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CC 2013-05-20_05.a. Preliminary Biennial BudgetTO: CITY COUNCIL ADAMS, FROM: STEVEN A, , RYAN CORNELL, ACCOUNTING SUPERVISOR r; +l. SUBJECT: CONSIDERATION OF PRELIMINARY FY 2013-14/ FY 2014-15 BIENNIAL RECOMMENDATION: It is recommended the City Council review the Preliminary FY 2013 -14/ FY 2014 -15 Biennial Budget, provide opportunity for public comment, and direct staff to make any requested changes to the proposed budget prior to formal consideration at the June 11, 2013 meeting. IMPACT ON FINANCIAL AND PERSONNEL RESOURCES: The recommended Citywide total budget for FY 2013 -14 is $23,953,195 and $23,003,212 for FY 2014 -15. Proposed General Fund expenditures are $13,605,885 in FY 2013 -14 and $14,023,090 in FY 2014 -15. This represents over a 2.5% decrease in ongoing costs in the General Fund from the prior year budget in FY 2013 -14 and an increase of slightly over 3% in FY 2014 -15. However, when one -time expenditures and revenues are accounted for, there is an increase of less than .2% in FY 2013 -14 and less than 2% in FY 2014 -15. Therefore, the budget recommendations represent holding General Fund expenditure amounts very steady. BACKGROUND: The City adopts a biennial budget every two years. Budget goals are established as the first step in the budget process. The purpose of these goals is to establish clear priorities in reviewing budget requests and developing funding recommendations. At the January 8t" meeting, staff presented recommendations, and the Council provided direction, on budget goals. These included major citywide goals, departmental project goals, ongoing department service level goals, and service level increases and /or new funding items. Goals recommended were based on the assumption of maintaining existing service levels. The goals also reflected the previously established Critical Needs Action Plan, which identified agreed upon major citywide priorities. The major citywide goals approved are: CITY COUNCIL CONSIDERATION F PRELIMINARY Y 2013 -14/ FY 2014 -15 BIENNIAL BUDGET MAY 20, 2013 PAGE 2 • Complete design and pursue approval of State and Federal funding for the Brisco Road Interchange project. • Fully fund and construct the pavement management program to establish and maintain a schedule of improving all streets in the City on a 7 -year cycle. • Continue an escalated sidewalk repair program. • Address the Police Department's facility needs. • Address the Corporation Yard facility needs. • Implement recommendations to address the City's water needs through a combination of conservation measures, potential recycling efforts and additional water supply that may become available. • Implement a City Charter planning process. • Develop and implement recommendations to enhance customer service. Based on these goals, departments developed and submitted budget requests to the City Manager's Office. In developing budget recommendations, department directors were instructed to maintain service and supply costs the same as the FY 2012 -13 amended budget and to minimize capital outlay requests. Administration staff reviewed these budgets to arrive at the recommendations for inclusion into the Biennial Budget. Like most government agencies, the City of Arroyo Grande has experienced significant budget challenges over the past several years as a result of the economic recession. In addressing these challenges, the City's approach has been to place the highest priority on maintaining service levels to the public. As a result, a comprehensive approach utilizing a variety of strategies has been developed over the past few years. An emphasis has been particularly placed on restructuring operations to provide services in a more cost efficient manner. This has frequently involved consolidating operations and cross training staff to perform shared functions. To fully appreciate the constraints of the current budget, it is helpful to review the measures that have been taken over the past few years. Serious reductions in revenues were first detected late in FY 2007 -08. In 2008, staff presented the City Council with a long list of recommendations to address a remaining budget shortfall of over $950,000 in FY 2007 -08 and over $1.2 million in FY 2008 -09. As a result, the following positions were eliminated: • Full -time Office Assistant (replaced with part -time) • Part -time Printer • Public Works Engineering Technician (layoff) • Public Works Maintenance Worker • Police Support Services Supervisor (layoff) • Two part -time Property /Evidence Technicians • Part -time Support Services Technician • Parks Maintenance Worker CITY COUNCIL CONSIDERATION OF PRELIMINARY FY 2013 -14/ FY 2014-15 BIENNIAL BUDGET MAY 20, 2013 AGE 3 Later that fiscal year, two full -time Associate Engineers were changed to part -time when vacancies occurred. When the FY 2009 -10 and FY 2010 -11 Biennial Budget was prepared, deficits of $1.94 million and $2.28 million were projected. Another comprehensive effort was initiated to address the shortfall, and the following additional staffing reductions were made: • Three Maintenance Workers (replaced with part -time) • Two Administrative Secretaries (one replaced with part -time) • Sergeant (frozen position) • Public Works Inspector (layoff) • Public Works Director (layoff) • Part -time Planning Associate In December 2010, a full -time Recreation Coordinator position was eliminated as the result of reorganizing the City's recreation program staffing. In July 2012, the restructuring of the Recreation and Maintenance Services Department resulted in the additional elimination of a Maintenance Services Supervisor position and two Maintenance Worker positions. Funding was also eliminated for a vacant Police Sergeant position, which has recently been refunded as a Senior Officer using Local Sales Tax funds diverted from the Police Building project budget. During this period, the City also reformed the medical retiree benefit system to minimize future cost increases, which resulted in a substantial reduction in the unfunded liability. This was followed with reform of the pension plan, which included establishment of a second tier with lower benefits and payment of the entire employee share by City staff. ANALYSIS OF ISSUES: The proposed City budget represents a mixture of both increased financial stability, but also continued challenges and constraints. The City is projected to finish FY 2012 -13 with General Fund revenues exceeding expenditures, which is a substantial accomplishment given that the City had initially anticipated use of over $450,000 in reserves. On the other hand, continued budget shortfalls are projected in FY 2013 -14 and FY 2014 -15. However, the ongoing shortfall has been meaningfully reduced. Staff's goal is to achieve a fully balanced budget during the course of the next fiscal year through labor negotiations and other measures under way to further reduce costs. The recommended budget will fund the goals approved by the City Council in the goal setting process. These include all the major capital project needs identified, as well as the network upgrade, update of the General Plan Land Use Element and replacement of the telephone system. Funds for the Land Use Element and telephone system will come from one -time revenues from the City's share of proceeds anticipated from the sale of land previously owned by the Redevelopment Agency. The proposed budget will accomplish all the City's fiscal policies for the first time. CITY COUNCIL CONSIDERATION OF PRELIMINARY FY 2013 -141 FY 2014 -15 BIENNIAL BUDGET MAY 20, 2013 AGE 4 Despite these operational funding constraints, the budget continues the City's commitment to utilize revenue from the 2006 Local Sales Tax Measure for the purposes intended, which primarily consist of capital improvements. In addition, the budget does not rely on General Fund fee or tax increases except inflationary adjustments in recognition of the impact economic conditions have had on the community's residents and businesses. This has been the City's approach throughout this difficult economic period. General Fund The General Fund balance is projected to be at least $3,226,145 by the end of the biennial budget period. This amount will exceed the City's policy goal of 20% of General Fund expenditures. There is a significant increase in lease costs found within the budget. This is due to proposed leasing of the computer network upgrade and vehicle replacements in the Public Works Department. Staff believes a lease purchase arrangement for this equipment is prudent since they are items that are replaced on a regular basis. Lease arrangements not only reduce the upfront costs to address these needs, but also provide a mechanism to budget for these items on a consistent annual basis. Budget recommendations address projected impacts from the Federal Affordable Health Care Act. Under the new regulations, employers with over 50 employees are required to provide a specified level of medical benefits to employees who average 30 hours per week or more. Funding is budgeted for part -time positions that have been determined necessary to remain at 30 hours per week and above to maintain existing service levels. Other part -time positions are proposed to be maintained below 30 hours per week in order to avoid increased costs. As a result, funds are budgeted at a minimal amount to provide medical benefits for the part -time Planning Assistant, Community Development Department Office Assistants, Custodial Maintenance Worker, three Head Teachers in the Children in Motion program (one for each site), and one Police Reserve. The Five Cities Fire Authority has not yet determined how they will address the program requirements for their staff. Therefore, this could result in an additional cost in the future when their budget is finalized. Funds recommended include figures from the Five Cities Fire Authority's preliminary budget. Enterprise Funds Both the Water and Sewer Funds are also balanced and fully fund the projects approved by the City Council in the Water and Wastewater Master Plans. The Water Fund has a projected fund balance at the end of FY 2014 -15 of $12.6 million, which remains well above the policy goal of 60 days of operating expenses plus $500,000. The ending fund balance for the Sewer Fund is projected to be $802,000, which also meets the policy goal for the first time in many years. These recommendations will establish the enterprise budgets in a strong position as the City begins the process of preparing the next water and sewer rate study. CITY COUNCIL CONSIDERATION F PRELIMINARY FY 013 -14/ FY 2014-15 BIENNIAL BUDGET MAY 20, 2013 PAGE 5 Development Impact Fee Accounts Development impact fee accounts are established to fund upgrades in public facilities through fees from development projects. These accounts have experienced a significant reduction in ongoing revenues due to the impact of the economy on new development, which has in turn affected the City's ability to fund major capital improvements. Each of the funds remains balanced. The most significant funds to note are the Traffic Signalization and Park Development Funds, which have funds sufficient for new projects. As a result, staff is initiating processes in both areas to prioritize needs in the community during the upcoming year. Projected expenditures and fund balances are as follows: Fee FY 2013 -14 Fire Protection $0 Police Protection $20,000 Park Development $0 Park Improvement $20,000 Community Center $0 Traffic Signalization $0 Transportation Facility $700,000 Water Neutralization $105,900 Affordable Housing $5,000 FY 2014 -15 $0 $0 $0 $20,000 $0 $30,000 $0 $99,400 $5,000 Balance $143,009 $64,421 $680,433 $84,960 $38,082 $408,947 $963,608 $193,867 $76,842 _Capital Improvement Program The recommended Capital Improvement Program (CIP) includes the funding projected necessary to address all of the major needs identified. These include the annual Pavement Management Program, the Police Building remodel, the Brisco Interchange project, sidewalk repairs, drainage repairs, upgrade of the Corporation Yard offices, purchase of the Le Point Street parking lot property, ongoing Americans with Disabilities (ADA) improvements, lighting at Don Roberts Field, undergrounding utilities on East Grand Avenue, trenchless sewer rehabilitation, Sewer Lift Station No. 4 rehabilitation, Fair Oaks Water Main improvements, Leanna Drive Creek Crossing Water Upgrade, Well No. 11 Construction, and Reservoirs No. 3 and No. 4 Coating and Seismic Evaluation. Local Transportation Funds available for street improvements have increased by roughly $200,000 due to the Five Cities area's recent designation as a Federal "urbanized area ". Along with current year savings, this increases the Pavement Management Program budget to over $1.2 million once again in FY 2013 -14. Long -Range Financial Plan The Long -Range Financial Plan includes both 10 -year projections for the General Fund, as well as the Local Sales Tax Fund. Modest average revenue growth is now projected, which decreases in the later years of the plan given an expectation of another recession when the current growth period diminishes. The primary anticipated issue is cost CITY COUNCIL CONSIDERATION F PRELIMINARY FY 2013 -14/ FY 2014-15 BIENNIAL BUDGET MAY 20, 2013 PAGE 6 increases projected for the City's pension program, which is programmed throughout the 10 -year period. Some of this increase is expected to be mitigated through savings from establishing the second and third tier plans for new employees. Modest salary increases are identified. The 10 -Year projections also assume that the proposed biennial budget will be balanced throughout the next two -year period by adjusting expenditures. The Council recently authorized use of $250,000 from the Local Sales Tax Fund for operational purposes. Staff has managed to maintain a balanced budget and service levels without utilizing those funds. However, it is projected to potentially be needed to maintain services in the future. The long -range plan for the Local Sales Tax Fund demonstrates that this can be done without impacting funding for the City's capital needs that have been identified, as well as maintaining excess funds for unanticipated project needs. The actual need to use those funds may be avoided if the City continues generating savings each year over what is projected. Due to time constraints resulting from staffing transitions, staff did not have an opportunity to conduct the level of analysis that is preferred in developing the Long - Range Financial Plan. Therefore, staff intends to prepare more sophisticated analysis and provide an updated Long -Range Financial Plan to the City Council during the upcoming year. Resource, workload and performance indicators have also been left out of the preliminary document due to time constraints. They will be added to the final budget. ALTERNATIVES: The following alternatives are provided for the Council's consideration: 1. Provide staff direction to present the Preliminary Budget for formal consideration at the June 11 th meeting; 2. Provide staff direction to make specific changes to the proposed budget for consideration at the June 11 th meeting; 3. Direct staff to utilize more or less reserves or propose additional cuts or expenditures; or 4. Provide direction to staff. ADVANTAGES: The recommendations in the Preliminary Budget reflect revenue and expenditure strategies that will accomplish the following: • Maintain key service levels; • Maintain a substantial investment in improvements to the City's infrastructure and facilities; • Effectively manage current and future salary and benefit costs; • Maintain reserves at or above the City's policy levels; CITY COUNCIL CONSIDERATION LIMINA Y FY 2013 -14/ FY 2014-15 BIENNIAL BUDGET MAY 20, 2013 PAGE i • Do not rely on tax or fee increases; and • Limit reliance on one -time revenues. DISADVANTAGES: The recommendations will rely on negotiated concessions with employee unions that have not yet been finalized, will utilize reserves, and will leave a projected shortfall in FY 2013 -14 and FY 2014 -15. ENVIRONMENTAL REVIEW: No environmental review is required for this item. PUBLIC NOTIFICATION AND COMMENTS: The agenda was posted in front of City Hall and on the City's website on Wednesday, May 15, 2013. A press release was also issued regarding the public workshop. Attachment: 1. Preliminary FY 2013 -14/ FY 2014 -15 Biennial Budget (document available at City Hall for public review)