HomeMy WebLinkAbout2001-10-23 - AGENDA REPORTS - MIDYEAR FINANCIAL ANALYSIS (4)CITY OF SANTA CLARITA
AGENDA REPORT
NEW BUSINESS City Manager Approval:
Item to be presented by: George Caravalho
DATE: October 23, 2001
SUBJECT: FISCAL YEAR 2001-02 MIDYEAR FINANCIAL ANALYSIS &
PLANNING
DEPARTMENT: City Manager
RECOMMENDED ACTION
City Council receive report, direct staff to return on dates outlined below, adopt budget
guidelines endorsing a no -new -unfunded -programs policy, and reaffirm the City's desire to
maintain minimum reserve levels.
BACKGROUND
Tonight's meeting marks the kick-off of the fiscal year 2001-02 Midyear Financial Review.
Typically, this time of year is set forth to assess assumptions made during the budget
process in developing revenue and expenditure estimates and "tweaking" the budget for any
changes to the assumptions based on current information. This year's process is a little
different. The current state of the Nation's economy, and the impacts of the tragedies of
September 11, 2001, as well as changes to the City's Reserve levels, brings us to a need to
spend more time and delve deeper into the City's current fiscal condition.
The first step in that process is to provide City Council with detailed information regarding
the City's Reserved and Unreserved Fund Balances. This information is provided in the
attached memo. Based on the current downturn in the City's Fund Balances, and the
uncertainty of the economy, it is recommended that the City Council endorse a budget
guideline of "No New Unfunded Programs or Projects." This policy will provide that the
City's dwindling dollars will not be further drained and have a negative impact on the
Fy2002-03 Budget. If new programs are to be considered, these programs should be 100%
self-sustaining, or current programs should be cut to provide the funding.
In addition to the "No New Programs" guideline, staff recommends City Council reaffirm its
desire to maintain minimum reserve levels, as outlined in the attached memo, in order to
continue to be prepared to address any unforeseen changes in the economy or disasters that
may occur.
,�. Agenda Item :�
FISCAL YEAR 2001-02 MIDYEAR
FINANCIAL ANALYSIS & PLANNING
October 23, 2001— Page 2
The next steps in the Midyear process will be:
November 13, 2001: The City's external auditors will attend the City Council meeting to
report their findings of the Annual Audit, as well as present the Draft
Annual Financial Report for Fiscal Year 2000-01.
November 27, 2001: Introduce FY 2001-02 Midyear Budget Review — Proposed Midyear
budget adjustments will be brought before City Council for
consideration and adoption on December 11, 2001.
December 11, 2001: Adopt Midyear Budget Adjustments.
ALTERNATIVE ACTION
Other action as determined by the City Council.
FISCAL IMPACT
None by this action.
ATTACHMENT
Memo to City Council, dated October 18, 2001
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CITY OF SANTA CLARITA
INTEROFFICE MEMORANDUM
TO: Mayor Weste and Members of the Cit ouncil
FROM: George Caravalho, City Manager
DATE: October 18, 2001
SUBJECT: MIDYEAR FINANCIAL ANALYSIS AND PLANNING
On August 17, 2001, I provided City Council with a memo detailing the City's financial
status, available reserves, and information on issues facing the City both short-term and
long-term. Since that time, several of those issues have been addressed, resulting in
decreases to the City's reserves. In addition, on September 11`", the Nation experienced a
series of tragic events, which have had a definite impact on the economy. At this point it
is not clear how significant this impact will be both in the short and long term, or how
they will affect the economy of the City of Santa Clarita. I wanted to take this
opportunity to update the City Council on the state of the City's current financial health,
considering these events, and update information on outstanding issues we are facing.
RECOMMENDATION
Based on this uncertainty, I recommend the City Council adopt budget guidelines
addressing new programs or projects and reaffirm the City's reserve policy. The
guidelines will implement a policy of not adding any new programs or projects unless it
is self-funded, or funding is identified by cutting an existing program. The Council
should also reaffirm the City's policy of maintaining minimum levels of reserves.
RESERVE SUMMARY
As detailed in the chart below, the current balance of Reserved and Unreserved Funds
available are $4,250,971, down from $7,555,685 as reported in August 2001. Reserved
Fund Balance represents funding being held for a specific project that has not yet been
budgeted. Unreserved Fund Balance represents funding that has not yet been earmarked
for any specific purpose.
As you may remember during the budget process, staff projected an ending Fy2001-02
General Fund balance of $106,000, based on estimated revenues and expenditures in
March. The external auditors have now completed their annual audit and have provided
us with a preliminary revised fund balance amount, which is $1,400,000 higher than
anticipated. It is not unusual, that once we are through year end, and the audit, that the
fund balance figure changes. As discussed during the budget meetings, the year end
MIDYEAR FINANCIAL ANALYSIS AND PLANNING
October 18, 2001
Page 2
estimates for both revenues and expenditures are our best guess at how the year will
finish out. Fortunately, the year end reconciliation added funding to our projected fund
balance. These additional funds are a result of a combination of expenditure savings and
higher than anticipated revenues as of June 30, 2001, bringing our current estimated
ending fund balance to $1,506,000.
It is prudent financial management to maintain various reserves. It is common for cities
to adopt formal policies addressing this issue. In the past, the City has maintained several
different reserves. These included the Unreserved (or Unallocated) Fund Balance, and
budgeted reserves such as the City Council Contingency, the TMC/Elsmere Reserve and,
new this year, the Open Space Deserve Fund. Each of these reserves serves it's own
purpose. The "Unreserved Fund Balance" can be thought of as our "Emergency
Deserve". We would tap into these funds to address unforeseen revenue shortfalls, or
natural disasters. The "City Council Contingency" can be thought of as an "Operating
Deserve". It is the place where City Council can go to address unanticipated needs
throughout the fiscal year. The 'TMC//Elsmere Deserve has been established for potential
litigation related to the TNTC or Elsmere Canyon and the Open Space Deserve was
established for providing funding for acquisition of open space.
We also maintain several special purpose replacement funds. These funds are established
to provide funding for the future replacement of the City's assets. They include
Computer Replacement Fund ($550,000), Fleet Replacement Fund ($1,300,000) and the
Public Facilities Fund ($300,000). Typically, these funds are to be used only for the
purpose designated, and not for addressing unanticipated needs. This year the City tapped
in to the Public Facilities Replacement to provide funding for the. acquisition of park land
and a loan to the School Facilities Foundation for the construction of Golden Valley
Road. This should be looked upon as an unusual event, and the City should work
towards replenishing that fund.
While it may be appropriate to spend from any of these funds, the City shouldn't spend
all of its reserves. Doing so leaves no resources to fall back on for unanticipated needs.
Each fund should have a benchmark funding level we should strive to maintain. We
recently surveyed California cities asking them what their reserve levels were. Of the 21
cities surveyed, 16 had a goal between 10%-25% of operating expenditures to be set
aside and 5 had a goal 25% e 50%. 1 believe our reserve levels should be as follows:
MIDYEAR FINANCIAL, ANALYSIS AND PLANNING
October 18, 2001
Page 3
Unreserved Fund Balance —10%: $5,000,000
City Council Contingency — 4%: 2,000,000
TOTAL -14% $7,000,000
Our current balance of $4,250,971 (including the Opera Space and TMC/Elsmere
Reserves) falls short of the standard, and our goal over the next fiscal year should be to
brim the reserves up to the desired levels.
As depicted in the chart below, the adopted ,,Unreserved General Fund Balance" has
declined from a high of approximately $4,500,000 in 199900 to the current level of
$1,506,000.
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
1997-93 1998099 199900 2000-01 2001-02
It should be noted that FY 1997-98 marked the end of a recession. Lased on information
we've read from national economists, we are currently in the beginning of a recession,
which means we are beginning this recession at the same point we ended the last. Eased
on the historical trends of the recessions of the 90's, at best we can expect our fund
balance to remain level.
The City has also traditionally budgeted Reserves, including City Council Contingency,
Elsrnere Legal Reserve, and FEMA Reserve. These Reserves have gone from a high of
nearly $10,000,000 in Fiscal Year 200001 to the current balance of $2,744,971. The
chart below summarizes the funding levels of these reserves for the past 5 years.
MIDYEAR FINANCIAL ANALYSIS AND PLANNING
October 18, 2001
Page 4
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
0
1997-98 1998-99 1999-00 2000-01 2001-02 1
Council Contingency NTIVIC/Elsmere Legal Reserve 13 FEMA
Public Facilities Replacement ®BATA Grant Match Reserve M® n Space Reserve
In prior years, the combined Reserved/Unreserved Fund Balances indicated good, solid
fiscal position. Now both the Reserved and Unreserved Funds have diminished, from a
high of over $13,000,000 in FY1999-00 to the current balance of $4,250,9719 as
presented in the chart below.
15,000,000
10,000,000
5,000,000
0
1997-98 1998-99 1999-00 200001 200102
Lo Unreserved EReserved
X7
THE CHANGING ECONOM.,
To further complicate matters we are potentially facing difficult financial times. The
events of September 119 2001 continue to have a negative impact on the Nation's
economy. It is still too early to tell if the effect will be short-term or long-term. You
MIDYEAR FINANCIAL. ANALYSIS AND PLANNING
October 18, 2001
Page 5
may have read that unemployment has reached its highest pear since December 1991.
Ted Gibson, chief economist for the state Department of Finance was recently quoted as
saying: "In any 30 -odd years of doing this, this is probably the most uncertain period I've
experienced".
The state Department of Finance issued a letter late last month notifying the City that it
was adjusting the sales tax revenue projection for the P quarter of 2001 from a growth
rate of 4.8% to 0%®. And, in what may be one of the clearest signs of potential future
tough fiscal times ahead, an article appeared in the Sacramento Bee on October 12, 2001,
reporting that Governor Gray Davis had ordered state agencies to propose 15% across-
the-board budget cuts. Past history has shown that when the State falls into difficult
financial times, they try to balance their budgets by cutting funding to City's. A revenue
source that could be a potential victim is the Vehicle License Fee backfill, which
currently provides over $7,000,000 in funding to the General Fund.
Based on our current reserve balances, I believe the City is ill prepared to address a
negative swing in the economy. In looking forward to financial issues the City Council
will be faced with during the balance of the fiscal year, I recommend the Council act very
conservatively and with an eye to the future.
In addition to the economic issues described above, there continues to be critical
unfunded issues that will need to be addressed in the current fiscal year. Some of these
issues were included in the August 17, 2001 memo, while others have just recently come
to our attention. They include:
Funding for these items will need to come from the existing available reserves, resulting
in further reduction of the reserves from $4,250,971 to $1,863,471.
MIDYEAR FINANCIAL ANALYSIS AND PLANNING
October 18, 2001
Page 6
There also continues to be unfunded commitments that will need to be addressed within
the next 1-2 years. Some are have to do items, while other are want to do. They are:
In addition to the items listed above, the City is looking at increased maintenance costs
due to the addition of over 60 acres of park land to our active parr land inventory. It is
estimated that these costs add at least $600,000 per year to our annual budget, including
the need for several groundskeepers, supervisors and facilities maintenance workers.
We've also experienced an increase in the number and dollar value of claims against the
City. Currently we do not set aside, or reserve, any funds to address unsettled claims.
Rased on the activity over the past several years, the City may want to consider
establishing such a reserve. our estimates indicate that the City could have over
$600,000 in attorney's fees and settlement payments for the remainder of the fiscal year.
If these estimates tura out to be accurate, we are looking at a shortfall in the Self
Insurance Fund of approximately $200,000. The Self Insurance Fund would need to look
to the City Council Contingency to make up the shortfall.
In the August 17 memo, several projects were listed as possible sources of funding to
address the coming issues. Since that time, some of the projects have progressed, with
MIDYEAR FINANCIAL ANALYSIS AND PLANNING
October 18, 2001
Page 7
wn te's
Beautification
San Fernando
Median
Aquatics Center
$200,000 Prop C Local
Gas Tax
$8,290,157
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Sand y Canyon i ► 11 .1.1.1
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Whites Cyn Park
Whitney
$1,000,000
$100,000
110
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LIME
11 11`1
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Quimby Fees
General Fund
During the past several months the City has made some significant and important
property acquisitions, and has embarked on some large Capital Improvement Projects. It
MIDYEAR FINANCIAL ANALYSIS AND PLANNING
October 18, 2001
Page 8
is now time to step back and assess the City's current financial state. We should again
ask ourselves, "What business are we in?" and make a commitment to do a good job of
that business.
In order to ensure the City's continued financial health, I highly recommend the City
Council adopt a budget guideline of no new, unfunded programs or projects, and adopt
policies that will return the Unreserved and Reserved Fund Balances back to minimum
desired levels. We will be meeting with the Budget Committee prior to the City Council
meeting to ensure a good understanding of the City's finances.
If you have any questions or comments please feel free to contact me at your
convenience.
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