CITY OF SIGNAL HILL Cherry Avenue Signal Hill, CA MAIDA ALCANTARA ADMINISTRATIVE SERVICES OFFICER/ FINANCE DIRECTOR

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1 CITY OF SIGNAL HILL 2175 Cherry Avenue Signal Hill, CA AGENDA ITEM TO: FROM: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL KENNETH C. FARFSING CITY MANAGER MAIDA ALCANTARA ADMINISTRATIVE SERVICES OFFICER/ FINANCE DIRECTOR SUBJECT: PRELIMINARY YEAR-END FINANCIAL AND CARRYOVER REPORT FOR FISCAL YEAR Summary: The Preliminary Year-End Financial and Carryover Report is prepared each year as part of the year-end review process after the year-end closing has occurred. The Preliminary Year-End and Carryover Report presents the results of operations and recommends carrying over ongoing appropriations and adjustments to the new fiscal year. Recommendations: 1. Approve the recommended adjustments contained within Exhibit C of the Preliminary Year-End and Carryover Report. 2. Approve the transfer of $263,177 of the positive variance to the General Fund. 3. Approve the transfer of $1,000,000 of the positive variance to the Economic Uncertainties Fund. 4. Receive and file the report. Fiscal Impact: At the lowest point of the Great Recession the City s General Fund Reserve was at $4,845,621 and the Economic Uncertainties Reserve Fund was reduced to $2,284,534. As a result of the positive variance the projected General Fund Reserve will have grown to $5,054,033 on June 30, The balance in the Economic Uncertainties Reserve

2 Page 2 of 7 will have grown to $5,077,150. This report will detail the reasons for continuing to increase these two reserve funds at this time. Background; The Great Recession impacted California more than other states. The recession has been particularly hard on local government budgets. Although the economy is slowly recovering, city revenues generally lag economic recoveries by a number of years. The City budget experienced an approximate $392,573 or 2% increase in revenues over the projections in the FY budget. Much of this increase was in local sales tax revenues, especially as auto sales began to rebound from the precipitous drop in When the Recession began in 2008, the Council adopted a deliberate policy of reducing the City s budget by 2-3% annually and making prudent withdrawals from the Economic Uncertainties Reserve to balance the budget. This policy was adopted in order to avoid dramatic decreases in services to our residents and businesses. The Economic Uncertainties Reserve Fund (or our rainy day fund) was established over a decade ago to assist the City in dealing with the loss of a major sales tax provider or in planning for an economic recession.. The Council balanced the FY budget without drawing down from the Economic Uncertainties Reserve. At the end of the financial year the City will have a surplus of approximately $1.26 million. Staff is recommending that the City Council place $1 million into the Economic Uncertainties Reserve in order continue to build this reserve. Another $263,000 would be added to the General Fund Operating Reserve. The Council established a 50% budget reserve policy several years ago. The projected reserve level in June of 2013 is expected to reach 52% This $1.26 million budget surplus is the result of a slight increase in revenues. The City s departments have also cut back on expenditures. For example, we currently have 10 positions unfilled, primarily in City Hall and at the City Yard. Some of these positions are being staffed by part-time employees or by contract employees; however there are real savings in these efficiencies. For example, the City Council required that the all City employees fund a portion of their retirement program and medical retirement costs two years ago. City employees agreed to fund additional retirement payments this past year. These actions are positively impacting the budget. The employees also agreed to freeze merit increases and no COLA was included in the labor agreements. During the past two fiscal years the City s budgets are starting to see the tangible results of policy decisions made by the City Council and the willingness of our employees to assist. Another significant savings to the City s budget has been the reduction in the City Attorney services. The City Attorney also served as the legal counsel to the former Signal Hill Redevelopment Agency and now serves as the legal counsel to the

3 Page 3 of 7 Successor Agency. The former redevelopment agency began a major property acquisition in 2007, ultimately assembling over 25 acres of property, including the 4- acre Police Station site. City Attorney costs increased to handle the real estate transactions and property owner negotiations to $1.5 million in FY acquisition costs. The costs of the property acquisition program were entirely funded from the redevelopment agency, as opposed to the City s General Fund. Attorney services have been significantly reduced, with the total of both City and Successor Agency services of $447,836 for FY All of these budget savings from the various City departments and additional revenues have resulted in the positive variance of over $1.26 million at year end. However, this budget surplus does not mean that we are out of the budget woods just yet. Although there are several revenue bright spots on the horizon (including the opening of Cadillac, the opening of the Signal Hill Disposal Transfer Station this summer and the opening of new Fiat dealership next year); there is also uncertainty in the strength of the economic recovery. Some economists are concerned that the nation will go back into a recession next year. There is much uncertainty in economic and tax policy in the nation s capitol, including the current debate over the fiscal cliff. Signal Hill still needs to continue to budget conservatively and maintain healthy reserve funds in order to provide a cushion from the potential loss of a major sale tax producer and to anticipate a slow economic recovery or drop back into recession. The City s sales tax revenues for FY11-12 show a 10% improvement over last fiscal year and sales tax revenues are projected to increase by 12% this fiscal year. Car sales are returning to 2008 levels, as the average age of a car is now over 11 years old. However, staff is concerned that an auto bubble may be developing, similar to the housing bubble of Basing the City s budget on continuing increases in auto sales should be carefully moderated. The dissolution of the Signal Hill Redevelopment Agency has impacted the City s budget and created additional budget uncertainty. The State adopted AB 1484 in June of this year, which created a path forward to resolves disputes between the State s 400 former redevelopment agencies and the State. The path forward outlined by AB 1484 is known as the Finding of Completion process, which is a three-step process to resolve the remaining issues between the Successor Agency and the State. The legislation requires the submission of two audits. The first audit details the enforceable obligations from the former redevelopment agency s housing funds. This audit was competed in September and is currently being reviewed by the State Department of Finance. The second step is to complete an audit detailing the remaining non-housing enforceable obligations. This audit is being completed for review by the Oversight Board in January of next year. AB 1484 also contains a meet and confer process, where disputed enforceable obligations are presented by the Successor Agency to the Department of Finance. The Signal Hill Successor Agency has disputed several items, such as the CarMax real

4 Page 4 of 7 estate deposit, the repayment of the City/Agency advance, bond service obligations and housing obligations on the 1500 Hill Street/ 2170 Gundry Avenue project. The resolution of these disputed obligations with the Department of Finance is expected during the Spring-Summer of Upon completion of the two audits and the conclusion of the meet and confer process, the State is expected to issue a Finding of Completion. This finding will allow for the repayment of the City/Agency advance, the Hilltop Impact Fees and other obligations. The finding will also allow the Successor Agency to prepare the property management plan, which will either retain or dispose of properties owned by the former redevelopment agency. It is best to continue to build reserves pending the final resolution of the meet and confer process, considering the importance of the repayment of the City/Agency loan to the City s future budgets. Some budget uncertainty is also created by the timing of the opening of Office Depot s e-commerce center in Signal Hill. The Spring Street Corridor JPA entered into a tax sharing agreement between the Cities of Long Beach and Signal Hill for the operation of Office Depot s e-commerce center in Signal Hill. The e-commerce center is anticipated to be operational in March of 2013; however it will be several months before the actual sales performance is reported. Despite the recent good news on the State s budget, the State of California continues to have an accumulated budget deficit of several billion dollars. Over $4 million is scheduled to be paid back to special funds due to internal borrowing. The State continues to struggle with pension debts, including a 67% funding level for the California State Teachers Retirement System. The State Controller recently warned the State Legislature on the State s continuing budget issues. He noted that the State s revenues continue to lag the projections and cautioned that the revenue short fall serves as a sobering reminder that, while the economy is expanding, it is doing so at a slow and uneven pace that will require the State to exercise care and discipline in how its fiscal affairs are managed in the coming year. This same caution is recommended by the City staff as we move forward into FY The City Council adopted multi-year labor agreements with the Signal Hill Police Officers Association and the Signal Hill Employees Association in 2011, which expire in June of As detailed above, these labor agreements contained major concessions by the employees in recognition of the impacts of the Great Recession on the City s budget, the dissolution of the former redevelopment agency and State revenue raids. The labor agreements contain triggers to reopen discussions with the employees. These triggers include the budget impacts from the loss of a major sale tax provider and over-all City revenue performance. The agreements specify that the City meet and confer with the employee groups if certain mid-year budget performance and pension cost thresholds are met.

5 Page 5 of 7 General Fund Approval of the recommended adjustments will increase General Fund expenditures by $435,753 for the carryover items. Expenditures for the fiscal year ended June 30, 2012 in the General Fund were $1,789,621 less or 9% below the fiscal year adjusted budget of $19,089,630. Revenues were $978,777 more or 6% more than the fiscal year adjusted budget of $16,551,635. The positive variance of $978,777 in revenue receipts versus the projected revenue budget was primarily due to onetime aberrations and a slight improvement in sales tax revenues ($965,813) compared to the budget. At the same time, expenditures came in $1.8 million less than budgeted due to the City s on-going cost cutting measures which include employees now contributing over 50% of their share of retirement costs, frozen salaries, and unfilled or under filled vacancies in personnel. Exhibit A shows the $1,698,944 increase in fund balance over the $4,790,842 projected during the adoption of the FY budget last June, Unassigned General Fund fund balance at June 30, 2012 is $6,089,786. Staff recommends that $435,753 of the positive variance of $1,698,944 be appropriated for the carryover items listed in Exhibit C and $1,000,000 to be transferred to the Economic Uncertainties Fund to bring the current balance of $4,077,159 to $5,077,150. The remaining $263,191 will increase the General Fund projected fund balance for June 30, 2013 to $5,054,033. The total fund balances of both the Economic Uncertainties Fund and the General Fund will provide a 59% reserve ratio for the City s General Fund expenditures Budget. Last Year end, we were at 48%. Exhibit B itemizes these proposals. Other Funds Approval of the carryover budget items will adjust the impacted funds to the level projected in the FY budget for FY The additional appropriation proposed would amend the FY budget. Analysis: To be relevant, financial information must be timely. As a result, a preliminary year end financial report is being prepared in conjunction with a carryover budget report; so that the City Council can make timely decisions with the financial information it is given. Audited financial statements are prepared each year and are presented to Council as the City s Comprehensive Annual Financial Report (CAFR). The CAFR will be presented with all the accompanying financial disclosures and footnotes required by the Governmental Accounting Standards Board (GASB) in January, Carryover budget appropriations must meet certain criteria to be re-budgeted in the new fiscal year. The criteria specify that the recommended items must have been budgeted and projected to be spent in the previous fiscal year. Because the items were not expended in the previous fiscal year, the individual fund balances were higher and exceed the projected amounts by the carryover amount.

6 Page 6 of 7 The Year-End Carryover Report (Exhibit C) contains those expenditures that were both budgeted and projected to be spent by June 30, 2012, but because of scheduling or timing problems were not expended at fiscal year end. As a result, the balances of the respective funds were greater to the extent of the unspent amounts. Each item of expenditure was reviewed to see if it met the criteria specified above. The General Fund has $435,753 in carryover items. The Water Fund has $44,800 for water audits, Gundry Reservoir Sand Basin roof repairs and reservoir clean ups. The Pipeline Removal Fund has $7,000 in carryovers to cover the cost of removing and/or capping abandoned oil pipelines. The Capital Improvement Fund, Park projects has $165,000 carryovers for the completion of the pavement management projects completed after June, The amounts are detailed on Exhibit C. The Police Department under ran their expenditures by $943, and is requesting carryover appropriations totaling $51,603. The items represent either unbilled items or expenditures not incurred because of time restrictions, completion of annual maintenance contracts and purchase requirements at fiscal year end. Public Works is requesting $59,500 in the General Fund in carryover appropriations. The carryover items were projected but unspent at year end. In the General Fund, the carryover items include Hamilton Bowl Trash Capture Device repairs from vandalism, TMDL Studies ($32,000) maintenance painting projects ($11,700) and various mandatory training to be completed. Details are listed in Exhibit C. Public Works ended the fiscal year with $405, in unspent appropriations within the General Fund. The large under run was caused partially by salary savings from unfilled maintenance worker positions and savings from maintenance and operations. Community Development is requesting $206,300 in carryovers for the following: legal services and contract services in Planning for Housing Element Study ($33,000). In Neighborhood Enhancement, ($1,300), contract services ($20,000), legal services ($3,000), Contract Services ($95,000) for unbilled contract building official and inspector services, Building Code Enforcement ($20,000) in Building and Safety and in Oilfield Services, ($37,500) for contract services. Council Activity carryover includes ($500) for conference and meeting expenses that were billed after year end. Personnel is requesting carryover appropriations in Employee Recognition ($6,000), General City Training ($5,000), Safety Program ($1,200). These are all ongoing expenses that were billed after year end. Finance is requesting $35,800 in carryovers for items budgeted in Fiscal Year This amount includes supplies, $6,000 for cash receipts, CAFR supplies and checks that were ordered but not paid in fiscal year It also includes software and equipment purchases for the IT function for a total of $29,800 for server and computer upgrades that commenced in fiscal year and are ongoing. Community Services is requesting $19,850 for supplies and contracts budgeted last fiscal year including contract services in library ($8,800), pediatric health care in

7 Page 7 of 7 community services ($5,000) software purchases in recreation ($1,250). Itemized listing of the carryovers is in Exhibit C. An analysis of our FY revenues and expenditures is attached as Exhibit D. All City departments spent less than budgeted for fiscal year end June 30, Actual expenditures under ran the budget by $1.8 million, or 9% less (Exhibit D). Some of the under run in the budget was caused by unfilled or under filled positions. The City finds itself in the position of being able to increase the General Fund s fund balance by $263,191 after the recommended carryover request of $435,753 and the transfer of $1,000,000 to the Economic Uncertainties Fund. Attachments