BUSINESS OF THE CITY COUNCIL CITY OF MERCER ISLAND, WA

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1 BUSINESS OF THE CITY COUNCIL CITY OF MERCER ISLAND, WA September 3, 2013 Regular Business 2 ND QUARTER 2013 FINANCIAL STATUS REPORT & BUDGET ADJUSTMENTS Proposed Council Action: Receive report and adopt Ordinance No , amending the Budget. DEPARTMENT OF COUNCIL LIAISON EXHIBITS Finance (Chip Corder) n/a 1. 2 nd Quarter 2013 Financial Status Report CIP Project Management Report 3. Ordinance No (Amends Budget) APPROVED BY CITY MANAGER AMOUNT OF EXPENDITURE $ 161,971 AMOUNT BUDGETED $ APPROPRIATION REQUIRED $ 161,971 SUMMARY Attached as is the 2 nd Quarter 2013 Financial Status Report. In addition, a comprehensive update on the status of each CIP project as of June 30, 2013 is included as Exhibit 2. Finally, an ordinance amending the Budget is attached as Exhibit 3, which constitutes financial housekeeping. Accordingly, the City Manager recommends that the procedural requirement for a second reading be suspended and that the ordinance be adopted on September 3, The key takeaway items from the 2 nd Quarter 2013 Financial Status Report are: A General Fund revenue surplus of at least $785,000 (or 3.25% of General Fund budgeted revenues) is projected in This is the first revenue surplus since The primary drivers of the General Fund revenue surplus are: 1) stronger than expected development activity in the first half of 2013, which will result in stronger than expected constructionrelated sales tax in the second half of the year; and 2) stronger than expected electric, gas, and water utility tax revenues in the second half of the year resulting from significantly warmer and drier summer weather than Single family residential development serves as a leading economic indicator for the City. Compared to the first half of 2012, the total number of building permits issued is up 33.6 percent, and total valuation is up 78.9 percent for the first half of See the two graphs on p.7, which are broken down by first and second quarter for Page 1

2 It is projected that the total General Fund budget will be spent by the end of 2013 due to various unanticipated costs that have been incurred in 2013 (spike in firefighter overtime, spike in jail costs, and long-term care costs for a retired LEOFF I firefighter). A real estate excise tax (REET) surplus of $200,000 is projected in RECOMMENDATION Finance Director MOVE TO: 1. Suspend the City Council Rules of Procedure 5.2 requiring a second reading for an ordinance. 2. Adopt Ordinance No , amending the Budget. Page 2

3 City of Mercer Island FINANCIAL STATUS REPORT 2 nd Quarter 2013 FOREWORD The Financial Status Report provides a summary budget to actual comparison of revenues and expenditures for the General Fund (four times a year) and all other funds (twice a year) through the end of the most recently completed fiscal quarter. Revenue and expenditure comparisons are also made to the same period in the prior year. In addition, a comprehensive progress update on the City s Capital Improvement Program (CIP) is included twice a year in the second and fourth quarter reports. A separate fund balance analysis for every fund is included annually in the fourth quarter report as well. Finally, if needed, budget adjustments are identified in a separate section of this report, along with a budget amending ordinance. This report is comprised of the following five sections: General Fund Utility Funds All Other Funds Capital Improvement Program Budget Adjustments It should be noted that, where significant, revenues are recognized when earned, regardless of when cash is received, and expenditures are recognized when a liability has been incurred or when resources have been transferred to another fund. Also, in the case of the General Fund, the beginning fund balance, which corresponds to the Council approved cash carryover of net excess resources from the prior year, is separately identified. Page 3

4 GENERAL FUND For the first time since 2008, a General Fund revenue surplus of at least $785,000 (or 3.25 percent of General Fund budgeted revenues) is projected in 2013 driven by: 1) total revenues that are 1.5 percent ahead of the 50.0 percent budget threshold as of June 30, 2013; 2) stronger than expected development activity in the first half of 2013, which will result in stronger than expected construction-related sales tax revenue in the second half of the year; and 3) stronger than expected electric, gas, and water utility tax revenues in the second half of the year resulting from significantly warmer and drier summer weather than Total expenditures, which trail the 50.0 percent budget threshold by 1.1 percent through the second quarter of the year, are expected to be very close to the total General Fund budget at year-end due to various unanticipated (i.e. unbudgeted) costs that have been incurred in Revenues Comparing total actual to total budgeted revenues (i.e. excluding Beginning Fund Balance and Transfer From Other Funds) through the first half of the year, the General Fund is 51.5 percent of budget in 2013 versus 50.7 percent of budget in 2012, which is modestly ahead of the 50.0 percent budget threshold. This is primarily due to property tax and licenses, permits, and zoning fees, as shown in the table below. GENERAL FUND: Revenues As of June 30, 2012 and 2013 Revenue Actuals Budget % of Budget Category 6/30/12 6/30/13 % Chg Property Tax 5,416,737 5,669, % 10,367,735 10,575, % 53.6% Sales Tax 1,388,494 1,439, % 2,698,000 2,889, % 49.8% Utility Taxes 1,779,150 2,011, % 3,684,000 4,070, % 49.4% Licenses, Permits & Zoning Fees 966,188 1,230, % 1,852,120 1,960, % 62.8% Intergovernmental Revenues 226, , % 487, , % 29.4% EMS Levy & Charges for Service 519, , % 1,064,391 1,206, % 48.8% Recreation Program Fees 592, , % 1,414,281 1,505, % 45.3% Utility Overhead Charges 366, , % 732, , % 37.6% CIP Administration 88,075 87, % 176, , % 50.0% Court Fines 190, , % 394, , % 44.0% Investment Interest 7,782 1, % 39,550 2, % 58.5% Misc General Government 190, , % 241, , % 71.1% Total Revenues 11,732,156 12,459, % 23,152,360 24,177, % 51.5% Beginning Fund Balance 396, , % 396, , % 100.0% Transfer from Other Funds 104, , % 454, , % 100.0% Total Resources 12,233,481 12,883, % 24,003,217 24,602, % 52.4% Comparing 2013 to 2012, total actual revenues are up almost $727,000, or 6.2 percent, through the second quarter of the year primarily due to the following: Page 4

5 1) 1.0 percent optional and new construction increases in the 2013 property tax levy; 2) newly instituted 3.9 percent utility tax on City s water, sewer, and storm water utilities, which took effect on January 1, 2013; and 3) stronger than expected development activity as reflected by the significant increase in licenses, permits, and zoning fees. A more in-depth analysis is provided for the following revenues: Sales tax is 49.8 percent of budget in 2013 compared to 51.5 percent of budget in In addition, actual revenue is up about $51,000, or 3.7 percent, in 2013 compared to the first half of last year. However, as noted above, there are significant, one-time receipts from a non-classified business of almost $37,000 in 2013 and almost $98,000 in Excluding these one-time receipts, actual revenue is up 8.7 percent in The following tables compare sales tax revenue through the first half of the year for each business sector, including and excluding the significant one-time receipts Actual Sales Tax Revenue (Including Extraordinary Receipts) Business Sector Revenue (Jan-Jun) % Change % of Total Construction 491, , , % 11.1% 38.4% 35.3% 37.9% Retail & Wholesale Trade 377, , , % 10.2% 29.4% 27.3% 29.0% Admin & Support Services 62,369 63,392 71, % 13.3% 4.9% 4.6% 5.0% Food Services 79,285 86,640 89, % 3.6% 6.2% 6.2% 6.2% Telecommunications 61,877 68,326 78, % 14.3% 4.8% 4.9% 5.4% Finance, Insurance & Real Estate 35,480 42,454 40, % -3.6% 2.8% 3.1% 2.8% All Other Sectors 172, , , % -23.9% 13.5% 18.6% 13.7% Total 1,280,634 1,388,494 1,439, % 3.7% 100.0% 100.0% 100.0% Actual Sales Tax Revenue (Excluding Extraordinary Receipts) Business Sector Revenue (Jan-Jun) % Change % of Total Construction 491, , , % 11.1% 38.4% 38.0% 38.8% Retail & Wholesale Trade 377, , , % 10.2% 29.4% 29.3% 29.7% Admin & Support Services 62,369 63,392 71, % 13.3% 4.9% 4.9% 5.1% Food Services 79,285 86,640 89, % 3.6% 6.2% 6.7% 6.4% Telecommunications 61,877 68,326 78, % 14.3% 4.8% 5.3% 5.6% Finance, Insurance & Real Estate 35,480 42,454 40, % -3.6% 2.8% 3.3% 2.9% All Other Sectors 172, , , % -0.5% 13.5% 12.4% 11.4% Total 1,280,634 1,290,875 1,402, % 8.7% 100.0% 100.0% 100.0% Excluding the one-time receipts, the overall increase of 8.7 percent in 2013 can be attributed primarily to the construction, retail & wholesale trade, admin & support services, and telecommunications, sectors, which are up 11.1 percent, 10.2 percent, Page 5

6 13.3 percent, and 14.3 percent respectively. Together, these four sectors comprise almost 80.0 percent of the City s total sales tax receipts. Utility taxes are 49.4 percent of budget in 2013 compared to 48.3 percent of budget in The table below compares utility tax revenues, which are broken down by type of utility, for through the second quarter of the year B&O Tax Revenue Utility Revenue (Jan-Jun) % Change Tax Electricity/Gas 969, , , % -0.6% Garbage 107, , , % 14.1% Cable TV 298, , , % 3.8% Telephone 69,239 63,800 56, % -11.7% Cellular 294, , , % -0.9% Long Distance 55,165 55,130 54, % -2.0% Water, Sewer & Storm Water 26,386 29, , % 739.1% Total 1,820,860 1,779,150 2,011, % 13.1% Relative to 2012, actual revenue is up almost $233,000, or 13.1 percent, in 2013 primarily due to the newly instituted 3.9 percent utility tax on the City s water, sewer, and storm water utilities noted above. Previously, there was a 1.7 percent utility tax on the City s water utility only. The 0.6 percent decrease in the electric/gas utility (i.e. Puget Sound Energy) is directly related to a significant natural gas rate decrease that took effect in October The 11.7 percent decline in telephone utilities is consistent with the long-term trend of people switching from land line to cellular and/or VoIP (voice over internet protocol) phone plans. The latter is significantly cheaper than land line phone plans. Finally, the 0.9 percent drop in cellular utilities is directly related to the following: 1) a highly competitive business environment, which has resulted in less expensive monthly phone plans; 2) the availability of prepaid phone plans, which limit phone usage; 3) the popularity of texting over talking, which has reduced the use of voice minutes; and 4) the exclusion of data plans from utility taxes. Licenses, permits, and zoning fees are 62.8 percent of budget in 2013 compared to 52.2 percent of budget in In addition, actual revenue is up about $264,000, or 27.3 percent, in 2013 versus the same period in This revenue category consists of all fees related to development, business licenses, and a cable franchise. Across all building permit types (which include single family residential, multifamily residential, commercial, mixed use, and public), the total number of building permits issued is up 20.2 percent, and total valuation is up 57.1 percent through the second quarter of In terms of single family residential development, which serves as a leading economic indicator for the City, the total number of building permits issued Page 6

7 is up 33.6 percent, and total valuation is up 78.9 percent for the first half of 2013 (see following 2 graphs, which are broken down by first and second quarter for ). Number of Single Family Residential Permits ( ) st Quarter 2nd Quarter Single Family Residential Valuation ( ) $16,000,000 $14,000,000 $12,000,000 $10,000,000 $8,000,000 1st Quarter 2nd Quarter $6,000,000 $4,000,000 $2,000,000 $ Intergovernmental revenues are only 29.4 percent of budget in 2013 compared to 46.4 percent of budget in Also, actual revenue is down almost $98,000, or 43.1 percent, in 2013 relative to the first half of This decline is directly related to a reduction in the distribution of liquor-related revenues to counties Page 7

8 and cities (which was one of the ways the state legislature balanced the General Fund budget) and a reduction in marine patrol grant revenues from the Washington State Parks & Recreation Commission. This revenue category also consists of vessel registration fees that are received from the state through King County and contract revenue for marine patrol services provided to the cities of Bellevue and Renton. These two revenues, which comprise about one-third of what is budgeted in this category, will not be received, or otherwise recognized, until December Utility overhead charges are only 37.6 percent of budget in 2013 compared to 50.0 percent of budget in These are interfund charges paid by the Water, Sewer, and Storm Water Funds for the administrative, building maintenance, and insurance costs incurred by the General Fund in support of each utility. In 2013, an accounting change was implemented, with all utility-related insurance costs being charged directly to the three Utility Funds instead of being charged to the General Fund and then reimbursed via the utility overhead charges. The adopted 2013 budget, however, still reflects the previous accounting practice. As a result, this revenue budget underage is offset by a corresponding expenditure budget underage in insurance costs in the General Fund (see Expenditures section below). This budget discrepancy has been corrected in the budget amending ordinance attached as Exhibit 3. All other revenues are either within expected norms through the second quarter of the year or too insignificant to highlight. Expenditures Comparing total actual to total budgeted expenditures (i.e. excluding the Transfer of the Prior Year s Surplus) through the first half of the year, the General Fund is 48.9 percent of budget in 2013 compared to 47.6 percent of budget in The following two tables compare actual to budgeted expenditures, first by category and then by department, as of June 30, 2012 and Page 8

9 GENERAL FUND: Expenditures by Category As of June 30, 2012 and 2013 Expenditure Actuals Budget % of Budget Category 6/30/12 6/30/13 % Chg Salaries 6,236,591 6,535, % 12,679,443 12,917, % 50.6% Benefits 2,015,923 2,315, % 4,272,965 4,628, % 50.0% Contractual Services 502, , % 1,682,726 1,769, % 33.8% Supplies 241, , % 664, , % 38.7% Phone, Postage & Advertising 42,943 36, % 125, , % 27.8% Equipment Rental 587, , % 1,220,658 1,265, % 47.7% Insurance 786, , % 809, , % 72.7% Utilities 179, , % 532, , % 34.4% Other Services & Charges 79, , % 326, , % 63.9% Jail 20,712 57, % 57,695 61, % 94.1% Intergovernmental Services 327, , % 774, , % 47.4% Capital 20, % 30, % N/A Transfer to Tech/Equip Fund 90, , % 181, , % 50.0% Transfer to YFS Fund 160, , % 320, , % 50.0% Transfer to Non-Voted Bond Fund 12,468 11, % 94,937 93, % 12.6% Transfer to Water Fund 39,546 43, % 81,000 87, % 50.0% Subtotal 11,342,543 12,041, % 23,853,295 24,602, % 48.9% Transfer of Prior Year's Surplus - - N/A - - N/A N/A Total Expenditures 11,342,543 12,041, % 23,853,295 24,602, % 48.9% GENERAL FUND: Expenditures by Department As of June 30, 2012 and 2013 Actuals Budget % of Budget Department 6/30/12 6/30/13 % Chg City Attorney's Office 216, , % 548, , % 52.1% City Council 24,430 22, % 36,265 46, % 48.7% City Manager's Office 374, , % 810,402 1,066, % 56.6% Development Services 1,015,467 1,032, % 2,063,984 2,166, % 47.7% Finance 325, , % 691, , % 47.3% Fire 2,517,267 2,852, % 5,229,551 5,493, % 51.9% Human Resources 254, , % 483, , % 50.5% Maintenance 693, , % 1,706,943 1,570, % 39.4% Municipal Court 186, , % 382, , % 46.9% Parks & Recreation 1,681,065 1,852, % 4,010,241 4,212, % 44.0% Police 2,602,180 2,726, % 5,219,519 5,502, % 49.5% Non-Departmental 1,451,742 1,315, % 2,670,273 2,470, % 53.2% Total Expenditures 11,342,543 12,041, % 23,853,295 24,602, % 48.9% Page 9

10 In reviewing expenditures by category, the following are noteworthy: Salaries, which comprise about 53.0 percent of the 2013 General Fund budget, are 50.6 percent of budget in 2013 compared to 49.2 percent of budget in This slight overage relative to the 50.0 percent budget threshold is primarily due to a spike in firefighter overtime, which is described below under expenditures by department. Benefits, which comprise about 19.0 percent of the 2013 General Fund budget, are 50.0 percent of budget in 2013 compared to 47.2 percent of budget in Typically, there is a slight underage relative to the 50.0 percent budget threshold due to position vacancies. However, there have been fewer vacancies than normal in the first half of 2013, with the savings completely offset by the following employee benefits, which are paid annually in January: 1) Police (commissioned and support staff) retirement health savings (RHS) account contributions; 2) Fire VEBA account contributions; and 3) Directors RHS account contributions. Contractual services, which comprise about 7.0 percent of the 2013 General Fund budget, are only 33.8 percent of budget in 2013 compared to 29.9 percent of budget in This expenditure category includes outside legal counsel, software support, development and engineering support, recreation instructors, repairs and maintenance, and other professional services. It typically trails the 50.0 budget threshold significantly, because many services are contracted for during the second and third quarters of the year. Supplies, which comprise about 3.0 percent of the 2013 General Fund budget, are only 38.7 percent of budget in 2013 compared to 36.3 percent of budget in Trailing the 50.0 percent budget threshold is typical for the same reason noted above under contractual services. Insurance, which comprises about 3.0 percent of the 2013 General Fund budget, is 72.7 percent of budget in 2013 compared to 97.1 percent of budget in This expenditure budget underage is directly related to the revenue budget underage in utility overhead charges noted above in the Revenues section. In 2013, an accounting change was implemented, with all utility-related insurance costs being charged directly to the three Utility Funds instead of being charged to the General Fund and then reimbursed via the utility overhead charges. The adopted 2013 budget, however, still reflects the previous accounting practice. This budget discrepancy has been corrected in the budget amending ordinance attached as Exhibit 3. Jail costs, which comprise only about 0.2 percent of the 2013 General Fund budget, are 94.1 percent of budget in 2013 compared to 35.9 percent of budget in This significant overage relative to the 50.0 percent budget threshold is due to an unusual number of long-term incarcerations at Snohomish County Jail. The funding source for such an unexpected spike is the jail reserve, which resides in the Criminal Justice Fund and is currently unappropriated. Page 10

11 Transfer of prior year s surplus represents that portion of the General Fund s revenue surplus from the previous year that has been approved by the Council to be distributed to other funds for various purposes in the current year. In 2012, the General Fund experienced a $361,000 revenue shortfall. Consequently, there is no money available to transfer to other funds in In reviewing expenditures by department, the following are noteworthy: The City Attorney s Office has spent 52.1 percent of its budget through the first half of 2013 due to unanticipated outside legal costs related to public records requests, labor issues, and shoreline master program issues. These unexpected costs will be funded by a $50,000 expenditure contingency budget in Non-Departmental. The City Manager s Office has spent 56.6 percent of its budget through the first half of 2013, because the legally adopted budget has not been increased yet for the $100,000 approved by Council on May 20, 2013 to provide additional funding for the City s efforts to oppose the state s I-90 tolling plan. The $100,000 budget adjustment is included in the budget amending ordinance attached as Exhibit 3. The Fire Department has spent 51.9 percent of its budget through the first half of 2013 due to a spike in firefighter overtime, which was driven by three FMLA leaves in the Fire Department costing about $117,000. This is too large of a spike for the Fire Department to absorb in its already lean budget. The Finance Director s funding plan is described below. Non-Departmental has spent 53.2 percent of its budget through the first half of 2013, because the City paid almost $470,000 in insurance premiums to the Washington Cities Insurance Authority in the first quarter of 2013, which is typical. In other words, being modestly over the 50.0 budget threshold is normal for Non- Departmental. However, for the first time since 2005, the City began paying for the long-term care costs of a retired LEOFF I firefighter in June 2013, which will likely require a budget adjustment later this year. The funding source for such costs is the LEOFF I long-term care reserve, which resides in the General Fund and is currently unappropriated. If the unanticipated costs noted above cannot be absorbed by expenditure savings elsewhere in the General Fund budget, then the Finance Director will recommend appropriating $121,000 in unearned permit revenue from a Shorewood Apartments building permit, which expired earlier this year and is non-refundable. If this is still insufficient, then the Finance Director will recommend appropriating, as needed, the jail reserve and/or the LEOFF I long-term care reserve. The need for a budget adjustment will be determined when the 3 rd Quarter 2013 Financial Status Report is prepared in November. In any case, it is projected that the total General Fund budget will be spent by the end of All other expenditures are either within expected norms through the second quarter of the year or too insignificant to highlight. Page 11

12 Water Fund UTILITY FUNDS Through the first half of 2013, operating income is down almost $152,000, or 46.9 percent, compared to the same period in This is primarily due to the net effect of the following: 1) a 4.3 percent overall water rate increase; 2) warmer and drier weather in 2013, resulting in a significant increase in water purchased for resale; and 3) a significant increase in maintenance and operations relative to See the summary of revenues and expenditures in the table below. WATER FUND: Revenues and Expenditures As of June 30, 2012 and 2013 Actuals Budget % of Budget Category 6/30/12 6/30/13 % Chg Operating Revenues: Charges for Services 1,874,301 1,989, % 4,865,428 4,975, % 40.0% Water Utility Tax (Gen Fund Xfr) 39,546 43, % 82,271 86, % 50.1% Miscellaneous 2,001 31, % - - N/A N/A Total Operating Revenues 1,915,848 2,064, % 4,947,699 5,061, % 40.8% Operating Expenditures: Water Purchased for Resale 717, , % 1,856,230 1,882, % 43.1% Maintenance & Operations 875,767 1,081, % 2,069,284 2,254, % 48.0% Total Operating Expenditures 1,592,777 1,892, % 3,925,514 4,137, % 45.8% Operating Income (Loss) 323, , % 1,022, , % 18.6% Non-Operating Items: Sale of Fixed Assets - 1,900,004 N/A - 1,691,929 N/A 112.3% Water Connection Charges 20, , % 112,640 60, % 186.3% Interest 4,301 3, % 6,432 7, % 41.5% Unbilled Water Settlement (SPU) - (316,929) N/A - (316,929) N/A 100.0% Debt Service (32,440) (1,006,754) % (137,856) (1,097,987) 23.5% 91.7% Capital Projects (831,973) (154,896) -81.4% (1,983,763) (1,282,518) 41.9% 12.1% Total Non-Operating Items (839,483) 536,347 N/A (2,002,547) (937,869) 41.9% -57.2% Net Increase (Decrease) (516,412) 707,901 N/A (980,362) (13,229) N/A N/A The following are noteworthy: Charges for services (i.e. water utility customer charges) are only 40.0 percent of budget in 2013 compared to 38.5 percent of budget in Trailing the 50.0 percent budget threshold is typical given that the high water usage months are in the summer. Relative to 2012, charges for services are up about $115,000, or 6.1 percent, in the first half of 2013 due to a 4.3 percent water rate increase and a significant increase in water usage driven by warmer and drier weather than Page 12

13 Water purchased for resale is only 43.1 percent of budget in 2013 compared to 38.6 percent of budget in As noted above, this is typical, since the high water usage months are in the summer. Relative to the first half of 2012, water purchased for resale is up about $94,000, or 13.2 percent, in 2013 due to significantly warmer and drier weather than The sale of fixed assets amounting to $1.90 million in 2013 relates to the First Hill water utility property, which was sold in May Through the first half of 2013, the proceeds have been used to pay off a $975,000 limited term general obligation bond, which was used to finance the construction of an emergency water supply well at Rotary Park, and to cover the $317,000 unbilled water settlement with SPU, which is highlighted below. The unbilled water settlement with SPU in 2013 for almost $317,000 relates to a malfunctioning SPU master water meter, which significantly under-read the amount of water provided to the City for a two year period (June June 2011). SPU fixed its master water meter in July 2011, and an agreement regarding the unbilled amount of water was finalized in May Capital projects are only 12.1 percent of budget in 2013 compared to 41.9 percent of budget in This is typical, because the construction season for many projects does not begin until June. Last year was an anomaly with the First Hill Water Improvements project being substantially complete as of June Of particular note are the following projects: o o o Mercerwood Drive Main Replacement ($68,444 actual expenditures vs. $442,000 budget): Construction started in June 2013 and was completed in July Sandy Cove Water Improvements ($15,585 actual expenditures vs. $388,066 budget): An open house meeting for the neighborhood was held in the spring of Construction is scheduled for September-October th Ave & 86 th Ave Water Improvements ($97 actual expenditures vs. $131,000 budget): Design is planned for the second half of See the CIP Project Management Report, which is attached as Exhibit 2, for detailed project information. Sewer Fund Through the first half of 2013, operating income is up about $27,000, or 3.3 percent, compared to the same period in This is primarily due to the net effect of the following: 1) a 4.0 percent rate increase in City sewer maintenance services; 2) a 10.2 percent rate increase in King County sewage treatment charges; and 3) maintenance and operating costs, which are flat in the first half of 2013 relative to See the summary of revenues and expenditures in the table below. Page 13

14 Operating Revenues: Actuals Budget % of Budget Category 6/30/12 6/30/13 % Chg Charges for Services 3,480,839 3,709, % 7,126,622 7,482, % 49.6% Total Operating Revenues 3,480,839 3,709, % 7,126,622 7,482, % 49.6% Operating Expenditures: King County Sewage Treatment 1,901,207 2,100, % 3,790,200 4,202, % 50.0% Maintenance & Operations 759, , % 1,710,498 1,754, % 43.4% Total Operating Expenditures 2,660,841 2,861, % 5,500,698 5,957, % 48.0% Operating Income (Loss) 819, , % 1,625,924 1,525, % 55.6% Non-Operating Items: SEWER FUND: Revenues and Expenditures As of June 30, 2012 and 2013 Sewer Connection Charges 198,755 15, % 3,600 5, % 266.4% Interest 2,142 1, % 7,841 2, % 47.4% Debt Service (560,417) (538,567) -3.9% (1,130,583) (1,108,063) 49.6% 48.6% Capital Projects (194,002) (78,069) -59.8% (1,499,652) (1,253,989) 12.9% 6.2% Total Non-Operating Items (553,522) (600,208) N/A (2,618,794) (2,354,031) 21.1% 25.5% Net Increase (Decrease) 266, ,223 N/A (992,870) (828,993) N/A N/A The following are noteworthy: Charges for services (i.e. sewer utility customer charges) are up about $228,000, or 6.6 percent, in the first half of 2013 compared to This is due to the combined impact of a 4.0 percent rate increase in City sewer maintenance services and a 10.2 percent rate increase in King County sewage treatment charges. Sewer connection charges are down about $183,000, or 92.3 percent, in the first half of 2013 compared to This is directly related to the mixed use Aviara project, which paid its sewer connection charge in the first half of Capital projects are only 6.2 percent of budget in 2013 compared to 12.9 percent of budget in This is typical, because the construction season for many projects does not begin until June. Of particular note are the following projects: o Pump Station 14 Modernization ($30,275 actual expenditures vs. $458,055 budget): The City s consultant is working on final design. Construction is scheduled to begin in the fourth quarter of o Sewer System Generator Replacement ($0 actual expenditures vs. $295,953 budget): This project is underway with completion expected by October o Sewer Telemetry Improvements ($49 actual expenditures vs. $263,000 budget): The City s consultant has been selected with design underway for 5 remaining stations. Page 14

15 See the CIP Project Management Report, which is attached as Exhibit 2, for detailed project information. Storm Water Fund Through the first half of 2013, operating income is down about $24,000, or 5.1 percent, compared to the same period in This is primarily due to the net effect of the following: 1) a 1.2 percent storm water rate increase; 2) a $110,000 Department of Ecology grant from the state; and 3) a significant increase in maintenance and operations relative to See the summary of revenues and expenditures in the table below. Operating Revenues: Actuals Budget % of Budget Category 6/30/12 6/30/13 % Chg Charges for Services 842, , % 1,731,705 1,752, % 48.6% Grants 10, , % 340, , % 81.5% Total Operating Revenues 853, , % 2,072,446 1,887, % 50.9% Operating Expenditures: Maintenance & Operations 376, , % 1,082,966 1,149, % 44.2% Total Operating Expenditures 376, , % 1,082,966 1,149, % 44.2% Operating Income (Loss) 477, , % 989, , % 61.4% Non-Operating Items: STORM WATER FUND: Revenues and Expenditures As of June 30, 2012 and 2013 Fee in Lieu 27,856 52, % 35,000 60, % 87.5% Interest 2,755 2, % 6,600 4, % 52.3% Capital Projects (210,771) (155,336) -26.3% (1,523,111) (1,083,699) 13.8% 14.3% Total Non-Operating Items (180,160) (100,651) N/A (1,481,511) (1,019,504) 12.2% 9.9% Net Increase (Decrease) 296, ,200 N/A (492,031) (281,676) N/A N/A The following are noteworthy: Charges for services (i.e. storm water utility customer charges) are up almost $9,000, or 1.1 percent, in the first half of 2013 compared to This is due to a 1.2 percent storm water rate increase. Maintenance and operations are 44.2 percent of budget in 2013 compared to 34.7 percent of budget in The difference is directly related to two position vacancies on the storm water crew in the first half of Also, trailing the 50.0 percent budget threshold is typical given that seasonal maintenance work occurs mostly during the summer months. Capital projects are only 14.3 percent of budget in 2013 compared to 13.8 percent of budget in This is typical, because the construction season for many projects does not begin until June. Of particular note are the following projects: Page 15

16 o o o Sub Basin 4 Watercourse ($56,467 actual expenditures vs. $383,885 budget): Design is 60 percent complete as of mid-year. Construction is planned for the third quarter of Minor Watercourse Improvements ($33,399 actual expenditures vs. $144,000 budget): This project is currently going through the state and federal agency permitting review process. Construction was planned for the third quarter of 2013, but it might need to be bumped out to 2014 due to a federal permitting review delay in August Street Related Drainage Improvements ($876 actual expenditures vs. $75,000 budget): Construction began in June 2013 and will be completed in the fourth quarter of See the CIP Project Management Report, which is attached as Exhibit 2, for detailed project information. Page 16

17 ALL OTHER FUNDS Highly summarized revenue and expenditure information is displayed for all other funds in the table below. ALL OTHER FUNDS: Revenues and Expenditures As of June 30, 2012 and 2013 Fund Actuals Budget % of Budget Name 6/30/12 6/30/13 % Chg Self Insurance Claim Revenues 0 0 N/A 10,000 10, % 0.0% Expenditures 0 0 N/A 10,000 10, % 0.0% Youth Services Endowment Revenues % 3,500 1, % 22.5% Expenditures 0 0 N/A 3,500 1, % 0.0% Street Revenues 898, , % 1,850,902 1,567, % 54.1% Expenditures 315, , % 2,512,336 2,375, % 14.2% Criminal Justice Revenues 240, , % 501, , % 50.5% Expenditures 271, , % 565, , % 43.5% Beautification Revenues 309, , % 801, , % 37.6% Expenditures 377, , % 916,874 1,200, % 42.9% Contingency Revenues 0 9,809 N/A 0 0 N/A N/A Expenditures 0 150,000 N/A 415, , % 100.0% Municipal Arts Revenues 0 0 N/A 32,000 15, % 0.0% Expenditures 7,967 14, % 30,980 34, % 43.2% Youth & Family Services Revenues 975,500 1,052, % 1,873,694 2,288, % 46.0% Expenditures 1,023,407 1,136, % 2,024,010 2,340, % 48.6% Bond Redemption (Voted) Revenues 0 0 N/A 0 0 N/A N/A Expenditures 0 0 N/A 0 0 N/A N/A Bond Redemption (Non-Voted) Revenues 221, , % 441,241 1,098, % 47.8% Expenditures 221, , % 441,241 1,098, % 20.4% Page 17

18 ALL OTHER FUNDS: Revenues and Expenditures (Cont'd) As of June 30, 2012 and 2013 Fund Actuals Budget % of Budget Name 6/30/12 6/30/13 % Chg Capital Improvement Revenues 710,047 1,223, % 1,684,579 2,156, % 56.7% Expenditures 704, , % 2,723,146 2,334, % 25.2% Technology & Equipment Revenues 90, , % 216, , % 44.9% Expenditures 170, , % 580, , % 34.1% Fire Station 92 Construction Revenues 0 4,788,180 N/A 0 4,803,000 N/A 99.7% Expenditures 0 254,724 N/A 0 4,803,000 N/A 5.3% Capital Reserve Revenues 0 0 N/A 0 0 N/A N/A Expenditures 0 0 N/A 0 0 N/A N/A Equipment Rental Revenues 710,550 1,023, % 1,211,558 1,684, % 60.7% Expenditures 975, , % 1,661,759 1,958, % 35.9% Computer Equipment Revenues 294, , % 589, , % 50.4% Expenditures 275, , % 479, , % 53.6% Firemen's Pension Revenues 52,737 41, % 30,000 54, % 77.1% Expenditures 29,489 38, % 83,000 82, % 47.3% In reviewing revenues and expenditures through the first half of the year, the following funds warrant further attention: Street Fund: o Total revenues are 54.1 percent of budget in 2013 compared to 48.5 percent of budget in This is directly related to real estate excise tax receipts, which are 55.5 percent of budget in Relative to 2012, total revenues are down about $50,000, or 5.6 percent, in the first half of 2013 due to the net effect of the following: 1) the City received a $242,000 grant from the state Transportation Improvement Board in 2012, but no grant will be received in 2013; and 2) real estate excise tax receipts are up $191,000, or 44.4 percent, in o Total expenditures are only 14.2 percent of budget in 2013 compared to 12.6 percent of budget in This is primarily reflective of the construction season, which usually begins in June. Of particular note are the following projects: Page 18

19 Residential Street Improvements ($6,066 actual expenditures vs. $690,000 budget): Bid award occurred in June 2013, with construction scheduled for July through September Mercerwood Drive Chip Seal ($2,650 actual expenditures vs. $255,000 budget): Bid award occurred in June 2013, with construction scheduled for July through August East Mercer Way Shoulders Phase 8 ($156,664 actual expenditures vs. $332,000 budget): Construction started in May 2013 and was completed in July See the CIP Project Management Report, which is attached as Exhibit 2, for detailed project information. Beautification Fund: o Total revenues are 37.6 percent of budget in 2013 compared to 38.7 percent of budget in This underage relative to the 50.0 percent budget threshold is typical, because 98 percent of the City s registered businesses file an annual, instead of a quarterly, B&O tax return that is not due until January 31 st of the following year. Through June 30, 2013, B&O tax revenue is up 4.5 percent relative to 2012, which is a good indicator. o Total expenditures are only 42.9 percent of budget in 2013 compared to 41.2 percent of budget in Most of the underage relative to the 50.0 percent budget threshold is directly related to Aubrey Davis Park (formerly known as Park on the Lid) maintenance and Town Center median and planter maintenance, which occur primarily during the summer and fall months. Youth & Family Services Fund: o Total revenues are only 46.0 percent of budget in 2013 compared to 52.1 percent of budget in This underage relative to the 50.0 percent budget threshold is directly related to: 1) Thrift Shop sales, which are up about $66,000, or 11.9 percent, in 2013, but which are only 44.6 percent of budget as of June 30, 2013 (i.e. the revenue growth has been less than projected); and 2) $125,000 Federal Drug Free Communities grant, which has been awarded to the City but has not been received yet. Bond Redemption (Non-Voted) Fund: o Total expenditures are only 20.4 percent of budget in 2013 compared to 50.3 percent of budget in This underage relative to the 50.0 percent budget threshold is directly related to the limited tax general obligation (LTGO) and refunding bonds issued in February 2013 to: 1) finance the replacement of Fire Station 92 and a fire rescue truck; and 2) refinance the City s outstanding, callable 2003 LTGO bonds (related to the purchase of the Mercerview property) and 2004 LTGO bonds (related to the construction of the new community center). The first principal payment on this new bond issue is not due until December 1, Page 19

20 Capital Improvement Fund: o o Total revenues are up almost $514,000, or 72.4 percent, in the first half of 2013 compared to This large increase is primarily due to the following: 1) $275,000 increase in interfund transfers from other funds for various capital projects; and 2) $191,000, or 44.4 percent, increase in real estate excise tax receipts. Total expenditures are only 25.2 percent of budget in 2013 compared to 25.9 percent of budget in This is primarily reflective of the construction season, which usually begins in June. Of particular note are the following projects: Vegetation Management ($62,101 actual expenditures vs. $424,207 budget): The seasonal natural resources crew was hired and vegetation management work commenced in April 2013, with most of the intensive work scheduled during the summer and fall months. Luther Burbank Playground Replacement ($19,721 actual expenditures vs. $328,000 budget): Two community meetings were held in February 2013, and construction began in late May The grand re-opening of the new playground is scheduled for September See the CIP Project Management Report, which is attached as Exhibit 2, for detailed project information. Technology & Equipment Fund: o Total expenditures are only 34.1 percent of budget in 2013 compared to 29.5 percent of budget in Of particular note are the following projects: Document Management ($40,460 actual expenditures vs. $158,399 budget): A two year contract employee was hired in March 2013 as a full-time, dedicated project resource. Police In-Car Video System ($0 actual expenditures vs. $77,000 budget): This project is scheduled for the fourth quarter of Financial System Enhancement ($9,772 actual expenditures vs. $70,000 budget): A services agreement was completed in June Installation, testing, and training will occur during the second half of Mobile Asset Data Collection ($518 actual expenditures vs. $60,000 budget): A consultant was selected via a RFP process in June Street and right-of way data collection will occur in August/September 2013, with data analysis expected to be completed by the consultant in the fourth quarter of Internal staff review of the contracted data analysis will occur during the first quarter of See the CIP Project Management Report, which is attached as Exhibit 2, for detailed project information. Page 20

21 Fire Station 92 Construction Fund: o Total expenditures are only 5.3 percent of budget in 2013 compared. Design development for the replacement of Fire Station 92 was completed in early June Work on construction documents began in late June Equipment Rental Fund: o Total expenditures are only 35.9 percent of budget in 2013 compared to 58.7 percent of budget in This underage relative to the 50.0 percent budget threshold is directly related to the scheduled replacement of fleet vehicles, which is only 33.9 percent of budget as of June 30, 2013, and the scheduled replacement of the fire rescue truck ($415,000), which was ordered in August 2013 and will take 220 days to build. All other variances are either within expected norms through the second quarter of the year or too insignificant to highlight. Page 21

22 CAPITAL IMPROVEMENT PROGRAM This section of the Financial Status Report includes a comprehensive overview of the City s capital improvement program (CIP), with a more detailed look at real estate excise tax receipts, highlights of particularly notable projects, and a Project Management Report (see Exhibit 2), which provides an update on the status of every CIP project. Financial Overview Being only six months into the biennium, many capital projects are either in the design phase or early in the construction phase. In aggregate, CIP-related expenditures are 8.1 percent of the adopted biennial budget, which breaks down as follows: Capital Reinvestment Plan (CRP): 8.2 percent of biennial budget Capital Facilities Plan (CFP): 7.8 percent of biennial budget About $20.7 million in projects are planned for the biennium, including $6.2 million in water, sewer, and storm water projects; $5.7 million in general government facilities projects; $2.9 million in street improvement projects; and $2.7 million in parks/open space projects. Real Estate Excise Tax Real estate excise tax (REET) is the 0.5 percent tax paid by the seller in property transactions, and its use is restricted by state law for specific capital purposes. REET 1 (the 1 st quarter of 1.0 percent of the sales price) may be used for streets, parks, facilities, or utilities. REET 2 (the 2 nd quarter of 1.0 percent of the sales price) may be used for the same capital purposes as REET 1, except for facilities, which are specifically prohibited. Neither REET 1 nor REET 2 may be used for equipment or technology. In May 2011, the Governor signed HB 1953, which temporarily allows cities to use up to 35% of REET revenue (not to exceed $1.0 million for either REET 1 or 2) for operations and maintenance purposes within the same categorical restrictions noted above. This temporary expansion of how REET can be used will sunset on December 31, Because of the City s many capital needs, the passage of HB 1953 has had no impact on how REET funds are currently used. It simply gives the City more flexibility. Through the first half of the year, REET is 55.5 percent of budget in 2013 compared to 39.5 percent of budget in 2012, as shown in the table below. REET Revenue: Actual vs. Budget As of June 30, 2012 and 2013 Actual Budget % of Budget 6/30/12 6/30/13 % Change ,381 1,243, % 2,179,000 2,242, % 55.5% Page 22

23 Relative to 2012, actual revenue is up about $382,000, or 44.4 percent, in the first half of This substantial increase is due to a 24.9 percent increase in the number of sales as well as an 11.4 percent increase in the average sales price, which is now almost $965,000. Home sale statistics are displayed in the following table. Number of Sales Home Sale Statistics As of June 30, 2012 and 2013 Average Sales Price 6/30/12 6/30/13 % Change 6/30/12 6/30/13 % Change % $865,627 $964, % Please note that the average sales price encompasses all property sales namely, land, single family residential homes, condominiums, businesses, and below market property sales from one family member to another. In the table below, REET is broken down according to property sales (i.e. $5.0 million and >$5.0 million) for the period In addition, the average property sales price and the number of sales are identified for those properties that sold for $5.0 million or less. Property Sale Breakdown Avg Property Sales $5.0M: Average Sales Price $735 $799 $905 $963 $1,072 $1,237 $854 $994 $916 $899 $937 % Change in Avg Sales Price 6.8% 8.7% 13.3% 6.4% 11.4% 15.4% -30.9% 16.3% -7.8% -1.9% Number of Property Sales REET Revenue $1,768 $2,385 $2,590 $2,597 $2,277 $1,592 $1,129 $1,565 $1,665 $1,860 $1,943 Property Sales >$5.0M: REET Revenue (Dollars in Thousands) Property Sales $5.0M and >$5.0M Number of Property Sales REET Revenue $54 $119 $1,119 $179 $653 $755 $129 $642 $162 $300 $411 Total REET Revenue $1,821 $2,504 $3,709 $2,776 $2,930 $2,347 $1,258 $2,207 $1,827 $2,160 $2,354 Based on actual receipts through July 2013, staff conservatively forecasts that REET will exceed the 2013 budget by almost $200,000 (see following table), which would be split 50/50 between the Street Fund and the Capital Improvement Fund. The REET forecast will be reviewed again as part of the 3 rd Quarter 2013 Financial Status Report, which will be presented to the Council on November 18, Page 23

24 REET Revenue Budget vs. Actual/Forecast Year: Budget Actual Budget Forecast Property Sales $5.0M: Average Sales Price 1,050, , , ,000 Number of Property Sales REET Revenue 2,079,000 1,859,873 2,092,000 2,340,608 Property Sales >$5.0M: 100, , , ,000 Total REET Revenue 2,179,000 2,160,053 2,242,000 2,440,608 Project Highlights A brief update is provided for the following projects: Mercerwood Drive Water System Improvements, Luther Burbank Playground Replacement, Gallagher Hill Trail, Solar Array at MICEC, and LED Light Installation in the Town Center. Mercerwood Drive Water System Improvements The Mercerwood Drive Water System Improvements project installed 1,163 feet of 8-inch ductile iron water main and associated water system components (water services, fire hydrants, and an air vacuum release assembly). The project replaced a 4-inch asbestos cement (AC) water main beneath Mercerwood Drive, between Shoreclub Drive and East Mercer Way, which was undersized and had experienced breaks in the past. Mercerwood is one of the older neighborhoods on Mercer Island, and the 4-inch pipe was aging and due for replacement. Design of the Mercerwood Drive Water System Improvements started in early February 2013 and was completed in April Construction started in early June 2013 and was completed on July 12th, in time for the street paving project which began immediately thereafter. The water improvements were completed on time and within the $442,000 project budget. This project provides an additional benefit for the surrounding area. A segment of water main was installed to interconnect (or loop) the Mercerwood Drive system to the existing water main at East Mercer Way to improve fire flow and water quality for the neighborhood. Page 24

25 Luther Burbank Playground Replacement The City of Mercer Island s Parks and Recreation Department is nearing completion on a new playground installation at Luther Burbank Park, which is scheduled for its grand re-opening in September The new play structure has replaced outdated and non-compliant equipment that had reached the end of its useful life. Input received from two public meetings helped guide the design committee, comprised of parents, members from the Mercer Island Preschool Association and the Friends of Luther Burbank. The equipment selected for the project includes a new zip line, merry-goround, climbing web, drop zone, and new and improved embankment slides. Improved accessibility was completed by using a new poured-in-place rubber surfacing product and creating a direct entrance to the second level of the playground from the adjoining raised walkway. The playground installed at Luther Burbank Park includes play equipment suitable for children between the ages of The Mercer Island Preschool Association (MIPA) and the Parks and Recreation Department partnered to sell personalized bricks and to hold a silent auction to raise additional funds for this project. In addition to a $25,000 contribution from the MIPA, an additional $72,700 was raised which the MIPA used for equipment upgrades, picnic tables, and signage (purchased directly from the contractor). While not quite complete, the project is on schedule and within the $328,000 project budget. Gallagher Hill Trail The Gallagher Hill Trail is a newly constructed quarter mile trail which winds through the wooded Gallagher Hill ravine, connecting the East Mercer Commercial District (the commercial area including the Jewish Community Center and City Hall) with the Shorewood Apartments neighborhood. The trail was identified as a project in the proposed Mercer Island Parks and Open Space Capital Bond issue that went to the voters in That bond did not receive the 60 percent voter approval needed to pass. However, the City was able to use funding received from the 2007 King County Prop 2 Parks and Trails Levy to fund the project. Shorewood Page 25

26 Apartments granted a trail easement through its property in 2012, enabling the project to go forward. This summer, Parks and Recreation employees, with help from VOICE and Mountains to Sound Greenway volunteers, completed construction of the Gallagher Hill trail, including two bridges, at a total cost of $76,556. Solar Array at Mercer Island Community and Event Center In 2012, the City of Mercer Island partnered with Puget Sound Energy (PSE) to increase the number of Green Power customers on the Island. By meeting the PSE Green Power Challenge, plus the additional stretch challenge, Mercer Island was awarded a $30,000 grant from PSE towards a Solar Energy (Photovoltaic) System for installation at the Mercer Island Community and Event Center (MICEC). A team of citizens raised an additional $6,386 to increase the size of the solar installation. The 22-panel installation, including an electrical control room and underground conduit for electrical connections, was constructed and installed in June-July The solar array will generate approximately 4,468 kilowatt hours of electricity per year, using solar panels and electrical inverters made in Washington State. It will also produce $2,500 in income each year thanks to state energy incentives money that will support future energy efficiency projects. On July 23 rd Mayor Bruce Bassett, City Staff, and key stakeholders formally activated the first City-owned solar array on the Island at the Mercer Island Community and Event Center. LED Light Installation in Town Center Using the seed money from a sinking fund that was established in 2013 to fund sustainability capital projects, the City just began an energy efficiency retrofit of all 228 decorative streetlights in the Town Center area, replacing 100-watt metal halide lamps with new LED lamps that use just 35 watts each. The first phase of the project will cost almost $34,000, which will be offset by a conservation grant from Puget Sound Energy (PSE) for 50 percent of the total cost. According to PSE's calculations, the cost savings in energy alone are estimated to be $8,180 per year, leading to an impressive 2.1 year payback after the grant is deducted. LED lamps also last three to four times as long. Phase 1 of the project includes the vertical decorative streetlights in the town center. Phase 2 will include the higher streetlights as funding permits. Page 26