TOWN OF LOS ALTOS HILLS June 21, 2018 Staff Report to the City Council

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1 TOWN OF LOS ALTOS HILLS June 21, 2018 Staff Report to the City Council SUBJECT: APPROVE RESOLUTIONS ADOPTING THE FISCAL YEAR BUDGET AND GANN APPROPRIATIONS LIMIT. FROM: Carl Cahill, City Manager RECOMMENDATION: That the City Council: Approve the attached two resolutions which: 1. Adopt the Town s Operating and Capital Budgets, with the exception of the Gardner Bullis capital improvement project, and approve the Gann Appropriations Limit; and 2. Approve the Gardner Bullis capital improvement project budget for for $40,000. DISCUSSION: The budget is an annual planning tool that communicates priorities and sets the Town s operating and spending policy for the year. The City Manager is responsible for presenting a budget to the City Council, in accordance with Municipal Code The financial objective of the budget is to ensure that there are sufficient funds to meet ongoing spending. Special projects, where spending is generally one-time in nature, can utilize reserves. The General Fund is budgeted to add a total of a net of $63,000 to Reserves for , after funding operating and capital improvements. The Sewer Fund, entering the last year of its last rate increase plan, will drawdown Sewer reserves by $333,000 to fund its capital improvement program. Budget Process The budget process began in February with the first department budget retreat. Key priorities were discussed and each department aligned their objectives to these key priorities. The key priorities are preservation of current quality of life, emergency preparedness, promote sense of community, transparency, and risk mitigation. The details of these priorities and department goals are available in Attachment 2c: Departmental Budget. After the mid-year financial update, which was presented to the City Council in February, the Budget Team began working to update the estimated year-end actual, which is the foundation for the development of base budget. The base budget consists of minimum funding requirement to maintain operating status quo. On April 2, 2018, Staff presented the methodology in estimating the Actual and the development of the base budget to the Finance and Investment Committee (FIC). On May 30, 2018, the Operating Budget and the Projected Budget, as well as the Capital Improvement Plan and Budge were presented to the City Council during the

2 Budget Study Session jointly with members of the Finance and Investment Committee (FIC). The proposed budget included the base budget, operating service enhancements, and capital improvement program requests. A financial summary of the proposed budget is as follows: TOWN WIDE FINANCIAL SUMMARY, PROPOSED BUDGET Special Revenue Funds General Capital Improvement Funds FINANCIAL SUMMARY General Fund Sewer Fund REVENUES BY TYPE GF SRF CIP Sewer Property Tax $ 5,944,886 $ $ $ $ 5,944,886 Taxes Other Than Property 638, ,776 Franchise Fees 532, ,240 Licenses And Permits 1,276, ,276,232 Use Of Money And Property 80, ,114 11, ,874 Intergovernmental 57, , , ,832 Charges For Services 1,037,665 42, ,700 3,142,107 4,603,472 Miscellaneous 38, ,470 41,370 Allocations In 1,784, ,784,369 TOTAL REVENUES 11,390, , ,416 3,155,767 15,503,051 EXPENDITURES BY FUNCTION General Administration (2,289,216) (2,289,216) Public Safety (1,469,740) (645,220) 0 0 (2,114,960) Planning & Building (2,891,236) (2,891,236) Parks & Recreation (748,589) (748,589) Public Works (1,798,917) 0 0 (2,388,951) (4,187,868) Capital Outlay Sewer (1,100,000) (1,100,000) Capital Outlay Governmental 0 0 (3,335,418) 0 (3,335,418) Non Departmental (200,000) (200,000) TOTAL EXPENDITURES (9,397,698) (645,220) (3,335,418) (3,488,951) (16,867,287) TRANSFERS IN / (OUT) TRANSFERS IN 0 544,911 1,568,837 1,100,000 3,213,748 TRANSFERS OUT (1,930,316) (43,432) (140,000) (1,100,000) (3,213,748) TOTAL TRANSFERS (1,930,316) 501,479 1,428,837 0 (0) CHANGE IN FUND BALANCE 62,854 (1,741) (1,092,166) (333,184) (1,364,236) FUND BALANCE, BEGINNING 11,131,958 64,537 2,277,548 1,598,080 15,072,125 FUND BALANCE, ENDING $ 11,194,813 $ 62,796 $ 1,185,383 $ 1,264,896 $ 13,707,888 Joint Budget Study Session Summary During the joint study session, Staff presented the projected financial health of the Town, the base budget, and funding requests for service enhancements and capital improvement 2

3 program. The proposed budget includes net new ongoing General Fund service level increases of $304,600, $25,000 in one-time service enhancement requests, and $74,000 in onetime mandated increases. The General Fund is proposed to fund $1.385 million in new capital project request, of which $1.0 million is for the annual Road Rehabilitation project. The City Council reviewed the requests for service enhancements and capital projects in detail. At the Council s direction, this proposed budget includes a reduced Gardner Bullis Pathways project, funded from the Pathway Fund, of $40,000. The following items are incorporated into the Proposed Budget, and follow the Council s priorities discussed in community meetings and in the April 19, 2018 Council Meeting: Service Enhancements General Fund Council Priority Ongoing Cost Total Proposed TOTAL Ongoing Cost Onetime One Time Cost Total Request Dept Increase Sheriff Patrol time (from 0.7 FTE to PUBLIC SAFETY 1.0 FTE 95,000 95,000 Public Safety 95,000 95,000 Transfer from GF to Pub Safety Fund 95,000 95,000 95,000 95,000 Transfer In to Pub Safety Fund from GF (95,000) (95,000) (95,000) (95,000) Increase Emergency Street Tree Removal Funding from $5,000 to $50,000 ROAD MAINT 45,000 45,000 Pub Works 45,000 45,000 Add Principal Planner STAFF Net Cost $11,000 RETENTION 189, ,000 Comm Develop 189, ,000 Less Increase in billable hours (47,000) (47,000) (47,000) (47,000) Less reduction in contract planning costs (131,000) (131,000) (131,000) (131,000) Annual Maintenance, Support, and Updates for new Building Permit and GIS systems COMMUNITY ENGAGEMENT 29,600 29,600 Comm Develop 29,600 29,600 Increase in contract IT support 10,000 10,000 Finance 10,000 10,000 Update Cost Allocation Plan and User Fee Study 25,000 25,000 Finance 25,000 25,000 Merit Increase for Employees STAFF RETENTION 114, ,000 City Manager 114, ,000 Sewer Rate Study SEWER MGMT 25,000 25,000 Pub Works 25,000 25,000 MANDATES Election Green Infrastructure Compliance Consultant Support FACILITIES 30,000 30,000 Council/Clerk 30,000 30,000 44,000 44,000 Pub Works 44,000 44,000 Total City $304,600 $124,000 $428,600 $304,600 $124,000 $428,600 General Fund $304,600 $99,000 $403,600 $304,600 $99,000 $403,600 Capital Improvement Budget Below is a summary of the recommended Capital Improvement Program from all funding sources: 3

4 Total Spending Thru Appropriation March '18 Available Budget (Release)/Est. Carryover UPDATE Request Total Recommended Capital Program & Equipment Purchase Council Priority Continuing and Ongoing Projects 01. Annual Road Rehabilitation (Street CIP 046) 2,052,640 1,985,333 67,307 1,917,307 1,917,307 ROAD MAINT Annual road pavement program based on the 2018 Pavement Management Program. The program includes storm drainage improvements along roadsides. 02. Annual Sewer Rehabilitation (Sewer CIP 048) 2,890,000 1,638,271 1,100,000 1,100,000 SEWER MGMT Annual sewer rehabilitation program. The current program is a 1.5 year program from selection to construction completion. The program will change now that 100% of the sewer system has been videoed. 03. Byrne Preserve Restoration (TR4169) 83,106 69,216 13,890 43,432 43,432 PATHWAYS/ In , the Town contracted with Grassroot, formally Acterra, to complete Byrne Preserve restoration, a grant reimbursement project. This is a three year contract with as the last part. Grassroot also manages the Town's open space through community education on eliminating and treating non native, invasive plants and how to manage native vegetation. 04. Cable Service Expansion Cost Sharing Program (410209) 100,000 46,384 50,000 50,000 50,000 COMMUNITY Since the creation of this program, in , the Town paid its share of cable expansion for Byrne Park Lane and Deer Springs Way, ENGAGEMENT Carado Court, Almaden Court, Christopher Lane, and Julietta Lane. 05. Matadero Creek Erosion and Restoration Project 1,084, , , , ,433 ROAD MAINT Repair the erosion along the edge of Page Mill Road between Baleri Ranch Road and Berry Hill Court at Matadero Creek. Due to large overall expense, lengthy permitting process and the risk of road damage, the project was divided into two phases. Phase One was completed on December 12, Phase Two design has been submitted to regulatory agencies for review and permitting. 06. Page Mill/Moon Lane Pedestrian Bridge Crossing (427901) 166,000 17, , , ,246 PATHWAYS/ Design completed. Consultant is working to obtain permit from Department of Fish and Wildlife and preparing for project bid package. 07. Summerhill Pathway Project (427902) 30, ,000 80,000 80,000 PATHWAYS/ 08. Westwind Barn 145,000 69, , ,000 PATHWAYS/ New Projects 09. Gardner Bullis Pathway 40,000 40,000 PATHWAYS/ Currently the Town s pathway connects to the Gardner Bullis Elementary School along Fremont Road but discontinues in front of the school. This project will bridge the pathway for pedestrians, equestrians, and general community use. 10. Fremont and Estacada Pathways 38,000 38,000 PATHWAYS/ The Fremont Road to Redwood Grove pathway project consists with a native path from Fremont road. it will improve pedestrian safety and connect to neighboring City of Los Altos from existing route. 11. Purchase of flail mower 180, ,000 ROAD MAINT A new high capacity mower is needed to keep up with mainenance and fire protection needs. The Town s maintenance crew mows 65 plus miles of town roads, 90 plus miles of town pathways, and additional open space/town lands. PUBLIC SAFETY 12. Phone System Upgrade The current phone system is obsolete and needs replacement. 55,000 55,000 COMMUNITY ENGAGEMENT Reserves Total General Fund Reserves are expected to end with a net increase of $63,000 to $11.2 million. To continue along the path of fiscal prudence, staff recommends a total of $1.6 million be set aside from the General Fund Unassigned Reserve internally into the Town s Pension Reserve. That amount, plus the supplemental payments made to the California Public Employees Retirement System (CalPERS) and to Public Agency Retirement Services (PARS) in , matches the most recent estimate by CalPERS (January 2018) of what the Town s unfunded pension liability will be as of June 30, The calculation for that set aside is as follows: Net Est. Pension Liability, June 30, 2018 (Estimated as of June 30, 2018 by CalPERS, taking into account the $1.36 million supplemental payment/deposit to CalPERS made by Town in January 2018): $ 2,092,468 Less Additional Payments to PARS Approved by Council; not factored into the above estimate by CalPERS: $ (500,000) Net Estimated Pension Liability as of August 31, 2018 (after last PARS deposit is made): $ 1,592,468 Rounded/ Recommended Internal Pension Reserve Set Aside: $ 1,600,000 4

5 The Council may, at its discretion later, choose to deposit additional funds with either CalPERS or PARS to continue paying down the Town s pension liability, but at this time funds will simply be set aside internally. Staff notes that the Finance and Investment Committee (FIC) recommends a larger amount be set aside for an internal Pension Reserve, one that matches a lowered long-term earnings rate (6%) than is used by CalPERS in its calculations of contribution rates and unfunded liabilities. (With lowered earnings, payments by the employer need to increase to make up the difference, thereby increasing the unfunded liability). Using CalPERS most recent actuarial study from August 2017, staff estimates that using a 6% earnings rate would increase the liability by approximately $2.5 million 1. Staff understands the FIC s concern about the ability of CalPERS to meet its investment objectives, and notes that CalPERS has reduced its earnings assumptions downward in several steps, and will reach 7% in the next several years. The Council may adjust the internal funding of this Reserve as CalPERS and/or the Town s actuary updates the estimated pension liability over time, or may choose to be more conservative than staff s recommendation and set aside additional funding by reducing the Unassigned Reserve further. Staff will continue to update the Council as part of its financial reporting on the status of the Town s pension liability. Gann Appropriations Limit Staff has recalculated the Town s Gann Appropriations Limit according to a worksheet provided by the League of California Cities in its Municipal Revenue Sources guide, included in the budget attachments to this staff report. The guide states that expenditures made for qualifying 2 capital outlay expenditures from the General Fund reduce the amount of taxes subject to the Gann limit. Under the League s definitions, the Town s new General Fund budgeted expenditures for Street Rehabilitation capital improvements ($1.1 million) qualify as capital outlay, thereby reducing the Town s appropriations subject to the limit. That calculation is summarized below: Appropriations Subject to Limitation City Town of Los Altos Hills FY Amount a) Proceeds of Taxes $ 6,587,062 b) Exclusions $ 1,088,098 c) Appropriations Subject to Limitation $ 5,498,964 d) Appropriations Limit (current year) $ 7,145,665 e) Under (Over) Limit $ 1,646,701 (Under Limit) 1 Source: CalPERS actuarial report dated August 2017, page Capital Outlay of over $100,000 that extends the useful life of an asset by at least ten years makes that expenditure qualifying to reduce the appropriations subject to the limit. 5

6 Resolutions The resolutions adopting the budget include adoption of: Operating and Capital Budgets and the Gann Appropriations Limit, including all revenues, expenditures, inter-fund transfers, and reserve changes), with the exception of the Gardner Bullis Pathway project. (The budget is for information, and is not being adopted at this time); and 2. The Gardner Bullis Pathway project budget for for $40,000. The Resolutions contain a new provision to authorize the City Manager to solicit bids on the open market for projects in the budget. This will decrease the time it takes to initiate projects, thereby increasing Town responsiveness and align the Town s practice with most other municipalities. That does not change the Council s policy that all contracts over $15,000 will continue to be brought to the City Council for approval. FISCAL IMPACT: General Fund Reserves will increase by $63,000 with this proposed budget, and the Sewer Fund s Reserves will decrease by $333,000. Report Prepared by: Jim Steele Special Advisor Management Partners ATTACHMENTS 1. Resolutions 2. Budget 6

Budget. One. Time Cost. Total

Budget. One. Time Cost. Total Service Enhancements General Fund Town of Los Altos Hills 2018 20 Budget Attachment 2 - Budget Service Enhancements/New Requests CIP and Capital Funds Town wide 15,072,124 (1,364,236) 13,707,888 932,967