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Mid year Budget"" n< MEETING DATE: 2/21/2012 ITEM NO: 8 tay cAi�s TOWN COUNCIL/TOWN COUNCIL AS SUCCESSOR AGENCY AGENDA REPORT DATE: FEBRUARY 16, 2012 TO: MAYOR AND TOWN COUNCIL/MEMEERS OF THE , ���a !/ SUCCESSOR AGENCY FROM: GREG LARSON, TOWN MANAGER/EXECUTIVE DIRECTOR SUBJECT: FY 2011/12 MID -YEAR BUDGET PERFORMANCE AND STATUS REPORT - SIX MONTHS ENDING DECEMBER 31.2011 A. ACCEPT FY 2011/12 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT, INCLUDING FY 2011/12 FINANCIAL PROJECTIONS B. AUTHORIZE BUDGET ADJUSTMENTS AS RECOMMENDED IN THE ATTACHED SECOND QUARTER BUDGET PERFORMANCE REPORT C. AUTHORIZE AMENDMENT OF FY 2011/12 COMPREHENSIVE FEE SCHEDULE - LIBRARY INTERNET PRINTING FEE RECOMMENDATION: 1. Accept the FY 2011/12 Mid -Year Budget Performance and Status Report, including FY 2011 /12 financial projections. 2. Authorize budget adjustments as recommended in the attached Second Quarter Budget Performance Report (Attachment 1). 3. Authorize amendment of the Town FY 2011/12 Comprehensive Fee Schedule, Library Internet Printing Fee. The purpose of this report is to provide the Town Council with a status of the FY 2011/12 Adopted Operating Budget at the mid -year point, including an overview of revenue and expenditure trends and financial projections for the current fiscal year. This report also includes a brief discussion of the Town's current year General Fund Reserve status and an update to the Town's five -year financial projections (FY 2012 -2017) to provide a context for the FY 2012/13 budget development process d recd ended budget approach. PREPARED BY: A sistant Budg ance Director NAF1NANCRQtrly Financial Reports\FY 201212nd Quartw12011 _Mid_Year_Budget_Report Final.doc Reviewed by: Y_�_JAssistant Town Manager Town Attorney T��Finance PAGE 2 MAYOR AND TOWN COUNCIL/MEMBERS OF THE SUCCESSOR AGENCY SUBJECT: FY 2011/12 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT - SIX MONTHS ENDING DECEMBER 31, 2011 February 16, 2012 DISCUSSION FY 2011/12 MID -YEAR BUDGET STATUS Budget Performance Report The attached Budget Performance Report is a mid -year report covering a six -month period beginning July 1, 2011 and ending December 31, 2011. The report provides analysis and recommendations related to the current year's adopted budget revenue and expenditures and the projected financial condition of all Town funds. General Fund Revenue Highlights FY 2011112 Overall, key economically sensitive General Fund revenues are trending positively compared to the prior year, with the one significant exception being the declining Netflix sales tax receipts previously collected on video streaming subscriptions when they were combined with DVD memberships. As a result, staff recommends a $667,515 net decrease in adopted budget levels. The proposed revenue changes include: • A $110,000 decrease in Motor Vehicle In -Lieu (VLF) Property Tax Backfill • An $800,000 decrease in Sales Tax, from $9.4 million to $8.6 million • A $203,780 increase in Franchise Fees, from $1.7 million to $1.9 million • A $66,980 increase in Transient Occupancy Tax (TOT), from $900,000 to $1 million • A $85,725 increase in Intergovernmental Fees, from $700,000 to $900,000 • An $114,000 decrease in Interest Income, from $700,000 to $600,000 General Fund Expenditure Highlights FY 2011112 Current departmental expenditures are trending below the expected 50% of budget level, which may result in expenditure savings at year -end. General Fund Projected Year -End Balances June 30, 2012 Current fiscal year -end projections for FY 2011/12 reflect a balance of operating revenue and expenditures. This has been achieved by incorporating an additional $800,000 prudently set aside at the close of FY 2010/11 to address anticipated budget impacts due to the State deficit. Without the additional funding, operating revenues were forecast to be below FY 2011/12 adopted budget levels. This decline was in line with projections influenced by both the announcement of Netflix's business model change and the adopted California State legislation to dissolve redevelopment agencies. While the change in Netflix's business model will result in a $1 million sales tax decline, the FY 2011/12 adopted sales tax revenues have been revised downward in the Five -Year Forecast by approximately $800,000 due to growth in other sales tax revenue segments. While the Five -Year Forecast reflects an $800,000 net decline in total revenues, staff recommends only $667,515 in revenue adjustments at this time. Approximately $132,485 of anticipated revenue declines reflected in the Five -Year Forecast are not recommended as formal budgetary adjustments due to PAGE 3 MAYOR AND TOWN COUNCILIMEMBERS OF THE SUCCESSOR AGENCY SUBJECT: FY 2011/12 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT - SIX MONTHS ENDING DECEMBER 31, 2011 February 16, 2012 the speculative nature of the revenue reductions projected as a result of the impacts associated with the dissolution of the redevelopment agency. FY 2011/12 MID-YEAR BUDGET UPDATE TRENDS Operating Revenue Trends As discussed earlier, the FY 2011/12 mid -year update reflects a decrease in the general retail category of sales tax, which is the Town's largest and most economically sensitive source of revenue. The current recession has greatly impacted the Town's sales tax revenue, which has experienced declines over the past two years. Sales tax financial assessments reflect a decrease in sales tax revenue due to business model changes by Netflix, a retail internet commerce company. Internet commerce sales tax revenue ( Netflix) previously accounted for nearly 40% of the Town's sales tax revenue, and now provides 29% of revenue, which is expected to continue to decline incrementally over time. On a positive note, other segments in general retail and various sales tax categories are showing signs of growth. The Town's revenue forecast is dependent upon the stability of economically sensitive revenues, including sales tax, property tax, transient occupancy tax, franchise fees, and interest income. Given Netflix's business model change, the volatile nature of sales tax is evident, underscoring the importance of diversifying the Town's economic portfolio. Due to the decrease in sales tax, the current sales tax revenue forecast will be revised from $9.4 million to $8.6 million. Total FY 2011/12 revenue will be adjusted approximately $667,515 lower than the adopted budget. Operating Expenditure Trends Anticipating that some of the Town's economically sensitive revenues would be impacted by the recession, staff proactively implemented cost reduction strategies this fiscal year, including targeted hiring freezes, unpaid furlough days, redeployment of staff, and reduction in materials and supply costs. Many of these reduction strategies have helped to keep current departmental expenditures below the expected 50% of budget level, which could result in expenditure savings at year -end. State Budget Impacts to Local Governments The State of California is facing a budget shortfall of more than $13 billion for FY 2012 /13. The State's current budget proposal includes a reduction in Motor Vehicle In -Lieu Property Tax (VLF), resulting in an $110,000 revenue loss to the Town. More significant is the impact of legislation which eliminates California's 400+ redevelopment agencies, which account for an estimated $5 billion in property tax. revenues statewide. On June 28, 2011, the Governor signed ABxl 26 and ABxl 27 into law. ABxl 26 (the "Dissolution Act ") proposed to eliminate redevelopment agencies as of October 1, 2011, and essentially restricted redevelopment agencies from entering into new agreements, borrowing or lending funds, or acquiring or disposing of real property prior to dissolution. ABxl 27 (the PAGE MAYOR AND TOWN COUNCIL/MEMBERS OF THE SUCCESSOR AGENCY SUBJECT: FY 2011/12 MID -YEAR BUDGET PERFORMANCE AND STATUS REPORT - SIX MONTHS ENDING DECEMBER 31, 2011 February 16, 2012 "Voluntary Program Act ") would have allowed redevelopment agencies to remain in existence and be exempt from ABx 126 if certain `voluntary" payments were made to the State in FY 2012 and in each fiscal year thereafter. This legislation was later challenged and considered by the California Supreme Court. On December 29, 2011, the California Supreme Court issued its decision in the California Redevelopment Association v. Matosantos case, finding the ABxl 26 Dissolution Act constitutional and the ABxl 27 ( "Alternative Redevelopment Program Act ") unconstitutional. Effective February 1, 2012, all California redevelopment agencies ( "RDAs ") were dissolved and their assets and functions have been transferred to successor agencies and housing functions successors, to "wind- down" the activities of the former RDAs. The Town elected and has been designated to serve as the "Successor Agency" to the former Los Gatos Redevelopment Agency. The Town has also elected to retain and accept specified affordable housing assets, obligations, and housing functions of the former Redevelopment Agency and will serve as the "Housing Functions Successor." While the implementation associated with the legislation is evolving, staff and legal counsel continue to work closely with the California Redevelopment Association (CRA), League of California Cities, California Society of Municipal Finance Officers (CSMFO), and other legal entities to understand and monitor the current and future impacts of the dissolution of the Town's Redevelopment Agency. COMPREHENSIVE FEE SCHEDULE AMENDMENT New computer software has been installed to manage printing activities from internet terminals through copy machines in the new library. This change will require an amendment to the existing library internet printing fee, which currently provides ten free pages and charges $0.10 per page thereafter. Since the new software manages printing activities via copy machines and cannot provide free printing, staff recommends that the internet printing fee be aligned to the library copy fee, which is $0.15 per page. GENERAL FUND RESERVE STATUS As of June 30, 2011, Town's FY 2011/12 General Fund balance was approximately $25.7 million, all of which is legally reserved or designated for special purposes by Council. Included in this amount are approximately $3.7 million in reserves for Economic Uncertainty, $5.7 million for Capital and Special Projects, and $7.9 million for Revenue Stabilization. These reserves remain intact and available at the mid -year point of FY 2011/12. Changes to our reserve designations and allocations are required by new general accounting standards (GASB 54) and will be considered with the proposed budget in May 2012. PAGE 5 MAYOR AND TOWN COUNCIL/MEMBERS OF THE SUCCESSOR AGENCY SUBJECT: FY 2011/12 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT - SIX MONTHS ENDING DECEMBER 31, 2011 February 16, 2012 FY 2012/13 BUDGET DEVELOPMENT PROCESS Concurrent with the update of the Five -Year Financial Plan and in anticipation that service reductions would be necessary for the FY 2012/13 budget, staff began informal budget development discussions in December 2011. This process includes the conceptual development of budget reduction scenarios, limited revenue enhancements, and adjustments to the User Fee Schedule. Staff is currently evaluating the feasibility and impact of budget options, which will be brought forward to Council in early May 2012, based on direction provided during the Council's January 2012 retreat. FIVE -YEAR FINANCIAL PLAN UPDATE The Five -Year Financial Plan is an independent financial tool used to forecast current and future revenues and expenses. This tool is designed to be more fluid in nature to build various funding scenarios and test "what if' assumptions, providing a range of budget strategies for consideration. The updated Plan for FY 2012/13 forecasts a deficit of $1.8 million, as presented at the January 2012 Council Retreat, and projects continued deficits in subsequent years if structural and ongoing adjustments are not made. Current and future deficit projections in the Town's Five - Year Financial Plan are based upon conservative, yet realistic, revenue and expenditure growth rates and trends. The estimates for FY 2012 /13 include preliminary budget assumptions and revenue and expenditure updates as discussed in this report. Upon consultation with the Town's sales tax advisor and given Netflix's business model change, adjustments have been made to the FY 2012/13 sales tax revenue to reflect the latest projections. All adjustments to the forecast will be presented to Council at the upcoming budget discussions in May 2012. PAGE MAYOR AND TOWN COUNCIL/MEMBERS OF THE SUCCESSOR AGENCY SUBJECT: FY 2011/12 MID-YEAR BUDGET PERFORMANCE AND STATUS REPORT- SIX MONTHS ENDING DECEMBER 31, 2011 February 16, 2012 Town of Los Gatos General Fund Updated Fire -fear Financial Plan F7. hP) I Fry Account Renvnie Categon 2010;11 Budget 2010'11 Actual, 2011112 Budget 201112 Forecast 201213 Forecast 201314 Forecast 2014'15 Forecast 201616 Forecast 201617 Forecast 41DO Property Tm S 73 2A 8A 1.9 1.0 1.1 2.1 0.7 23 0.6 12 38 0.4 S 73 23 10.0 1.9 1.0 Ll 2.0 0.8 2.7 0.7 0.6 23 1 0.4 S 75 2A 9A 1.7 0.9 1.1 2.0 0.7 25 0.6 0.7 35 0.4 S 7A 2} 8.6 1.9 1.0 1.1 1.9 0.8 2.1 0.6 0.6 35 1 OA S 78 23 7.7 1.9 1.0 13 1.9 OP 2.0 0.6 0.6 3.6 I 0.4 S 81 23 7.6 2.0 1.0 1A 2.0 0.8 2.0 0.7 0.6 3.4 1 02 S 8.6 23 72 2.0 1.1 IA 2.0 08 2.0 0.7 0.6 3.4 1 02 S 9.0 23 7.1 2.0 1.1 15 2.1 OA 2.0 0.7 0.6 3.4 1 0.1 S 95 2.4 7.1 2.1 1.1 IS 2.1 0.8 2.1 0.7 0.7 35 0.1 4110 VLF Rakfdl Property Tax _ 4200 Sales &Use Tax 4250 Frandiise Fees _ 4251 Trmsient Oavpanry Ta, 4400 Busmesa License Tax _ 4400 U.. & Permits 4500 Interpvenmmtal _ 4600 Charge for Services 4700 Ed. &Forfeitures 4800 Interest 4850 Other Sours 4900 Fwd Transfers In TOTALREVFNUFS 331 33.1 33A 32.2 31.9 322 32} 32.6 33.6 1 sc.FRegaces/Uopsits 0.9 13 3.7 45 0.7 0.8 OA OA 0.1 TOTAL RFYEN FES & 1'I21NSFTR5 _._ 5 34.1 S 34.4 S 37.1 S 36.7 S 32.6 S 33.0 S 33.1 5 33.4 5 33.7 deco..( Ecp..dture Categ.n 2010,11 Budeet 2 010111. Acmals 2011112 Budget 2011112 - Forecast' 2012 13_ FOeead 2013 /U Forecast 201415 Forecast 2015,96. Fareeut 201647 Forecast �I ID Salay _ _ _ _ _ 5130 Teopocary Employees _ 5140 Overtime _ _ 5170 Other Salary 5200 Benefits S 13.2 0.6 05 0.1 5.6 5.7 02 0.4 3.1 22 S 12.5 0.8 05 0} 55 4.6 0.2 0.4 3.0 1.4 S 13.0 0.6 OA 0.4 6.4 53 02 0.4 3.1 2.1 S 12.7 0.8 03 03 61 5.2 0.2 0.4 3.1 2.2 S 13.2 0.6 03 0.4 65 5.4 01 0.4 33 2.2 S 131 0.6 03 0.4 6.7 5.6 0.2 OA 3.4 2.0 S 13.2 0.6 03 0.4 71 5.7 01 0.4 35 1 2.0 S 13.2 0.6 03 OA 75 5.8 02 0.4 3.6 2.0 5 132 0.6 03 0.4 7.8 6.0 02 OS 3.7 1 2.0 6000 Supplim,Mazerials, &Services 7100 Gmts &Awards 7400 UtiOties _ 8060 In ternal Service Charges 8900 Debt Service TOTALEXYENDITIIRFS 5 31.6 5 29.2 S 31.9 S 31.4 S 32.5 5 32A S 335 5 34.0 5 34.7 - - -- 9900 RDA Ransom 9900 Operating Tmnsfm Out 9900 Capital Transfers Out to GFAR 9900 GASB 45 Rethee Medical Actuarial 0.9 0.8 0.8 0.8 33 1.1 3A 1.1 0.7 1.2 - 0.8 13 0.8 1A - 08 15 0.1 lb TOTALBUDGETID EXPENDITURES 333 30.8 363 35.9 34.4 34.9 35.7 363 36A 9900 legally Required Reserve Allocation 9900 Reserve 9900 Transfer to Stabilization Reserve 0.6 1.8 0.8 0.8 08 0.8 - TOTAL EXPENDITLRFS & AUOCATIOSS S 33.9 1 5 34.2 1 S 37.1 S 36.7 S 34.4 S 34.9 1 S 35.7 36A REVENUES LETPF.4DITLRFB S 0.2 S 0.2 S S 5 1.8 S 1.9 S 2.6 436.3S 2.7 ONGOING SHORTFALL N ITIGITION 5 S 1.8 S 1.9 2.9 NETRPtTNUFS LESS EXPENDITURES - S 02 S 02 S S 5 11.8) S (0.1) S (0.7) 01 PAGE MAYOR AND TOWN COUNCIL/MEMBERS OF THE SUCCESSOR AGENCY SUBJECT: FY 2011/12 MID -YEAR BUDGET PERFORMANCE AND STATUS REPORT - SIX MONTHS ENDING DECEMBER 31, 2011 February 16, 2012 CONCLUSION: hi spite of a decline in sales tax revenue, the Town's outlook at mid -year is encouraging due to its planned expenditure reductions and the prudent set -aside of funds to address impacts of the State budget deficit. Staff will incorporate Council feedback as discussed at the January 2012 Council Retreat, outlining service prioritizations, budget reductions, and limited revenue enhancement options to address the FY 2012/13 projected $1.8 million deficit. Understanding the growth limitations of key revenues and expected increases in operating costs, such as employer retiree medical costs and other personnel costs, the Town's highest fiscal priority will be to contain its operating costs on an ongoing basis. 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 2011/12. As discussed earlier in this report, staff is currently engaged in the FY 2012/13 budget development process, which will identify a variety of service reductions and limited revenue enhancements, contingent upon the performance of the local economy and any budget actions taken by the State of California to balance its budget. Attachments: Attachment 1- Budget Performance Report for the Six Months Ended December 31, 2011 THIS PAGE INTENTIONALLY LEFT BLANK TOWN OF LOS GATOS BUDGET PERFORMANCE REPORT FOR THE SIX MONTHS ENDED DECEMBER 31, 2011 February 16, 2012 FINANCIAL OVERVIEW — EXECUTIVE SUMMARY Status of FY 2011/12 Adopted Budget: Overall, second quarter General Fund revenues are trending moderately lower and are recommended to be adjusted downward by a cumulative amount of approximately $667,515 from adopted budget estimates. The current forecast expects sales tax revenue to decrease by approximately $800,000 this fiscal year. This decline was largely due to a change in the general retail category, primarily Netflix, an internet commerce company that is the Town's largest provider of sales tax revenues. General property tax for the second quarter is trending as expected, however, Motor Vehicle In Lieu Property Tax Backfill revenue has been adjusted downward in the amount of $110,000 due to State budget takes. Modifications have also been made to interest income, which has decreased due to the slow economy and low investment returns. Revenues trending positively include Franchise Fees and Transient Occupancy Tax (TOT). Compared to the prior year second quarter, Franchise Fees and TOT have increased by 6% and 11 % respectively. Department expenditure totals for the second quarter FY 2011/12 are trending as expected with spending at the end of the second quarter averaging 47 %. Because of expected lower operating revenues, staff implemented strategic cost reductions to contain the rise of operating costs. With six months of data now available, staff can better predict the next six months of expenditure trends, although unexpected costs can occur. Should any budget adjustments be necessary to balance operating revenue and expenditures, staff will advise Council accordingly. Providing services to the community in this and future fiscal years will continue to require strong performance by economically sensitive revenues to offset cost increases. The FY 2012/13 budget development process will endeavor to maintain essential public services while controlling operational costs in light of the five -year fiscal forecast, which predicts operating revenue shortfalls in subsequent fiscal years. General Fund Reserve Status - June 30, 2011 General Fund reserves closed at a balance of approximately $25.7 million at June 30, 2011. General Fund reserves are classified into three categories: Non - Spendable, Restricted, and Assigned. Non - spendable reserves represent amounts that are not available in spendable form, such as accounts receivable. Restricted funds represent a mix of restricted reserves that have been legally appropriated for a specific use. Assigned funds are those that have been dedicated for specific purposes via Council policy. Total restricted reserves include a $1.5 million loan to what is now known as the former Los Gatos Redevelopment Agency. In addition to the restricted reserves, the Town has approximately $24.2 million in designated reserves established in accordance with Town financial policies and operating and capital budget requirements. The chart on the next page reflects Assigned Reserve balances as of June 30, 2011. ATTACHMENTI Assigned Reserves: Assigned for Vasona Land Sale $2,834,779 Assiened for Revenue Stabilization 7,563,931 Assigned for Economic Uncertainty 3,678,001 Assiened for Capital & Special Projects 5,718,997 Assigned for Compensated Absences 2,318,082 Assigned for Market Fluctuation 247,705 Assigned for Open Space_,AMWIL 562,000 Assigned for Post Retirement Medical 400,000 Assigned for Special Studies m T 255,000 Assiened for Sustainability 140,553 Assigned for Productivity Enhancements 100,000 Assigned for Year End Budget Adjustments 175,000 Total Assigned Reserves $24,240,337 I 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 funding source to replenish the Town's General Fund Appropriated Reserve (GFAR) in addition to the annual budgeted transfer from the General Fund's operations of $650,000 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 designated programmed 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 refers to the $24.2 million in Assigned General Fund reserves as the Town's "reserves" since these reserves are established by Council policy for their intended purpose. The $24.2 million in Assigned 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. GENERAL FUND -KEY REVENUE ANALYSIS FY 2011/12 The following presentation provides a recap of significant General Fund revenue sources as of the second quarter ending December 31, 2011. Staff is monitoring developments in each major revenue source closely for potential adjustments to budgeted revenues as recommended in this report. SALES T. Description Sales tax is the largest revenue source for the Town's General Fund, accounting for 28.1% of budgeted General Fund revenues in FY 2011 /12. The Town receives 1 cent for every 8.25 cents of sales tax paid per dollar on retail sales and taxable services transacted within Los Gatos. The State Board of Equalization, since the implementation of the mechanism commonly known as the "triple flip," retains 0.25 cents of the Town's 1 -cent share and requires the Santa Clara County Auditor to replace it with an equal amount of property tax revenues. Revenues are remitted from the State to the Town on a monthly basis, and from the County to the Town on a biannual basis. These revenues are placed in the General Fund for unrestricted uses. Analysis Total second quarter receipts are trending behind those in the same period last fiscal year. This overall trend is the net of two shifts: first, a sizeable decrease in sales tax revenues attributable to Netflix; and second, a relatively small increase in non -Netflix sales tax revenues. The increase in non -Netflix sales tax revenues, about 4.5% from September 30, 2010 to September 30, 2011, ameliorates the potential hit from the change in Netflix's change in its business model. Staff believes it is prudent to assume a 3.5% growth in non -Netflix revenues, and to include all of the Netflix revenues, when projecting revenues through the end of this fiscal year. The net effect is a recommendation for a revenue budget reduction of $800,000. Quarterly and Annual Revenues 5 -Year History slo,000,000 58,000,000 56,000,000 54,000,000 $2,000,000 $- 2nd Quarter Actual Revenues Fiscal Year Total Actual Revenues Fiscal Year Budgeted Revenues 2nd Quarter Percent of Total FY 07/08 FY 08/09 FY 09/10 �26d l2usrter Actual Revenues OFucal Yea Told Acnul Revenues ■F_al Yea Budgeted Revea�es FY 10/11 FY 11/12 S 3,326,298 $ 3,236,975 S 3,221,690 $ 4,776,828 $ 3,667,071 $ 9,345,432 $ 8,487,000 $ 8,317,216 $ 9,971,409 $ 9,400,000 3559% 38.14 38.74% 47.91% 39.01% Recom ®ended Budget Revision $ (800,000) FY 07/08 FY 08/09 FY 09/10 FY 10/11 FY 11/12 PROPERTY TAX Description l Property tax is the second largest revenue source for the Town's General Fund and accounts for 28.1% of budgeted General Fund revenues in FY 2011/12. Property tax is levied by the Santa Clara County Assessor's Office at 1% of a property's assessed value, of which the Town receives approximately 9.5 cents per dollar paid on property located within the municipal limits of Los Gatos. In compliance with Proposition 13, the assessed value of real property is based on the 1975/76 assessment roll value, adjusted by a 2% inflation factor thereafter. However, when property changes hands or new construction occurs, property is reassessed at its current market value. Real property values critically impact revenues. With the passage of Proposition 13, voters limited the tax rate that can be imposed by the Town on property. With the limitation on rates, therefore, higher revenues are generated by a higher aggregate property value. Analysis Property tax distributions are largely received in the third and fourth quarters of each fiscal year; therefore, revenue receipts are not reflected proportionately by quarter in the chart below. Property tax is trending as expected, although second quarter receipts reflect a 15% decrease compared to the same period in the prior year. This is because of an early tax payment received in December 2010. However, due to State budget takes, Motor Vehicle in Lieu Property Tax Backfill revenue will be reduced, resulting in a budget reduction of $110,000. Quarterly and Annual Revenues 5 -Year History 510,000,000 58,000,000 56,000,000 54,000,000 52,000,000 U 02nd Quarter Actual Revenues OFiscal Year Total Actual Revenues a Fiscal Year Budgeted Revenues Ct FY 07/08 FY 08/09 FY 09/10 FY 10 /11 FY 11/12 FY 07/08 FY 08/09 FY 09/10 FY 10/11 FY 11/12 2nd Quatter Actual Revenues $ 3,061,873 S 3,160,810 $ 3,191,286 S 3,763,165 $ 3,186,558 Fiscal Year Total Actual Revenues S 9,178,869 $ 9,724,070 S 9,809,365 $ 9,597,378 Fiscal Year Budgeted Revenues S 9,799,400 2nd QuatterPercentofTotal 33.36 32.51% 3233% 39.21% 32.52% Recoaassended Budget Revision $ (110,000) Ct FY 07/08 FY 08/09 FY 09/10 FY 10 /11 FY 11/12 FRANCHISE FEES Description Franchise fees are collected by the Town for the privilege of operating a utility service within Los Gatos, and as a fee in lieu of a business license tax. Franchise fees are currently received from Comcast for cable television services, PG &E for gas and electric services, West Valley Collection and Recycling (WVC &R) for solid waste collection services, and AT &T and Comcast for video services. Franchise fees represent 5.1% of budgeted General Fund revenues in FY 2011/12. Analysis Historically, franchise fee payments are not remitted equally throughout the fiscal year; therefore, second quarter receipts are not necessarily predictive. The FY 2011/12 budget was prepared during FY 2010/11, before all of the franchise fee receipts for the year were received; therefore, an estimate of total receipts was used as a basis for developing the 2011/12 budget. The total receipts for 2010/11 were higher than estimated, and, as a result, the 2011/12 revenue budget is somewhat below actuals. In addition, current year remittances from WVC &R, which provides approximately 59% of franchise fee revenue, are trending ahead by 6 %. This increase is attributable to increased construction activity and the addition of new homes to the customer base. Staff recommends a revenue budget increase of $203,780. Quarterly and Annual Revenues 5 -Year History S2,0o0,000 51,500,000 S1,000,000 5500,000 S- M2nd Quartcr Actual Revenues OFiscal Year Total Actual Revenues MFucal Year Total Budgeted Revenues FY 07/08 FY 08/09 FY 09/10 FY 10 /I1 FY 11/12 FY 07/08 FY 08/09 FY 09/10 FY 10/11 FY 11/12 2nd Quarter Actual Revenues $- 547,508 $ 548,795 $ 553,434 $ 626,592 $ 669,186 Fiscal Year Total Actual Revenues $ 1,659,829 $ 1,656,100 $ 1,699,850 S 1,901,605 Fiscal Year Total Budgeted Revenues $ 1 2nd Quarter Percent of Total 32.99% 33.14% 32.56% 32.95% 38.98% Recommended Budget Revision S 203,780 FY 07/08 FY 08/09 FY 09/10 FY 10 /I1 FY 11/12 BUSINESS LICENSE TAX Description The Town requires all businesses located within Los Gatos, or those that operate within Los Gatos, to obtain a business license. The amount of business license tax paid by each business is based on its business activity. Fees for activities such as wholesale sales and manufacturing are charged on a sliding scale based on gross receipts, as is retail, but only to a cap of $975. These activities account for approximately 40% of annual business license tax revenues. Fees for other activities, as specified in the Town Code, are assessed as flat fees; these make up approximately 60% of annual business license tax revenues. Annual renewal payments are due on January 2 of each year. Payments for new flat - fee -based businesses are pro -rated by quarter. Analysis Due to local, state, and national economic challenges, business license tax revenue for the current fiscal year was budgeted at approximately 4.5% less than the prior year actuals. Businesses assessed by gross receipts are confirming this expected decrease in their submitted revenue estimates for 2012. Second quarter revenue is indeed trending below that of the previous year, but to a greater degree than might be expected. This significantly lower second quarter revenue collection is primarily due to the timing of the business license payment processing, which was affected by furlough closures in December and reduced staffing for the business license function. End of January business license fee revenues are trending in line with budgeted revenue. There are no recommended budget changes to this revenue source. Quarterly and Annual Revenues 5 -Year History 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 god Quarter Actual Revenues Fiscal Year Total Actual Revenues Fiscal Year Total Budgeted Revenues 2nd Quarter Percent of Total FY07 /08 FYO&09 o 2nd Quarter Act Revers us ❑ Fiscal Year Total Actual Revenues ■ Fiscal Year Total Budgeted Revenues FY 09/10 FY 10/11 447,514 376,704 470,833 368,757 S 1,138,057 S 1,139,107 S 1,220,802 S 1,136,511 FY 11/12 209,377 S 1,085,000 39.32% 33.07% 38.57% 32.45% 1930'/0 Recainmended Budget Revision No Change FY 07/08 FY 08/09 FY 09/10 FY 10/ 11 FY 11/12 TRANSIENT OCCUPANCY TAX Description The Town levies a 10% transient occupancy tax (TOT) on all hotel and motel rooms within the municipal limits of Los Gatos. This tax helps to fund Town services provided to transitory visitors to Los Gatos. Analysis Visit California, formerly the California Travel and Tourism Commission, reports that visitors to California spent $95.1 billion in 2010, a 7.5% increase from 2009, as both the state and national travel industries began to recover during 2010. It predicts that visits to California will increase by an additional 3.8% in 2011, surpassing the pre- recession peak of 2007. Second quarter TOT revenue supports this state -wide trend, showing an increase from the prior year of about 11 %. Given the slow economic recovery, TOT revenue for the current fiscal year was budgeted at 7.1 % less than prior year actuals. Staff recommends a revenue budget increase of $66,980. Quarterly and Annual Revenues 5-Year History $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 FY FY FY FY FY 07/08 08/09 09/10 10 /11 11/12 FY 07/08 FY08/09 FY09 110 FY 10 /11 FY 11/12 2nd Quarter Actual Revenues S 435,891 S 436,515 S 354,551 S 380,129 $ 422,059 Fiscal Year Total Actual Revenues $ 1,245,078 $ 966,638 S 923,783 $ 1,004,659 Fiscal Year Total BudWted Revenues S 933,020 2nd Quarter Percent of Total m2nd Quarter Actual Revenues Fiscal Year Total Aced Revenues Year Total 35.01% 45.16% 38.38 37.84% 45.24% Recommended Budget Revision S 66,980 7 INTEREST INCOME Description \ The Town earns interest income by investing monies not immediately required for daily operations in a number of money market instruments. These investments are made within the parameters stated in the Town Council's Investment Policy. The Town's investment goal is to achieve a competitive rate of return while protecting the safety of its funds. Interest income revenue is primarily dependent on two factors: first, the cash balance in the Town's investment portfolio; and second, the yield on those funds. Analysis Second quarter receipts are trending significantly below those in the same period in the four previous fiscal years. Financial indicators during the same period show mixed results. For example, between December 2010 and December 2011 the Dow Jones Industrial Average showed growth of about 5.5 %, the S &P 500 remained flat, and the NASDAQ showed decline of about 1.7 %. The LAW yield declined from 0.46% to 0.38 %, and the three -month Treasury declined from 0.12% to 0.02 %. In January 2011, the Federal Reserve policymaking committee announced that it now expects to keep its key short-term interest rate near zero until late 2014, as it expects any growth in the economy to remain modest. As the Town's investment policy requires investment in conservative vehicles such as the LAIF and Treasury bills, their continued low returns will greatly affect interest income returns. Staff recommends a revenue budget reduction of $151,182. Quarterly and Annual Revenues 5 -Year History S2,500,000 S2,000,000 $1,500,000 $1,000,000 $500,000 S. FY 07/08 FY 08/09 FY 09/10 FY 10 /11 FY 11/12 2ad Quarter Actual Revenues Fiscal Year Revenues Fiscal Year Total Budgeted Revenues 2nd Quarter Percent of Total FY 07/08 FY 08/09 $ 936,081 S 1,011,756 $ $ 2,221,338 S 1,627,727 $ 42.1% 621% Wed Quarter Actual Revenues OFiscal Year Revenues at Fiscal Year Total Budgeted Revenues FY 09/10 FY 10/11 FY 11/12 687,571 S 545,913 S 291,074 1,129,895 S 942,977 $ 717,981 60.9% 57.9% 40.5% Recommended Budget Revision $ (151,182) FY 2011/12 RECOMMENDED BUDGET ADJUSTMENTS Budget adjustments are recommended for the following revenues and expenditures at the second quarter as described below: General Fund Revenues Motor Vehicle In Lieu (VLF) Property Tax Backfi8 (110,000) Saks & Use Tax (800,000) Franchise Fees 203,780 Transient Occupancy Tax 66,980 Motor Vehicle In Lieu Fee 47,690 Intergovernmental 38,035 Interest (114,000) TOTAL GENERAL FUND REVENUES $ (667,515) Other Funds Revenues GFAR University Sidewalk/Sports Park 9,000 Lark/LG Blvd Intersection Restripmg Design 2,000 11,000 Grants ADA Compliance - Live Oak Manor Park (93,000) ADA Compliance - Civic Center (23,806) (116,806) Equipment Replacement ABAG - Replace PA System at the Civic Center 18,000 Reimbursement for Street Sweeper Replacement 217,000 235,000 TOTAL OTHER FUNDS REVENUES $ 119,194 Other Funds Expenditures GFAR University Sidewalk/Sports Park 9,000 Lark/LG Blvd Intersection Restripmg Design 2,000 11,000 Grants ADA Compliance - Live OakManor Park (93,000) ADA Compliance - Civic Center (23,806) (116,806) ABAG Town Liability Claim against the Town 72,500 72,500 MIS Fund Tmepoint Training for Accela 28,000 28,000 Equipment Replacement ABAG - Replace PA System at the Civic Center 18,000 Replacement of Six Patrol Vehicles 47,286 Reimbursement for Sweeper Replacement 217,000 282,286 TOTAL OTHER FUNDS EXPENDITURES $ 176,988 It SUMMARY OF KEY RECOMMENDED BUDGET ADJUSTMENTS General Fund Revenues • Sales Tax: Actual receipts are trending low, primarily due to the change in Netflix's business model. Staff recommends a revenue budget reduction of $800,000. • Property Tax: Staff recommends a revenue reduction of $110,000 in Motor Vehicle in Lieu Property Tax Backfill revenue due to State budget takes. • Franchise Fees: Actual receipts are trending above those estimated on partial actuals from the previous year. Staff recommends a revenue budget increase of $203,780. • Transient Occupancy Tax: Actual receipts support the state -wide trend of increased travel, showing an increase from the prior year of about 11 %. Staff recommends a revenue budget increase of $66,980. • Intergovernmental: Intergovernmental revenues are trending slightly higher than adopted budget levels. Staff recommends a budget increase of $38,035. • Interest Income: The continued low returns from key investment vehicles will greatly affect interest income returns. Staff recommends a revenue budget reduction of $114,000. General Fund and Other Funds • Street Sweeper Reimbursement: Reimbursement funding has been received from ABAG to replace a street sweeper damaged by fire. A revenue budget increase of $217,000 is recommended. • Police Vehicle Replacement: Six police patrol vehicles were approved for replacement as part of the FY 2011/12 budget. However, funding for police vehicle computer equipment was inadvertently left out. A budget expenditure increase of $47,286 is recommended. General Fund Appropriated Reserve (GEAR) Fund University Avenue Sidewalk Design: A budget expenditure of $9,000 is recommended to fund the design (including plans and specifications) of a new ADA accessible sidewalk along the University Avenue from Lark Avenue south to the new Sports Park. This funding will allow to design to begin this current fiscal year. Construction will begin in early FY 2012/13 and will be completed by October 2012 to coincide with the completion of the Sports Park project. • Lark Avenue/Los Gatos Blvd Improvements: A budget expenditure of $2,000 is recommended to fund the design of pedestrian and bicycle improvements at the intersection of Lark Avenue and Los Gatos Blvd. The design will begin this fiscal year and will address ADA accessibility as well as pedestrian and bicycle safety improvements. Construction will begin in early FY 2012/13 and will be funded separately in the FY 2012/13 CIP. 10 FINANCIAL SUMMARIES, PROJECTIONS AND RECOMMENDATIONS Presented below is the Schedule of FY 2011112 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 second quarter. To" of Los Gatos Schedule of General Fund Operating Revenues vs. Operating Expenditures For the period ended December 31, 2011 11 Unsaddled F \90/11 FY10111 FY10 /I1 FY10 111 FYII /12 FYII 112 FYII 112 FYII 112 FV11 /12 Final Adjusted 2nd Qtr % Adopted Adjusted grid Qtr % Finance Balance Budget Actual. YID Budget Budget Morals YID Projection Revenuer General Property Tax S 7,270,325 S 7300.840 S 3,734,908 51% S 7,432.470 S 7.432,470 S 3.171320 43% S ].432,4]0 VLF Becklill Property Taa 2 ,327,053 2366,930 1,163 ,527 49% 2366,930 2 ,366,930 - 2,256,930 Sales &U. Tax 9,971,409 9.100.000 4,776,828 52% 9,400,000 9,400,000 3.667,071 39% 8,600,000 Franchise Fees 1,901,605 2,006,950 626.592 31% 1,716,830 1,716,830 669,185 39% 1,920.610 Trdsient()ccupadcy Tai 1,004,659 989,800 380.129 38% 933,020 933,020 422,059 45% 1,000,000 MVL Fee 139,814 95,950 28,258 93,520 93520 15,238 16% 141,210 Business License Tae 1,136511 1,085,000 368,766 34% 1,085,000 1,083,000 209,377 19% 1,085,000 Licenses &Permits 1,831308 1,972,200 1,049,351 53% 1,757,050 1,757,050 1,140228 65% 1.757,050 inlergoammental 694,898 602,660 243.577 40% 646473 646373 274,858 43% 681.563 Changes for Services 3570,110 3,786,936 2.141,947 57% 3,641,736 3,641,736 2,378,412 65% 3233,006 FInes &Forfeitures 737,903 600,000 277,396 46% 671.596 671,596 314,683 47% 671.596 Interest 904,474 1,105,410 623,067 56% 979,960 828,778 271,457 33% 866,001 GASB Investment to Mld per Audit (278,820) - - (261,979) (261,979) - (261,979) Miscellaneous /Other 1,584,394 2,641449 1,465,832 55% 2545,457 2545,457 2258,070 89% 2545,457 Fund Transfers 437,755 438.920 382,716 87% 416,920 416,920 62,829 15% 416,920 Taw Berea.. 33233588 34,092,945 17262,894 51% 33,424,883 33273,701 14,854,787 45% 32345,834 Use of Other Funding Sources: Use of Rescnes- Capital Projects 900,000 650,000 650,000 650,000 Use of Reserves - Special Studies 252,000 _ V... Land Safe Resale 2,700,000 2,700,000 2,700,000 Fwd Balance Reallocauna (1215,000) - Year EndSaings 700,000 Caryforuard Allocatious 150,000 - PF]4S Liability Account 300,000 300,000 300,000 300,000 Use of Internal Service Reseraes 194,000 - TowOnceFundiogsourses - 581,000 - 3,650,000 3,650,000 - 4350.000 Total Revenues plus Reserves S 33.233.588 S 34.673.945 S 17262.894 S 37.074.883 S 36.923.701 $ 14.854.797 S 36.695.834 Bvpeodlmm (includes erteur no encumbrances) Mayor &Couc,i1 163,417 180,542 73201 41% 209,182 209,182 91,533 44% 204,998 Treasurer - - - _ _ Accuracy 197,716 251,341 97,474 39% 227,041 227,041 105.277 46% 222,500 Admidishratia Smites 2294.655 2331539 1,159.777 50% 2,863,055 2,863,055 1227522 43% 2.805,794 Comm Develnpmcut 2,991,866 3,343,745 1351,401 40% 3,210,624 3210,624 1530.151 48% 3,146,412 Police 13,103 .808 13,080,815 6,444,133 49% 13,484,876 13,484,876 6.627,132 49% 13215,178 park; &Public Worl 5,105.809 5,472,797 2507,634 0% 5,720,908 5.720,908 2,614322 46% 5,606,490 Commwity5m6ced 618,641 852,407 315,484 37% - - - Libray 1,817,842 1,879235 923,041 49% 1,921329 1,921429 929.483 48% 1,882,902 Tow Bear Eapema S 26293284 S 27.392.421 S 12.872.145 47% S 27.637.015 S 27.637.015 S 13.125.420 471. S 27.084275 Nov -Dept lRe,an itmes and other ores General GOSammeut 4.471,662 6.063 .876 2.435.096 40% 8.684.922 8.684.922 2.982,880 34% 8.811559 Tow Boo-Dept Exposes ".471.66 S 6.063.876 $ 2.435.096 40% S 8.684.922 S 8.684.922 S 2.982,980 34% S 8.811559 Tow Oncoming expenditures S 30.765.416 S 33456297 $ 15307241 46% S 36321.937 S 36321.937 S 16.108300 44% S 35 .895,834 Bel Operning Rereoues Be6rt Cspiul Tnhs d Budgeted Beg Fund Balance S 2.468,142 S 123].648 S 1.955.653 $ 752.946 S 601]64 S (1253513) S 804000 Reserve Allbcalibns Capital ProjecueSpeclal Projects 800.000 Tow Budgeted Use orReserves $ $ $ 0% S S S 0 ° e S 800.000 ear Burnie. ur(0e)nt Reserves $ 2.468.142 S 1217,648 S 1.955.653 O °: S 752,946 S 601.764 S (1253513) 0 S 11 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 forma[ is presented. The fund information starts with beginning fund balances and adds current year revenues and subtracts current year expenditures which give the endingfund balance. Budgeted amounts are also providedfor revenues and expenditures, these are useful for comparing actual amounts received or spent to date versus budgeted for PY 2011112. 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 Community Development Block Grant Fund, Non -Point Source Fund, Landscaping and Lighting District Funds. CBDG Grant Fund revenues reflecting below budget at mid -year is a timing issue, the revenues received are largely based on reimbursements of expenditures that occurred in the prior quarter. Special Revenue Funds Budget to Actuals Comparisons Beginning Fund Balance Budgeted Revenues Actual Revenues - 2nd Qtr Budgeted Expenditures Total Actual Expenditures - 2nd Qtr 2nd Quarter Ending Fund Balance 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 2011/12 adopted budget. Staff is recommending no changes at this time. CDBG Grants Non Point Source /.IDs (82,032) 58,143 111,511 223,094 135,000 40,200 2,993 - 397 222,031 135,900 37,100 97 55,229 7,903 (79,136) 2,914 104,005 Capital Project Funds Budget to Actuals Comparisons Beginning Fund Balance GFAR Traffic Grant Fund Storm Utility Gas Fund Mitigation CIP's Drains Undergd Tax 13,416,625 4,129,135 35,827 866,456 2,385,666 73,264 9,884,475 2,526,536 676,314 - 19,988,103 2,526,536 5,997,069 76,204 1,752,862 102,540 51,010 843,310 - 118,863 27,755 429,512 1,751,752 285,000 - 756,000 3,556 - 4,707 - Budgeted Revenues Actual Revenues - 2nd Qtr Budgeted Expenditures Total Actual Expenditures - 2nd Qtr 2nd Quarter Ending Fund Balance 8,095,870 4,052,932 32,271 985,319 2,408,714 502,776 While this is not the case for the current year, occasionally the Grant Funded CIP Fund displays a deficit balance. This is because Town dollars are expensed first before receiving reimbursement from the State of California or other granting agencies. This process eventually results with the fund "breaking even" or a zero fund balance. 12 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 Budget to Acluals Comparisons 2nd Quarter Ending Fund Balance 3,086,112 2,663,925 1,763,227 238,534 2,345,595 515,398 969,458 Internal Service Funds are tracking in accordance with the FY 2011/12 Adopted Budget, although expenditures in Workers' Compensation and the Self- Insurance Liability Funds are trending slightly higher than average due to adjustments in insurance premiums and claim activity. 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. Trust and Agency Funds - Town Trust and Agency Funds have fund balances as of July 1, 2010 of $324,857 for Parking District #88 and $1.6 million in the Library Trust Funds. No budget revisions are contemplated at this time for these funds. Successor Agency to the Fornfer Los Gatos Redevelopment Agency - The Successor Agency's FY 2011/12 and FY 2011 -2016 Capital Improvement Plan adopted budgets are incorporated into the Successor Agency's financial statements and year -to -date actuals which are presented below. Revenue and expenses are tracking in accordance with the adopted budget, with the exception of the Low/Moderate Housing Fund. The deficit shown in the Low/Moderate Housing Fund is due to a timing issue as the tax increment revenue was not received in January 2012. The bulk of the expenditures are the remaining obligations associated with the Public Improvement Grant and Cooperation Agreement. Redevelopment Agency Funds Budget to Actuals Comparisons Beginning Fund Balance Budgeted Revenues Actual Revenues - 2nd Qtr Budgeted Expenditures Total Actual Expenditures - 2nd Qtr Capital Debt Law/Mod Total Projects Service Housing RDAFunds 1,262,758 1,454,311 - 2,717,069 660,000 8,810,055 354,286 4,520,937 1,666,032 11,136,087 656,184 5,531,407 754,232 8,849,535 530,100 4,204,650 406,091 10,009,858 727,135 5,461,885 2nd Quarter Ending Fund Balance 1,086,944 1,770,598 (70,951) 2,786,591 13 Equipment workers Self Office Mmgt Info Vehicle Building Replacemt Comp Insurance Stores Systems blaint Maint Beginning Fund Balance 3,093,890 2,809,884 2,066,068 245,645 2,265,502 438,816 853,445 Budgeted Revenues 319,819 687,085 532,958 118,500 1,001,546 540,100 1,050,300 Actual Revenues -2nd Qtr 159,910 350,153 266,610 48,154 453,612 267,775 552,748 Budgeted Expenditures 417,893 623,097 625,224 134,050 1,056,207 536,200 1,142,733 Total Actual Expenditures - 2nd Qtr 167,687 496,112 569,451 55,265 373,519 191,193 436,735 2nd Quarter Ending Fund Balance 3,086,112 2,663,925 1,763,227 238,534 2,345,595 515,398 969,458 Internal Service Funds are tracking in accordance with the FY 2011/12 Adopted Budget, although expenditures in Workers' Compensation and the Self- Insurance Liability Funds are trending slightly higher than average due to adjustments in insurance premiums and claim activity. 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. Trust and Agency Funds - Town Trust and Agency Funds have fund balances as of July 1, 2010 of $324,857 for Parking District #88 and $1.6 million in the Library Trust Funds. No budget revisions are contemplated at this time for these funds. Successor Agency to the Fornfer Los Gatos Redevelopment Agency - The Successor Agency's FY 2011/12 and FY 2011 -2016 Capital Improvement Plan adopted budgets are incorporated into the Successor Agency's financial statements and year -to -date actuals which are presented below. Revenue and expenses are tracking in accordance with the adopted budget, with the exception of the Low/Moderate Housing Fund. The deficit shown in the Low/Moderate Housing Fund is due to a timing issue as the tax increment revenue was not received in January 2012. The bulk of the expenditures are the remaining obligations associated with the Public Improvement Grant and Cooperation Agreement. Redevelopment Agency Funds Budget to Actuals Comparisons Beginning Fund Balance Budgeted Revenues Actual Revenues - 2nd Qtr Budgeted Expenditures Total Actual Expenditures - 2nd Qtr Capital Debt Law/Mod Total Projects Service Housing RDAFunds 1,262,758 1,454,311 - 2,717,069 660,000 8,810,055 354,286 4,520,937 1,666,032 11,136,087 656,184 5,531,407 754,232 8,849,535 530,100 4,204,650 406,091 10,009,858 727,135 5,461,885 2nd Quarter Ending Fund Balance 1,086,944 1,770,598 (70,951) 2,786,591 13 On June 28, 2011, the Governor signed ABxl 26 and ABxl 27 into law. ABxl 26 (the "Dissolution Act ") proposed to eliminate redevelopment agencies as of October 1, 2011, and essentially restricted redevelopment agencies from entering into new agreements, borrowing or lending funds, or acquiring or disposing of real property prior to dissolution. ABxl 27 (the "Voluntary Program Act ") would have allowed redevelopment agencies to remain in j existence and be exempt from ABx1 26 if certain "voluntary" payments were made to the State in FY 2012 and in each fiscal year thereafter. This legislation was later challenged and considered by the California Supreme Court. On December 29, 2011, the California Supreme Court issued its decision in the California Redevelopment Association v. Matosantos case, finding the ABxl 26 Dissolution Act constitutional and the ABxl 27 ("Alternative Redevelopment Program Act ") unconstitutional. Effective February 1, 2012, all California redevelopment agencies ( "RDAs ") were dissolved and their assets and functions have been transferred to successor agencies and housing functions successors, to "wind - down" the activities of the former RDAs. The Town elected and has been designated to serve as the "Successor Agency" to the former Los Gatos Redevelopment Agency. The Town has also elected to retain and accept specified affordable housing assets, obligations, and housing functions of the former Redevelopment Agency and will serve as the "Housing Functions Successor." While the implementation associated with the legislation is evolving, staff and legal counsel continue to work closely with the California Redevelopment Association (CRA), League of California Cities, California Society of Municipal Finance Officers (CSMFO), and other legal entities to understand and monitor the current and future impacts of the dissolution of the Town's Redevelopment Agency. CONCLUSION The financial results from the prior fiscal year and data collected through the second quarter of FY 2011 /12 are stable in light of the reduction in sales tax revenue. The Five -Year Financial Plan continues to project challenging revenue shortfalls, requiring a continued examination of revenue and expenditure activity and need to explore options to enhance revenue to support current and future operating and capital needs. Equally important is to ensure that the Town's current limited resources are allocated to meet the priority service needs of the community. 14