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16-0523_BOYS & GIRLS CLUBS OF CAPISTRANO VALLEY_C1_Agenda ReportCity of San Juan Capistrano Agenda Report TO: Honorable Mayor and Me m bers of the City Council FROM: $n Siegel, City Manager SUBM ITTED BY: Ken Al-l mam, Interim Chief Financial Officer ~ DATE : May 23, 2016 5/23 /2016 C 1 SUBJECT: Consideration of Proposed Operating Budgets for Fiscal Years 2016-17 and 2017-18 and the Proposed Seven-Yea r Capital Improvement Program fo r Fiscal Years 20 16-17 through 2022-23 RECOMMEN DAT ION: 1) Review the Proposed Ope rating Budgets for Fiscal Years 2016-17 and 2017-18 and Proposed Seven-Year Capital Improvement Program for Fiscal Years 2016- 17 through 2022-23; 2) Provide direction to staff with respect to any changes; and , 3) Direct staff to present the revised Operating and Capital Budgets to the City Counci l for adoption on June 21, 2016 . EXECUTIVE SUMMARY: The City adopts its budget on a biennial basis. The accompanying documents represent the proposed two -yea r budget for Fisca l Years 2016-17 and 20 17-18. Staff w ill provide a detailed presentation on the proposed budget during the public workshop on May 23, 2016. The proposed operating budget for the General Fund reflects budgeted revenues of $26.6 million for Fiscal Year 2016-17 and $27.3 million for Fiscal Year 2017-18. This compares to an adopted budget of $26.3 mill ion for Fiscal Year 2015-16. For Fisca l Year 2015-16, actual revenues are projected to be $1.3 million less than budgeted primarily due to reduced development-related revenues, as reported in the Fiscal Year 2015-16 Second Quarter Financial Report. T he proposed operating budget for the Genera l Fund reflects budgeted expenditures of $26.5 million for Fiscal Year 20 16-17 City Council Agenda Report May 23,2016 Page 2 of 5 and $27.2 million for Fiscal Year 2017-18. This compares to an adopted budget of $25.2 million for Fiscal Year 2015-16. For Fiscal Year 2015-16, actual expenditures are projected to be $800,000 more than budgeted due to higher than expected litigation expenses. Budgetary data for the other funds is summarized in tab 2 of the enclosed Proposed Operating Budgets for Fiscal Years 2016-17 and 2017-18. DISCUSSION/ANALYSIS: Because a budget represents an estimate of future resource inflows and outflows, certain assumptions must be made to arrive at the best estimates possible for amounts to be included in the budgets for these future periods. Revenue projections for Fiscal Years 2016-17 and 2017-18 were estimated using all of the information available at the time that the proposed budget was developed. For property tax and sales tax revenues, the City uses a consulting firm (Hdl Coren & Core) that specializes in helping cities monitor, analyze, and project these revenue streams using sophisticated city-specific economic models. This information was the basis for the budgeted revenues for property taxes and sales taxes that are reflected in the proposed budget. For expenditures, cost estimates were provided by the City's operating departments as to their best estimate of the cost to provide existing levels of service. Personnel costs for Fiscal Year 2016-17 reflect the 3% cost of living increase provided by the City's Memoranda of Understanding for the City's labor associations. For Fiscal Year 2017-18, personnel costs reflect no salary increase pending the results of labor negotiations to take place in the spring of 2017. Pension costs are estimated to increase 3% per year based upon an average of the increases over the past three years. Medical insurance premiums are estimated to increase 11% per year from the level of actual costs currently being paid based upon an average of increases over the past two years. Budgetary Challenges for Fiscal Year 2016-17 and 2017-18 There are several factors contributing to the City's need to limit spending this year. First, sales tax revenues are experiencing modest growth. The post-recessionary growth of sales tax revenues have been limited due to continued caution on the part of consumers to return to pre-recession levels of spending. In addition, unusually low fuel prices have had the effect of decreasing the amount of sales tax collected on gasoline sales. Additionally, one-third of the General Fund budget is comprised of the contract with the County of Orange for law enforcement services. As a result, the County controls the extent to which the cost of personnel services associated with this contract increase from year to year. In recent years, increases in the cost of contracted law enforcement services have ranged from 4% to 6% per year. City Council Agenda Report May 23,2016 Page 3 of 5 The cost of General Fund services is also impacted by prevailing wage rate requirements. Changes in prevailing wage rates required to be paid for public works contracts for construction and maintenance projects have resulted in cost increases of up to 30% for some activities in the General Fund. The General Fund is also impacted by significant litigation expenses. In Fiscal Year 2015-16, legal expenses paid by the City's General Fund were in excess of $900,000. In developing its response to these challenges, staff was mindful of the priorities that were communicated by City Council at the City's Strategic Planning Workshop. For example, in order to maximize utilization of Gas Tax Funds for street projects, the proposed budget defers funding depreciation of its buildings, vehicles, and equipment for two years. In addition, there were no additional full-time positions added to the proposed budget, nor were there any new programs added to the budget. Finally, all of the landfill mitigation revenue (estimated to be $600,000 per year) recently negotiated between the City and County of Orange has been dedicated to street rehabilitation projects. Over the long-term, the General Fund's financial prospects are expected to be more favorable than current conditions. Although development-related revenues are expected to diminish as the City approaches build out, the prospects of two hotels opening in the downtown are anticipated to outweigh this reduction. Reserve Targets At the workshop, staff will also seek direction from the City Council with respect to budgetary reserve targets. Presently, the General Fund reserves are held in two reserves. A capital replacement reserve has been funded in the amount of $2 million. A contingency reserve has been funded in the amount of $11 million. During the workshop, staff will provide information regarding best practices for reserve management, including a recommendation to distribute the existing contingency reserve into components that more clearly address the need and purpose for each reserve component. Based on direction received at the workshop, staff will develop a proposed reserve policy for adoption in June 2016. Other Funds The proposed budget addresses certain financial challenges relating to the City's Water Fund. For Fiscal Year 2016-17, the Water Fund is impacted by unusually high litigation costs, increasing costs for imported water, and reduced water sales revenue as a result of water conservation efforts. In addition, the benefits of the City's five-year rate study are only partially realized as of Fiscal Year 2016-17, because of the five-year implementation phase-in of the approved rates. City Council Agenda Report May23, 2016 Page 4 of 5 As a result of these conditions, the proposed budget includes a recommendation to delay by one year the scheduled first principal repayment by the Water Fund to the Sewer Fund for money that was borrowed from the Sewer Fund to finance water customer refunds authorized in June 2015. The amount of the delayed principal payment is $1,430,000. Only the principal payment is being delayed. Interest of $66,360 would be paid to the Sewer Fund in Fiscal Year 2016-17 on schedule. Because of the continued phase-in of the City's five-year rate study, the proposed budget for Fiscal Year 2017-18 reflects a resumption of the scheduled principal payments to be made to the Sewer Fund. Consequently, the Water Fund's borrowing from the Sewer Fund is anticipated to be paid off on June 30, 2020, one year later than originally planned. Capital Improvement Program The budget for the City's seven-year Capital Improvement Program is identified in the budget workshop binder at tab 4. The development of this budget was based on the prior year's capital plan and further guided by the direction provided by City Council at the City's Strategic Planning Workshop held on April 4, 2016. For example, the project initiative that was assigned the highest rating at the workshop was the street maintenance and rehabilitation program. Accordingly, $3.2 million of the City's CIP funds would be expended over the next two years to improve the City's streets. Results of Budget Workshop If City Council directs staff to make changes to the proposed budget, staff will also need direction as to one of the following methods to identify the funds necessary to accommodate the directed change: • Identification of another project or activity in that year's budget for which funding should be reduced; or • Identification of the Reserve from which the funds required for the change will be appropriated; or • Identification of an area of municipal service to be reduced from existing levels. FISCAL IMPACT: The fiscal impact of the proposed budget on each City fund is summarized in tabs 2 and 4 of the enclosed Proposed Operating Budgets for Fiscal Years 2016-17 and 2017-18 and Proposed Seven-Year Capital Improvement Program for Fiscal Years 2016-17 through 2022-23. ENVIRONMENTAL IMPACT: Not applicable. City Council Agenda Report May 23,2016 Page 5 of 5 PRIOR CITY COUNCIL REVIEW: Not applicable. COMMISSION/COMMITTEE/BOARD REVIEW AND RECOMMENDATIONS: The Utilities Commission reviewed the proposed Water and Sewer Fund budgets on May 17, 2016. The Commission identified no changes that needed to be made to the proposed budgets for the Water and Sewer Funds. NOTIFICATION: Not applicable. ENCLOSURE: Enclosure-Proposed Operating Budgets for Fiscal Years 2016-17 and 2017-18 and Proposed Seven-Year Capital Improvement Program for Fiscal Years 2016-17 through 2022-23.