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1a - Transmittal Letter Finalweb A - 1 TOWN OF LOS GATOS CIVIC CENTER 110 E. MAIN STREET P.O. BOX 949 LOS GATOS, CA 95031 May 6, 2011 Honorable Mayor and Town Council: I am pleased to present to you the FY 2011/12 Operating and Capital Budget for the Town of Los Gatos and the Los Gatos Redevelopment Agency. This document provides a comprehensive recommendation and projection for all Town financial activities for FY 2011/12 and Capital Improvement Program activities for the FY 2011/12 – 2016/17 planning period. This budget is a numerical representation of the Town’s priorities and goals given continued global economic and local fiscal challenges. The proposed operating budget incorporates expense reductions and limited revenue enhancements totaling the $1.3 million necessary to balance this year’s budget after eliminating a previously planned increase to the Town reserves. This balancing includes targeted expenditure reductions, service delivery changes, the elimination of vacant positions, and modest revenue adjustments to recover costs for private development and other user fee supported services. The capital budget includes limited funding for upgrades to the Town’s infrastructure, including investments in streets, parks, and storm drains, and site improvements to the Civic Center. The construction of the new Library continues to be a prominent capital project that is expected to be complete by early 2012. Strategic Goals and Priorities In January 2011, the Town Council reviewed the core values which guide the development of key strategic goals. The Town of Los Gatos six core values are: Community Character, Good Governance, Fiscal Stability, Quality Public Infrastructure, Civic Enrichment, and Public Safety. For each core value, there are several corresponding strategic goals. The attached matrix reflects the Town strategic goals for 2011 – 2013. Key strategic goals over the next two years include, but are not limited to: Community Character Implement the 2020 General Plan actions identified for the first two years Facilitate development process and specific plan for the North 40 Develop Sustainability Action Plan Good Governance Increase communication and online services using the Town website, social networking, and other means Increase availability of online services to meet customer needs 24/7 Pursue technology solutions to enhance productivity Fiscal Stability A - 2 Respond to ongoing structural deficit through benefit cost containment, organizational redesign and alternative service delivery Update and implement economic vitality strategy to facilitate business retention, expansion and attraction, including major tax generators Increase availability of online services to meet customer needs 24/7. Quality Public Infrastructure Evaluate approaches and implement project to improve condition of streets in the Almond Grove district Develop and begin implementation of plan for the re-use of vacated Library space Develop "Complete Streets Program" that plans for a balanced, multimodal transportation network Civic Enrichment Complete construction and opening of new Library, providing new and expanded library services Develop master plan and construct a new sports/recreation facility to meet community needs Enhance efforts to encourage community members to participate in civic leadership through membership on the Council and commissions Public Safety Expand the Los Gatos Prepared campaign to maximize community self-sufficiency In conjunction with County Fire, implement evacuation plans for areas subject to flooding and fires Develop baseline metrics of traffic patterns and maintain ongoing monitoring to inform strategies to improve traffic safety and reduce volume Five Year Financial Plan and Framework for Budget Development The updated Five-Year Financial Plan included in the budget staff report spans FY 2011/12 – 2016/17 and is an integral part of the budget development process. The forecast is used as an independent financial tool that is based upon current costs and revenue forecasts, but is designed to be fluid in nature, allowing staff to build various funding scenarios and test “what if” assumptions of expected increases in operating costs and changes to operating revenues. Provisions for limited augmentations to critical service areas including maintenance were also assumed in the forecast. The five-year forecast identified the need for budget adjustments totaling $1.3 million to balance the FY 2011/12 budget after eliminating a previously forecasted addition to operating reserves. Forecasted FY 2011/12 revenues were projected with the current recession in mind, assuming varying growth rates, ranging from flat to 3% for tax revenues and for fees for services, including overhead charges. Expenditures were projected using a database of prior year actual costs adjusted for future known increases in employee benefit costs, the final remaining cost of living increase for police, and actuarial updates for post-retirement benefits. Budget Development Principles and Strategies The five-year forecast projected a $1.3 budget gap for FY 2011/12 and continued operating deficits over the next four years. With this forecast as a guide, staff began developing FY 2011/12 A - 3 budget strategies, including reductions that generate ongoing savings while maintaining service levels to the greatest extent possible. The proposed FY 2011/12 budget reflects principles that take into account the current and long- term fiscal picture, as well as high priority service delivery needs. The key principles include: Develop and recommend a balanced budget that maintains service levels; Continue to make progress on Council strategic goals identified at the 2011 Town Council retreat; Initiate organizational transitions to ensure cost-effective and efficient service delivery; and Identify opportunities to enhance service delivery through technology. The following section reflects strategies used to balance the FY 2011/12 operating budget. In analyzing these issues, staff considered the impacts on both current and future budgets and assessed alternative approaches to meet service demands. Staffing Adjustments and Salary Reductions The FY 2011/12 proposed operating budget reflects several adjustments to better align staff resources with work demands. The following section highlights several recommended staffing changes that involve departmental reorganizations, furloughs, and alternate service delivery models resulting in an estimated savings of $800,000 and an increased focus on Council and community priorities. Administrative Services Reorganization. The Town Manager’s Office will implement an administrative restructuring strategy to better align services to achieve operational efficiencies. A cost neutral staffing plan has been developed, enabling the full integration of the Community Services Department into various Town departments, including the Administrative Services Department, and a realignment of Clerk functions. Services provided by the Community Services Department will be incorporated into the Town Manager’s Office, including resources to support the Community Services Commission and Arts and Culture Commission; partnerships with LGS Recreation, LG Museums Association, and LG Music & Arts; and community grants and the Community Development Block Grant program. The services will be provided by the reclassification of a Deputy Town Manager and a part-time staff technician. The Community Services Director, Administrative Analyst, and Administrative Secretary positions, which were previously funded in the Community Services program will be eliminated. In addition, Clerk functions will be aligned with the Town Attorney’s Office, enabling the consolidation of customer support services in the Town Manager’s Office. The customer service duties of the Deputy Clerk position will be redistributed to a part-time Office Clerk. This position will support the Town Manager’s Office while performing additional clerical responsibilities. The remaining Deputy Clerk duties will be provided by a separate part-time position. Last, a half-time Deputy Town Attorney will also be appointed as a half-time Clerk Administrator. This staffing realignment will enable staff to allocate resources to focus on the goal of enhancing emergency preparedness and community outreach efforts as reflected in the adopted 2011 – 2013 Council Strategic Goals. To achieve this, it is recommended that an existing FTE in the Administrative Services Department be A - 4 modified to serve as a Community Outreach Coordinator to expand community outreach, support, and emergency preparedness efforts, and staff the community volunteer program. Modification of Library Schedule. The proposed FY 2011/12 budget includes a recommendation to modify Library service hours by closing on Sundays and extending Saturdays by two hours. Multiple reduction scenarios were studied; however, elimination of Sundays generated the greatest cost savings ($65,000), while maintaining current weekday and evening hours. Online services such as the Library catalog, databases, e- books, downloadable audiobooks, library mobile application and the Library website will continue to be available 24 hours per day, seven days a week. Implementation of 12-hour Police Patrol Shift. In Spring 2011, the patrol staffing schedule was modified from a combination 10 hour and 12 hour schedule with five patrol teams to a straight 12 hour schedule with four patrol teams. This new structure will reduce overtime, increase patrol staffing levels, and allow for the elimination of a vacant sergeant position late next year. Furloughs. Unpaid furloughs for all Town employees are included in the proposed budget and are expected to provide a savings of $340,000. To ensure minimal impact to Town services, the furloughs will be implemented on Veterans’ Day, a national holiday in November and during the annual holiday closure in late December. A furlough alternative that generates the same cost savings value is currently being explored with sworn staff. Regional and Local Resources The Proposed FY 2011/12 budget addresses immediate funding for two regional and one local issue that will likely require significant additional resources in future years. Non Point Source Discharge Elimination System (NPDES) Additional resources may be required in future years to comply with the new regional storm water permit issued by the San Francisco Regional Water Quality Control Board (SFRWQCB). The permit is issued to four programs, the Santa Clara Valley Urban Runoff Prevention program (comprised of all cities in the County), the West Valley Sanitation District (independent district), the West Valley Clean Water Program (comprised of City of Campbell, Town of Los Gatos, and The City of Saratoga) and the Town’s managed Non Point Source Discharge Elimination System (NPDES). In past years, the Town-managed NPDES program has had sufficient pass-through revenues collected from Los Gatos customers by the West Valley Sanitation District (WVSD) to provide funding for the Town’s NPDES program requirements. As the storm water program requirements have grown, the funding collected by WVSD for this purpose is no longer sufficient to meet the program costs. These funds are used by each local agency for carrying out the local government’s responsibilities as required by the storm water permit. The local share of revenues are reduced due in part to increasing costs of administration for the collective Storm Water Management program and the higher levels of program activity required to meet increasingly tough permit standards. In the coming year, Community Development, Parks and Public Works and Finance staff will ascertain the long term rising cost impacts of the new permitting requirements and propose appropriate fee and revenue sources to cover these increased costs. A - 5 Silicon Valley Regional Interoperability Project (SVRIP) In FY 2010/11, SVRIP became a Joint Powers Authority and renamed SVRIA – Silicon Valley Regional Interoperability Authority, resulting in the joint ownership and maintenance of the Santa Clara County microwave communication system. As with other member agencies, the Town will continue to pay a portion of ongoing annual system management and maintenance costs. A separate, but related system is the Bay Area Regional Interoperable Communication System, or BayRICS. Using key communication access points, the Town and the cities of Sunnyvale, Santa Clara, and Monte Sereno formed a south bay hub to create a regional broadband wireless network for public safety-specific uses and the general public. While major portions of this project are grant funded, it is anticipated that there will be some local costs to participating to support and maintain the infrastructure. Pavement Condition Index (PCI) Increased funding for local street maintenance is discussed within the Five-Year Capital Program, including the possible redirection of future operating resources to meet rising community expectations and demands for improved neighborhood street maintenance. Approximately 56.7% of the proposed FY 2011/12-2016/17 CIP funding is allocated to street reconstruction and related projects, reflecting the Council’s priority to address street maintenance needs. As previously communicated to Council, the Town’s past Pavement Condition Index (PCI) of 74 (100 being the highest rating possible) has dropped to 69. However, planned FY 2011/12 CIP street infrastructure projects will enhance the Town PCI. Continued attention to infrastructure funding over the next five years will be necessary to meet future street maintenance needs. FY 2011/12 General Fund Operating Budget Overview The proposed FY 2011/12 General Fund Budget is a balanced budget barring any other unanticipated financial outcomes. However, revenue estimates may change next year if there are unexpected negative local economic developments or unanticipated future State revenue take- aways. If any of these occur, adjustments to the budget may be required early next fiscal year. Overall, General Fund appropriated expenditures are proposed to increase approximately 1.4% from the FY 2010/11 Adopted Budget levels of $30,144,236 to $29,731,401 excluding debt service and capital transfers-out. The FY 2011/12 General Fund Operating Budget projects a balanced budget after supplementing operating revenues with designated reserves for discretionary or “one-time” use. A - 6 GENERAL FUND SOURCES FY 2011/12 PROPOSED BUDGET Revenues General Fund Operating Revenues Sales & Use Tax9,400,000$ Property Taxes7,466,210$ Licenses & Permits2,022,186$ Charge for Services3,191,993$ All Others11,344,494$ Fund Balance Sources Other Uses of Fund Balance300,000$ Capital / Special Project Reserve650,000$ Vasona Land Sale Reserve2,700,000$ TOTAL SOURCE37,074,883$ GENERAL FUND USES General Fund Operating Expenditures29,731,401$ Debt Service Payments2,094,727$ General Fund Transfers4,440,000$ Fund Balance Allocation Revenue Stabilization-$ CIP Capital Projects800,000$ TOTAL USE37,066,128$ NET SOURCES LESS USES8,755$ Operating Revenues It is expected that FY 2011/12 General Fund revenue will continue to remain relatively flat given the current economic climate. With the exception of sales tax, which is expected to increase primarily due to Netflix, the Town’s largest sales tax provider, the recession continues to impact the Town’s economically sensitive revenues, including property taxes, charges for services, and licenses and permits. Sales tax and property tax have been budgeted at a low growth rate for FY 2011/12. A continuing challenge to the sales tax base is the portion attributable to the Town’s auto dealerships, which has fallen from 30% to 12% over the past five years. Another concern is the importance of retaining technology-based businesses which contribute to the Town’s revenue; Netflix is the Town’s largest provider of sales tax annually, contributing nearly 41% of the Town’s sales tax revenue. Diversification continues to be an important objective so that the Town can better weather the effects of economic cycles and their impact on services. To that end, the Town will move forward with key economic development efforts, including the Los Gatos Boulevard Plan and North Forty Specific Plan, and maintain its outreach and support of downtown and local businesses through continued funding of the Economic Vitality Program. Los Gatos’ property values remain largely stable, although the volume of housing sales has decreased in the past year. Turnover of pre-Proposition 13 housing units, which are often A - 7 revalued at current market rates may offset the loss of property tax growth due to the slow housing market. Transient Occupancy Tax (TOT) has been reduced slightly in anticipation of slow travel and tourism activity. Expected revenue from Licenses and Permits has been reduced slightly due to a decrease in private development activity. Conversely, charges for Town Services have increased by 3% or $85,615. Overall, the FY 2011/12 combined revenue for these charges are projected to remain flat and take in account overhead and fee adjustments adopted by Council in April 2011. All other revenues were based on the latest information available from the State, recent revenue trend history, and other information provided by Town departments that track particular revenue sources. Operating Expenditures The Town’s General Fund operating budget expenditures for FY 2011/12 have increased by $412,835 compared to the prior year’s adopted budget (excluding fund transfers and debt service). These expenditures are comprised of six major categories of costs, including salaries and benefits, grants and awards, internal service charges, operating expenses for supplies and services, and debt service. Despite strategic reductions made in staffing, overtime, and operating expenditures, salary and benefits continue to be the largest portion of the Town costs. Compared to the prior year, benefits increased nearly 15%, largely due record PERS investment losses sustained in 2008. In addition to increases in miscellaneous and safety PERS rates, health care costs for active and retired employees coupled with actuarial requirements as prescribed by the Governmental Accounting Standards Board Statement (GASB) #45 continue to grow, exacerbating the gap between revenue and expenditures in the five-year forecast. State Budget Impacts Details on the State of California Proposed FY 2011/12 budget will be available as part of the Governor’s May Budget Revise. Based on the most recent review of the State’s proposed budget, the League of California Cities has identified several budget proposals that will impact cities: Elimination of Redevelopment. While the status of this proposal is unclear, the threat of losing redevelopment funds remains serious. To date, the Town has lost nearly $2.7 million in redevelopment funding from state takeaways. In response to the State’s proposal to eliminate redevelopment, the Town has taken steps to secure the remainder of its redevelopment funding. However, if the proposal is enacted, it is anticipated that the Town will lose up to $800,000 annually for related administrative overhead costs. Booking Fees and COPS Program. Booking fees and the COPS program, which provides partial funding to local government for police officers, are funded by a temporary .15% from the Vehicle License Fee (VLF). This funding will expire on July 1, 2011. Absent tax extensions or alternative funding, booking fees incurred by the County will not be reimbursed by the State and the COPS program will be eliminated. As a result, the cost of booking fees, estimated to be $70,000, would be passed down to the Town and approximately $200,000 in COPS funding would be lost, which is currently used to partially support two Los Gatos-Monte Sereno Traffic Police Officers. Public Library Funds. The State proposed to reduce the Public Library Fund by $15 million. It is unclear if this proposal will be brought forward as part of the FY 2011/12 A - 8 State budget. It is anticipated that the potential impact to the Town budget would be $6,000. Aware of the potential impacts of the State’s proposed budget, the Town Council, as part of the FY 2010/11 Mid-Year Update, set-side approximately $1 million to address the loss of the funding sources discussed above. Staff will continue to monitor the State budget situation and work proactively with the League of California Cities, legislators, and other professional associations like the California Police Chief’s Association to protect local revenue sources. Forecasted General Fund Reserve Status - June 30, 2011 The total General Fund Reserves are forecasted to close at a balance of approximately $19.8 million at June 30, 2011 (excluding $2.3 million in funds set aside to pay accrued compensated absences). In addition to the $1.5 million set aside for legally restricted purposes, the Town anticipated reserve balances of approximately $18.3 million in General Fund designated reserves (established in accordance with current Town financial policies and operating and capital budget requirements). Included in the $18.3 are approximately $3.7 million in reserves for economic uncertainty, $5.8 million in revenue stabilization reserves which together constitute approximately 29.9% of the Town’s annual operating budget. Nationally, establishing contingency reserve level benchmarks of 15% of operating budget for a contingency reserve is indicative of a strong financial position. To guide the future use of reserves and establish appropriate reserve levels, the Council Finance Committee has developed a recommended General Fund Reserve Policy that will be discussed at part of the May budget deliberations. Overview of the FY 2011/12 Capital Budget Of vital importance is the Town’s continued investment in infrastructure preservation and the addition of new capital assets to benefit the community. The FY 2011/12 proposed budget funds the first year of the Town’s Five-Year Capital Improvement Plan (CIP). Total appropriations for FY 2011/12 are $26.2 million, consisting of $13.8 million in new project funding, and $12.4 million in carryover funding from the prior year for projects like the new library that span multiple years. Of note in the CIP is continued funding for investment in the Town’s street system infrastructure. The proposed CIP includes a total of approximately $1.1 million in total new funding dedicated for various street repair and resurfacing projects in the Town. Other notable street, park, and public facility projects in FY 2011/12 include: Streets Projects: Almond Grove Street Rehabilitation Project, including the design and multi-year reconstruction of neighborhood streets. Blossom Hill Road street improvements, including roadway widening and sidewalk, bicycle lane, and crosswalk construction. Highway 9/University Avenue traffic system improvements, including dedicated left turn lanes, new traffic signal and sidewalks, and ADA improvements. Wedgewood Avenue street improvements, including the construction of sidewalks, bicycle lanes, and a storm drain system. Parks Projects: Implementation of Phase 2 of the Pageant Grounds Access Improvement Project, enhancing pedestrian access to the park area from the new Library. Construction of the new Los Gatos Creekside Sports Park, beginning in Winter 2011/12. A - 9 Public Facilities Projects: Completion of the new Library, including approximately $8 million of carry forward funds. Conceptual design and planned reuse of the existing Library space at the Civic Center. Future Challenges Sales Tax Vulnerability - Sales tax revenue accounts for approximately 28% of General Fund operating revenues. Netflix, an internet retail provider, generates a significant portion of this revenue, which continues to grow at a rapid rate. However, Netflix is continuing to change its product mix, potentially impacting future sales tax revenue. Therefore, efforts will continue to ensure a strong and diverse sales tax revenue base that can withstand an unexpected loss of a vital sales tax generator. Given this vulnerability, staff is exploring future service delivery options in the absence of this vital source of operating revenue. Structural Imbalances (Operating Deficits) – Based on the five-year forecast, the projected operating revenue is inadequate to meet the ongoing costs of current services. If permanent, structural adjustments are not made, the level of the imbalance would worsen each year leading to annual projected shortfalls ranging from $1.5 million to $3 million in the fiscal years following 2011/12. Many other jurisdictions in Silicon Valley and throughout California are already facing these challenges and may identify usable solutions for Los Gatos. Fortunately, the Town’s strong reserves and past fiscal prudence have provided flexibility in addressing these ongoing challenging issues. PERS Retirement Rates – Due to investment losses experienced in 2008, projected employer PERS rates are expected to be in the range of 20% higher for FY 2011/12. These losses exceed the statutory “corridor” for rate smoothing and as a result, the PERS rates could increase by approximately 30% effective FY 2012/13. The Five-Year Financial Plan has been updated with these higher rates, barring a recovery in the general stock market and/or changes in legislation. Limited Infrastructure Funding – To fund its infrastructure needs, the Town allocates one-half of available excess revenues at year-end (after meeting certain required reserves balances) to the Reserve for Future Capital Improvements. This reserve is the primary funding source for street improvements and other capital projects for the past 10 years. While the recent update of the Construction Mitigation Impact fee serves as an additional resource, it is not enough to maintain future infrastructure maintenance or build new facilities. Establishing a reliable, dedicated source of funding for basic capital improvements beyond the use of accumulated reserves continues to be a priority goals and future challenge for the Town. Conclusion For the foreseeable future, the Town anticipates fiscal challenges and uncertainties until the global, national, and local economy improves and structural changes are made. Acting proactively, the Town recommends reductions to operating expenses and revenue enhancements and associated service delivery adjustments totaling approximately $1.3 million for the proposed FY 2011/12 budget. If the economy does not improve in the short term, the financial forecast indicates that more adjustments will be necessary to balance future budgets. A - 10 In light of anticipated deficit projections, staff has already begun exploring opportunities to enhance service delivery and lower operating costs through resource and workload redeployments and organizational restructuring. Staff will also be vigilant in tracking developments in the local economy and at the state level, enabling the Town to quickly respond to changing conditions. Changes needed to respond to more severe revenue declines due to a continued recession, unanticipated changes in major revenue sources or unforeseen State revenue “takes” will be brought to Town Council’s attention in a timely manner so that the Town can implement the appropriate response to conditions as warranted. I wish to thank all of the departments, in particular, Department Directors and the members of their management and support staff, who worked diligently on the preparation of this budget document as well as the following staff members: Stephen Conway, Finance and Administrative Services Director Jenny Haruyama, Assistant Budget/ Finance Director Pamela Jacobs, Assistant Town Manager Rumi Portillio, HR Director Gayle Barr, Payroll Specialist Linda Isherwood, Accountant/Finance Analyst Bob Edris, Temporary Accountant Gitta Ungvari, Administrative Analyst Nicole Tram, Account Technician Respectfully submitted, Greg Larson Town Manager A - 11 The Government Finance Officers Association of the United States and Canada (GFOA) has presented a Distinguished Budget Presentation Award to the Town of Los Gatos, California for its annual budget since the fiscal year beginning July 1, 2003. In order to receive this award, a government unit must publish a budget document that meets program criteria as a policy document, as an operations guide, as a financial plan, and as a communications device. This award is valid for a period of one year only. We believe our current budget continues to conform to program requirements, and we are submitting it to GFOA to determine its eligibility for another award. A - 12 CORE VALUES A - 13 A - 14