Loading...
HomeMy WebLinkAbout8.1 Financial Trends ChallengesG~~~ O~ DU~~~ #~ ~9`~;~/2 STAFF REPORT CITY C L E R K ~c,,,~ ~ DUBLIN CITY COUNCIL File # ^©©~-©^~ DATE: February 24, 2010 TO: Honorable Mayor and City Councilmembers FROM: Joni Pattillo, City Manager SUBJ Special Report: Financial Trends and Challenges Prepared By: Paul S. Rankin, Administrative Services Director EXECUTIVE SUMMARY: Finance Staff have prepared a Special Report that examines revenue and expenditure trends experienced by the City over the past 10 years. The report also provides anear-term early projection of financial challenges that will need to be addressed in the upcoming Fiscal Year 2010-2011 budget. This information is intended as an informational foundation to be considered as the City Council begins discussions related to the upcoming Budget process. FINANCIAL IMPACT: The full report identifies that major discretionary revenue sources are declining in both real terms and on a per capita basis. At the same time the City is struggling to fund important services which have increased costs including essential public safety services. The near term projection is that revenue remains in decline and base expenditure costs continue to increase, which creates a financial challenge in order to create a balanced budget. RECOMMENDATION: Receive the Staff Report and presentation. Submitted By: y~a~t ~'~o~ Administrative Services erector sewed y: Assistant anager Page 1 of 2 ITEM NO. $. h DESCRIPTION: The City's Annual Budget Study Session provides the City Council with an opportunity to: • Identify those programs and services the City Council would like Staff to analyze as part of the development of the City's Annual Operating Budget. • Identify those Projects that the City Council would like to see presented as part of the development of a new Five Year Capital Improvement Program, which will be presented with the Budget. • Receive early information regarding those items that may have a significant impact (positive or negative) on the City's revenues and expenditures in Fiscal Year 2010-2011. • Have early input on the budget process reducing the potential for last minute budget issues for which there would be insufficient time to evaluate. The focus of this report is primarily informational and is intended to serve as background for the discussion by the City Council, in advance of the preparation of the Fiscal Year 2010-2011 Budget and Financial Plan. In order to prepare the upcoming budget, it is relevant to consider historical financial trends. Staff will provide an overview of key trends associated with General Fund Revenues and Expenditures. In prior years the City has benefited from the economic growth in the region. However, current trends identify that Revenues and Expenditures in the General Fund are no longer balanced. This creates a challenge in addressing how adjustments will be made to continue to provide important and necessary public services that are supported by City resources. Staff has prepared a Special Report (Attachment 1) which places the current financial trends in context for the City of Dublin. It should be noted that this analysis has been prepared based on information available today, which is subject to change. As the preliminary budget and financial plan is developed, Staff will continue to incorporate the impact of any significant change(s). This report does not provide a final solution or recommendation. Given the scope of the situation the recommended solution will be developed in the coming months as the City Manager directs the preparation of the Budget based upon City Council input on policy direction, which will be discussed as part of this Budget Study Session. Staff will present an overview in order to prepare the City Council for consideration of key budget decisions. NOTICING REQUIREMENTS/PUBLIC OUTREACH: None ATTACHMENTS: 1. SPECIAL REPORT Financial Trends And Challenges Page 2 of 2 • • • • • • CITY OF DUBLIN SPECIAL BUDGET REPORT Financial Trends and Challenges FEBRUARY 24, 2010 Prepared by: Paul S. Rankin Administrative Services Director . . . . . . . . . . . . . . . Attachment 1 a a~-~v s~ i • .. Page Left Intentionally Blank Page 2 of 27 INTRODUCTION Since the City of Dublin's incorporation in 1982, City Officials have taken pride in the delivery of quality services to the community. The delivery of services and growth of the City have been thoughtfully planned based on the community needs and resources available. As the City matures it is destined to face different types of challenges. The City does not function in a vacuum and in recent times it has been directly impacted by external forces. Facing the longest recessionary period since the City incorporated is bound to add additional challenges in meeting its objectives. The purpose of this report is to serve as a foundation which provides historical financial trends, with a specific emphasis on those which impact the General Fund. The report is also intended to be forward looking, providing projections for key revenues and expenditures, in order to plan for tomorrow. Although these estimates are preliminary and are based upon the limited data available, they offer an important context for decision making in the near-term. In order to simplify the presentation the Fiscal Year stated is the second year e.g. Fiscal Year 2009/2010 is referred to as 2010. REVENUES HISTORICAL TRENDS OF MAJOR REVENUES The General Fund is the largest source of discretionary funds available to fund City operations. It is important to consider that a relatively few sources of revenue comprise the largest part of the General Fund Revenue base for the City. Chart 1 graphically displays the high concentration of revenue derived from only a few sources. CHART 1 -FISCAL YEAR 2009/2010 GENERAL FUND REVENUE DISTRIBUTION Property Taxes 47% All Other 14% Sales Tax 24% rocessing i Check 4% Page 3 of 27 5% 3% • A single Revenue Source -Property Tax - is nearly one half (47%) of all General Fund Revenue. • Over 70% of the total General Fund Revenue is derived from Sales Tax and Property Tax. • Six Revenue Sources comprise 86% of the total General Fund Revenue. • These six revenues are all impacted negatively during an economic recession. Rather than examine all of the Revenue Sources, a core group of revenues will be individually reviewed in terms of historical results as well as factors that impact the future projected trend. Property Tax Trends As shown in Chart 2 the City has experienced significant growth in Property Taxes over the past ten years. However, starting with the Fiscal Year 2008/2009 Tax Roll the County Assessor reduced assessed values on some properties based upon market value trends on January 1, 2008. CHART 2 -10 YEAR TREND CITY OF DUBLIN GENERAL FUND PROPERTY TAX REVENUE (In Millions $ Actual Revenue For FY 2001-2009 and Budget For 2010) $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 r ~ N ~ i ~? r' i - -- N -~ i b. N M ~ ~ - 6~ - O ~ T ~ ~ Efl a t 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 The growth in Property Tax revenue experienced by the City of Dublin was uniquely impacted by the ownership of substantial amounts of land that have developed over the past 10 years. Several large parcels were government owned and started with an assessed valuation of zero Page 4 of 27 since they were exempt from property taxes. Other land in private ownership had been held long term by the owners with a very low assessed value and / or an assessed value related to uses prior to the zoning granted as part of the General Plan and Specific Plan processes. As reflected in Chart 2, Property Tax revenue is projected to decrease for the first time during the most recent ten years. This reflects the estimated impact of the assessed valuation reductions made to date as the real estate markets both nationally and statewide have undergone significant corrections compared to the values prior to the recent financial mortgage lending crisis. Since General Fund Property Tax is used to provide core services to residents, it is also important to consider the change in Property Tax per resident, given the growth in residents served. Chart 3 depicts the results if the Total City Property Tax Revenue was divided by the estimated population for the past 5 years. The population estimate is based on estimates of Household Population that are released annually by the California Department of Finance. CHART 3 -CITY OF DUBLIN PROPERTY TAX REVENUE PER RESIDENT 2006-2010 (Actual 2006-2009; Budget 2010) $600 $580 $560 $540 $520 $500 $484 $480 $460 $440 $420 $578 $501 2006 2007 2008 2009 2010 The results in Chart 3 are dramatic given that the trend shows a decrease in per capita Property Tax revenue both last fiscal year and for the current fiscal year. The 2010 budget shows a 13% decrease from just two years ago. Further the 2010 results are only 3.5% more than the per capita Property Tax revenue in 2006. During this same period the population grew by nearly 24% (household population increased from 34,669 in 2006 to 42,866 in 2010). The City of Dublin is also unique in the fact that significant amounts of land within the City are owned by other governmental jurisdictions (i.e. United States Government, County of Alameda, Alameda County Surplus Property Authority, Bay Area Rapid Transit District, etc.) As government owned parcels they are exempt from the payment of General Fund Property Page 5 of 27 taxes. These properties amount to over 2,300 acres. This amounts to over 25% of the 14.01 square miles that comprise the City Limits. Future Trends For Property Tax Revenue The Fiscal Year 2010/11 Assessed Values will be established based on market values as of January 1, 2010. The County Assessor is just beginning to evaluate adjustments, as they utilize sales data through March 2010 before making adjustments. At this early stage it is expected that the 2011 Property Tax Roll will be negative overall for the second year in a row. The County Assessor, prior to submitting the tax roll on July 1, 2010, will be reviewing both residential and non-residential parcels for potential adjustments. For parcels that have not had a recent change in ownership, there is normally u~ to a 2% increase in the assessed valuation. This is part of the formula established under Proposition 13. In the past this provided some annual growth in the Property Tax revenue. For the first time ever the adjustment factor for 2011 will be negative. This means that the only opportunity for increased assessed valuation will be from properties that change ownership for an amount greater than their current assessed value and from new construction. The County Assessor as well as industry reports suggest that non-residential properties may be facing increasing foreclosures and resulting decreases in market value. For the residential market the sales price of a home is typically a good indication of the market value that is used by the Assessor to establish the assessed value. In the case of non-residential properties, the market value also takes into consideration rents and other factors. In an economy where there is a large supply of retail and / or office space it typically results in reduced rents. Chart 4 depicts the 2009/2010 breakdown of the City of Dublin Assessed Valuation by category. This information is relevant in projecting upcoming adjustments. Over the last two years much of the Assessor's downward adjustments to the valuation factor focused on residential parcels which comprise approximately 69% of the total assessed valuation. The assessed valuation on commercial properties represents 16% of the total base. CHART 4 -CITY OF DUBLIN 2009 / 2010 ASSESSED VALUATION BY CATEGORY Commercial Vacant Land ,~°~ $% Unsecured _ Others 4% 69% Page 6 of 27 In any case even a smaller decrease in 2011 is significant compared to the percentage of assessed valuation growth experienced before 2009. Chart 5 displays the annual percentage growth in assessed valuation for the City of Dublin. An estimate is included for 2011 which is a very preliminary projection and will require further refinement in the coming months. Zo.o°i° 15.0% 10.0% s.o°i° o.o°i° -5.0% CHART 5 -CITY OF DUBLIN ANNUAL PERCENTAGE GROWTH IN ASSESSED VALUATION (Actual Rate For Fiscal Years 2006-2010 /Projected Rate For 2011) 16.7% 14.5% 10.5% 5.3% 2006 2007 2008 2009 2010 Est. 2011 The trends in property values are not projected to increase in the coming years at the rates experienced in the past. As discussed values have been decreasing which has a negative impact on the single largest General Fund source of revenue (representing 47% of all General Fund Revenue). The nature of Property Tax revenue is that it tends to lag behind what has occurred in the economy, in part based on the date the Assessor must use for establishing valuations. Even if the general economy improves there will be a lag (12 to 24 months), before increases will be recognized in Property Tax revenue. For Fiscal Year 2011 the negative revenue impact to the City of Dublin could be between $800,000 and $1.5 million less than in the current Fiscal Year. A special note is warranted related to the 2010 Property Tax Revenue and State Borrowing. In order to balance the State Budget, the California legislature required the City to loan the State approximately $2.1 million in Property Tax revenues. The City has not shown a corresponding reduction as the City participated in a statewide financing program at no additional cost to the City. The current law prevents the State from borrowing again until the current loan is repaid in 2013. The legislation enacting the State borrowing did not include a plan for how the State will make the repayment. This may add additional pressures to the State /Local financing in coming years. Page 7 of 27 Sales Tax Trends The second focus area addressed in this report is Sales Tax. As noted at the beginning of this report Sales Tax accounts for 24% of the General Fund discretionary revenue in the 2010 Budget. The City has been negatively impacted by the closure of major retailers; the decline in automobile sales which represent a high percentage of the local tax base; and the worldwide recession that has placed enormous pressure on any growth in consumer spending. CHART 6 - 10 YEAR TREND CITY OF DUBLIN GENERAL FUND SALES TAX REVENUE (In Millions $ Actual Revenue For FY 2001-2009 and Budget For 2010) 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 As shown above, the City experienced healthy growth in Sales revenue between 2001 and 2008. During that period there were small year to year declines that occurred in 2002 and 2007, however they were far less dramatic than the most recent two years. Both 2009 and 2010 are less than what was received in 2001. The last time the Sales Tax revenue was lower than the 2010 budget, was 1999 when the City received approximately $8 million. Similar to the analysis of Property Tax, it is prudent to also evaluate the recent sales tax trend on a per capita basis. Page 8 of 27 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Budget CHART 7 -CITY OF DUBLIN SALES TAX REVENUE PER RESIDENT 2006 - 2010 (Actual 2006-2009; Budget 2010) $450 $400 $350 $300 $250 $200 N h M fA $150 I ~ N 7 M N ~ $100 - $50 e $0 2006 2007 2008 2009 2010 Budget The negative trend observed with Property Tax is repeating itself when Sales Tax is compared on a per capita basis. General Fund Sales Tax revenue has been decreasing at a time when the population served by the City is increasing. The degree of deterioration is astounding as the City is experiencing per capita sales tax revenue rates that are 40% less than the amount collected in Fiscal Year 2006. A longer view going back to 2001 shows that per capita rates are 47% less ($472 in 2001 and $248 in the 2010 Budget). The composition of the retail sales tax outlets in the City also has a direct impact on the revenue decline. Chart 8 below shows that two categories 1) Autos and Transportation, and 2) General Consumer Goods, are the source of roughly 59% of the total retail sales transactions that occur in the City of Dublin. As part of the total sales tax distribution by the State cities also receive a share of pooled sales taxes. In 2009 this amounted to approximately $1.3 million which is not included in the comparison below. CHART 8 -CITY OF DUBLIN 2009 LOCAL RETAIL SALES TAX TRANSACTIONS MAJOR BUSINESS CATEGORY Autos 8~ Transportation Food 8 Drugs 29% Fuel 8 Stat 9' Busir Inds 11 ral ~.onsumer Goods 30% Page 9 of 27 Restaurants 8 Building 8 Hotels Construction 11% 8% The Autos and Transportation Category is broader than vehicle sales. However, focusing on a sub-category consisting sales of New and Used Automobiles, the data suggests that this represented 24% of the total City of Dublin Sales Tax in Fiscal Year 2009. In Fiscal Year 2005 this category represented as much as 31 % of the total. Chart 9 shows the local revenue derived from the sub-category focused on the sales tax derived from the sale of New and Used Automobiles in each of the past 5 years. CHART 9 -CITY OF DUBLIN SALES TAX REVENUE DERIVED FROM NEW AND USED AUTOMOBILE SALES TRANSACTIONS 2005-2009 During this five year period the revenue derived from this category has decreased by more than 40%. As noted above the automobile sector represents a very large share (ranging from 31 % to 24% over this 5 year period) of the sales tax revenue generated from retailers located in the City of Dublin. The industry as a whole has undergone major changes with 2009 being reported as the worst year for new car sales in the United States in nearly 30 years. The City has also been impacted by changes in the distribution of Auto Dealers with the closure of Dublin Ford as well as temporary closures of dealers selling Chevrolet, Buick, Pontiac and GMC. In Fiscal Year 2008 the City received taxes from the first full year of operation of Dublin Hummer Saab Saturn. In 2009 General Motors announced its plans phase out these brands as well as Pontiac. The Dublin location is serving a relocated Chevrolet and Cadillac dealership while the ultimate future of the Hummer, Saab, and Saturn brands is sorted out in the market place. The second largest category of retail sales tax generators in the City of Dublin is the "General Consumer" category which includes: department stores, clothing stores, electronics, appliance Page 10 of 27 2005 2006 2007 2008 2009 stores, etc. The City has experienced declines in this category as a result of general economic trends as well as the closure of Major Retailers including: Mervyns, Circuit City, and Andersons TV. As shown below in Chart 10, the 2009 results for this category were 10% below the revenue collected in 2005. CHART 10 -CITY OF DUBLIN SALES TAX REVENUE DERIVED FROM GENERAL CONSUMER CATEGORY SALES TRANSACTIONS 2005-2009 A key factor regarding the 2009 General Coi 2009 did not include the full year impact from period from December 2008 to June 2009. sumer category is that the revenue shown for several of the retailers which closed during the Future Trends For Sales Tax Revenue Current projections for sales tax revenues reflect a leveling off of the deterioration in revenue. From a broader economic perspective it is projected that the recessionary conditions are considered to be near a point where slow amounts of growth may occur in the coming year. For the City of Dublin year to year comparisons will still need to factor in the fact that some of the retailers that have closed operated for part of 2009. It is also important to keep the perspective that any growth will be on a smaller base. For example if you refer back to the annual sales tax figures in Chart 7, in 2007 the City received $14.36 million and in 2010 it is expected to be $10.65 million. Using these as examples a 1 growth on the 2007 base would yield an additional $146,000 in sales tax revenue. The same growth factor of 1 % on the 2010 base is 27% less at $106,500. Therefore, it is not expected that vve will achieve 2007 levels potentially for many years. In working with the HdL Companies, the City of Dublin's consultant on sales tax management services, Staff have prepared a very rough estimate of projected sales tax for 2011. Page 11 of 27 2005 2006 2007 2008 2009 Adjusting for known factors the amount projected for 2011 is virtually flat. Although the estimate includes some modest increases in some sectors over 2009, the increases are offset by the full year loss of closed retail outlets and one-time adjustments that may have occurred for back taxes. Inflation And Per Capita Revenue (Combined Property Tax and Sales Tax) As discussed on the previous pages Property Tax and Sales Tax comprise a majority of the City General Fund revenue (71 % in the 2010 Budget). Chart 11 displays the combined per capita revenue from these two sources over the past 5 years. In order to also view this in terms of the larger economy a trend line has been added. The trend line shows the result of taking the 2006 per capita revenue and increasing or decreasing it based on the annual change in the Consumer Price Index (CPI). CHART 11 -CITY OF DUBLIN PROPERTY TAX AND SALES TAX PER CAPITA 2006-2010 WITH TREND LINE SHOWING 2006 ADJUSTED BY ANNUAL CHANGE IN CPI $1,200 $1,000 $soo $600 $400 $200 $0 2006 2007 2008 2009 2010 Budget As shown for the first three years the revenue growth followed the same general pattern as increases in the CPI. However, the most recent two years have been drastically different. Had these revenues grown at the same rate as the CPI in 2010 the per capita amount would be 34% greater than what is estimated in the adopted budget. Assuming the CPI does not decline this gap will continue to widen in the future since there is flat to declining revenue growth projected for these revenues. Development Related Revenue Development related revenue provides funding in two key areas: 1) General Fund supported services associated with processing, permitting and inspecting new development; and 2) Page 12 of 27 Impact or Mitigation Fees that fund capital projects required to provide services to new development. The initial discussion will be related to the General Fund operating revenues. As shown in Chart 1 (on page 3) the combination of General Fund Development Processing / Plan Check and Permits represent approximately 7% of the total 2010 General Fund Revenue. There is also a relationship between fees collected and expenditures for the services; however the timing of these two elements may not always match the same fiscal year. For example, if a Building Permit for a new building is obtained in March, it is likely that inspection costs will continue after the July 1St start of the next fiscal year. Therefore, instead of focusing solely on revenue Staff has also examined measures of building activity of a period of time. Chart 12 below, demonstrates that the last 2 years of Building Permit valuations have been the lowest over the past 10 years. Likewise the number of new residential units receiving final inspection is also near the lowest point for the past 10 year period, as shown in Chart 13. CHART 12 -CITY OF DUBLIN VALUATION OF BUILDING PERMITS ISSUED 2000-2009 (In Millions $) 350.0 300.0 250.0 200.0 150.0 100.0 50.0 0.0 CHART 13 -CITY OF DUBLIN NEW RESIDENTIAL UNITS RECEIVING FINAL INSPECTION 2000-2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Page 13 of 27 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 During the 10 year period 6,873 new residential units had a final inspection, which approaches an average of nearly 700 units per year. Last year only 235 units were finaled and the 2010 Budget projected a similar amount of 287 units which were expected to have a final inspection. Preliminary projections by Community Development are that actual 2010 figures are expected to be closer to 200 units and will remain between 200 and 340 for the next two years. Depending on the recovery of the residential real estate market additional units may occur beyond 2012; however it will remain well below the prior 10-year average of 700 per year. Future Trends For Development Related Processing Revenue These trends will have negative implications for not only development processing related revenue, but also for Property Taxes which are based on valuation. It will also ultimately impact any revenue sources the City receives based on population, as there is a significant slow-down in the number of housing units added. It is important to note that the City Council has already taken important steps to reduce the expenditures associated with these functions. In the 2010 adopted Budget, authorized staffing in the Community Development Program (includes: Planning, Building & Safety, and Engineering) was reduced by 7.85 Full Time Equivalent (FTE) positions. The preliminary estimate is that in 2011 Building Permits may be $300,000 less than the 2010 Budget. Staff will be analyzing the impact on of the reduction in Building Permit Revenue on contract inspection expenditures. As discussed the net permit expenditures (Permit Fees less Permit Inspection Costs) can fluctuate widely depending on the fiscal year the permit is issued versus the year inspections occur. It is also expected that other development processing revenue will also be less in 2011, based on the lack of certainty for larger pipeline projects. Projects in that category include: Kaiser Hospital and Medical Offices; Camp Parks; and Jordan Ranch. Staff will be doing further analysis on the levels of expected decrease as the budget is developed. Capital Impact Fees As a growing community, the City has managed over the past ten years, the planned delivery of numerous public improvements including: streets, freeway interchanges; parks; a library, and other community buildings. To the extent that the projects were to meet the requirements of new development they were either constructed directly by developers or by the City using Capital Impact Fees. Impact Fees are typically collected at the time of the building permit so the trends as they relate to collections are going to mirror that activity. How Impact Fee Programs Function The City has established Impact Fees for Traffic Improvements, Fire Facilities, as well as Public Facilities (which includes neighborhood parks, community parks, library, aquatic facility, and community buildings such as community center, and senior center). The fee program is established to collect the pro-rata cost of improvements required by new development based on the type of development. Therefore, the scheduling of the timing for construction must take into account fees collected as well as needs to adequately service the new development. Ultimately since fees are collected on a permit by permit basis the entire cash required to construct all improvements will not be available until the end of all of the planned new development. In order to mitigate the impacts of the new development, some improvements are needed in advance (for example roadway improvements). The City has worked with the development community to obtain the pre-payment of funding for the construction. This was the case with Page 14 of 27 the I-580 Fallon Interchange where the Lin Family advanced over $11 million to ensure the timely delivery of this important improvement. The developer receives a fee credit which can be used as a credit against fees collected when the Developer develops property subject to the fee. In two cases the City has also advanced funding to advance the construction of community improvements: a new Fire Station and Phase I of Fallon Sports Park. As of June 30, 2009 the City was still owed $1.8 million for the Fire Station advance and it is estimated that the Fallon Park advance may total $4.2 million. Because the fee programs are designed to meet requirements to have new development pay its way, these advances will need to be repaid with interest as fees are collected. Impact Fee Trends Since most impact fees are collected at the time of building permit these collections are similar to previous trends discussed earlier in the report. There are exceptions such as the collection of park land fees which are collected at the time of the final map and in some cases Development Agreements have provided a requirement for the developer to make payment of funds in advance of the building permit. The following chart displays the total City of Dublin Impact Fees collected per year for the past ten years, including a combination of; Traffic Impact Fees, Public Facility Fees, Park Dedication Fees, and Fire Impact Fees. CHART 14 -CITY OF DUBLIN IMPACT FEES COLLECTED 2001- BUDGET 2010 (Traffic Impact Fees, Public Facility Fees, Park Dedication Fees, and Fire Impact Fees In Millions $) $20.000 2008 "pattern segment" _ $9.3 million Interchange Financing. $18.000 N 2010 Budget "pattern segment" _ $5.2 ~ $1s.ooo million Windstar Project . ~ $14.000-I ( ~ $12.000 $10.000 ~ $8.000 ~ Budget Page 15 of 27 There are several unique adjustments that need to be taken into consideration when viewing 2008 and 2010 data. In 2008 approximately $9.3 million of the $14.5 million total was a lump sum contribution for the I-580 / Fallon Road Interchange construction. The 2010 Budget included approximately $5.2 million in fees for the Windstar Project. It should be noted that this project has undergone a change in ownership and it is unknown if the fees will be received in 2010. In the seven years from 2001 to 2007 nearly $80 million has been collected to fund capital improvements. Adjusting out the items mentioned for 2008 and 2010 (Interchange Funding and Windstar) and the total for the most recent three year period, would be approximately $9.6 million. Future Trend Capital Impact Fee Funds Estimating the timing of Capital Impact Fee collection requires assumptions regarding development timing. Staff is just beginning to evaluate the projections based on input from the development community and the status of project approvals. Should general economic factors change dramatically this can result in large swings in the revenue estimates. Traffic Impact Fees (TIF): The actual total TIF collected during the nine year period from 2001 - 2009 was $54.6 million or an average of $6 million per year. Preliminary projections are that the City will collect approximately $6.5 million in Traffic Impact Fees in total over the next 4 years. This averages less than $2 million per year. The City will need to evaluate needed projects and determine the priority based on available funding. There are numerous TIF Credits which will convert to a "Right To Reimbursement" and developers holding these rights will also have an interest in repayments as a use for funds collected. Public Facility Fees (PFF): The actual PFF collected during the nine year period from 2001 - 2009 was $37.7 million or an average of $5.4 million per year. This fund is expected to be in a deficit position due to borrowing to proceed with Fallon Sports Park Phase 1. Therefore, Staff reviewed the preliminary projections to account for the repayment of borrowed funds. A rough estimate is that after repayment the City will collect approximately $22.9 million in Public Facility Fees over the next 4 years. This averages to approximately $5.7 million per year available for projects. As part of the development of Five Year Capital Improvement Plan, Staff will be analyzing projected cash flow along with the identified projects. It will also be necessary to assess prior to proceeding with new construction, the impact on operating costs for projects. This is particularly important for those projects with staffing and specialized operating expenses such as the Emerald Glen Recreation and Aquatic Center. The City has a history of managing well maintained facilities and in order to continue that standard it will be fiscally prudent to assess the impact of all projects on the operating budget after construction. Other projects that are supported from these fees include expansion space to continue to accommodate police personnel, and the development of several neighborhood park sites. Balancing these as well as other PFF funded projects in a volatile development cycle will be a serious challenge. Fire Impact Fee: The primary use of all Fire Impact Fee revenue collected is to reduce funds advanced for the construction and outfitting of fire stations to serve growth areas. There is not currently a Master Plan which identifies additional new facilities. As this is a minor portion of the overall Impact Fee Program, Staff has not yet had time to develop longer term projections. Page 16 of 27 Interest Revenue As shown in Chart 1 Interest accounts for approximately 3% of the 2010 General Fund budget. Although this is a small percentage compared to the dominating percentage of revenue collected from taxes, it is highly important since it is a locally controlled discretionary revenue source. It is also important given the impact of the economic meltdown in financial markets resulting in lower interest rates than have been experienced at any other time by the City. Chart 15 provides a 10 year view of General Fund revenue derived from Interest earnings. It is important to recognize that the reported interest revenue will fluctuate based both upon interest rates and the balance available for investment. CHART 15 -CITY OF DUBLIN GENERAL FUND INTEREST REVENUE 2001-BUDGET 2010 INCLUDING AN OVERLAY OF THE LOCAL AGENCY INVESTMENT FUND (LAIF) HISTORICAL INTEREST RATE (Note: 2010 Rate is an estimate based on 2 Quarters) (Interest Revenue In Millions $ /Interest Rate As a Percentage) $3.00 $2.50 $2.00 $1.50 $1.10 $1.00 $0.50 $0.00 Line displays average Local Agency Investment Fund Interest rate and the $2.62 $2.62 scale is on the right. n Bars depict General Fund Interest Revenue in Millions $ 61.84 $1.49 $1.61 1.45 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 The Local Agency Investment Fund (LAIF) is a short term investment pool operated by the State Treasurer. Although it is not the only investment vehicle used by the City the interest rate reflects the overall trend in the market. During this period the LAIF rate was as high as 6.1 % in 2001. The current rate in February 2010 is approximately 0.55% which is less than the 0.90% reported for the first quarter of 2010. The Chart data assumes the 2010 annualized LAIF rate will be approximately 0.6%. Page 17 of 27 Future Trend For Interest Revenue The expected trend for interest revenue will be continued decreases in General Fund Interest revenue. Factors contributing to this include: 1) A continued low interest rate environment with forecasts suggesting that the rates will continue at low levels for some time; and 2) The City has been using General Fund Reserves to balance the budget and for capital projects (Shannon Center; Historic Park; Fallon Park Advance; Maintenance Facility Project; etc.). The use of reserves will decrease the amount invested resulting in lower revenue. Staff has not had a chance to fully evaluate projected cash balances and longer term projections for interest rates. Based on very rough information available the 2011 interest revenue could be as much as $300,000 - $600,000 less than the 2010 Budget. SUMMARY -GENERAL FUND REVENUE OUTLOOK The following is a summary of the preliminary forecast of decreases in major General Fund Revenue. As part of the overall budget preparation and a more refined mid-year budget update Staff will also be conducting further analysis on other revenue sources. CHART 16 -SUMMARY OF PROJECTED POTENTIAL GENERAL FUND REVENUE DECREASES FOR 2011 Pro ert Tax $ 800,000 - $ 1.5 Million Sales Tax Flat Develo ment Processin /Permits $300,000 + Interest $300,000 - $600,000 TOTAL DECREASE $1.4 Million - $ 2.4 million Page 18 of 27 GENERAL FUND EXPENDITURE TRENDS As a growing community the City of Dublin's General Fund Expenditures have increased as the City matured and the population increased. Chart 17 provides a comparison of the annual expenditures over the past 10 years. Chart 18 provides a more specific view of the distribution of General Fund Operating Expenditures by major program area. CHART 17 -CITY OF DUBLIN GENERAL FUND EXPENDITURES (OPERATING ~ CAPITAL) 2001 -BUDGET 2010 (In Million $) $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $- CHART 18 -CITY OF DUBLIN GENERAL FUND OPERATING EXPENSE -BUDGET 2010 Police & Fire 54% dic Safety nsportation 4% Page 19 of 27 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Budget Community Culture & Leisure Health & Welfare Development Services Less than 1% 11% f7% Given that Police and Fire represent more than 50% of the total general fund operating expenses for the City, additional analysis of the historical trends will be provided. CHART 19 -CITY OF DUBLIN POLICE DEPARTMENT AND FIRE DEPARTMENT GENERAL FUND OPERATING EXPENDITURES 2001 -BUDGET 2010 (In Million $) $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $- As noted in Chart 19 a significant increase in Fire Department costs occurred in 2004 due to the staffing and opening of an additional Fire Station. The Fire Services are provided through a contract with Alameda County Fire Department. This offers the City broader access to specialized fire suppression and rescue resources under a shared agreement with multiple jurisdictions. With the provision of Fire Department services there is a staffing cost and component that follows the number of apparatus made available from a station. The staffing associated with the Fire Department has remained relatively stable since the opening of the third fire station in 2004. The City provides one Senior Office Assistant position that assists with licensing and permits obtained at City Offices. The Police Services function is provided through a contract with Alameda County Sheriffs Office. In the 2010 Budget the Sheriffs Office provides 54 FTE positions and the City provides seven positions. The City positions include support Staff as well as non-sworn crime prevention personnel to augment the services provided by Sheriffs Office Staff. The City requests staffing from the Sheriffs Office based upon an approved budget and established services levels. During the period shown in Chart 19 the staffing for Dublin Police Services has grown from 47.5 FTE in 2001 to 61 FTE which has remained unchanged for the period from 2008 - 2010. Changes in staffing typically follow growth in population or programs. Because Public Safety represents such a large portion of the General Fund costs, it is appropriate to examine the trends between the changes in General Fund Revenue, compared Page 20 of 27 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 *New Fire Station (No. 18) Operational in 2004 Budget to the change in expenditures for these important services. As previously depicted costs have continued to steadily increase each year for Police and Fire Services. The blue line in Chart 20 depicts these increases. The Green Line in Chart 20 is the annual percentage change in General Fund Revenue. With revenues following a decreasing trend it becomes a major challenge to support increased expenditures. CHART 20 -CITY OF DUBLIN POLICE DEPARTMENT AND FIRE DEPARTMENT GENERAL FUND OPERATING EXPENDITURES 2005 -BUDGET 2010 (In Million $) WITH A TREND LINE FOR PERCENTAGE GROWTH IN GENERAL FUND REVENUE $30.00 $25.00 10.8% 6.5% $20.00 $19.37 $18.05 $15.00 14.9% $20.84 $22.15 $22.39 -0.3% -1.8% $10.00 $5.00 $- 20.0% 15.0% $24.13 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -13.9% -20.0% 2005 2006 2007 2008 2009 2010 Budget Future Trends For Police and Fire Expenditures Efforts have been made to control costs where possible for these services. In the case of Fire Department Services the City has received some relief from the growth in costs due to the Alameda County Fire Department expanding the number of agency partners. The Department was successful in merging and servicing the Lawrence Livermore National Laboratory and this reduced some of the overhead costs to the City of Dublin. The Fire Department continues to explore opportunities to offer services to a larger base which will increase the operating efficiency for the City of Dublin. If this effort is successful the City may be able to see limited increases, or best case a possible decrease in Fire Service costs in 2011. Staff is in the process of examining the impact of Dublin Police Services contract costs, as a result of collective bargaining agreements which were more favorable than estimates used to develop the City 2010 Budget. Due to the complex negotiation environment it has been difficult for the last two years to estimate for budget purposes, the cost of Sheriffs Office personnel and benefit increases. For example, the 2009 Police General Fund expenditures were $721,097 less than the final budget. This was achieved through a combination of managing costs and overtime staffing as well as salary and benefit increases being less than Police 8~ Fire General Fund Costs (In Million $) Percentage Change All General Fund Revenue (Scale On Right) Page 21 of 27 what was estimated for budget purposes. Recently, the Alameda County Board of Supervisors approved a new multi-year agreement with the Deputy Sheriffs Association which is expected to have positive impacts on 2011 Police Services costs. Staff is expecting that the 2011 Budget for Dublin Police Services will possibly include a modest decrease from the amount budgeted in 2010. General Fund Operating Costs All Departments With the need to reduce expenditures in the 2010 Budget the most significant reductions came from programs other than Police and Fire. With the 2010 reductions significant adjustments were made in areas related to the servicing of new development applications or inspections where the workload had also been reduced. Chart 21 depicts graphically the annual General Fund operating expenditures for Police and Fire compared to all other departments. CHART 21 -CITY OF DUBLIN GENERAL FUND OPERATING EXPENDITURES 2005 -BUDGET 2010 (In Million $) POLICE DEPARTMENT AND FIRE DEPARTMENT -RED BARS ALL OTHER DEPARTMENTS BLUE BARS $25.00 $20.00 $15.00 $10.00 $5.00 $- It is appropriate to also examine operating costs on a per capita basis and the impact of general inflationary costs associated with the provision of services. Chart 22 shows the per capita operating expenditures that have actually been declining for the past two years. The Chart also shows what the expected per capita spending would be if the 2005 amount was adjusted annually by the change in the Consumer Price Index. The reductions made to date have been accomplished at a time when the population has continued to grow. Page 22 of 27 2005 2006 2007 2008 20uy 1u~utsuaget CHART 22 -CITY OF DUBLIN GENERAL FUND OPERATING EXPENSE PER CAPITA 2005-2010 BUDGET WITH TREND LINE SHOWING 2005 ADJUSTED BY ANNUAL CHANGE IN CPI $1,400 $1,200 $1,000 $800 $600 $400 $200 $- $1,233 $1,292 $1,289 $1,140 $1,152 $1,197 _.. ,_ c ^ u~ ~ o ~ ~ r ~ _~ r ~ ~ ~ 4sr ~ ° o ~ ~ 2005 2006 2007 2008 2009 2010 Budget Trends and Considerations For Operating Expenses As noted earlier, Public Safety cost increases may be mitigated in 2011, however, there continues to be inflationary pressures in several areas that will need to be accounted for. The following discussion will highlight some of the anticipated challenges. Employee Wages & Benefits - In 2010 cost of living and performance pay adjustments were eliminated for City Staff. Regular salaries for budgeted positions equal approximately $7.4 million. Retirement costs (Public Employee Retirement System (PERS) and Retiree Medical contributions) are projected to increase approximately $75,000 based on 2010 salaries. Any adjustment to salaries would increase the change in costs. Looking beyond 2011 the PERS contribution rate will increase by approximately $125,000, as the rates are adjusted to address investments that have underperformed the rates assumed by PERS. Utilities - Utility rates including, Gas, Electricity, Water, and Sewer have been increasing in recent years. Projecting potential increases of 5% - 10% could mean an additional $85,000 - $165,000 per year. Page 23 of 27 Liability Insurance - The City obtains general liability insurance coverage as part of a self-insured multi-agency insurance pool, which combines self insurance with commercial insurance. It is typical to experience increased premiums at times when investment earnings are low, since the general insurance market relies on investments as a supplemental source of funding in addition to premiums. The City also pays an insurance surcharge for County Contract Services. The City has experienced significant increases in the County program. In 2011 it is projected that total insurance costs may increase by $250,000. Park Maintenance - With the addition of the expanded Heritage Park and the addition of Fallon Sports Park, based on 2010 estimates these facilities will add expenses of as much as $525,000 more than the 2010 Budget. These costs include a reserve charge of $65,000 for future replacement of the artificial turf. It should also be noted that this estimate is the gross cost and does not factor in any additional revenue that may be derived from facility rentals. Public Safety - As noted it is still very early in the process of developing the 2011 Budget, however, it is hoped that savings of $150,000 - $500,000 may be achieved in terms of reduced Police and Fire service costs. The Budget preparation will also need to evaluate the potential impact if special revenue funding available is reduced (i.e. State COPS Grant of $100,000; County and Local Emergency Medical Services Funding of $384,000.) In the event that these special funding sources are reduced the General Fund will bear more of the costs. Storm Water Mandates - The City is facing additional State mandates that will result in additional programs to address the management of storm water discharges and drainage that may costs $100,000 - $250,000. State Budget - The State is once again facing a deficit, and may seek solutions that have a more direct impact on Dublin. Perhaps the greatest impact from the State Budget is the indirect pressures resulting from decreased State funding in other areas. Schools, as well as other public service entities, are seeking replacement funding for activities that would be impacted by State Budget reductions. Page 24 of 27 SUMMARY -GENERAL FUND EXPENDITURE OUTLOOK The following is a summary of the preliminary forecast of changes in major General Fund Expenditures. As part of the overall budget preparation and a more refined mid-year budget update Staff will also be conducting further analysis on other expenses. The total impact is projected to range from $535,000 to $1,115,00 in additional General Fund expenditures net of potential savings in Public Safety costs. SUMMARY OF PROJECTED POTENTIAL GENERAL FUND EXPENDITURE INCREASES / (DECREASES) FOR 2011 Salaries & Benefits without an Cost of Livin $ 75,000 Utilities $ 85,000 - $ 165,000 Liabilit Insurance $ 250,000 Park Maintenance $ 525,000 Public Safet $500,000 - $150 000 Storm Water Mandates , $ 100,000 - $ 250 000 State Bud et Im acts , Undetermined TOTAL INCREASED COSTS $535,000 - $1,115,000 General Fund Capital Expenditure Trends Over the years the City has managed during good times to build General Fund Reserves that can be used to finance special projects and amenities. This has allowed the City to approach several capital projects on a pay as you go basis without incurring debt. Examples of recent projects which included major funding from the General Fund are: Historic Park Expansion; Reconstruction of Shannon Community Center; and Acquisition of a City Maintenance Yard site. Chart 23 displays the historical use of General Fund revenue for Capital Projects. CHART 23 -CITY OF DUBLIN GENERAL FUND CAPITAL EXPENDITURES 2001 -BUDGET 2010 (In Million $) $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $- - ~ co av-. of 1001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Budget Page 25 of 27 It is significant to note that, out of the $5.3 million budgeted in 2010, over 75% of this was funded from reserves and represented projects which had been initiated in a prior year. In the past there were times when the General Fund revenue was in excess of operating expenditures. This difference could be allocated to reserves or used to fund capital projects. That scenario is not anticipated in 2011 as the City experiences declines in General Fund Revenue and increased operating costs. It is anticipated that any new General Fund Capital Improvement Projects for 2011 will need to be assessed in terms of: Is the project critical to public health and safety, what is the impact of the project on future operating costs, and does the project address a critical need in the City Council adopted Goals and Objectives. This will also require an analysis of the staffing required to undertake the Capital Project workload. Additional direction from the City Council will be beneficial in identifying options for the coming year. Page 26 of 27 CONCLUSION Examining the past trends is important to understand how the City successfully financed services to the community. However, the current economic climate requires that the City take into consideration recent trends and apply that information to a forecast for the future. It is not possible to "assume" that what worked yesterday will continue to work without any changes. Proper planning and discussion of the challenges is the best course to identify a solution. As previously noted the assumptions in this report for the future are based upon limited data and will need to be refined as the process of developing the 2011 Budget and Financial Plan proceed. However, based on current information the 2011 Budget is projected to have less revenue and more expenditures. With government budgets it is not uncommon to utilize reserves to balance the expenditures for the year. The prudent use of reserves is in a situation such as construction of a large capital project where excess revenue from a prior year is utilized to fund the project. Ideally a government agency wants to avoid a structural deficit where the operating revenue for the year will not support the operating expenditures. Options to eliminate a structural on-going deficit are to reduce expenditures, increase revenue, or a combination of the two approaches. In 2010 the City already had to utilize one-time economic stability reserves to balance the budget and without correcting the structural deficit the imbalance will grow in 2011 as shown below: 2010 GENERAL FUND ADOPTED BUDGET 2010 BUDGET GENERAL FUND REVENUE $ 44,973,643 LESS: Capital Project /One-Time Grant Funding (Also an offsetting General Fund Expense- Fallon Interchange /Village Parkway Storm Drains) ( 1,059,215) NET GENERAL FUND OPERATING REVENUE $ 43,914,428 ADOPTED BUDGET GENERAL FUND OPERATING EXPENSE (45,068,083) 2010 OPERATING EXPENSES FUNDED FROM ECONOMIC STABILITY RESERVE (SHORTFALL) ($ 1.153.6551* * Without additional expenditure reductions in 2011 or increased revenue this amount would be expected as a structural deficit that will recur in 2011 PRELIMINARY ASSESSMENT OF 2011 SHORTFALLS (Reductions in Revenue /Increases In Expenditures) 2011 PROJECTED REDUCTIONS IN REVENUE $1,400,000 - $2,400,000 2011 PROJECTED INCREASED COSTS 535 000 - 1 115 000 SUB-TOTAL 2011 SHORTFALL $1,935,000 - $3,515,000 CARRYOVER 2010 STRUCTURAL DEFICIT 1 153 655 - 1 153 655 GRAND TOTAL 2011 POTENTIAL SHORTFALL 3 6 5 - 4 68 655 Page 27 of 27