FINANCIAL FORECAST. Introduction

Transcription

1 FINANCIAL FORECAST Intrductin The Five-Year Financial Frecast prvides a lng-term view f City revenues and expenditures t assist in evaluating the impact f plicy chices n the lng-term fiscal health f the City. This sectin prvides a detailed discussin f the General Fund Five-Year Frecast. The Five-Year Frecast is useful in identifying ptential issues that may arise in the future, which require fiscal planning affecting the current budget. Early planning fr prjected changes in baseline expenditures is critical t ensuring lng-term fiscal stability fr the rganizatin. Furthermre, the restrictins impsed by the State limiting lcal gvernments ability t raise revenues, adds t the imprtance f understanding the lng-term fiscal impact f plicy decisins. The frecast shuld nt nly identify pprtunities r challenges, but it shuld als serve t explain the underlying cnditins cntributing t the results. By understanding the specific factrs impacting variances in the frecast, plicy makers can target budgetary actins apprpriate t the nature and scpe f specific issues. Over the curse f the past year, there has been fcus n the sensitivity f the budget frecast t the majr underlying revenue and expenditure assumptins. The uncertainty that characterizes the current ecnmic climate nt nly argues fr prudent lng-term financial planning, but als suggests that being prepared fr a range f utcmes is perhaps mre apprpriate than fcusing n any single predicted utcme. As such, the five-year budget mdel truly serves mre as a planning tl rather than a frecasting tl. Preliminary Budget

2 Summary f Five-Year Frecast This sectin f the budget dcument presents an update f the General Fund Five-Year Frecast. Previus effrts t address the structural deficits in past frecasts have relied n decreasing levels f ne-time resurces and cntributed t an increasingly imprved frecast. Hwever, the current prlnged ecnmic recessin has necessitated budget reductins in each f the past fur budgets. Additinal balancing measures have been implemented as part f this budget t narrw a prjected FY 2013/14 General Fund structural deficit t $620,105 ending in a General Fund reserve f 7.5% shrt f the 15% plicy level. Past Five-Year frecasts have served as valuable tls in assessing the City s prgress in meeting its gal f fiscal stability, ensuring that current revenues are sufficient t meet expenditure requirements fr maintaining existing service levels and that the City can sustain this level f service withut reliance n grwth r increases in current tax rates. This year, the five-year budget frecast again serves t highlight the variability f the City s budget utlk in the face f a slwly rebunding ecnmy and cntinued uncertainty. Thrugh mdeling alternative revenue and expenditure assumptins, the frecast prvides nt nly a sense f the shrt-term measures that are required t maintain a balanced budget, but als infrms the level f cntingency plans that als need t be in place, shuld alternative scenaris play ut. The FY 2013/14 Preliminary Budget has been develped cnsistent with the City s multi-year budget balancing framewrk. Key features f the multi-year framewrk include: Develpment f annual budgets that fully-address the recurring structural deficits, thrugh measures that generate nging savings, and d nt rely n new revenues r ne-time surces. Need t either renew r replace revenues subject t reauthrizatin by vters, including the sales tax verride measure which expires in Evaluate funding surces t address the highest pririty needs that are nt currently funded within existing resurces. Maintenance f a prudent general fund reserve level with excess fund balances restricted fr allcatin t ne-time uses. The fllwing summarizes the results f the City s General Fund frecast fr FY 2013/14. General Fund revenues are prjected t grw at an average annual rate f 2.4% per year, resulting in ttal revenue grwth f $ 5.3 millin fr the perid FY 2013/14 thrugh FY 2018/19. General Fund expenditures are prjected t experience annual increases frm FY 2013/14 thrugh FY 2018/19 averaging 4.1% per year, resulting in ttal General Fund expenditures grwth f $ 9.3 millin ver five-year frecast perid. Preliminary Budget

3 Withut additinal crrective actin, the General Fund reserve wuld cntinue t deterirate frm a prjected $3.1 millin (7.5% f revenues) at the end f FY 2013/14, drpping t a deficit fund balance beginning FY 2014/15 and cntinuing t wrsen thrugh FY 2017/18. The frecast yields a FY 2013/14 structural budget shrtfall f $(620,105). In the absence f additinal adjustments t the FY 2013/14 budget, the General Fund structural deficit is prjected t grw in FY 2014/15 and beynd. This result is a reflectin f prjected increases in Retirement and Retiree Insurance csts, infrastructure debt financing, nging street and bike path infrastructure rehabilitatin as well as the incremental cst f city water and sewer services even in light f the cumulative impact f budget reductins and cst-saving measures implemented ver the past five years and a frecast fr a mderate recvery f City revenues. The five-year frecast includes preliminary estimates f increased persnnel csts cnsistent with current and prjected MOU s currently in negtiatin. The perating prjectins shwn ver the five-year planning hrizn remain highly sensitive t assumptins related t majr city revenues and expenditure categries. Amng the main areas f cncern are, prperty and sales tax revenues, verall persnnel csts (and specifically csts fr health and retirement benefits), and the cntinued threat f adverse actins by the State that culd further erde revenues at the lcal level. Preliminary Budget

4 Five-Year Frecast Assumptins The Five-Year Frecast is based n a number f assumptins. Many factrs which drive the frecast are beynd the cntrl f the City, such as inflatin, federal and state spending cuts, state wide initiatives, shrt-term ecnmic cycles, and unfreseen emergencies. These assumptins impact revenue and expenditure prjectins and variatins can cause wide swings in budget balancing strategies. Inflatin Inflatin is an imprtant factr in any ecnmic frecast, given its influence n bth city revenues and expenditures. Inflatin sensitive revenue, such as sales and business license taxes, make up a significant prtin f the General Fund budget. Salary and benefit csts are als influenced by annual cst-f-living increases. The uses as its inflatin index, the April-t-April All Urban Cnsumer Price Index fr the San Francisc Bay Area. This index has increased an average f 1.9% ver the last five years. This is a factr that is used when apprpriate within the frecast. Other inflatrs are used in areas where specific increases are knwn, i.e. water rates and insurances. CONSUMER PRICE INDEX Change frm previus year YEAR Average 1.9% Ppulatin Based n data frm the State Department f Finance, ppulatin is prjected t be 66,471 fr FY 2013/14 and remain relatively flat. Ppulatin impacts sme state revenues (allcated n a per capita basis) as well as drives demands fr a variety f city services. The ppulatin figure reprted fr the excludes persns hused n the University f Califrnia at Davis campus as it lies utside f City limits. State Impacts Over the past several years, the City s budget has been subject t significant impacts frm the State budget. Specifically, prperty tax shifts under ERAF (first implemented in 1992/93, and mst recently in 2004/05 and 2005/06), lss f Vehicle License Fee backfill revenues, and the exchange f Sales Tax fr Prperty Tax under the State s Triple-Flip prgram have greatly impacted verall city revenues as well as cash flw psitins. Since 1992/93, the City has lst tens f millins f dllars t the State thrugh a series f raids n lcal revenues. Preliminary Budget

5 With the Passage f tw separate Prpsitin 1A s (2004 and 2006), cities have nw been affrded significant prtectin against future State takeaways. Hwever, despite these prtectins, the State triggered the brrwing prvisin f the 2004 Prpsitin 1A whereby 8% f lcal prperty tax revenues were laned t the State. In additin, the State budget included prvisins t transfer $3.6 millin in the City s redevelpment tax increment revenues t the State in FY 2009/10 and $660,000 in FY 2010/11. In additin, state legislative actin has disslved redevelpment agencies shifting prperty tax revenues frm RDA s and relieving the state f bligatins t schls and ther lcal entities. In the meantime, the current Five-Year Frecast reflects the lingering impacts f past and current State actins, but reflects restratin f ERAF II funds and VLF backfill mnies per current statutry and cnstitutinal prvisins. Expenditure Baseline The expenditure baseline fr the Five-Year Frecast is the Adjusted FY 2012/13, and the Prpsed FY 2013/14 budgets. The frecast prjects expenditures as a result f anticipated changes in factrs and assumptins highlighted in this sectin. Current service/staffing levels - The baseline Five-Year frecast assumed current (FY 2012/13) staffing levels. In the past, this assumptin has been referred t as a flat budget ; hwever, it shuld be nted that any budget that maintains flat staffing/service levels needs t accunt fr increased csts resulting frm persnnel csts as well as inflatin and cntractual bligatins impacting nn-persnnel expenditures. Since initializing the baseline budget, citywide rerganizatins and restructuring has been implemented reducing the Full Time Equivalent staff by 21 psitins. Persnnel Csts Salary and benefit csts make up 78% f the discretinary General Fund budget. Every 1% increase in ttal cmpensatin csts apprximately $520,000 n an all funds basis, and apprximately $327,000 t the General Fund. The Five-Year Plan reflects ttal general fund cmpensatin (salaries and benefits) increases 2.4% fr FY 2013/14, and averaging increases f 2.3% per year ver the five-year frecast. This represents an increase f apprximately $4.0 millin ver the Five-Year Plan. Changes in the specific cmpnents that make up ttal persnnel csts are summarized as fllws: Annual % Change FY 2013/14 Five-Year Frecast Salaries* 12.0%* 0.9% Insurance 22.0% 1.0% Retirement (25.3%) up t 30.4% (civilian) up t 39.4% (safety) *In FY 12/13 persnnel csts were prjected with an assumed 8.08% average ttal cmpensatin savings factr n the basis f bargaining cntracts which were in negtiatins. Since the labr cntract savings were delayed the adpted FY 12/13 budgeted persnnel csts were artificially lw. Cmpared t the FY 13/14 salaries, annual change appear mre significant than the MOU s have negtiated. Preliminary Budget

6 Insurance Premiums Csts related t Health, Dental, Retiree Medical, Disability, Wrkers Cmpensatin, Life Insurance and Unemplyment insurance are assumed t grw at an annual rate f 0.0% 8.5% fr FY 2013/14 and the frecast assumes annual increases f 5.0% thereafter. These csts are anticipated t level ff n the ut years with the implementatin f recently negtiated MOU s. Other Pst-emplyment Benefits (OPEB) GASB Prnuncement 45 requires public agencies t evaluate and reprt in its annual financial statements the fully-funding cst f any pst-emplyment benefits (i.e. retiree healthcare). While GASB 45 des nt require fullfunding f pst-emplyment benefits, its effectively sheds light in the gaps between the true cst f these benefits and the funds typically allcated n an annual basis fr pay-as-yu-g funding plans. The met its bligatin t reprt the funding statute f its OPEB liability with the 2008/09 fiscal year. The City is in the prcess f updating its actuarial valuatin, which last estimated the City s unfunded liability at $57 millin, with a resulting annual required cntributin rate f apprximately $5.965 millin, r 21.3% f salaries. The ttal OPEB required cntributin prir t agreements with labr partners was $6.405 millin, shwing a ttal decrease f $440,000. Althugh the ttal amunt f bligatin has imprved, the percentage f salaries cntinues t grw as there are fewer psitins t spread the cst ver. Fr the past fur years, the city budget has included incremental funding ver and abve the histrical pay-as-yu- g levels - with the gal f meeting ur actuarial funding requirements ver a 5-7 year perid. Fr FY 2013/14, this change nw meets the full annual funding requirements, t be applied t the amrtizatin f the unfunded liability. State Retirement System Retirement rates are set annually by the Califrnia Public Emplyees Retirement System (CalPERS). The rates established fr FY 2013/14 reflect an increase frm current rates. Retirement cntributin rates are primarily driven by investment earnings fr the CalPERS investment prtfli, as well as variatins in ther actuarial assumptins. While investment returns cntinue t struggle with the current ecnmy, PERS has reduced their actuarial investment earnings assumptins frm 7.75% t 7.5%. The CalPERS actuaries ecnmic assumptins study is expected t be cmpleted in Upn cmpletin f the study the Chief actuary expects t recmmend lwering this a further 0.25% t 0.50%, ptentially reducing the investment earnings assumptins t a 7% rate. The fllwing table summarizes the emplyer cntributin rates used in the Prpsed FY 2013/14 Budget and Five-Year Frecast: FY12/13 FY13/14 FY014/15 FY15/16 FY16/17 FY17/18 FY18/19 Plice (Swrn) 25.56% 27.80% % % % % % Fire (Swrn) 25.56% 27.80% % % % % % Civilian (Misc.) 19.05% 20.80% % % % % % Nte: The PERS rates used are based n actuarial frecasts prepared by Bartel Assciates Inc. These actuarial calculatins include assumptins fr newly adpted PERS Market value smthing methd change using 25 year (fixed) amrtizatin perid paid ver 30 years, as well as anticipated changes t mrtality assumptins and anticipated investment returns frm 7.5 t 7.25%. Preliminary Budget

7 On an all-funds basis, the City s cst fr retirement benefits in FY 2013/14 is $6.5 millin, a decrease f $260,000 ver FY 2012/13. This reductin reflects current cntract prpsals and emplyee cst sharing f retirement benefits. The General Fund represents apprximately 63% f citywide persnnel csts which implies that the General Fund cst fr retirement cntributins wuld decrease by just ver $180,000 fr FY 2013/14. The City s expsure t increased retirement csts is largely mitigated thrugh agreements reached with a majrity f the City s emplyee bargaining grups whereby emplyees wuld cver up t 3% f any increases in emplyer retirement cntributin rates as well as the City n lnger picking up the emplyee share f the PERS rates. Beginning in FY 2004/05, the City s Plice and Fire retirement plans were cmbined int a single Public Safety plan s as t avid being mandated t participate in a statewide safety plan (required fr all agencies with fewer than 100 members). The City was able t avid ptentially higher csts fr public safety retirement given that the rates fr Plice and Fire have typically been well-belw state averages fr similar plans. CalPERS emplyer cntributin rates are prjected t increase significantly beginning in FY 2012/13 as a result f retirement fund investments lses in recent years. The rate impacts are effectively delayed as a result f a rate-smthing methdlgy adpted by CalPERS. Other Majr Frecast Expenditure Assumptins City service csts fr water and sewer have been included in the frecast mdel with anticipated increases t rates ver the next five years cnsistent with Cuncil apprved rate structures. These csts are prjected t increase $1.7 millin dllar increase ver the five year frecast. This cst will be ffset by $800,000 in lease revenue. City infrastructure financing fr street, bike path and irrigatin rehabilitatin prjects are anticipated t require annual debt service payment f $2.0 millin per year beginning FY 14/15 and have been factred int the mdel. General Fund Reserve The General Fund reserve is intended t buffer against dwnturns in the ecnmy, reductins in State and Federal funding, and culd be used t buffer the impacts f ptential budget balancing measures. The Five-Year Plan reflects an immediate shrtfall f the Cuncil s current plicy f maintaining a General Fund Reserve equal t 15% f prjected revenues. This level f reserve has enabled the City t largely absrb the impact f a ne-time lss f state revenues as well as supprt recent budgets with significant annual perating shrtfalls (expenditures in excess f revenues). Preliminary Budget

8 In cnjunctin with the City Cuncil s adptin f the FY 2006/07 budget, it adpted a frmal General Fund Reserve Plicy. The gal f the plicy is t establish the level f reserves as well as establish clear guidelines n the apprpriate use f reserve funds. General Fund Revenues The amunt f mney available t fund services and prgrams thrugh the General Fund is determined by the dllars generated by the City s ecnmic base and the City s revenue structure (i.e., the fees and rates applied like business licenses). The General Fund prvides the nly fully discretinary revenue available t the Cuncil and citizens t directly supprt changing lcal pririties. The General Fund prvides funding fr such services as plice and fire prtectin, parks, recreatin, cmmunity develpment, as well as mst f the administrative and supprt functins f City gvernment. While there are numerus surces cntributing t verall General Fund revenues, there are seven primary surces that the City uses thrughut the year as key indicatrs f the health f verall General Fund revenue: real prperty tax, sales tax, business license fees, mtr vehicle in-lieu taxes, transient ccupancy (htel) tax, Municipal Service Tax and fee revenues. In FY 2013/14, these indicatr revenues are expected t cmprise an estimated 86.5% f the ttal General Fund revenue. General Fund Majr Revenue Surces The City s ability t maintain General Fund revenue cnsistent with inflatin and ther increasing pressures has been severely limited by varius vter initiatives ver the last 20 years. This trend began in 1979 with Prpsitin 13, and cntinued with the State-wide Prpsitin 218. The effects these vter initiatives have had n the City s General Fund have been further cmpunded by the State s shift f lcal prperty tax revenues away frm cities t schl districts (ERAF) and the State General Fund. The prjectin f revenues int the future is based n past perfrmance and analysis f actual current private and public sectr activity. This includes such private sectr activities as husing trends, emplyment, prperty turnver and business grwth; and public sectr develpments such as plicy shifts at the lcal, state and federal levels. Revenue prjectins are inherently dependent n a number f assumptins, which vary frm revenue surce t revenue surce. The assumptins used t prject the General Fund Revenues in the Five-Year Strategic Plan are as fllws: Real Prperty Tax The State Cnstitutin sets the base prperty tax rate at 1% f assessed value. The City receives apprximately 18% f the prperty tax generated in Davis, with the majrity f the revenue ging t the State. Prperty tax receipts are prjected t see a 1% increase fr FY 2013/14, and grw at a mdest % thrughut the frecast. Prperty tax assessments grew at a rate f 2% this past year, and while this represents a sharp decline in the rate f grwth experienced in recent Preliminary Budget

9 years, Davis was ne f nly a few cmmunities in the regin that did nt experience a decline in verall prperty assessments. Sales Tax Sales tax revenues are derived frm the tax impsed n sales f gds and services transacted within the City. An increase in the lcal sales tax rate frm 7.25% t 7.75% was renewed by vters in June f 2010 and is set t expire in June Of the 7.75% tax rate, the City nw generally receives apprximately 1.5 cents frm the sales tax generated in the City. Sales Tax revenues are prjected t be flat in the FY 2013/14 budget. This is due t higher than average revenue in the current year. The City cntinues t assess the impact f the vter-renewed ½ cent sales tax (Measure Q 2010). Since this tax is technically a use tax, it is nly assessed n gds purchased fr use (ex. vehicles registered) in the City. Business License Tax This revenue surce is derived frm a tax impsed n grss receipts f businesses licensed t perate in the City. The tax rate varies depending n the business enterprise. The revenue prjectins assume 3.7% grwth in FY 2013/14 and 2% per year thereafter. Mtr Vehicle In-Lieu This revenue surce represents the City s allcated share f state-wide vehicle registratins, apprtined thrughut the Cunty n a per capita basis. Histrically, this revenue surce has prvided a stable funding surce t the General Fund, in excess f $3.5 millin per year. In FY 2003/04, this surce f revenue was targeted by the State as a means t address the state s budget dilemma. This resulted in the lss f 3 mnths, r ne-quarter, f the anticipated annual revenue. The FY 2004/05 State Budget changed hw VLF revenues are distributed, and lessened the reliance f this revenue surce n the part f cities. In that year, rughly 90% f cities VLF revenues were exchanged fr an equal amunt f Prperty Tax revenues frm the state. In subsequent years, the amunt f the prperty tax in-lieu payments increased in prprtin t grwth in each jurisdictin s assessed value. Municipal Service Tax This revenue surce was adpted by lcal vters in The tax is paid by residential prperty wners based primarily n a per dwelling unit basis, and t cmmercial prperty wners primarily n a per square ft f building basis. The tax is expected t generate $2.8 millin in FY 2013/14. An annual increase f 3% is built int the Five-Year Frecast. Fee Revenues Several City prgrams are funded thrugh fees charged t participants and users f city services. These range frm fees fr recreatin prgrams t fees fr building permits. In general, fees are reviewed and updated n a regular basis t reflect increasing csts. Fr this five-year prjectin, fee revenues are assumed t increase by 3.0% per year. Preliminary Budget

10 Preliminary Budget