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.