyond current benchmarks will be reviewed with the goal in mind that any new proposal brought forward be either cost neutral, have an associated ongoing revenue source or have a revenue/funding strategy to offset increased costs. At the same time, the Town Manager will evaluate service deficiencies which could exist due to the last four years of budget reductions. Areas of concern will be brought to Council's attention during the budget process. Mindful of the projected future revenue shortfalls in the out years of the plan, the status quo budget will provide more time for the Town to study opportunities for cost sharing, re-structurings, public/private partnerships, joint ventures, revenue enhancements and alternative service delivery options that may deliver services at a lower net cost to the Town. VULNERABILITIES AND THEIR FINANCIAL IMPLICATIONS At its January 2006 Town Council retreat, a request was made for staff to provide information on the impact to Town service delivery resulting from two "what if' revenue reduction scenarios. The first scenario assumes the loss in the future of a major sales tax contributor, the second adds more losses of sales tax contributors that effectively double the loss scenario generated in the first scenario. As shown in the five year plan, current service levels have associated revenue challenges in the long run. The plan assumes that some of the key revenue sources such as the internet commerce retailers or the automobile dealerships will continue to contribute a large portion of the Town's sales taxes. However, if this assumption were to change and these businesses no longer were a continuing major revenue source for the Town, current service levels to the community would be in jeopardy. To better understand what that could mean, staff examined two "what if' scenarios of sales tax loss, one at 5% or approximately $1.3 million, the other at 10% or approximately $2.6 million. These scenarios could be the result of losses derived from any combination of setbacks in the local economy. While there is no current indication that either the first or second scenarios will materialize, staff believes it is important to explore the implications of such a potential in terms of the effects on current service levels now being provided to the community. Included as Exhibit B are examples of adjustments that would be necessary should either scenario become reality in the future. The examples show the impacts should all the adjustments be made through equal reductions in each department. In actuality, reductions would take into consideration priority services and thus potentially not be spread across departments equally. PAGE 13 MAYOR AND TOWN COUNCIL/ CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY SUBJECT: 2005/06 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX MONTHS ENDING DECEMBER 31, 2005 MARCH 3, 2006 Many of the reductions taken in the past years have resulted from a reduction in workforce and through operational efficiencies departments have been able to develop. These reductions, though difficult, have been well managed and implemented by Town staff to make them fairly seamless to the community in terms of service level impacts. It will be extremely challenging to adjust service levels under either the 5% or 10% scenarios without the community becoming very aware of these changes in service delivery. Should these conditions develop in the future, staff will continue to seek new and creative ways to deliver services within the constraints of the new revenue realities, but the current services the community now enjoys will be reduced. Staff intends to discuss service level priorities with Council as part of the May preliminary budget presentation. Staff will also continue its proactive efforts to retain and attract businesses that provide services to the community and also provide operating revenues to the Town, such as the Town's automobile dealerships, which represent approximately 23% of the Town's sales tax annually. WHERE WE ARE TODAY AND CONTINUING CHALLENGES AHEAD The Town finds itself today in sound financial condition. This status is the result of strategies we have pursued to manage through the downturns experienced in recent years. If the Five Year Financial forecasts hold true, the Town has an opportunity over the next few years to implement further strategies such as cost containment, organizational realignments, efficiencies, potential strategic public and private partnerships, and new revenue considerations, among others, that will aid in the Town's ability to continue to provide quality public services. The amount of progress in dealing effectively with these challenges and vulnerabilities will affect service delivery goals in future years. The future will provide the Town opportunities to look for acceptable ways to diversify, strengthen and grow the Town's economic base consistent with the General Plan goal "to maintain a balanced, economically stable community within environmental goals." This goal will be one of many important considerations as the Town undertakes .and implements strategic planning efforts such as the Los Gatos Boulevard Plan and the North Forty Plan, and focuses economic vitality efforts on the University Avenue research and development area and Downtown. ENVIRONMENTAL ASSESSMENT: This budget report is not a project defined under CEQA, and no further action is required. PAGE 14 MAYOR AND TOWN COUNCIL/ CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY SUBJECT: 2005/06 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX MONTHS ENDING DECEMBER 31, 2005 MARCH 3, 2006 FISCAL IMPACT: The Second Quarter Budget Performance Report includes a number of recommended budget adjustments necessary for FY 2005/06. 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, 2006. As detailed in this report, staff is currently, engaged in FY 2006/07 budget development process which incorporates plans for a status quo budget plan, contingent upon the performance of the local economy and any unforeseen budgetary actions taken by the State of California to balance its budget. Attachments: Exhibit A - Terminology Guide to Five Year Financial Projections Exhibit B - Potential Scenarios-Reductions by Department Attachment 1- Budget Performance Report for the Six Months Ended December 31, 2005 Terminology Guide in Reviewing Five Year Financial Plan Total Revenues - Total of principal General Fund revenues, FY 2004/05 presents revenue actuals, FY 2005/06 the adopted revenue budget, and the other years use an average 2 to 4% growth rate, depending upon the type of revenue and recent Town history. Total Expenditures - Total of principal General Fund expenditures by expenditure type, FY 2004/05 uses expenditure actuals, FY 2005/06 the adopted expenditure budget and the other years use an average growth rate of 3 to 5% in future years depending on the expenditure type. Authorized Use of Reserves/Ongoing Shortfall Mitigation One-time use of reserves for one- time use such as the use of capital projects reserves. Shortfall mitigation dollars are 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 are intact or lost and whether a full permanent fix is made each year. If operating revenues are not sufficient, staff will need to evaluate whether partial offsets with Revenue Stabilization 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 2009/10 & 2010/11, the projected reduction percentage required to align operating expenditures with revenues. EXHIBIT A Departmental Reduction Calculations For Fiscal Year 2006/07 FY 2005/06 Adopted General Fund Departments Budget Town Council $ 153,490 Town Treasurer 97,250 Town Attorney's Office 233,700 Town Manager's Department Town Manager's Office 431,000 Human Resources 543,300 Finance & Administrative Services 1,008,300 Clerk Administration 213,560 Customer Service Center 94,150 Community Development 2,529,850 Police Department 11,274,400 Parks & Public Works 4,587,690 Community Services 902,065 Library Department 1,903,860 ,Non-Departmental 2,541,212 Totals (net of ass-thrus) $ 26,513,827 5% Budget Reduction Less 5% Equals Reduction Target Budget. $ 7,675 = S 145,876 $ 4,863 = $ 92,388. $ 11,685 = $ 222,015 $ 21,550 = $ 409,450. $ 27,165 = S 516,135 $ 50,415 = S 957,885 $ 10,678 = S 202,882 $ 4,708 = S 89,443 $ 126,493 = S 2,403,358 $ 563,720 = $ 10,710,680 $ 229,385 = S 4,358,306 $ 45,103 = S 856,962 $ 95,193 = S 1,808,667 $ 127,061 = S 2,414,151 $ 1,325,691 $ 25,188,136 10% Budget Reduction Less 10% Equals Reduction Target Budget $ 15,349 = S 138,141 $ 9,725 = $ 82,663 $ 23,370 = S 198,645 $ 43,100 = $ 366,350 $ 54,330 = $ 461,805 $ 100,830 = S 857,055 $ 21,356 = S 181,526 $ 9,415 = $ 80,028 $ 252,985 = S 2,150,373` $ 1,127,440 = S 9,583,240 $ 458,769 = S 3,899,537 $ 90,207 = S 766,755 $ 190,386 = $ I'618,281 $ 254,121 = $ 2,160,030 $ 2,651,383 $ 22,544,4271 EXHIBIT B TOWN OF LOS GATOS MID-YEAR BUDGET PERFORMANCE REPORT FOR THE SIX MONTHS ENDED DECEMBER 31, 2005 March 06, 2006 FINANCIAL OVERVIEW-EXECUTIVE SUMMARY Status of FY 2005/06 Adopted Budget: Taken collectively, second quarter General fund revenues continue to trend positively. Sales tax collections which were lagging slightly at the first quarter are now exceeding the pace set the prior year. The current forecast expects Sales Tax to exceed revenue estimates by approximately $487,000 for this fiscal year. The increase is due to growth 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 the general retail category helped offset the trend of decline in sales tax collected from the Town's auto dealers. Auto dealerships as a whole have declined to 23% of total Town sales tax, compared to approximately 30% in recent years. With the announced closure of two car dealerships in the Town this year, staff is proactively working to ensure the long term viability of auto sales in the Town. Property tax collections are also exceeding budget estimates, with current forecasts exceeding budget estimates by approximately $200,000. Property Tax appears to be tracking favorably at nearly 11% growth, outperforming estimates of 4% growth used for the adopted budget estimates for FY 2005/06. The growth is attributable to the turnover of local housing stock, reflecting the continuing desirability of the Town's housing stock and new commercial developments being added to the property tax rolls: Other positive trends were seen in the Intergovernmental (Vehicle License Fees) and Other Revenue categories. The cost to provide services to the community for FY 2005/06 and future fiscal years will continue to require strong performance in the Town's economically sensitive revenues to offset the cost increases likely to occur. The FY 2006/07 status quo budget proposals and fee updates efforts now being developed for presentation to the Town Council protect critical public services while limiting operating cost escalation in light of the fiscal forecast which predicts operating revenue shortfalls in the later years of the five year plan. Another positive development since the presentation of the First Quarter Budget Performance Report was announcement in the Governor's January 2006 budget in which no additional State local revenue "takes" were proposed for the State budget in FY 2006/07. The successful passage of the Local Taxpayers Revenue Protection Proposition IA in November 2004 by a large majority of California voters makes future State takes more difficult. 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. ATTACHMENT I GENERAL FUND-KEYREVENUE ANALYSIS FY 2005/06 The following presentation provides a recap of significant General Fund revenue sources as of the second quarter ending December 31, 2005. Sales Tax and Property Tax collections show positive trends for the current year. Staff is monitoring each revenue source closely, and at this time is most concerned about two revenue sources: parking citations, and police fingerprinting fees, which are recommended to be adjusted lower for the fiscal year. FINANCIAL OUTLOOK FY 2005/06 ♦ Sales Tax Revenue Description The State Board of Equalization, with the implementation of the "triple flip," now allocates .75 cents of the 8.25 cents of local sales tax collected by merchants on retail sales and taxable services transacted within the Town of Los Gatos. This .25 cents of local sales tax is being replaced by the state with an equal amount of property tax. Revenues are remitted to the Town on a monthly basis. This revenue is placed in the General Fund for unrestricted uses. Analysis According to California's Department of Finance, California's economy has continued to expand, with a fairly broad-based growth outpacing the nation's rate.. The latest unemployment figures from July, 2005 show the lowest rates since May 2001. What is unknown at this time is the possible braking of this economic momentum by the recent spike in energy costs. More data will become available as the fiscal year progresses. Second quarter collections now exceed the rate of collections experienced last fiscal year. The positive trend is most evident in the general retail category. This trend is largely due to the continuing strong performance of one company involved in internet commerce. While this is very positive, staff remains concerned as it is aware that more diversification is necessary. The Town should not be depending on one primary sales tax generator; instead it should continue to seek more balance in business sectors that generate sales tax. Quarterly and Annual Revenues 5-Year History $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 FY 01/02 FY 02/03 FY 03/04 2nd Quarter Actual Revenues $ 3,288,885 $ 3,237,902 $ 3,217,070 Fiscal Year Total Actual Revenues $ 6,953,880 $ 6,928,817 $ 6,914,526 Fiscal Year Budgeted Revenues FY 2004/05 forward will reflect the Sales Tax In Lieu paid by Santa Clara County 0 2nd Quarter Actual Revenues ❑ Fiscal Year Total Actual Revenues B Fiscal Year Budgeted Revenues FY 04/05 FY 05/06 $ 3,179,238 $ 3,131,898 $ 7,904,130 $ 3,131,898 $ 7,313,000 2nd Quarter Percent of Total 47.30% 46.73% 46.53% 40.22% 42.83% Recommended Budget Revision $ 487,000 3 FY 01/02 FY 02/03 FY 03104 FY 04/05 FY 05/06 FINANCIAL OUTLOOK FY 2005/06 Description Property Tax Revenue Property Tax is one of the Town's largest revenue sources, accounting for 20.8% of the Town's budgeted General Fund revenue for FY 2005/06. Property Tax distributions are largely received in the third and fourth quarters of the fiscal year, meaning revenue receipts are not reflected proportionately in the chart below, by quarter. Property Tax is levied at 1% of a property's assessed value, of which the Town currently receives approximately 9.5 cents on each dollar paid to the County Assessor's Office. The assessed value of real property appraised by the County Assessor is the 1975-76 assessment role value, adjusted by a two percent inflation factor thereafter. However, when property changes hands or new construction occurs, property is reassessed at its current market value. $8,000,000 $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 Real property values critically impact revenues. With the passage of Proposition 13, voters in California limited the tax rate that can be imposed by the Town on property. With this limitation on rates, the higher the aggregate property value, the higher the revenue generated. Analysis Property tax receipts through the second quarter indicate that taxes revenues are exceeding budget estimates. Though according to recent press reports that home sales have slowed in Santa Clara County, demand for available housing stock in Los Gatos appears to be strong. The Santa Clara County Assessor's Office provided a positive outlook in its FY2005/06 Annual Report. All cities in the county are showing positive growth. The Town of Los Gatos reflects a 10.55% increase in assessed value for FY 2005/06. Quarterly and Annual Revenues 5-Year History O 2nd Quarter Actual Revenues ❑ Fiscal Year Total Actual Revenues ® Fiscal Year Budgeted Revenues FY 01/02 FY 02/03 FY 03/04 FY 04/05 FY 05/06 2nd Quarter Actual Revenues $ 2,225,874 $ 2,246,511 $ 2,297,420 $ 2,497,953 $ 2,678,416 Fiscal Year Total Actual Revenues $ 4,784,476 $ 4,977,119 $ 5,207,381 $ 6,856,993 $ 2,678,416 Fiscal Year Budgeted Revenues $ 7,091,890 FY2004105 forward will reflect an increase in Property Tax due to "Permanent" Realignm ent of VLF 2nd Quarter Percent of Total 46.52% 45.14% 44.12% 36.43% 37.77% Recommended Budget Revision $ 500,000 4 FY 01/02 FY 02/03 FY 03/04 FY 04/05 FY 05/06 FINANCIAL OUTLOOK FY 2005/06 ♦ Transient Occupancy Tax Description The Town of Los Gatos levies a 10 per cent Transient Occupancy Tax on all hotel/motel rooms within Town limits as a method to help fund Town services provided to transitory lodgers. Analysis The Transient Occupancy Tax revenues received in the first quarter of FY 2005/06 reflects a growth in occupancy rates for nearly all Town hotels and motels. This is in line with reports from the State that both business and leisure travel has edged up in the last year. Statewide occupancies during the first six months of 2005 were reported to be up an average of 3.2%, although the highest average occupancies for the month of June were in Southern California. Overall, the Town expects the occupancy rates to continue improving with the re-establishment of air travel and normal business activity, subject to the possible negative effects of the unexpected rise in travel costs due to increases in the cost of energy. Quarterly and Annual Revenues 5-Year History $1,000,000 $800,000 $600,000 $400,000 $200,000 ® 2nd Quarter Actual Revenues ❑ Fiscal Year Total Actual Revenues ® Fiscal Year Total Budgeted Revenues FY 01/02 FY 02/03 FY 03/04 FY 04/05 FY 05/06 2nd Quarter Actual Revenues $ 334,858 $ 293,570 $ 312,998 $ 301,725 $ 382,190 Fiscal Year Total Actual Revenues $ 788,408 $ 713,064 $ 829,025 $ 868,908 $ 382,190 Fiscal Year Total Budgeted Revenues $ 870,000 2nd Quarter Percent of Total 42.47% 41.17% 37.75% 34.72% 43.93% Recommended Budget Revision $ 80,000 5 FY 01/02 FY 02/03 FY 03/04 FY 04/05 FY 05/06 FINANCIAL OUTLOOK FY 2005/06 ♦ 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. $2,000,000 $1,500,000 $1,000,000 $500,000 ® 2nd Quarter Actual Revenues ❑Fiscal Year Revenues ®Fiscal Year Total Budgeted Revenues FY 01/02 FY 02/03 FY 03/04 FY 04/05 FY 05/06 2nd Quarter Actual Revenues $ 875,695 $ 638,036 $ 460,598 $ 450,838 $ 552,860 Fiscal Year Revenues $ 1,834,191 $ 1,461,677 $ 894,153 $ 1,021,703 $ 552,860 Fiscal Year Total Budgeted Revenues $ 1,018,750 2nd Quarter Percent of Total 47.7% 43.7% 51.5% 44.1% 54.3% Recommended Budget Revision $ 110,000 J Analysis The Town's Interest Income earning has 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) continues to rise, having grown from 3.179% in August 2005 to the December month end LAIF yield of 3.810%. The latest yield is a significant improvement from the LAW record low average yield of 1.42% in May of 2004. Quarterly and Annual Revenues 5-Year History 6 FY 01/02 FY 02/03 FY 03/04 FY 04/05 FY 05/06 FINANCIAL OUTLOOK FY 2005/06 ♦ 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, and comprise approximately 40% of the Business License Tax revenue. Other Business License Tax revenues 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. Analysis The Business License Tax revenue received in the first quarter is primarily comprised of new Business License fees. The majority of revenues come from renewals, which are received in the second and third quarters. As FY 2004/05 business license tax revenue includes some prior year settlements, the FY 2005/06 budget was adjusted to reflect current year receipts only, and under anticipation that the economy would continue at current levels. While current receipts are tracking lower than prior year receipts, there is not enough revenue data for adequate analysis in the I" quarter. Quarterly and Annual Revenues 5-Year History J 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 2nd Quarter Actual Revenues ❑ Fiscal Year Total Actual Revenues ® Fiscal Year Total Budgeted Revenues FY 01/02 FY 02/03 FY 03/04 FY 04105 FY 05106 2nd Quarter Actual Revenues 499,446 450,284 458,003 396,773 343,358 Fiscal Year Total Actual Revenues $ 978,350 $ 970,554 $ 1,041,865 $ 1,056,814 $ 343,358 Fiscal Year Total Budgeted Revenues $ 1,000,000 2nd Quarter Percent of Total 51.05% 46.39% 43.96% 37.54% 34.34% Recommended Budget Revision No Change 7 FY 01/02 FY 02/03 FY 03/04 FY 04/05 FY 05/06 FINANCIAL OUTLOOK FY 2005/06 ♦ Franchise Fee Description Franchise Fees are collected by the Town for the privilege of operating a utility service within Town limits, and as a fee in lieu of 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 slightly below budget estimates. Franchise Fees are paid as a percentage of gross receipts, and with service rates increased by Green Valley Disposal Company, Inc in August 2005, and higher electricity bills, revenues are expected to rebound over the fiscal year, but no increase is recommended at this time. Quarterly and Annual Revenues 5-Year History 8 O 2nd Quarter Actual Revenues ❑ Fiscal Year Total Actual Revenues ® Fiscal Year Total Budgeted Revenues FY 01/02 FY 02/03 FY 03/04 FY 04/05 FY 05/06 2nd Quarter Actual Revenues $ 267,296 $ 200,819 $ 239,295 $ 246,980 $ 248,860 Fiscal Year Total Actual Revenues $ 990,861 $ 897,158 $ 930,997 $ 942,647 $ 248,860 Fiscal Year Total Budgeted Revenues $ 983,450 2nd Quarter Percent of Total 26.98% 22.38% 25.70% 26.20% 25.30% Recommended Budget Revision No Change $1,000,000 $800,000 $600,000 $400,000 $200,000 FY 01/02 FY 02/03 FY 03/04 FY 04/05 FY 05/06 RECOMMENDED BUDGET ADJUSTMENTS FY 2005/06 General Fund budget adjustments are recommended for the following revenues and expenditures: GENERAL FUND FY 2005/06 Recommended FY 2005/06 Current Adjustment Revised Budget Increase (Deer.) Budget Revenue: Sales Tax $ 7,313,000 $ 487,000 $ 7,800,000 Property Tax 5,459,780 208,730 5,668,510 VLF Property Tax Backfill (State) 1,632,110 291,270 1,923,380 Interest Earned 1,018,750 110,000 1,128,750 Hotel Tax 870,000 80,000 950,000 PD Fingerprinting Fees DOJ 139,200 (113,200) 26,000 Booking Fees 84,000. (84,000) - PD Fingerprinting Fees 75,000 (59,000) 16,000 PD Donations - 19,550 19,550 Sale of Sewer Infrastructure (Net of Costs) - 2,437,000 2,437,000 Transfers from Sewer Maintence 88,630 . (69,280) 19,350 Total Revenue Adjustments $ 16,680,470 $ 3,308,070 $ . 19,988,540 Expenditures: DOJ Fingerprinting Services 139,200 (113,200) 26,000 Safety Equipment 12,000 5,350 17,350 Booking Fees 84,000 (42,000) 42,000 Ordinance Consultant - 8,930 8,930 Transfer to Parking Management 131,650 40,000 171,650 Transfer to GFAR 150,000 50,000 200,000 Storm Related Expenses-Parks - 13,000 13,000 Storm Related Expenses-Streets 2,000 2,000 4,000 Emergency Repairs - 12,190 12,190 Reallocation of Sewer Personnel various 87,400 87,400 Total Expenditure Adjustments $ 283,650 $ 63,670 $ 409,770 Recap of General Fund Revenue Adjustments: The suggested adjustments to Sales Tax, Property Tax, VLF Property Tax, Interest, Hotel Tax, Fingerprinting Fees, and Booking Fees were explained earlier in this report. Adjustments to other revenues shown above are explained below: PD Grants/Donations: This adjustment is recommended to reflect the receipt of a $10,000 grant from the Association of Bay Area Governments for the Police Department taser equipment, $4,200 from the PD foundation for ballistic vests, and a $5,350 donation from the Police Foundation dedicated for the purchase of multi-use training mats. 9 Sewer Infrastructure Sale and Overhead Transfers: Staff recommends a net adjustment to reflect proceeds from the sale of sewer system infrastructure in the amount of $2,572,000 less estimated maintenance costs through November 1, 2005 of $135,000, leaving net revenue of $2,437,000. With the transfer of maintenance occurring on November 1, 2005, the overhead charges paid by the Sewer Maintenance fund to the General Fund are recommended to be reduced accordingly for the fiscal year in the amount of $69,280. Recap of General Fund Expenditure Adjustments: Adjustments to General Fund expenditure not previously explained are presented below: Ordinance Consultant: Staff recommends an increase to appropriations of $8,930 for Grading Ordinance consulting that was budgeted the prior year but staff not expend last year due to other workload priorities. Transfer to Parking ro r~ 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. Transfer to GFAR: Staff recommends adjusting transfer out revenues by $50,000 to reflect $50,000 received in the General Fund from William Sweitzer for trail improvements. This adjustment will transfer dollars from the General Fund to the GFAR fund to be used on the Shannon Road Trail project. Storm & Emergency Related Repairs (Parks, Streetst): This adjustment is recommended to provide an augmentation to the General Fund operating budgets for emergency repairs resulting from the recent winter storm events and emergency storm drain repairs done on Shannon Road. Sewer Infrastructure Sale and Overhead Transfers: Staff recommends adjusting the General Fund operating budget to accommodate the shift of Sewer Maintenance personnel to the. appropriate General Fund streets program. 10 Recap of Other Fiend Revenue Adiustments FY 2005/06 Recommended FY 2005/06 Current Adjustment Revised OTHER FUNDS Budget Increase (Deer.) Budget Parking Management Fund: Parking Citation Revenues $ 400,000 $ (40,000) $ 360,000 Transfer Revenue from Gen. Fund $ 131,650 $ 40,000 $ 171,650 Sewer Maintenance Fund Revenue Budget Expenditure Budget 601,120 $ (467,400) $ 133,720 601,120 $ (467,400) $ 133,720 GFAR Capital Projects Fund Congestion Relief $ - $ 59,000 $ 59,000 Transfer Revenue from Gen. Fund $ 150,000 $ 50,000 $ 200,000 Los Gatos Creek Trail Deck Replace Proj: Grant-Caltran Funding (Rev & Exp)\ $ 63,750 $ (63,750) $ - Grant-Prop 12 Funding (Rev & Exp) $ - $ 55,000 $ 55,000 GFAR Match-Construction Engineering $ 1,250 $ (1,250) $ - Roberts Road Bridge-Engineering & Des. $ 4,415 $ 7,500 $ 11,915 Internal Service Funds MIS Fund Transfers Out (Rev & Exp) $ 130,000 $ (130,000) $ - Equip. Repl. Fund Transfers Out (Rev & Exp) $ - $ 130,000 $ 130,000 Vehicle Maintenance Personnel Costs $ 240,000 $ 17,071 $ 257,077 Building Maintenance Personnel Costs $ 113,000 $ 23,647 $ 136,647 Redevlopment Agency Debt Service Fund: Tax Increment $ 4,551,600 $ 538,400 $ 5,090,000 ERAF Payment $ (303,000) $ (44,440) $ (347,440) SB 813 Tax Revenues $ 448,400 $ 147,200 $ 595,600 Pass Through Expenditure Payments $ 1,817,540 $ 310,000 $ 2,127,540 Parking Management Fund: Citation revenue is trending lower than staff estimates for FY 2005/06. 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. GFAR Capital Projects Fund: $59,000 increase for additional funds received this fiscal year for traffic congestion relief. The increase of $50,000 in General Fund transfers relates to the Schweitzer donation discussed previously. The Los Gatos Creek Trail Deck project's estimated costs are recommended to be reduced and Prop 12 state grant funds will be used versus the original plan to use Caltrans grant funds. The required Town GFAR match.is lowered by $1,250 due to project costs being revised downward. Roberts Road Bridge project costs are also recommended to be increased by $7,500 for monitoring of the bridge as required by Caltrans. Internal Service Funds: $130,000 re-allocation of fund source. This is a correction to a first quarter budget adjustment. MIS funds were approved for use in the Police Department Dispatch center servers. Instead of MIS funds, staff recommends using funds from the Equipment Replacement Fund where they had been allocated and set aside in previous years. Staff recommends adjusting the Vehicle Maintenance and. Building Maintenance operating budget to accommodate the shift of certain Town employees formerly assigned to the Sewer Maintenance Fund to new funding assignments in the Vehicle Maintenance and Building Maintenance Funds. 11 RDA Tax Increment: Staff recommends adjustment to FY 2005/06 estimated tax increment property taxes, with related increase to ERAF shares and increases to tax increment pass through payments that will increase if property taxes increase. 12 FINANCIAL SUMMARIES, PROJECTIONS AND RECOMMENDATIONS General Fund As stated earlier in this report, the attached Schedule of FY 200506 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 For the period ended December 31, 2005 Revenues General Property Tax Prop Tax Car Tax Backfill Sales & Use Tax Franchise Fees Transient Occ Tax Business License Tax Licenses & Permits Motor Vehicle In Lieu Intergovernmental Charges for Services Fines & Forfeitures Interest GASB investment to market per audit Miscellaneous/Other Fund Transfers Total Revenues Authorized Use of Reserves PERS Liability Reserve Use of Internal Service Reserves - Yr 3 Total Use of Reserves Total Revenues plus Reserves FY04/05 FY04105 FY04/05 FY04/05 FY05/06 FY05/06 FY05/06 FY05/06 FY05106 Final Adjusted 2nd Qtr % Adopted Adjusted 2nd Qtr % Finance Balance Budget Actuals YTD Budget Budget Actuals YTD Projection $ 5,302,061 $ 5,101,668 $ 2,497,953 49% $ 5,459,780 $ 5,459,780 $ 2,678,416 49% $ 5,668,510 1,554,932 1,554,390 - 1,632,110 1,632,110 - 0% $ 1,923,380 7,904,130 7,100,000 3,179,238 45% 7,313,000 7,313,000 3,131,898 43% $ 7,800,000 942,648 957,000 246,980 26% 983,450 983,450 248,860 25% $ 983,450 868,908 880,000 301,725 34% 870,000 870,000 382,190 44% $ 950,000 1,056,814 985,000 396,773 40% 1,000,000 1,000,000 343,358 34% $ 1,000,000 1,347,521 1,589,055 910,389 57% 1,564,180 1,564,180 977,737 63% $ 1,566,600 314,041 317,600 251,898 79% 148,300 148,300 81,574 55% $ 148,300 2,002,922 1,893,015 715,639 38% 1,987,450 2,647,620 1,288,369 49% $ 2,580,131 2,920,356 2,624,725 1,977,726 75% 2;973,570 2,991,570 2,094,981 70% $ 2,932,010 190,549 174,950 66,252 38% 166,700 166,700 68,182 41% $ 137,300 1,021,703 931,836 513,339 55% 1,018,750 1,018,750 552,858 54% $ 1,128,750 (115,999) - - - 214,482 187,178 156,623 84% 195,900 246,060 2,651,045 1077% 2,693,955 312,381 289,920 285,119 361,060 361,060 183,873 226,780 25,837,449 24,586,337 11,499,654 47% 25,674,250 26,402,580 14,683,341 56% 29,739,166 977,784 1,020,150 496,000 702,650 702,650 571,000 742,650 300,000 300,000 300,000 300,000 300,000 300,000 300,000 - 520,000 520,000 312,000 312,000 - - 1,277,784 1,840,150 1,316,000 $ 27,115,233 $ 26,426,487 $ 12,815,654 Expenditures (includes c/f but no encumbrances) Mayor & Council 137,760 143,500 63,513 Treasurer 82,756 89,360 39,644 Attorney 213,307 232,550 97,112 Manager and Clerks 2,150,319 2,255,310 1,046,335 Comm Development 2,547,748 2,743,110 1,251,321 Police 9,971,461 9,928,675 4,688,556 Parks & Public Works 4,385,068 4,477,390 2,116,607 Community Services 848,475 916,630 379,668 Library 1,784,842 1,816,365 826,297 Total Dept Expenses $ 22,121,737 $ 22,602,890 $ 10,509,053 1,314,650 1,314,650 871,000 1,042,650 $ 26,988,900 $ 27,717,230 $ 15,554,341 $ 30,781,816 44% 153,490 153,490 70,914 46% 151,530 44% 97,250 97,250 40,668 42% 86,850 42% 233,700 233,700 114,612 49% 217,950 46% 2,290,310 2,290,310 1,032,327 45% 2,264,855 46% 3,016,850 3,016,850 1,382,135 46% 2,822,669 47% 11,012,350 11,012,350 5,088,897 46% 10,700,543 47% 4,666,190 4,666,190 4,594,840 98% 4,756,590 41% 905,065 907,565 393,293 43% 880,225 45% 1,903,860 1,903,860 918,802 48% 1,855,490 46% $ 24,279,065 $ 24,281,565 $ 13,636,488 56% $ 23,736,702 Non-Dept Expenditures and other uses General Government 2,372,206 3,119,952 709,171 23% 2,594,077 2,594,077 600,517 23% 2,252,959 Total Non-Dept Expenses $ 2,372,206 $ 3,119,952 $ 709,171 23% $ 2,594,077 $ 2,594,077 $ 600,517 23% $ 2,252,959 Total Operating Expenditures $ 24,493,943 $ 25,722,842 $ 11,218,224 44% $ 26,873,142 $ 26,875,642 $ 14,237,005 53% $ 25,989,661 Net Operating Revenues Before Capital Trsfrs & Budgeted Beg Fund Balance $ 2,621,290 $ 703,645 $ 1,597,430 $ 115,758 $ 841,588 $ 1,317,336 N/A $ 4,792,155 Authorized Use of Reserves - 2 Yr One-time State Take 421,000 421,000 421,000 421,000 421,000 421,000 421,000 Parking Management Program 181,784 224,150 - 131,650 131,650 - 171,650 Capital Projects 75,000 75,000 75,000 150,000 150,000 150,000 150,000 Animal Shelter 300,000 300,000 Total Budgeted Use of Reserves 977,784 1,020,150 496,000 702,650 702,650 571,000 742,650 Net Surplus or (Use) ofReserves 1,643,506 (316,505) 1,101,430 (586,892) 138,938 746,336 4,049,505 13 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 FY2004105. Special Reve~aue 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 2005/06 is the fourth year of implementation of the parking program. Citation revenues are trending below estimates, necessitating an approximate $40,000 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. The deficit in the Sewer Maintenance Fund will be recovered from reimbursements from the Sanitation District Fund proceeds upon final close out of the fund at fiscal year end. 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) - 250,037 1,149,730 154,127 - 106,647 28,278 Budgeted Revenues 577,250 381,420 191,421 176,330 601,120 39,020 19,782 Actual Revenues - 2nd Qtr 158,370 160,458 63,409 175,002 - 37,770 - Budgeted Expenditures 577,250 389,300 391,421 176,330 601,120 40,700 40,249 Total Actual Expenditures - 2nd Qtr 225,238 156,205 73,010 95,760 133,341 20,972 2,203 1st Quarter Ending Fund Balance (66,868) 254,290 1,140,129 233,369 (133,341) 123,445 26,075 Capital Protects 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 2005/06 adopted budget. Staff is recommending no changes at this time. Operating revenues in the Town's General fund appear positive and should be available to support the General Fund's current year $150,000 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. 14 Capital Project Funds Budget to Actuals Comparisons GFAR Traffic Grant Fund Storm Utility Gas Fund Mitigation CIP's Drains Undergd Tax Beginning Fund Balance 3,812,640 45,131 (4,024) 1,138,871 1,973,183 929,546 Budgeted Revenues 375,000 180,000 1,696,555 289,000 95,000 444,000 Actual Revenues - 2nd Qtr 368,297 - 31,010 240,811 29,118 285,179 Budgeted Expenditures 1,562,049 70,000 1,663,476 415,000 - 956,231 Total Actual Expenditures - 2nd Qtr 713,792 7,485 66,702 234,576 - 916,510 1st Quarter Ending Fund Balance 3,467,145 37,646 (39,716) 1,145,106 2,002,301 298,215 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 2005/06 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 Mmgt Info Vehicle Building Replacemt Comp Insurance Stores Systems Maint. Maint. Beginning Fund Balance . 3,491,310 1,817,055 1,939,958 230,219 2,401,732 152,274 1,000,995 Budgeted Revenues 430,700 601,420 492,600 86,000 805,600 512,900 991,000 Actual Revenues - 2nd Qtr 200,800 304,207 253,639 36,744 411,608 253,665 474,395 Budgeted Expenditures 388,199 664,680 549,750 86,000 1,423,900 571,222 1,333,170 Total Actual Expenditures - 2nd Qtr 147,940 307,462 377,757 38,088 260,974 . 258,181 475,732 1st Quarter Ending Fund Balance 3,544,170 1,813,800 1,815,840 228,875 2,552,366 147,758 999,658 Trust and Agency Funds - Town Trust and Agency Funds have fund balances as of June 30, 2005 of $323,371 for Parking District #88 and $292,903 in the Library Trust Funds. Redevelopment Agency - The Agency's FY 2005/06 and FY 2005/06-2009/10 Capital Improvement Plan adopted budgets are incorporated into the Redevelopment Agency's financial statements and year-to-date actuals as presented below. At mid-year the Capital Projects Fund balances include approximately $2.0 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 ($668K), Downtown Parking Improvement Plan ($96K), Alley Improvements ($143K), Santa Cruz Avenue/Wood Road Gateway ($65K), contingencies ($183K) and debt service reserves ($752K). 15 Redevelopment Agency Funds Budget to Actuals Comparisons Beginning Fund Balance Budgeted Revenues Actual Revenues - 2nd Qtr Budgeted Expenditures Total Actual Expenditures - 2nd Qtr Capital Projects Debt Service Low/Mod Housing Total RDA Funds 3,320,273 4,481,846 4,335,193 12,137,311 50,000 4,336,440 1,103,460 5,489,900 559,968 1,137,501 535,838 2,233,307 2,588,243 3,785,240 50,000 6,423,483 1,347,306 746,244 335,210 2,428,760 1st Quarter Ending Fund Balance 2,532,935 4,873,103 4,535,821 11,941,858 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 $347,000, compared to $303,000 due to the State the prior year. The ERAF payment is anticipated to be made from RDA fund balance. Proposition IA 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 $347,000 could escalate to nearly $700,000 annually in the years following FY 2005/06. Though the Governor's budget did not call for additional ERAF takes in FY 2006/07, 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 2005/06 revenue trends are certainly encouraging, with net revenues forecast to provide a moderate potential surplus at year end. However, based on the recent update of the Town's Five-Year Financial Plan the Town faces a longer term challenge in aligning future operating revenues and expenditures. 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. It is the overall financial strength of the Town that enables it to effectively manage its way through changing economic conditions. The Town continues to carefully monitor revenue and expenditure trends and to react 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 ongoing operating and capital needs of the community for the future. 16