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HomeMy WebLinkAboutcc min 1982/07/16 July 16, 1982 TO: The Honorable Mayor and City Council FROM: City Manager ~ SUBJECT: THREE-YEaR FINANCIAL PLAN During previous budget discussions, the City Council requested that a 3-Year Budget Plan be developed prior to their final consideration of the FY 1982-83 proposed budget. This memo provides back9round information on the 3-Year Financial Plan that will be discussed at the July 17, 1982 Council budget meeting. The purposes of this plan are: - To provide a short-term future view that can be used to gauge the ramifications of our current and future fiscal situation; - To provide a means to judge which corrective actions are most appropriate to meet the immediate and future needs of the City; - To provide a basis to build consistent historical data by fiscal year to permit trend analysis in future years; To aid budgetary decision-makin9, including mid-year revisions prior to the annual budget process; To provide a means of addressin9 budgeted shortfalls in a planned manner in advance of the fiscal year rather than assuming a year-end closure of any budgeted gap. Thus the 3-Year Plan should be helpful not only in making the decisions necessary prior to adopting a final budget, but also in interpreting and acting upon monitored actual revenues and expenditures during the fiscal year. This plan is composed of two sections: (A) a 3-Year Forecast of the City's expenditures and revenues, based on a projection of current financial policies and the current level of municipal service; and (B) a listing of Bud9etary Alternatives or corrective actions that could be taken to improve the City's financial position. Each section is discussed separately below. A, 3-YEAR FORECAST A hypothetical forecast of the City's General Operatin9 Funds for fiscal years 1982-83, 1983-84, and 1984-85 is summarized in Table 3. It should be emphasized that a forecast serves to project existing conditions into the future, thereby identifying potential problems to be corrected through budget processes. As an outgrowth of the development and use of such a financial forecast, it is not unusual for projected hypothetical budget deficits not to materialize because corrective action was taken. · 'l T -2 - It is also important to emphasize that developing a forecast of this type requires making a number of assumptions which, if changed, could significantly modify the summary data shown in Table 3. As indicated above, this forecast is intended to provide a base-line projection, assuming a continuation of current policies and service levels, to provide a financial context within which to consider alternative budget actions such as revenue increases or expenditure reductions. Thus, one of the major assumptions in the forecast is that the City will maintain a constant services budget with essentially no net changes in the number of personnel. Another major assumption in the expenditure forecast involves the level of inflation factors, which were utilized to adjust employee service and supplies and services, as will be outlined in more detail later. Because of current uncertainties regarding the general economy, housing construction, and revenue from the State and other agencies, forecasting revenues is more imprecise than forecasting expenditures. Because of these uncertainties, three revenue estimates have been prepared for each of the fiscal years considered in the forecast: a low estimate, a best estimate, and a high estimate. All of these estimates, however, assume no changes in the City's current policies. Other important assumptions and definitions are provided below. Revenue Forecast Methodology All of the revenue forecasts assume that all Federal Revenue Sharing and Traffic Safety Fund revenues will be included in the General Operating Fund. Allocations of Revenue Sharing Funds for CIP projects are reflected as negative adjustments to the Reserve. Portions of Sewer Service and Gas Tax Funds are also included in the General Operating Fund, but the portion of these funds used in support of the General Fund is assumed to remain essentially the same as is currently reflected in the proposed FY 1982-83 budget. Alternative allocations of Sewer Service and Gas Tax Funds' between the General Operating Fund and CIP projects are discussed in the Budgetary Alternatives section of this memo. It should also be noted that potential reserve adjustments, such as transferring funds from the Public Liability Trust Fund to the General Fund, are not considered potential revenues in this forecast, but such alternatives are addressed in the Budgetary Alternatives section. The revenue estimates assume no change in the current Utility Users Tax rate, nor do they assume any changes other than small inflation adjustments in the Fee Schedule for fees and charges. The revenue forecast is summarized in Table 1. The major variables in the Low, Best, and High revenue estimates are outlined below. Low Estimate--The low estimates shown in the revenue forecast reflect very conservative estimates of revenue. They assume a slight further downturn in the economy with virtually no residential construction. They assume that Federal Revenue Sharing will be reduced 50 percent in FY 1983-84 and ~ 3~ 1984-85 compared to the current level. In terms of State subventions, the low estimates assume the loss of all Motor Vehicle License payments starting in FY 1983-84 and the loss of all Cigarette Taxes and Business Inventory Property Tax {Unsecured) in FY 1984-85. Best Estimate--The best estimates of revenue shown in the forecast reflect the same figures for FY 1982-83 as are currently being used in the formal budget. The best estimates for FY 1983-84 and 1984-85 reflect an extension of the 1982-83 estimates into the future. They assume a slight improvement in the economy and essentially a continuation of the current level of subventions from the State and Federal governments. High Estimate--The high estimates of revenue included in the forecast re lect a more liberal approach to estimating revenue. The high estimates assume a significant upturn in the general economy, including housing construction, by the end of FY 1983-84. They also assume a small increase in the level of Federal Revenue Sharing. Expenditure Forecast Methodology The purpose of the Expenditure Forecast is to ascertain a baseline level of costs in order to determine the future impact on forecasted revenues and to serve as a point of reference after budgetary alternatives are applied. The expenditure forecast reflects an extension of the FY 1982-83 budget as it now stands. The inflation factor used in most of the projections in the expenditure forecast is based on the GNP Implicit Price Deflator for State and Local Government Purchases. This index is generally considered more applicable than the CPI for government expenditures. The index is national rather than regional in scope, however, so it may be somewhat understated for San Diego. The national projections for this index reflect an average annual increase of 7.1 percent in FY 1983-84 and 1984-85. As indicated previously, a single expenditure forecast was prepared for each of the three years of the forecast period. These forecasts are based on the assumption that there will be few changes in service levels or authorized personnel. A slight adjustment to the regular FY 1983-84 and 1984-85 expenditure forecasts was developed, however, to correspond to the High Estimates of Revenue. These adjustments involved staffing increases that would be required to process land development applications, since the High Revenue Estimates assume a significant upturn in the economy and housing construction. These staffing adjustments would therefore be required to obtain the High Revenue Estimate. Since the expenditure forecast was developed in a manner which isolated Employee Services, Supplies and Services, Capital Outlay, and Expenditure Savings separately, each of these categories is discussed below. {See Table 2.} -4 - Employee Services The 7.1 percent increase rate was applied to Employee Services for each of the three years. This percent increase is based on a three-year forecasted average of the national GNP Implicit Price Deflator for State and Local Government Purchases and is being used for projective purposes only. The Mayor and Council's salaries were increased by the Statute-regulated 5 percent. In general, no new employees were added except in those cases where outside revenues would offset the expense of the new positions. Supplies and Services This expenditure category was increased generally by 7.1 percent in FY 1983-84 and FY 1984-85. An inflation factor had previously been applied to the FY 1982-83 figures during the budget formation. Several accounts were treated separately in applying future inflation factors due to their special nature in the marketplace: Utilities, Fuel, and Vehicle Maintenance. These increases were somewhat higher than the 7.1 percent used for general supplies and services and were based on indicators provided by or extrapolated from SDG&E published resource material. Special adjustments were also made to reflect the reduced level of energy consumption in FY 1983-84 and 1984-85 as a result of energy-saving CIP projects. In general, no new supplies and services were added beyond what exists in the FY 1982-83 proposed budget. Insurance premium coverage was held constant for the three-year period; while there was no apparent case for continuing the decreasing trend in premium costs experienced in 1981-82, likewise there were no indicators to substantiate an increase. Several items which would normally be considered under capital outlay, such as a Fire Pumper and a Copier Machine, have been partially reflected in Supplies and Services as lease-purchases in order to spread major costs over several years. Capital Outlay Capital outlay expenditures for FY 1983-84 and 1984-85 were approached from a zero base. Items anticipated by departments as needed in the normal course of business, either new or replacement items, were added to determine each annual total. This differs from the Employee Services and Supplies and Services Accounts where a pre-existing base was assumed. The identified capital outlay items have been projected on a basis of being unavoidable, not just "nice-to-have." lIT -5- Expenditure Savings The total of the forecasted amounts for Employee Services, Supplies and Services, and Capital Outlay was used as the Budgeted Expenditures figure shown in Table 2. An offsetting category of Expenditure Savings is also shown in the Table to take into account the savings that the City has historically realized when actual expenditures are compared to appropriations. A relatively conservative estimate of 3 percent of Budgeted Expenditures was used to develop the Expenditure Savings. It should be noted, however, that as budgets become tighter such savings become more difficult to achieve. Forecasted Reserves Reserves, by definition, are those monies not immediately needed for a specific fiscal year to offset proposed expenditures. These funds are set aside for future and/or unanticipated expenditures throughout the year. Historically, the City's reserve fund has frequently been augmented by a combination of additional income, one-time income, and expenditure savings which were unanticipated prior to the budget adoption. Table 3 provides a comparison for General Operating Funds of forecasted revenue to expenditures and the resulting impact to the reserve balance. The variations in the level of the reserve are based on revenues varying within a given fiscal year from low to best to high and are not due to any additional revenue-generating or cost-cutting actions. The ending reserve balances are viewed as increasing or decreasing from the existing 1982-83 Beginning Reserve Balance of $6,199,000. Using the Best Estimates of revenue, for example, the $6,199,000 reserve balance is forecasted to decrease to a FY 1984~85 Ending Reserve Balance of $3,276,000, assuming no new corrective actions are taken to offset the revenue shortfalls. A limitation of the presentation of data in Table 3 should be noted. The assumption of low, best, or high revenue estimates are held constant year to year. For example, the Low Revenue estimate for FY 1983-84 assumes that revenues had also been low in FY 1982-83. A similar situation exists with the Best and High Estimates. Due to a lack of space, the Table does not address the potential of, for example, one year's revenue being at a Best Level and in subsequent years being at a Low or High Level. This can have an impact on the resulting Ending Reserve Balance for each year and each category. However, regardless of the ability to vary the categories year to year, the extremes of the FY 1984-85 Ending Reserve Balance range from a hypothetical ($6,010,000) to $9,205,000. B. BUDGETARY ALTERNATIVES As demonstrated in Table 3, new methods of generating increased revenues and reducing expenditures will be required if the City's current sources of revenue continue to increase at a limited rate or in fact decline. Several alternatives have been developed in terms of added revenue, new revenue, -6- increased transfers to the General Operating Fund, use of the Reserve Balance, and reduced expenditures. Since a primary purpose of the three-year plan effort is to provide alternatives to the City Council in addressing the 1982-83 revenue shortfall and identifying implications of such corrective actions in future years, the followin9 discussion of corrective action alternatives is approached on the basis of immediate alternatives for Fiscal Year 1982-83, other alternatives to be applied in the future, and the availability of reserves and one-time revenues. All alternatives are presented as mutually exclusive, allowing an optimum flexibility in selecting which alternatives the Council might like to adopt and to establish their extent. (See Table 4.) 1982-83 Immediate Alternatives Alternatives which are considered immediate are those which would take relatively little time to implement, many of which should be occurring for reasons of good management practices in addition to reducing the budgetary gap. New Fees -- The activities of processing annexation applications, reviewing landscape plans, reviewing building plans for fire safety, and reserving books for Library patrons are examples of City functions which heretofore have never been viewed on a fee basis. Based on a full-cost or modified recovery assessment of these activities, the City could realize as much as $90,000 in new revenues. These new revenues would not only benefit the 1982~83 revenue picture, but also would continue in future years. However, factors which need to be considered are elasticity of demand and the serving of the public good. Reimbursement of the General Operatin9 Fund -- Activities which are not budgeted in the General Operatin9 Fund such as the Redevlopment Agency and the Golf Course do, from time-to-time, draw on services which originate in the General Operating Fund. Based on a full-cost or modified recovery assessment of those services, it is estimated that the Redevelopment Agency and the Golf Course could reimburse the General Operating Fund an additional $50,000 each for the services they received from Public Works Operations, Finance, etc. These additionial revenues would continue in future years based on the level of service that each received from General Operating Fund activities. Increased Fees -- Based on a full cost or modified recovery assessment of numerous development fees and recreation program fees, it has been determined that substantial increases in revenue could be realized by not only charging for the direct salaries tO provide the service but also for at least part of the administrative overhead and supplies costs that are incurred but have never been recognized in existing fees. The amount that could be realized through a more complete recovery of fees would fall in the range of $175,000 to $325,000 in Fiscal Year 1982-83 and would continue in future years. A more extensive breakdown of which fees would be impacted, and to what extent, will be addressed separately. As in the case of new fees, factors such as the elasticity of demand and the need to serve the public good should also be recognized in addressing the issue of increased fees. -7- Further Base Budget Reductions -- The proposed FY 1982-83 Operating Budget contains significant reductions in the area of Employee Services. A secondary level of additional cuts has been identified for Council's consideration in the event that this alternative is viewed as an immediate priority. However, even if this alternative is not utilized, all on-going expenditures will be scrutinized throughout the year in a continuing effort to achieve cost savings. Other Alternatives Additional Reimbursement to the General Fund -- Other areas which could be tapped for further reimbursement to the General Operating Fund include those activities associated with the performance of its Capital Improvement Program and the maintenance of sewer facilities. Realizing that additional transfer of funds from the CIP area will reduce the amount of revenue available to address CIP issues, this alternative may need closer scrutiny in terms of its impact in future years. The initial estimate of additional revenues amounts to $100,000 in CIP Funds and $154,000 from Sewer Service Funds. It is anticipated that the increased transfer from Sewer Service Funds to the General Operating Fund may require a small tax increase for sewer service. Further Full-Cost or Modified Recovery of Service Fees Should a more extensive approach to a complete recovery of fees for services provided to the public be necessary, a more extensive list of fees which could be increased has been established. It should be noted, however, that the framework to recommend the implementation of these fees will take a moderate level of staff preparation time in order to implement. The amount that could potentially be recovered falls into a range of $165,000 to $300,000. Additional Transfers of Gas Tax Funds Currently, the City collects approximately $1,000,000 in Gas Tax Funds annually. Those funds are split with approximately 50 percent going to the maintenance of existing roadways by City forces and 50 percent going to Capital Improvement Projects. Since it is known that more services which originate in the General Operating Fund to maintain streets are occurring than the amount we are collecting in gas tax, additional revenues could be transferred from Gas Tax Funds into the General Operating Fund. The net effect would be to reduce the available amount for Capital Improvement Projects, which is of concern because of the already limited revenues available for this type of construction. If the election item of the 2¢ tax/gallon passes, this alternative would become more viable. Utility Users Tax Rate Increase The current Utility Tax rate is established at 5 percent. As a means of increased revenue, the Council has the option to allow that tax to float to 6 percent, realizing an additional $270,000 in new revenues. -8- Additional Alternatives - Other areas which could be explored as future alternatives include Street Lighting Maintenance Districts, Landscape Maintenance Districts, Public Safety tax overrides, the development of a vacant parcel of land adjacent to the Golf Course, and the feasibility of an early retirement program for City employees. These alternatives have not been examined in detail, and some will require a year's leadtime to develop as viable alternatives. Reserves and One-Time Revenues Reserves and one-time revenues differ from the prior discussions in that these funds should not be viewed as on-going sources of revenue but rather as short-term solutions. Currently, the General Operating Fund Reserve Balance is at a level of $6,19g,000 (36 percent of the General Operating Expenditures}, some of which could be used to help offset revenue shortfalls. A reduction of the Public Liability Trust Fund is viewed as a one-time revenue in that the City's new reduced retention level reduces the need for such an extensive trust fund. The amount which could be realized from this one-time source is $500,000. LFC:jT:dl/vt WPC 0057I TABLE 2 3-YEAR EXPENDITURE FORECAST GENERAL OPERATING BUDGET D~9~tment 1982-83 1983-84 1984-85 City Council 96,067 101,396 106,727 Boards & Commissions 8,097 8,665 9,233 Conm~unity Promotions 8,850 9,478 10,106 City Attorney 161,435 172,349 183,194 City Clerk 104,142 115,186 125,227 Administration 314,887 335,918 356,787 Management Services 458,664 488,347 489,300 Personnel 197,986 211,265 224,544 Con~nunity Development 286,181 306,500 328,262 Finance 446,194 477,873 522,052 Planninq 482,640 491,799 532,707 InSurance 206,530 206,530 206,530 Non-Departmental 54,140 57,984 61,828 Police 4,830,117 5,128,552 5,486,133 Fire 2,532,054 2,746,46D 2,918,091 Buildinq& Housing 756,864 791,361 845,598 Engineering 1,627.700 1,866,956 1,920,252 Parks and Recreation 1.755,681 1,884,085 1,933,748 Library 1,245,815 1,239,024 1,371,002 Public Works ~peration 1,754,859 1,917,796 _ 1,994,429 $17,328,903 $18,557,524' $19,625,750' CAPITAL OUTLAY AND OTHER NOTES 1983-84 1984-85 City Clerk S4,000-microfilm reader/printer $7,000-Wang printer Finance $12,500-Offset press Planning $5,700-Replacement car Police S72,000-8 replmt. patrol cars $5,7OO-Replace Admin. car S5,000-1 motorcycle $11,400-2 replacement cars Sll.400-Replace 2 agent cars (Services) $72,000-8 reul. patrol cars $11,400-Replace 2 agent cars Fire S40,O00-Price Club annexation $25,000-Pumper (lease/purch.) S_~ OnO-Mobile Radios ~uildinq & HoOsinq S4,200-Custodial eouipment $4,500-Custodial equipment $3,200-2 Traffic Counters S40,O00-Lift Truck Parks 1 :pcrpatinn S7,000-Universal Gym $6,OO0-Athletic Field SB,nOO-Solar pool covers Conditioner 513,000-Riding mower $8,000-Solar pool covers library S7,100-.5 Clerk I-Reserves $9,750-.5 Data Entry Oprtr. SI5,000-Book budget (National City) S2,000-Rental plan 115,000-Book budget Sl7 O00-COM Catalog 4,000-COM Cataloo ~2,600-DataPhase Se ices 2,000-DataPhase ~ervices . rv i6,080-Disk Drive (CLSA) Public Works S50,000-8/10 Ton Roller $25,000-Dump Truck Rebuild S20,O00-Dump Truck Rebuild *Additional Staff nq COSts for High EStimates 1983-~4 = 137,685; 1954-85 = 166,648 WHY A RESERVE? 1. To provide for adequate cash flow during first six (6) months of fiscal year. 2. To provide for unanticipated appropriation during fiscal year (non-emergency). 3. To provide for emergencies. a. Natural disasters (floods, earthquakes, etc.) b. Replacement of essential equipment 4. To provide a cushion for unanticipated revenue drop. TYPE OF RESERVE 1. Reserve should be tied to a % of annual operating budget. 2. Reserve should increase or decrease with annual operating budget. 3. Reserve should be maintained in General Fund. HOW MUCH RESERVE? Analysis of past year cash flow requirements indicates about 2 million needed for this purpose. While we would need about 2 million for cash flow purposes other funds (revenue sharing, liability trust and worker's compensation trust funds) could be used to meet emergency type needs. To provide the minimum cost flow reserve of 2 million based on the proposed 1982-83 operating budget of $16,528,600 (without salary adjustments) would require a percentage factor of slightly more than 12%. ($16,528,600 x 12% = $1,983,432) We believe a percentage factor of at least 12% of the annual operating .budgeted appropriations is the minimum requirement. Increasing this percentage to 15% would provide additional reserves in the event emergencies occur during the early months of a fiscal year when cash flow problems exist.