12 Staff Report - 2006/07 Mid Year Budget PerformanceBONN 0 MEETING DATE: 3/19/2007
ITEM NO:
n „ .
!pSAjOS COUNCIL/AGENCY AGENDA REPORT
DATE: MARCH 13, 2007
TO: MAYOR AND TOWN COUNCIL/
CHAIR AND MAMBERS OF THE REDEVELOPMENT AGENCY
FROM: DEBRA J. FIGONE, TOWN MANAGER/EXECUTIVE DIRECTOR
SUBJECT: 2006/07 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT-SIX
MONTHS ENDING DECEMBER 31, 2006
A. ACCEPT 2006/07 MID-YEAR SECOND QUARTER BUDGET
PERFORMANCE STATUS REPORT, INCLUDING FY 2007-12- FIVE-
YEAR FINANCIAL PROJECTIONS
B. AUTHORIZE BUDGET ADJUSTMENTS AS RECOMMENDED IN
THE ATTACHED SECOND QUARTER BUDGET PERFORMANCE
REPORT
RECOMMENDATION:
1. Accept the 2006/07 Mid-Year Budget Performance and Status report, including FY
2007/12 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 2006/07 Adopted Budget at the mid-year point. Second, to provide the Town
Council with staffs most recent five year budget forecast which informs the evolving budget
status for FY 2007/08 and beyond. Third, to provide a FY 2007/08 proposed budget
development preview that includes a current financial status update and highlights of issues
arising out of the budget development meetings held in recent months with each department
which are being considered for service level changes or funding recommendations that are
anticipated to be included in the proposed budget scheduled for a public hearing on May 7. 2007.
PREPARED BY: STPMEN CON
Finance & Ad strative Services Director
C:ADocuments and Settings\GtJngvari\Desktop\2007 Mid Year Budget Report second draft - for merge.doc
Reviewed by: Tb&ssistant Town Manager/Deputy Director ~~Town Attorney/General
Counsel Clerk Administrator/Secretary Finance
Community Development
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MAYOR AND TOWN COUNCIL/CHAIR AND MEMBERS OF THE REDEVELOPMENT
AGENCY
SUBJECT:
MARCH 19, 2007
THE REPORT:
The report includes the following:
• A Mid-Year FY 2006/07 budget update focusing on revenue and expenditure trends and
financial projections for the current fiscal year.
• A discussion of the Town's current year financial condition, including a briefing on the
current General Fund reserve status.
• An update to the Town's five-year financial projections (FY 2007-12) to provide a context
for FY 2007/08 budget development.
• A FY 2007/08 proposed budget preview centering on key issues that staff addressed during
preliminary budget discussions and considerations taken into account when making funding
recommendations for the FY 2007/08 budget.
DI-',CI 1SSTON:
FY 2006/07 MID YEAR BUDGET STATUS:
Budget PerLormance Report
The Budget Performance Report (Attachment 1) is a mid-year report covering the six months
beginning July 1, 2006 and ending December 31, 2006. 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. At midyear staff has more information
available than at the time of the first quarter report presented to Council in the fall of 2006,
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 provides the status of the revenues adopted to support the current year's
operating budget. Furthermore, the Town Council is advised of any recommended changes to
estimated revenue or expenditure appropriations included in the Town's FY 2006/07 Adopted
Budget.
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MAYOR AND TOWN COUNCIL/CHAIR AND MEMBERS OF THE REDEVELOPMENT
AGENCY
SUBJECT:
MARCH 19, 2007
General Fund Revenue Hig-hli
Overall General Fund revenues continue to remain strong in most key categories of revenues
such as sales tax, property taxes and charges for services. The attached budget report includes
recommended changes to budgeted revenues at mid-year. Highlights of some of the significant
proposed revenue increase changes include:
• A $500,000 increase in estimated Investment Income from $1,205,700 to $1,705,700.
• A $454,140 increase in estimated Sales Tax from $7,646,000 to $8,100,140.
• A $225,440 increase in estimated Franchise Fee revenue from $1,013,500 to $1,238,940.
• A $100,000 increase in estimated Property Tax from $6,369,900 to $6,469,900.
• A $70,000 increase in Transient Occupancy Taxes from $930,000 to $1,000,000.
• Other revenue increases include a $150,000 increase to Licenses & Permits and a $111,050
increase in Vehicle License Fee (VLF) property tax backfills for the fiscal year.
Operating revenue decrease recommendations include:
• A decrease of $51,100 in Auto Task Force reimbursements and a $11,500 decrease in
Business License Recycle fees.
More detailed information and analysis of each of the above revenue highlights are presented in
the Budget Performance Report (Attachment 1).
General Fund Operating Budget Current Year Expenditure Trends
Staff is encouraged 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 departmental budget savings at year end in addition to excess operating
revenue above budget estimates. Though the trends at mid-year indicate the potential for a
positive increase in unspent operating revenues, staff continues to monitor key revenues and will
bring forward any material changes to operating revenue estimates for Town Council approval
should these be necessary for the remainder of the fiscal year. At this time, no additional
revenue estimate changes are deemed necessary other than those brought forward as part of this
report.
The attached Budget Performance and Status Report (Attachment 1) includes 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 titled "General Fund Operating Revenues Versus Operating
Expenditures" reflect the revised revenue projections as described in this report.
5.4
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MAYOR AND TOWN COUNCIL/CHAIR AND MEMBERS OF THE REDEVELOPMENT
AGENCY
SUBJECT:
MARCH 19, 2007
FIVE-YEAR FINANCIAL PROJECTIONS UPDATE:
Setting the stage for FY 2007/08 budget development, staff recently updated the Town's Five-
Year Financial Plan spanning fiscal years 2007/08 through 2011/12. The five-year plan is
presented on the following page. A presentation guide is attached as Exhibit A that can be used
as an aid to understand the projections data that is presented in each fiscal year. The updated plan
forecasts a balanced scenario for the next three years and revenue shortfalls approaching
approximately $600,000 in FY 2010/11 and approaching $1,000,000 in FY 2011/12 in year five
of the plan. The Five-Year Financial Plan is an independent financial tool that is based upon
current costs and revenue forecasts, but is designed to be more fluid in nature, allowing staff to
build various funding scenarios and "what if' assumptions with more immediate turnaround of
financial data regarding options presented in the FY 2007/08 budget proposals. As such, the FY
2007/08 projections in the Five-Year Financial Plan have been updated by staff to reflect the
preliminary budget assumptions made during the review of all departmental proposals, but as
data is still being refined at the time of this report, the FY 2007/08 projections are subject to
change before the budget is presented on May 7, 2007
The future shortfall projections in FY 2010/11 and 2011/12 are based upon conservative but
realistic revenue growth estimates using key current revenue categories and forecasting increases
in the costs to deliver current services to the community based upon actual expenditure patterns.
As in every year, the revenue 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 anticipated 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, assumptions for labor costs yet unknown, and actuarial updates for
retirement and other benefit costs as provided by PERS or other information sources available to
the Town.
In any given year of the plan in which a shortfall is projected, the plan assumes that budget
actions will be taken to eliminate the revenue shortfall 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.
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MAYOR AND TOWN COUNCIL/CHAIR AND MEMBERS OF THE REDEVELOPMENT
AGENCY
SUBJECT:
MARCH 19, 2007
Town of Los Gatos General Fund
Five Year Financial Plan FY 2006/07 Through FY 2011112
Summary Data EST. PROD. PROJ. PROD. PROJ. PROJ.
Revenue Summary 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
Sales Tax
Property Tax
Charges for Services
Business Licenses
Car Tax/VLF Prop Tax Swap
Intergovernmental Rev.
Other Lic. and Permits
Investment Earnings
Franchise Tax
Hotel/Motel Tax
Fines & Forfeitures
Miscellaneous
Transfers/Other Sources
Total Revenues
Town Expenditures
Salary
Elected Officials
Temporary Employees
Overtime
Other Salary
Benefits
Supplies, Materials, & Services
Grants & Awards
Utilities
Fixed Assets
Internal Service Charges
Debt Service
Operating Transfers Out
Solid Waste Fund Transfers Out
GFAR Capital Transfers Out
Total Expenditures
$8,100,140
$8,231,100
$8,490,400
$8,745,100
$9,007,400
$9,277,600
6,469,900
6,727,220
6,976,200
7,244,500
7,523,900
7,814,300
3,127,390
2,994,100
3,026,000
3,060,300
3,097,100
3,136,100
1,000,000
1,000,000
1,015,000
1,030,200
1,045,700
1,061,400
1,989,500
2,030,360
2,069,900
2,111,300
2,153,500
2,218,100
2,215,132
2,207,583
2,234,085
2,273,563
2,319,650
2,367,575
1,686,000
1,721,700
1,754,800
1,788,500
1,823,000
1,858,200
1,705,700
1,622,700
1,639,900
1,657,300
1,674,800
1,692,500
1,238,940
1,603,380
1,618,400
1,661,500
1,705,800
1,751,400
1,000,000
1,000,000
1,030,000
1,060,900
1,092,700
1,125,500
455,900
456,900
465,300
473,800
482,500
491,500
220,300
220,300
221,700
223,200
224,700
226,200
1,025,885
1,081,450
1,406,450
1,406,450
1,206,450
1,206,450
$30,234,787 $ 30,896,793 $31,948,135 $ 32,736,613 $ 33,357,200 $ 34,226,825
$12,936,252 $ 13,927,094 $ 14,482,650 $ 14,636,889 $ 15,183,718 $ 15,698,356
23,340
23,340
23,340
23,340
23,340
23,340
484,431
468,245
496,579
513,959
531,948
550,566
405,509
444,282
436,476
451,753
467,564
483,916
173,437
195,909
201,591
206,955
213,414
218,968
5,270,870
5,579,912
5,855,647
6,222,903
6,626,042
7,094,757
4,293,441
4,158,390
4,278,725
4,402,850
4,564,200
4,739,000
181,415
176,415
176,410
176,410
176,410
176,410
352,880
355,080
370,600
386,960
404,200
422,410
3,123,200
3,250,000
3,347,500
3,447,925
3,551,363
3,657,904
931,080
931,100
931,850
931,100
929,050
932,100
141,825
310,000
310,000
310,000
310,000
310,000
-
300,000
300,000
300,000
300,000
300,000
382,210
525,000
650,000
650,000
650,000
650,000
$28,699,890 $ 30,644,767 $31,861,368 $ 32,661,045 $ 33,931,249 $ 35,257,728
Net Rev & Other Sources Over Expend. $ 1,534,897 $ 252,026 $ 86,767 $ 75,568 $ (574,049) $ (1,030,903)
Ongoing Shortfall Mitigation 574,049 1,030,903
Revenues Over(Under)Exp. $ 1,534,897 $ 252,026 $ 86,767 $ 75,568 $ - $ -
Revenue Shortfall as a % of Operating Revenues -1.69% -2.92%
Status of Projected FY 2006/07 General Fund Year End Balances
Referring to the chart above, projections for FY 2006/07 as displayed in the "Estimated" column
of the Five-Year Financial Plan anticipate an excess of operating revenues above operating
expenditures of approximately $1.5 million. If the projections hold true, the Town's current
reserve policy provides that once legally restricted reserves such as Reserve for Open
Encumbrances are funded as required, the remaining reserves are designated equally to the
Reserve for Future Capital and Special Projects and the Town's Revenue Stabilization Reserve.
1< 31
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MAYOR AND TOWN COUNCIL/CHAIR AND MEMBERS OF THE REDEVELOPMENT
AGENCY
SUBJECT:
MARCH 19, 2007
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 Revenue Stabilization Reserve was first 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 "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. As the FY 2007/08 is being
developed, staff will continue to consider the use of some Revenue Stabilization Reserve Funds
which will be recommended to Council 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 in recent 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 PLAN UPDATE IMPLICATIONS -TRENDS & CHALLENGES
The update to the Five-Year financial forecast validates the Town's decision to begin strategic
cost reductions dating back to FY 2001/02, with cumulative salary and benefit savings totaling
approximately $2.8 million for 23.7 full-time equivalent de-funded positions. 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.
Revenue Trends
Recovery in Economically Sensitive Revenues- The five-year financial projections assume that
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.
-
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MAYOR AND TOWN COUNCIL/CHAIR AND MEMBERS OF THE REDEVELOPMENT
AGENCY
SUBJECT:
MARCH 19, 2007
The Town's Sales Tax base diversity is a continuing concern. Though the five-year projections
are encouraging, the Town's current lack of diversity in its portfolio of sales tax producers
continues to be a concern for the future. The current sales tax generators by category are
presented in the pie chart below:
Town Sales Tax Mix
2006/07 Sales Tax Revenues
$8.1 Million
A challenge to the sales tax base is the portion attributable to the Town's auto dealerships, one
which closed last fiscal year and another has moved its dealership out of Los Gatos. As depicted
above in the first chart, the Town's auto dealerships account for approximately 19% of the
Town's total annual Sales Tax. This percentage has fallen from five years ago when this sector
provided approximately 30% of the annual sales tax collections. 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
23% 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.
Shown below is a breakout of the top five General Fund revenue categories. These top five
sources provide the majority of funding for all Town services:
Others NatfliY
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MAYOR AND TOWN COUNCIL/CHAIR AND MEMBERS OF THE REDEVELOPMENT
AGENCY
SUBJECT:
MARCH 19, 2007
GF Revenue Source Comparison
Sales Tax 27.55%
All Other Sources-
Sales Tax
Property Tax 22.11 %
23.81%
27.55%
0 Town Services 10.54%
Intergovernmental
7.14%
0 Licenses & Permits 8.84%
Licenses &
-Property Tax
°
Intergovernmental 7.14%
Permits 8.84%
22.11%
Town Services)
10.54%
All Other Sources 23.81 %
State Budget Impacts to the Town are also unknown. The Governor's budget delivered in
January 2007 did not propose any additional state "takes" in the State's FY 2007/08 budget,
which is positive news for local government. But the potential for state "takes" is a constant
reality for the Town each fiscal year. Proposition 42 state gasoline taxes were proposed in the
Governor's January 2006 budget to be fully funded in 2006/07, however allocations are
suspended for FY 2007/08 and begin again in FY 2008/09. A significant mitigating factor to
preserve the Town's revenues from further takes was the successful approval of propositions in
2004 and in 2006 which were passed overwhelmingly by California voters to protect local tax
revenues for local services and local transportation projects.
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 a
comprehensive fee review as part of the budget process.
Service Delivery Costs- 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 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
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MAYOR AND TOWN COUNCIL/CHAIR AND MEMBERS OF THE REDEVELOPMENT
AGENCY
SUBJECT:
MARCH 19, 2007
labor market in a high cost region, the Town's labor costs have continued to grow. In particular,
significant public safety salary and benefit increases throughout the state 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 employee's 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 higher than the current year, rising from 12.663% of
covered payroll to 12.990%. Conversely, the rates for sworn emploees are expected to lower
slightly next year from 33.990% to 33.549% of covered payroll. The Five-Year Forecast assumes
this ongoing level of 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.
Employer Health Costs-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 benefit costs while
concurrently remaining a competitive employer in order to attract and retain a qualified
workforce.
Post Retirement Health Care Costs (Governmental Accounting Standards Board Statement #45)-
GAS13 45 will require the Town to accrue an annual expense on its financial statements for the
cost of providing post retirement health care costs. The annual cost of this benefit will
essentially be determined in the same way as annual pension costs are charged using an actuarial
study as its basis. The Town will soon be reviewing proposals from actuaries to begin an
actuarial study of the Town's post retirement health care benefits. GASB 45 requires the Town
to accrue an expense for this cost beginning in FY 2008/09. If the Town's experience is similar
to other cities, it can expect this cost will grow beyond the approximate $190,000 budgeted this
fiscal year. The Five-Year Plan assumes a 25% increase from year to year. The Town will not
know if this is sufficient until the actual evaluation is complete. Because the Town has a cap on
the annual growth of this benefit, this will be a positive element for the actuarial study, but since
the cap is linked to the growth in health care premiums, actuaries have told city officials to be
prepared for "big numbers." GASB 45 does allow for a "phase in" (amortization period-
essentially a 20 to 30 year payment plan) thereby allowing some flexibility in determining the
amount of annual funds placed in an irrevocable trust (which can be invested in generally higher
earning investments than is allowed for the Town's standard investments) to provide the
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MAYOR AND TOWN COUNCIL/CHAIR AND MEMBERS OF THE REDEVELOPMENT
AGENCY
SUBJECT:
MARCH 19, 2007
calculated future cost of benefits. The earnings accruing in the trust are then taken as a offset
against the calculated future costs of the post retirement benefits.
Energy Costs-Town-wide cost increases have exceeded the general inflation rate. The increases
are due in part to the rise in electric and gas charges resulting from the recent State-wide 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 for 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, the administration should continue to ensure that the Town's
internal rate setting practices are in line with projected internal service funding needs.
Infrastructure- An important point to note is that because of prior year budget savings and
increased revenues, the Five-Year Plan includes a yearly transfer of $550,000 in FY 2007/08
rising to $650,000 annually in FY's 2008/09 thru 2011/12, from the General Fund for the
Town's capital program. This annual transfer is funded by the $4.2 million in the General Fund
Appropriated Reserve for Future and Special Projects. Though the additional funding has
increased the Town's ability to implement the capital program, the level of annual funding still
falls short of fully funding the Town's need for infrastructure maintenance or to build 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 receipts are approximately $500,000 per year which is not sufficient to maintain
the Town's street condition at acceptable levels. The gap between gas tax and the desired
funding level must now be filled with excess General Fund revenue or State grants and /or bond
funds. A reliable, dedicated source of funding for basic capital improvements beyond these
means remains a goal for the Town.
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MAYOR AND TOWN COUNCIL/CHAIR AND MEMBERS OF THE REDEVELOPMENT
AGENCY
SUBJECT:
MARCH 19, 2007
FY 2007/08 BUDGET PREVIEW
PROPOSED STATUS QUO BUDGET TARGETS FY 2007/08
As presented in the Five-Year Financial Plan, the projections for next year indicate a moderate
excess of operating revenues over expenditures and a longer-term outlook for an imbalance in
expenditures and revenues. Consequently, except for some limited service restoration, staff will
be recommending a "status quo" budget for FY 2007/08.
The proposed FY 2007/08 budget will reflect a number of principles that take into account the
current and long-term fiscal picture as well as high priority service delivery needs. The key
principles include:
■ To the extent possible, recommend a "status quo" budget;
■ Consider budget augmentations in cases where prior year budget reductions have resulted
in service deficiencies in high priority areas;
■ Make progress on or initiate transitions to ensure cost-effective and high-performing
organizational structures; and
■ Identify opportunities for enhancing service delivery through technology.
Following are brief summaries of the issues which have surfaced in the budget discussions with
the departments, and which may be addressed in the proposed Operating and Capital Budgets
scheduled for consideration by the Town Council on Monday, May 7, 2007.
Police Department
Budget discussions with the Police Department have focused on service levels in the patrol area.
The department is exploring alternatives to address the goal of providing adequate patrol staffing
that accounts for vacancies due to turnover, illness, disabilities or vacations. In the current fiscal
year, the department has reassigned one officer from the Regional Auto Theft Task Force to
patrol to address the need for minimum staffing, and will be recommending to continue that
redeployment. While the reassignment results in a loss of $90,000 in reimbursement from the
regional task force, it adds one patrol officer to meet minimum shift requirements. Additionally
supplemental funding alternatives are being explored to ensure minimum staffing levels in the
event of vacancies, in particular the vacancies occurring between the time an officer resigns and
a new one is hired from the academy.
Another area being discussed is a transition in the parking control function to align staffing
resources with needs. An upcoming retirement of a Parking Control Officer presents an
opportunity to consider the most appropriate staffing needed to deliver the services associated
with the parking control function and other departmental needs.
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MAYOR AND TOWN COUNCIL/CHAIR AND MEMBERS OF THE REDEVELOPMENT
AGENCY
SUBJECT:
MARCH 19, 2007
Parks and Public Works
In the Parks and Public Works (PPW) department, budget discussions have focused on
transitions to align staffing resources with service needs and on ensuring adequate capacity to
deliver priority core services. Restructuring opportunities being explored are in the
administrative and engineering areas. In the administrative area, restructuring will better align
staff positions with customer service, work order, and general administrative demands.
Assessment of the administrative function will continue and may result in further restructuring.
In the engineering area, an upcoming retirement will allow the restructuring of a position to
meet the increased level of professional skills needed. Additional engineering support for both
private development (fee supported) and public infrastructure activities will be proposed to meet
the growing demand.
In the maintenance area, realignment of work assigned to temporary employees will be proposed
to address the need for enhanced garbage pick-up and steam cleaning in the downtown.
Additional non-personnel costs will be included for enhanced steam cleaning, as well. In
addition, the restoration of a maintenance worker position to permanent status is anticipated to
address the gap in maintenance capacity needed as a result of the transition of sewer services to
West Valley Sanitation District.
Community Development Department
Service demand generated by development activity remains high this fiscal year and is expected
by the department to continue into the foreseeable future. In addition, the department anticipates
ramping up efforts on the General Plan and housing element updates. To staff the department
with the experience needed for the complex special projects and the heightened workload, staff
will propose reclassifying positions to create opportunities for higher level professional staff that
can provide management level, policy development work and oversight. The cost of the
classification changes will be supported by development fees.
The department is also exploring alternatives for streamlining and enhancing the noticing
process, which may result in a budgetary change supported by development fees.
Library
The proposed budget will recommend maintaining the current model of the library open to the
public 54 hours/7 days per week, and the materials budget at the restored level included last year.
While no significant changes will be proposed to the library's operating budget, staff is exploring
technology alternatives to address the self-check service at the library. The current equipment is
not functioning consistently, and is no longer supported by its vendor. Any proposed technology
improvements will be included in the capital budget.
PAGE 13
MAYOR AND TOWN COUNCIL/CHAIR AND MEMBERS OF THE REDEVELOPMENT
AGENCY
SUBJECT:
MARCH 19, 2007
Community Services
Budget discussions in the Community Services Department have focused on reorganizations to
align service responsibilities with staff resources, and with reclassifications to better reflect job
responsibilities. Proposed reorganizations will result in more consistent coverage for customer
service and better alignment of work assignments with staff positions. Proposed reclassifications
will provide consistency in job classes delivering services at similar levels.
Town Manager's Office
The Town Manager's Office anticipates proposing further restructuring to align staff resources
with work demands throughout the department. The restructuring is designed to promote
seamless service delivery across administrative functions. One proposed change will reallocate
existing funding from vacant paraprofessional positions to an analyst position to provide
technical and professional support to both the human resources function and to the Town
Manager's Office. In addition, temporary hours will be proposed for the human resources
function to meet the demand for job studies associated with reclassification and restructuring
proposed throughout the organization. Recognizing the increasing workload generated as the
Town increases reliance on technology, staff will propose additional technical support in the
information systems program and restructuring to better align administrative staff support with
the needs throughout the department. A portion of the additional technical support will be fee-
supported as the new permit tracking system will require additional technical expertise.
Other Town-Wide Issues
Other issues that will be addressed in the FY 2007-08 budget include funding requests from
community organizations, such as the Chamber of Commerce, and the United Way 2-1-1
program. The capital budget will include funding for addressing some of the deferred
maintenance needs of Town facilities, such as the neighborhood center kitchen. In addition, the
proposed capital budget will reflect an emphasis on core infrastructure such as streets and
retaining walls as stated by Council at the Council Retreat on March 9 and 10, 2007.
CONCLUSION
The Town finds itself today in sound financial condition as a result of strategies undertaken to
manage through the downturns experienced in recent years. If the Five-Year Financial Forecast
holds true, the Town has an opportunity over the next few years to implement further strategies
such as cost containment, organizational realignments, efficiency measures, strategic public and
private partnerships, and revenue enhancement to enable the Town to continue to provide quality
public services. Any significant change in the forecast, with regard to either revenues or
expenditures, will require the implementation of additional strategies to maintain service levels.
In particular, the Town should continue to pursue acceptable opportunities to diversify and
strengthen the Town's economic base, as emphasized by the Town Council at the March 9 and
10 Council Retreat.
PAGE 14
MAYOR AND TOWN COUNCIL/CHAIR AND MEMBERS OF THE REDEVELOPMENT
AGENCY
SUBJECT:
MARCH 19, 2007
ENVIRONMENTAL ASSESSMENT:
This budget report is not a project defined under CEQA, and no further action is required.
FISCAL IMPACT:
The Second Quarter Budget Performance Report includes a number of recommended budget
adjustments necessary for FY 2006/07. Upon approval of the recommended budget adjustments
by Town Council, current projections forecast a moderate surplus of operating revenues over
operating expenses for the fiscal year ending June 30, 2007. 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:
Attachment 1- Budget Performance Report for the Six Months Ended December 31, 2006
Distribution:
TOWN OF LOS GATOS
BUDGET PERFORMANCE REPORT
FOR THE SIX MONTHS ENDED DECEMBER 31, 2006
March 17, 2007
FINANCIAL OVERVIEW - EXECUTIVE SUMMARY
Status of FY 2006/07 Adopted Budget:
Taken collectively, second quarter General Fund revenues continue to trend positively. Despite
the closure of two automobile dealerships the prior year and one in the current year, sales tax
receipts for the second quarter are trending moderately ahead of collections for the prior year. The
current forecast expects Sales Tax to exceed revenue estimates by approximately $454,100 this
fiscal year. The increase is due to growth in the general retail category, led by continued growth
of NETFLIX, an internet commerce company, 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 approximately 19%
of total Town sales tax, compared to approximately 30% five or more years ago. The success of
Netflix has allowed the Town to sustain the loss of three of the top ten businesses in the Town's
portfolio of sales tax generators, without a drastic decline in sales tax. Another favorable trend is
the continued economic recovery of the downtown. Sales tax collections, excluding new car sales
but including auto service stations, were up 3.57% for the year for the quarter ending September
30, 2006 (the most recent quarter available). Restaurant sales taxes for the period were the
highest generated in the past two years, up 8.1 % from the prior year.
Property tax collections are also exceeding budget estimates, with current forecasts exceeding
budgeted estimates by approximately $100,000. Property Tax appears to be tracking favorably at
nearly 10% growth, outperforming estimates of 4% growth used for the adopted budget estimates
for FY 2006/07. The growth is largely 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.
Department expenditure totals for the second quarter FY 2006/07 are also favorable, with
spending at the end of the second quarter averaging 43% expended, or 7% below the 50%
benchmark level used for six months of 12 months operations. With six months of data available
it is easier to predict revenues and expenditure trends for the entire fiscal year. However, the
uncertainty of the economic effects of potential rises in energy costs or a more dramatic downturn
in the local real estate market may impact consumer behavior. In light of this uncertainty and
being fully aware that the local economy's recovery remains vulnerable, staff continues to be
cautiously optimistic while monitoring fiscal developments very closely. Consequently, further
adjustments may be necessary during the fiscal year. Any further course corrections or budget
adjustments necessary will be brought to Town Council's attention at the earliest opportunity to
balance operating revenue and expenditures.
The cost to provide services to the community for FY 2006/07 and future fiscal years will
continue to require strong performance in the Town's economically sensitive revenues to offset
ATTACHMENT 1
the cost increases likely to occur. The FY 2007/08 "status quo" budget and fee update proposals
are being developed to 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.
State Budget Fiscal Impacts to Town for FY 2007/08:
Another positive development since the presentation of the First Quarter Budget Performance
Report was the announcement in the Governor's January 2007 Budget in which no additional
State local revenue "takes" were proposed for the State Budget in FY 2007/08. 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.
General Fund Reserve Status -June 30, 2006
General Fund reserves are classified into two categories-Restricted and Designated. Restricted
reserves are those which are restricted in use by accounting standards or legal agreements and are
not considered as available for use for another purpose. Designated reserves are established by
Council policy for an intended purpose. Current Restricted Reserves are presented below:
Restricted General Fund Reserves:
Amount
j Reserved for RDA Loan $1,500,000
Reserved for I .T Notes Receivable 478,873
Reserved for Advances to Urban Runoff 150,000
Total Restricted General Fund Reserves $2,207,380
As stated earlier the total General Fund Reserves closed at a balance of approximately $18.1
million at June 30, 2006. In addition to the approximate $2.2 million of General Fund Reserves
set aside for restricted purposes, the Town has approximately $15.9 million in designated reserves
established in accordance with Town financial policies and operating and capital budget
requirements. The Designated Reserves presented below include the newly established Revenue
Stabilization Reserve created by the Town upon the adoption of the FY 2005/06 budget.
Desi r late d serves
Designated for Capit
al & Special Projects
$4,143,889
M Designated for Revenue Stabilization
4,048,887
Designated for Economic Uncertainty
3,678,001
Designated for Sewer Asset Proceeds
2,438,660
Designated for Civic Center Improvements
663,086
Designated for Open Space
562,000
Designated for Mgr's Contingency & Prod.
200,000
Designated for Parking
186,930
Designated fro Grants Funds & Carryovers
79,650
Total Designated Reserves
-
515,921.450 I
2
The Reserve for Capital and Special projects, whose source is derived from half of the annual
available General Fund budget savings, serves as the primary source for replenishment to the
Town's Capital Improvement Fund (GFAR) in addition to the annual budgeted transfer from the
General Fund's operations of $150,000 in the current fiscal year. As such it represents the
potential source for a large number of unfunded needs identified during the annual capital
improvement plan process. This reserve also functions as a potential funding source for new
capital projects or augmentations to authorized projects funded through the Town's Five-Year
Capital Improvement Program (CIP). The Town continues to be challenged in identifying an
ongoing source of funds to meet the annual $1.5 million recommended street repair and
maintenance program and other priority infrastructure improvements like sidewalk repair and
replacement.
In its public communications, staff will refer to the $15.9 million in Designated General Fund
reserves as the Town's "reserves" since these reserves are established by Council policy for their
intended purpose. The availability of approximately $15.9 million in Designated General Fund
reserves provides the Town with resources to manage through future fiscal challenges and
opportunities, mindful of the many competing priorities for resource allocation, ranging from
restoration of core services to the community and a large amount of unfunded capital
improvements.
GENERAL FUND-KEY REVENUE ANALYSIS FY 2006/07
The following presentation provides a recap of significant General Fund revenue sources as of the
second quarter ending December 31, 2006. Sales Tax and Property Tax collections show positive
trends for the current year. Staff is monitoring developments in each major revenue source
closely for potential adjustments to budgeted revenues as recommended in this report.
FINANCIAL OUTLOOK FY 2006/07
♦ 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.
Anal
According to a recent update from the Bay Area
Council, the regional economy is strong enough
that nearly five times as many company
managers are preparing to recruit for new
employees than those who are planning on
reducing their staffing level. California's
economy continues to expand, with a fairly
broad-based growth outpacing the nation's rate.
What is unknown at this time is the possible
slowing of this economic momentum by the
recent reoccurrence of spikes in energy costs.
More data will become available as the fiscal
year progresses.
Second quarter Sales Tax revenues are slightly
above last year at the mid year point. Upon the
closure of two auto dealers who were "top ten
sales tax" generators last year, staff's
projections were for sales tax to decline in FY
2006/07. However, the continued success of
Netflix has generated sufficient additional
revenues to not only prevent a decline in sales
tax projections for the current year, but to
provide some growth in sales tax as noted
below. While this is very positive, staff remains
concerned as it is aware that more
diversification is necessary. The Town
continues 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 06/07
®2ndQuarter l
Actual Revenues
0 Fiscal Year Total
Actual Revenues
i
j 0 Fiscal Year j
Budgeted
Revenues
FY 02/03 FY 03/04 FY 04/05
FY 05/06 FY 06/07
2nd Quarter Actual Revenues $ 3,237,902 $ 3,217,070 $ 3,179,238
$ 3,131,898 $ 3,214,488
Fiscal Year Total Actual Revenues $ 6,928,817 $ 6,914,526 $ 7,904,130
$ 8,655,565 $ 3,214,488
Fiscal Year Budgeted Revenues
$ 7,646,000
FY 2004/05 forward will reflect the Sales Pax In Lieu paid by Santa Clara County
2nd Quarter Percent of Total 46.73% 46.53% 40.22% 36.18% 42.04%
Recommended Budget Revision (includes FY05/06 & FY06/07 State Adjustments) $ 454,140
4
FY 02/03 FY 03/04 FY 04/05 FY 05/06
FINANCIAL OUTLOOK FY 2006/07
♦ Property Tax Revenue
Description
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 by quarter in the chart below.
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.
Quarterly and Annual Revenues
5-Year History
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 moderately
exceeding budget estimates and a budget
revision upwards is recommended. 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
FY2006/07 Annual Report. All cities in the
county are showing positive growth. The Town
of Los Gatos reflects a 8.81% increase in
assessed value for FY 2006/07.
$8,000,000
$7,000,000
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
® 2nd Quarter Actual
Revenues
O Fiscal Year Total
Actual Revenues
® Fiscal Year
Budgeted Revenues
FY 02/03
FY 03/04
FY 04/05
FY 05/06
FY 06/07
2nd Quarter Actual Revenues
$ 2,246,511
$ 2,297,420
$ 2,497,953
$ 2,678,416
$ 2,806,731
Fiscal Year Total Actual Revenues
$ 4,977,119
$ 5,207,381
$ 6,856,993
$ 7,755,200
$ 2,806,731
Fiscal Year Budgeted Revenues
$ 8,249,400
FY 2004/05 forward will reflect an increase in Property Tax
due to "Permanent" Realignm
ent of VLF
2nd Quarter Percent of Total
45.14%
44.12%
36.43%
34.54%
34.02%
Recommended Budget Revision (Property Tax) $ 100,000
Recommended Budget Revision (VLF Backfill) $ 110,000
5
FY 02/03 FY 03/04 FY 04/05 FY 05/06 FY 06/07
FINANCIAL OUTLOOK FY 2006/07
♦ 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.
Anal
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.
Current year interest revenues reflect
significantly higher first quarter earnings than in
previous years due to increases in investment
returns and the Local Agency Investment Fund
(LAIF) rate, resulting in a recommended budget
revision. LAIF yields have risen to an average
yield of 5.129% in December 2006, from
3.808% in December 2005, and from its record
low of 1.42% in May 2004.
Quarterly and Annual Revenues
5-Year History
$1,600,000
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
❑ 2nd Quarter Actual
Revenues
Fiscal Year
Revenues
Fiscal Year Total
Budgeted Revenues
FY 02/03
FY 03/04
FY 04/05
FY 05/06
FY 06/07
2nd Quarter Actual Revenues
$ 638,036 $
594,001 $
513,338
$ 684,427
$
936,081
Fiscal Year Revenues
$ 1,596,850 $
1,290,100 $
931,836
$ 1,018,750
$
1,055,700
Fiscal Year Total Budgeted Revenues
$
1,055,700
2nd Quarter Percent of Total
40.0%
46.0%
55.1%
67.2%
88.7%
Recommended Budget Revision
$
500,000
6
FY 02/03 FY 03/04 FY 04/05 FY 05/06 FY 06/07
FINANCIAL OUTLOOK FY 2006/07
Description
♦ Franchise Fee
payment received. With the transition to the new
garbage contract, the franchise fees effective for
the new contract were established at 16%. The
prior contract provided for a 10% franchise fee
and approximately $300,000 in annual
surcharge fees for solid waste program
expenses. The new contract increases the
franchise fee but eliminates the solid waste
surcharge fees. Staff recommends a $225,440
increase in franchise fees for the period March
through June 2007.
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 slightly exceed the
budget estimates due to timing of actual
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
FY 02/03
2nd Quarter Actual Revenues
Fiscal Year Total Actual Revenues
Fiscal Year Total Budgeted Revenues
FY 2005106 Total Actual Revenues t
2nd Quarter Percent of Total
Quarterly and Annual Revenues
5-Year History
FY 02/03
$ 200,819
$ 897,158
•eflect increased revenh
22.38%
FY 03/04
$ 239,295
$ 930,997
e based on Aua
25.70%
FY 04/05
$ 246,980
$ 942,647
'it for Prior Yea
26.20%
® 2nd Quarter Actual
Revenues i
0 Fiscal Year Total
Actual Revenues
® Fiscal Year Total
Budgeted Revenues
J
FY 05/06
$ 248,860
$ 1,130,189
rs performed b}
22.02%
FY 06/07
$ 274,603
$ 274,603
$ 1,013,50C
Town
27.09%
Recommended Budget Revision 225,440
7
FY 03/04 FY 04/05 FY 05/06 FY 06/07
FINANCIAL OUTLOOK FY 2006/07
♦ 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.
based businesses are pro-rated by quarter, from
the date of application to the end of the year.
Analysis
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
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.
The favorable second quarter collections rate,
which is approximately $108K ahead of the
prior year, is partially the result of staff's
additional audit efforts conducted recently
which netted approximately $75K in additional
revenue from unlicensed businesses that were
performing services in Town this fiscal year.
Quarterly and Annual Revenues
5-Year History
1,200,000
1,000,000
800,000
600,000
400,000
200,000
❑ 2nd Quarter
Actual Revenues
❑ Fiscal Year Total
Actual Revenues
13 Fiscal Year Total
Budgeted
Revenues
FY 02/03
FY 03/04
FY 04/05
FY 05/06
FY 06/07
2nd Quarter Actual Revenues
450,284
458,003
396,773
343,358
452,346
Fiscal Year Total Actual Revenues
$ 970,554 $
1,041,865 $
1,056,814 $
1,019,386
$ 452,346
Fiscal Year Total Budgeted Revenues
$ 1,000,000
2nd Quarter Percent of Total
46.39%
43.96%
37.54%
33.68%
45.23%
Recommended Budget Revision
No Change
8
FY 02/03 FY 03/04 FY 04/05 FY 05/06 FY 06/07
FINANCIAL OUTLOOK FY 2006/07
♦ 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 second quarter of FY 2006/07
reflects a small decrease in collections
compared to the prior year, but the trends
indicate that the estimated revenues can be
increased by $70,000 for the fiscal year. State
projections show a 7.6 percent increase in travel
spending for 2006, with steady gains at an
annual rate of 7.1 percent since 2003. These
gains reflect the strongest travel market rebound
since 1999-2000 when travel spending had an
annual 8% growth rate. The travel industry
attributes these gains to higher room rates and
gasoline rates.
Overall, the Town expects the occupancy rates
to continue improving with projected increases
in tourism statewide, completed and upcoming
property re-investments, and local trends
demonstrating a strong increase in corporate and
leisure travel during the first and fourth
quarters. Local hotels have experienced
a moderate rebound in corporate events, leisure
travel related to the wedding industry, and
agricultural tourism related to the California
Wine industry.
Quarterly and Annual Revenues
5-Year History
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
® 2nd Quarter Actual
Revenues
O Fiscal Year Total
Actual Revenues
® Fiscal Year Total
Budgeted Revenues
FY 02/03
FY 03/04
FY 04/05
FY 05/06
FY 06/07
2nd Quarter Actual Revenues
$ 293,570
$ 312,998
$ 301,725
$ 382,190
$
371,333
Fiscal Year Total Actual Revenues
$ 713,064
$ 829,025
$ 868,908
$ 1,028,664
$
371,333
Fiscal Year Total Budgeted Revenues
$
930,000
2nd Quarter Percent of Total
41.17%
37.75%
34.72%
37.15%
39.93%
Recommended Budget Revision
$
70,000
9
FY 02/03 FY 03/04 FY 04/05 FY 05/06 FY 06/07
FY 2006/07 RECOMMENDED BUDGET ADJUSTMENTS
Budget adjustments are recommended for the following revenues and expenditures at the first
quarter as described below:
GENERAL FUND
FY 2006/07
Current
Budget
Recommended
Adjustment
Increase (Deer.)
FY 2006/07
Revised
Budget
Revenue:
Interest Earned
1,205,700
500,000
1,705,700
Sales Tax
$ 7,646,000
$ 454,140
$ 8,100,140
Franchise Fees
1,013,500
225,440
1,238,940
VLF Property Tax Backfill (State)
1,879,500
111,050
1,990,550
Building/Planning Various Permit Fees
1,547,500
150,000
1,697,500
Property Tax
6,369,900
100,000
6,469,900
VLF Property Tax Backfill (State)
1,879,500
110,000
1,989,500
Hotel Tax
930,000
70,000
1,000,000
Intergovernmental
3,178,490
(51,100)
3,127,390
Booking Fees (Intergovtl.)
-
42,777
42,777
Other Miscellaneous
Various
22,056
22,056
Total Revenue Adjustments
$ 24,444,390
$ 1,734,363
$ 25,678,753
Expenditures:
Storm Flooding Expenses
Repairs to Backflow Preventers
Misc Maint Services - Steam Cleaning
Transfer to CIP - Retaining Walls
"Transfer to CIP - Curbs, Gutters, & Sidewalks
Transfer to CIP - CDD Project
Below Market Price Program Expense
Homeland Security
CERT Supplies
- 42,100
42,100
- 16,000
16,000
- 7,100
7,100
- 150,000
150,000
- 20,000
20,000
- 15,000
15,000
- 24,000
24,000
- 4,552
4,552
- 11,005
11,005
Total Expenditure Adjustments
Net General Fund Adjusted Budget
$ - $ 289,757 $ 289,757
$ 1,444,606
FY 2005/06
Recommended
FY 2005/06
Current
Adjustment
Revised
OTHER FUNDS
Budget
Increase (Deer.)
Budget
GFAR Capital Projects Fund
Villa Avenue Retaining Wall
S
S
150,000
$
150,000
Curb, Gutter & Sidewalk
S
S
20,000
$
20,000
Community Development Automation
S
15,000
$
15,000
Reallocate Grant Revenues to Park Projects
$
125,000 $
-
$
125,000
Internal Service Funds
MIS Fund Transfers Out (Rev & Exp)
$
- S
15,000
$
15,000
Building Maintenance Personnel Costs
$
- $
6,500
S
6,500
10
Recommended Budget Adjustments
General Fund
Revenues
Interest Income-Due to an unexpected recovery in interest rates and larger than anticipated cash
balances, staff recommends an increase to estimated revenues of $500,000 for the fiscal year.
Sales Tax-Actual receipts are running ahead of estimates, primarily due to the general retail
(intemet commerce) category. Staff recommends an increase of $454,100 in estimated revenues
for the year.
Franchise Fees-The new garbage contract provides for increased franchise fees and eliminates
solid waste program funding reimbursements, Staff recommends an adjustment of $200,000 in
garbage franchise fees for the period of March through June 2007, and an additional $25,440 in
other franchise fees for the fiscal year.
Vehicle License Fees VLF Property Tax Backfills-Staff recommends increasing this estimated
revenue by $111,050 based upon documentation received by the Town from the State of
California.
Building and Planning Permit Fees-Staff recommends an increase of $150,000 for the year based
upon current year fees collected and the trends for the remaining months of the fiscal year.
Property Tax-Staff recommends a $100,000 increase to this revenue source based upon the
December 2006 property tax installments paid to the Town by the County which trended ahead of
estimates done during the prior year budget preparation.
Hotel Tax- Staff recommends a $70,000 increase to this revenue source based upon the actual six
months of receipts through December 2006 which are trending ahead of estimates done during the
prior year budget preparation.
Intergovernmental Revenues-Staff recommends a reduction in this revenue source of $51,100 to
reflect the reassignment of one police officer from the regional auto theft task force (which
provided partial reimbursement to the Town) to the Town's patrol function.
Booking Fees -Staff recommends an increase of $42,777 for booking fees reimbursements
restored this fiscal year through the efforts of California local government and public safety
officials.
Miscellaneous Revenues-Staff recommends an adjustment of $22,056 net increase in various
other General Fund revenues such as small safety grants, below market price home program fees
and business license recycle fees.
General Fund
Expenditures
Villa Avenue Retaining Walls Emergency Repairs-Staff recommends a $150,000 increase to
General Fund and GFAR fund transfers to fund the Villa Avenue Retaining Wall Project. The
project is required due to the recent failure of the existing retaining wall that requires emergency
repairs to stabilize the hillside and protect the public road.
11
Storm related repairs-Staff recommends a $42,100 budget increase to the General Fund streets
program to fund the emergency road repairs required due to the winter storm activity which
caused the road to fail. The repairs were done on various sections of streets in the Belwood
Gateway neighborhood and the entire roadway of Fairview Avenue. All repairs required digout,
base repairs and new asphalt roadway.
Curbs, Gutters, and Sidewalks-Staff recommends a $20,000 increase to the General Fund
transfers and a corresponding increase to GFAR fund transfers-in and to the related project
expenditure appropriations to provide funding for a pilot project using new methods for curb and
gutter repair. The repairs will take place in several neighborhoods town-wide, including Howes
Dr, Hershner Dr, Los Gatos Blvd & Hernandez Avenue.
Community Development Department -Accela Automation Software-Staff recommends an
addition of $15,000 for the automation project in the Town's MIS fund. The increase is
necessary to provide funding for new servers and software customization. The costs are
reimbursable from funds paid through development fees and set aside in the Town's GFAR fund
for support of development related technology improvements.
Staff recommends a $6,500 increase to the Building Maintenance Fund for installation of high
pressure release valves for the compressed natural gas station as required by law once the valves
have been in use for 1400 hours and a $16,000 increase to the Town's park program to install
backflow prevention devices at various park locations which were destroyed during the winter
2007 freeze.
Staff recommends a $7,100 increase to the Town's Streets program for additional contract steam
cleaning of downtown banners and a more extensive high pressure cleaning operation applied in
November to the downtown sidewalks to ready them for the holiday shopping season.
Staff recommends a $24,000 increase in appropriations for legal and Below Market Price (BMP)
program costs related primarily to the litigation, acquisition, rehabilitation, and ongoing
ownership costs for four BMP units at Villa Capri. These costs are fully funded by BMP In-Lieu
Fees, paid by developers as dictated by BMP Program regulations; these costs are not borne by
the General Fund.
Other Funds
Grant Fund
Staff recommends a $11,005 increase in authorized budget related to the 2005 Community
Emergency Response Team (CERT) for citizen's grant fund appropriations and a $4,552 increase
in Homeland Safety Grant expenditures for emergency preparedness.
FINANCIAL SUMMARIES, PROJECTIONS AND RECOMMENDATIONS
General Fund
The following page presents the Schedule of FY 06107 General Fund Operating Revenues vs.
Operating Expenditures 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 early trends observed through the first quarter.
12
Town of Los Gatos
Schedule of General Fund
Operating Revenues vs. Operating Expenditures
For the period ended December 31, 2006
Revenues
General Property Tae
Prop Tax Car Tax Backfill
Sales & Use Tax
Franchise Fees
Transient Oce Tax
Business License Tax
Licenses & Pen rits
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 ofResc-.
PERS Liability Reserve
Use of Internal Service Reserves - Yr 3
Total Use of Reserves
Total Revenues plus Reserves
FY05/06
FY05/06
FY05/06
FY05/06
FY06/07
FY06107
FY06/07
FY06/07
FY06/07
Final
Adjusted
2nd Qtr
%
Adopted
Adjusted
2nd Qtr
%
Finance
Balance
Budget
Aetuals
YTD
Budget
Budget
Actuals
YTD Projection
$ 5,831,822
$ 5,668,510
$ 2,678,416
47%
$ 6,369,900
$ 6,369,900
$ 2,806,732
44% $
6,469,900
1,923,378
1,923,380
-
1,879,500
1,879,500
-
0% $
1,989,500
8,655,566
7,800,000
3,131,898
40%
7,646,000
7,646,000
3214,488
42% $
8,100,140
1,130,190
983,450
248,860
25%
1,013,500
1,013,500
27403
27% $
1,238,940
1,028,664
950,000
382,191
40%
930,000
930,000
371,333
40% $
1,000,000
1,019,386
1,000,000
343,358
34%
1,000,000
1,000,000
452,346
45% $
1,000,000
1,584,662
1,564,180
977,737
63%
1,547,500
1,547,500
1,329,615
86% $
1,686,000
173,326
148,300
81,574
55%
152,700
152,700
112,624
74% $
152,700
2,606,356
2,563,620
1,295,430
51%
1,937,080
2,01055
825,333
41% $
2,062,432
3,006,634
2,819,370
2,094,989
74%
3,178,490
3,178,490
2,083,058
66% $
3,127,390
210,888
166,700
68,182
41%
455,900
455,900
224,330
49% $
455,900
1596949
1,128,750
684,428
61%
1,205.700
1,205,700
936,981
78% $
1,705,700
(189,685)
-
-
-
2338,297
2,702,610
2,786,046
103%
210,300
210,300
204,318
97%
210,300
430,839
603,780
189,671
31%
221,850
221,850
174,757
221,850
31,747,272
30,022,650
14,962,780
50%
27,748,420
27,830,995
13,010,519
47%
29,420,752
281,650
281,650
150,000
281,825
514,035
382,210
514,035
300,000
300,000
300,000
300,000
300,000
300,000
300,000
581,650
581,650
450,000
581,825
814,035
682,210
814,035
S 32328.922
$ 30,604,300
$ 15,412,780
$ 28,330,245
$ 28,645.030
$ 13,692,729
$ 30,234,787
Expenditures (includes e/f6ut no encumbrances)
Mayor & Council
Treasurer
Attorney
Administrative Services
Comm Developmeut
Police
Parks & Public Works
Conununity Services
Library
Total Dept Expenses
148,595
153,490
70,914
46%
161,130
161,130
68,078
42%
161,130
75,184
97,250
40,668
42%
98,150
98,150
44,006
45%
98,150
228,744
233,700
114,612
49%
245,450
245,450
100,283
41%
245,450
2,214,363
2,293,021
1,032,327
45%
2,338,010
2,338,010
1,077,524
46%
2,338,010
2,916,068
3,016,850
1,382,136
46%
3,231,500
3,231,500
1,200,530
37%
3,231,500
10,855,241
10,865,860
5,088,897
47%
10,949,660
10,949,660
5 .295,961
48%
10,949,660
4,766,536
4,813,240
2,158,653
45%
4,902,150
4,902,150
2,241,063
46%
4,902,150
866,027
907,565
393,293
43%
955,565
955,565
419,857
44%
955,565
1,879,184
1,903,860
918,802
48%
1,989,660
1,989,660
957,194
48%
1,989,660
$ 23,949,943
$ 24,284,836 S
11,200.301
46% $
24,871,275
$ 24,871275 $
11,404,497
4600 $
24371.275
Non-Dept Expenditures and other uses
General Government
2,240,216
2,909,476
600,517
21% 3,082,370
3,314580
810,598
24% 3.314,580_
Total Non-Dept Expenses
$ 2,240 216
$ 2,909,476
$ 600,517
21% $ 3,082,370
$ 3,314,580
$ 810,598
24% $ 3,314.580
Taal Operating Expenditures
$ 26,190,159
$ 27,794312
$ 11390819
43% $ 27,953,645
$ 28,185,855
$ 12,215,095
43% $ 28,185,855
Net Operating Revenues Before Capital Trsf.
& Budgeted Beg Fund Balance
$ 6,138,762
$ 3,409,988
$ 3,611,961
$ 37600
$ 459,175
$ 1,477,634
N/A $ 2,048,932
Authorized Use of Reserves
-
Capital Projects
150,000
150,000
150,000
150,000
382,210
382,210
382,210
Parking Management Prograrn
131,650
131,650
-
16,430
16,430
-
16,430
Revenue Stabilization Fund
-
-
-
16,795
16,795
16,795
Sewer Assets Proceeds Reserve
98,600
98,600
98,600
Total Budgeted Use of Reserves
281,650
281,650
150,000
281,825
514,035
382,210
514,035
Net Surplus or (Use) of Reserves 5,857,112 3,128,338 3,461 961 94,775 (54 860) 1,095,424 1,534,897
Guide to Presentation:
Each of the following groups of financial summaries present data by governmental fund type.
These funds are Special Revenue Funds, Capital Projects Funds, Internal Service Funds, and
Redevelopment Agency Funds. In each of the following projections similar format is presented.
The fund information starts with beginning fund balances and adds current year revenues and
subtracts current year expenditures which gives the ending fund balance. Budgeted amounts are
also provided for revenues and expenditures, these are useful for comparing actual amounts
received or spent to date versus budgeted for FY 2006107.
13
Special Revenue Funds - Special Revenue Funds, which account for the proceeds derived from
specific revenue sources that are legally restricted or assigned to special purposes including the
Town's Parking Fund, Solid Waste Fund, Community Development Block Grant Fund, Non
Point Source Fund, Landscaping and Lighting District Funds, and the Operating Grants Fund.
Of special note here is the Parking Fund, which despite de-funding of 1.8 FTE positions in FY
2006/07 continues to indicate revenue shortfalls. Due in large measure to employee injuries and
less aggressive enforcement during the Main Street Reconstruction Project last summer, the costs
of parking administration and enforcement are exceeding citation revenues. The budgeted
General Fund subsidy for this program for the fiscal year is $284,400 to balance operating
revenues with operating expenditures. Staff is continuing to evaluate this program, as any
shortfall in this fund must be covered at year-end with a transfer from the Town's General Fund.
Special Revenue Funds
Budget to Actuals Comparisons
Parking
Solid
CDBG
Non Point
Operating
Fund
Waste
Grants
Source
LIDS
Grants
Beginning Fund Balance (Pre-audit)
-
250,037
1,149,730
154,127
106,647
28,278
Budgeted Revenues
661,000
381,420
189,310
174,060
35,950
12,000
Actual Revenues - 2nd Qtr
172,178
172,593
21,853
172,066
38,164
-
Budgeted Expenditures
661,000
384,802
389,310
174,060
56,230
32,467
Total Actual Expenditures - 2nd Qtr
273,780
130,752
38,798
91,938
19,889
4,616
2nd Quarter Ending Fund Balance
(101,602)
291,878
1,132,785
234,254
124,922
23,662
Capital Projects Funds - Capital Projects Funds are utilized to account for resources used for
acquisition and construction of capital facilities by the Town. Funds included in this category are
the GFAR Fund (General Fund Appropriated Reserve), Traffic Mitigation Fees Fund, Grant
Funded CIF's Fund, Storm Drains Fund, Utility Undergrounding Fund, and the Gas Tax Fund.
Capital Project Funds are tracking in accordance with the FY 2006/07 adopted budget. Staff is
recommending no changes at this time.
In developing the FY 2006/07capital program, staff reviewed scheduled projects for potential
strategic slowdowns of expenditure activity. This slowdown will aid cash balances available for
General Fund investment earnings, in light of the aggressive capital-spending plan over the past
three years. If operating revenues will support it, staff still intends to maintain the General
Fund's current year $150,000 revenue commitment to the Town's Capital Improvement Plan.
The Grant Funded CIP fund displays a deficit balance because this grant fund expends Town
dollars first, then provides documentation of these expenditures to the State of California or other
granting agencies and is reimbursed for those costs, which eventually should result with the fund
"breaking even" or a zero fund balance (Dollars expended will be received back in grant
reimbursements in equal amounts).
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
2,473,423
275,000
4,539,262
130,800
95,000
562,700
Actual Revenues - 2nd Qtr
1,448,866
-
-
67,255
56,294
240,568
Budgeted Expenditures
3,439,475
40,430
4,493,586
242,614
-
646,000
Total Actual Expenditures - 2nd Qtr
998,313
21,949
391,754
50,000
-
82,308
2nd Quarter Ending Fund Balance 4,263,193 23,182 (395,779) 1,156,126 2,029,477 1,087,807
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 FY 2006/07 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
362,730
595,700
482,300
86,000
838,200
597,800
1,119,300
Actual Revenues - 2nd Qtr
178,850
300,333
290,754
35,042
432,818
298,900
584,663
Budgeted Expenditures
550,500
600,540
496,100
83,350
1,829,060
597,600
1,232,632
Total Actual Expenditures - 2nd Qtr
1269945
264,386
355,163
36,909
968,895
230,731
428,342
2nd Quarter Ending Fund Balance
3,543,215
1,853,001
1,875,549
228,352
1,865,656
220,443
19157,315
Trust and Agency Funds - Town Trust and Agency Funds have fund balances as of June 30,
2006 of $320,349 for Parking District #88 and $305,218 in the Library Trust Funds. No budget
revisions are contemplated at this time for these funds.
Redevelopment Agency - The Agency's FY 06/07 and FY 2006-11 Capital Improvement Plan
adopted budgets are incorporated into the Redevelopment Agency's financial statements and
year-to-date actuals as presented below. The Capital Projects Fund balances include
approximately $362,000 dollars of remaining unexpended funds at February 28, 2006 (taken from
current bank trustee statements) from the Agency's $10.7 million dollar 2002 COP issue. The
remaining funds (including accrued interest earnings) are available for their planned purpose
including eligible capital projects in the downtown project area such as the remaining Street
Reconstruction project funds (191K) Santa Cruz Avenue/Wood Road Gateway ($65K) and the
15
Downtown Parking Management Plan ($25K) and for related contingencies as per Town
contractual agreements.
Redevelopment Agency Funds
Budget to Actuals Comparisons
Capital
Debt
Low/Mod
Total
Projects
Service
Housing
RDA Funds
Beginning Fund Balance
3,320,273
4,481,846
4,335,193
12,137,311
Budgeted Revenues
50,000
5,494,780
1,197,430
6,742,210
Actual Revenues - 2nd Qtr
50,406
2,380,792
615,790
3,046,988
Budgeted Expenditures
1,847,533
4,224,800
451,050
6,523,383
Total Actual Expenditures - 2nd Qtr
1,424,271
751,526
348,392
2,524,190
2nd Quarter Ending Fund Balance
1,946,408
6,111,111
4,602,590
12,660,109
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 $303,000 for FY 2004/05 & FY 2005/06. The FY
2006/07 Budget Bill eliminated the approximately $303,000 increased ERAF payment, allowing
the Agency to retain this amount of tax increments to be used for important future Agency
projects.
Proposition IA approved in 2004 does not contain specific protections for redevelopment
agencies. These were not included because there are existing legal opinions that conclude that
redevelopment agency tax increment revenue is constitutionally protected from state revenue
takes.
It is important that the Town continue to monitor developments regarding Redevelopment
Agencies to discourage the legislature from further State takes from Redevelopment Agency Tax
Increment. Protecting Redevelopment Agency funds for all cities is also a strategic priority for
the League of California cities. It is essential to preserve the Agency's tax increment revenue as
any take from this source will reduce the annual revenue stream. If a larger revenue take is
enacted, the lowered revenue stream will reduce the total amount of bonds the Agency can issue
in the future.
CONCLUSION
The financial results from the prior fiscal year and data collected through the second quarter of
FY2006/07 point towards a cautious optimism that the Town's economically sensitive revenues
will continue their positive trends. This is especially important in light of the recent loss of three
auto dealerships which were in the top ten sales tax providers of last fiscal year. Though the
Five-Year Financial Plan continues to project moderate future revenue shortfall challenges, these
challenges will be made less so if the Town's economically sensitive revenues can sustain their
momentum and the cost of delivery of core services can be kept in check.
It is the overall financial strength of the Town that enables the Town to effectively manage the
current economic recovery. The Town continues to carefully monitor revenue and expenditure
trends and react pro-actively before a financial crisis presses upon the Town. Staff continues to
16
closely monitor all current year revenue and expenditure activity, mindful of the necessity to
balance operating revenues with operating expenditures. Staff continues its efforts exploring
options for enhancing revenue sources for ongoing operating and capital needs of the community
for the future. It is equally important to ensure that the Town's current limited resources are
allocated to meet the basic priority service needs of the community.
17