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