Report to Mayor and City Council
Tuesday, April 16, 2019
Discussion
SUBJECT:
Title
FISCAL YEAR 2019-2020 BUDGET WORKSHOP #1 - BUDGET POLICY ISSUES (CITY COUNCIL)
Body
I. SUMMARY
This is the first of three planned budget workshops, prior to a public hearing in June 2019 to consider adoption of the proposed Fiscal Year 2019-2020 budget. Initial draft budgets have been received from the departments. One purpose of tonight’s workshop is to receive direction from City Council on the proposals that would change the current budget structure.
The City has an ongoing General Fund budget deficit. One relatively new revenue source that was anticipated to help close the deficit is the Oil Industry Business License tax, which is expected to generate at least $4.7 million for Fiscal Year 2019-2020 based on information received to date. Collection of the tax began in January 2018, and the estimated revenue may grow as additional information becomes available, or when audits are concluded. Using the minimum estimate for now, the Fiscal Year 2019-2020 General Fund deficit may still be about $5.4 million without further changes to the budget structure.
|
|
2015-16 Adopted Budget |
2016-17 Adopted Budget |
2017-18 Adopted Budget |
2018-19 Adopted Budget |
2019-20 Adopted Budget |
|
Revenue |
$74,248,741 |
$74,572,223 |
$76,167,709 |
$86,919,816 |
$87,943,766 |
|
Expenditures |
($75,856,102) |
($76,219,758) |
($79,163,237) |
($88,799,813) |
($93,526,159) |
|
Surplus/(Deficit) |
($1,607,361) |
($1,647,535) |
($2,995,528) |
($1,879,997) |
($5,407,393) |
• Sales Tax (one-third of General Fund revenue) is expected to decrease slightly due to expected cooling off for auto sales.
• Property Tax (one-fifth of General Fund revenue) is expected to increase by 2% for most parcels and decrease for the oil refineries.
• Personnel expenditures are expected to increase by 5% ($1.7 million) for Fiscal Year 2019-2020.
• The Sheriff contract for law enforcement (one-quarter of General Fund expenditures) will increase by 5% ($1 million) overall based upon the same number of service units.
• The City’s CalPERS payment for Fiscal Year 2019-2020 will total $7,261,952. This is $2.4 million increase compared to Fiscal Year 2018-2019.
Although the City’s General Fund Reserve for Economic Uncertainties is nearly fully funded, the City is not prepared for the next recession. The structural budget deficit has not yet been cured; and the City’s major revenue sources are not increasing as fast as expenditures.
The City must continue to determine which services are necessary or which need reduction. The City Council’s decisions at this meeting are not final, as there will be additional opportunities to make changes to the draft Fiscal Year 2019-2020 budget prior to June 2019.
II. RECOMMENDATION
Recommendation
PROVIDE direction for each budget policy question, which will be used to build the draft budget.
Body
III. ALTERNATIVES
TAKE another action deemed appropriate by City Council.
IV. BACKGROUND
The purpose of this workshop is for the City Council to receive updated information regarding the General Fund Reserve and expectations for the Fiscal Year 2019-2020 budget; and to provide direction for potential changes to the budget structure for Fiscal Year 2019-2020.
Staff will be prepared to provide an overview of updated information, and walk through each policy question during the workshop.
General Fund Reserve
As reported on April 9th, the expected General Fund balance at June 30, 2019 is $25.6 million. As a reminder, the estimate includes one-time monies from the Endeavor settlement and General Fund savings as result of higher vacancy rate in the prior fiscal year.
The City Council’s reserve policy (Resolution 12-014) requires 20% of annual budget expenditures to be set aside as a Reserve for Economic Uncertainty. Another $1 million has been set aside for self-insurance claims. Another $0.5 million is non-spendable in form (inventory and prepaid amounts).
|
Expected June 30, 2019 Balance |
$25.6 million |
|
Less: |
|
|
Calculated Reserve for Economic Uncertainties |
$18.7 million |
|
Set Aside for Self-Insurance Claims |
$1.8 million |
|
Non-Spendable in Form (inventory, prepaid amounts) |
$0.5 million |
|
General Fund Balance Surplus |
$4.6 million |
The City Council may consider the use of the $4.6 excess reserve. Staff recommends the following:
1. Reduce the projected Fiscal Year 2019-2020 General Fund budget deficit from $5.4 million to $1.3 million
2. Use $500,000 to supplement high priority street repairs
Future Planning
After the Great Recession, the national economy has enjoyed a very long expansion period. By end of the Fiscal Year 2018-2019 (June 30, 2019), the current economic expansion will be the longest in modern United States history. Most economists forecast that there will be a recession within the next year or two with no certainty of its magnitude.
California’s economy, in the first part of 2019, remains on steady growth track despite concerns about how long the current expansion will continue. Like the nation, the state economy benefited from expansionary fiscal policy in the form of tax cuts coupled with increases in government spending that pushed the labor market closer to full employment and fueled solid job gains. Tech-related sectors made significant contributions to the state’s economic growth, as did a handful of other industries. Still, California faces a huge housing challenge, something that the new governor is addressing head on.
Most predictions are calling for a potential recession in the next two years. Drivers of this pessimism range from the stock market plunge and slow pace of sales in the housing market to fears surrounding the impact of an expanding trade war with China and decelerating global growth. Eventually, the current economic expansion we are experiencing will come to an end. When it does, it will bring a negative impact to the economy.
The City Council may consider reducing the General Fund budget expenditures or support an increase in revenues to eliminate the ongoing structural deficit.
The City is self-insured for dental and unemployment insurance. For the last 2 years, claims payments have averaged $1.8 million per year. It may be prudent to increase the General Fund balance set-aside for self-insurance from $1 million to $2 million.
Revenue Expectations for Fiscal Year 2019-2020
General Fund revenue estimates will be refined over the next 2 months. An early estimate for Fiscal Year 2018-2019 is $88 million, including a minimum Oil Industry Business License Tax of $4.7 million. Oil Industry Business License tax collection began in January 2018 and the City is still unable to establish a solid forecast. The new tax revenue estimate may grow as more information becomes available. It is also too early to provide estimates for potential Cannabis tax revenue. An updated estimate of Fiscal year 2019-2020 General Fund revenue will be presented with the Budget Workshop #2 report on April 30th.
Sales tax comprises roughly one-third of General Fund revenue. Due to an expected cooling off of auto sales, the revenue is expected to decrease slightly for Fiscal Year 2019-2020, from $24.8 million to $24.5 million.
Property tax comprises roughly one-fifth of General Fund revenue. The assessed values will likely increase by 1.5% for most parcels. However, staff has conservatively assumed a continued erosion of assessed values for the oil refineries. Over the last 5 years, the City’s share of property tax revenue from Marathon (formerly Andeavor) has decreased by an average of $130,000 per year. Over the same period, the City’s share of property tax revenue from Phillips 66 has decreased by an average of $140,000 per year. The assessed values for the refineries:
• Fluctuate with the volume and market price of oil held in the tanks each January;
• Increase when new equipment is purchased
• Decrease when existing equipment is depreciated; and
• Decrease when old equipment is decommissioned.
An estimate for the new Oil Industry Business License tax will be included in the draft Fiscal Year 2019-2020 budget. Initial projections show estimated annual revenue of $4.7 million. The auditor’s report has been received and reviews are on process which will help assess the fiscal year 2019-2020 revenue estimate.
Employee Compensation Expectations for Fiscal Year 2019-2020
Employee compensation is approximately 40% of the General Fund budget. Employee compensation includes wages and benefits. The City implemented a 3% increase in wages as a result of negotiations with the City’s bargaining groups. The primary benefit costs are health insurance (City contribution capped), employee pension, and retiree health insurance. Employee pension and retiree health insurance expectations are discussed below.
|
Department |
FTE Filled |
Part-Time |
FTE Vacant |
Overtime |
Total |
|
City Clerk |
$750,687 |
$5,229 |
|
$18,433 |
$774,349 |
|
City Council |
$923,417 |
$12,348 |
|
|
$935,765 |
|
City Manager |
$4,183,291 |
$191,338 |
$613,278 |
$59,540 |
$5,047,447 |
|
City Treasurer |
$478,802 |
|
$146,819 |
$1,741 |
$627,362 |
|
Community Development |
$1,582,063 |
$3,104 |
$250,130 |
$2,287 |
$1,837,584 |
|
Community Services |
$5,612,217 |
$4,820,534 |
$908,717 |
$29,692 |
$11,371,160 |
|
Finance |
$3,147,017 |
$374,096 |
$195,450 |
$8,124 |
$3,724,687 |
|
Human Resources |
$1,113,505 |
$25,614 |
$227,670 |
|
$1,366,789 |
|
Public Works |
$10,507,254 |
$367,785 |
$1,241,083 |
$128,188 |
$12,244,310 |
|
Grand Total |
$28,298,253 |
$5,800,048 |
$3,583,147 |
$248,005 |
$37,929,453 |
The personnel expenditures are estimated to increase by 5% in Fiscal Year 2019-2020 (or $1.8 million) compared to Fiscal Year 2018-2019:
|
|
Fiscal Year 2018-2019 |
Fiscal Year 2019-2020 |
Increase |
|
Personnel Expenditures |
$37,929,453 |
$36,147,851 |
$1,781,602 |
Employee Pension and Retiree Health Insurance Expectations for Fiscal Year 2019-2020
The City has three major expenditures related to employee retirement: the employer’s normal cost contribution to the defined benefit pension system (current cost of continued service); the employer’s payment of the unfunded pension liability; and the cost of retiree health insurance premiums.
The employee pension plan is administered by the California Public Employee Retirement System (CalPERS). In December 2016, the CalPERS Board took action to reduce the assumed rate of return on its investment portfolio from 7.5% to 7.0% over a 3-year period beginning fiscal year 2017-2018. This impacted both the normal cost contribution and payment of the unfunded liability. In February 2018, the CalPERS Board took further action to reduce the amortization period for future additions to the unfunded liability.
An unfunded liability exists when the accrued liability exceeds the market value of plan assets. The City’s unfunded liability at June 30, 2017 was $100.1million. CalPERS calculates the pension liability for each plan based on assumptions including expected employee wages, expected retirement date, expected mortality, and expected investment returns. Approximately 2/3 of retiree benefit payments are made from investment earnings. When the assumptions are not met, the unfunded liability increases.
Each increase of the unfunded liability has been amortized over 30 years, to minimize the impact on employers. Beginning with the June 30, 2019 valuation which sets contribution rates for Fiscal Year 2021-2022, however, any increase of the unfunded liability will be amortized over 20 years; thereby increasing employer contributions.
A summary of the City’s CalPERS contributions follows. The Fiscal Year 2019-2020 payment will total $7,261,952 which is $2.4 million higher than Fiscal Year 2018-2019. The City’s CalPERS will increase by $5.8 million from the 2017-18 level by 2022-2023.
|
|
2017-2018 |
2018-2019 |
2019-2020 |
2020-2021 |
|
Payment |
$4,869,400 |
$5,968,035 |
$7,261,952 |
$8,580,793 |
|
Increase from 2017-2018 |
|
$1,098,635 |
$2,392,552 |
$3,711,393 |
The City pays health insurance premiums for eligible retirees (241 currently receiving benefits). The average age of the City’s workforce is 46.8 years. Due to retirees living longer, an independent actuary expects the number of retirees receiving benefits will continue to increase.
Sheriff Contract Expectations for Fiscal Year 2019-2020
The Sheriff’s contract is approximately 22% of the General Fund budget. The Sheriff’s Department has provided rate increases for Fiscal Year 2019-2020. Services will increase by 5%, which includes an increase in the contribution to the liability trust fund, which will increase from a 10.5% surcharge of services to 11%.
|
|
Fiscal Year 2018-2019 |
Fiscal Year 2019-2020 |
Increase |
|
Sheriff Contract |
$20,008,576 |
$21,034,000 |
$1,025,424 |
The resulting overall increase is expected to be 5% for Fiscal Year 2019-2020. This assumes a status-quo to the number of units.
Status of Hiring Freeze for Full-Time Positions
To help reduce the General Fund budget deficit, 18 vacant full-time positions were frozen in Fiscal Year 2016-2017. Another 20 vacant full-time positions were frozen in Fiscal Year 2017-2018. Work is being deferred, as more than 10% of the City’s full-time positions were subject to the hiring freeze.
The total vacant positions stand at 30 positions with an estimated cost/savings of $3.6 million.
|
Department |
POSITION TITLE |
FTE |
|
City Treasurer |
Deputy City Treasurer |
1.0 |
|
CITY MANAGER |
Executive Assistant |
1.0 |
|
CITY MANAGER |
Code Enforcement Officer |
1.0 |
|
CITY MANAGER |
Controller |
1.0 |
|
CITY MANAGER |
City Manager |
1.0 |
|
COMMUNITY DEVELOPMENT |
Senior Planner |
1.0 |
|
COMMUNITY DEVELOPMENT |
(Senior) Administrative Specialist |
1.0 |
|
FINANCE |
Senior Budget Analyst |
1.0 |
|
FINANCE |
Accounts Payable Specialist I |
1.0 |
|
HUMAN RESOURCES |
Senior Human Resources Analyst |
1.0 |
|
HUMAN RESOURCES |
Human Resources Specialist |
1.0 |
|
COMMUNITY SERVICES |
Senior Recreation Center Supervisor |
1.0 |
|
COMMUNITY SERVICES |
Event Services Supervisor |
1.0 |
|
COMMUNITY SERVICES |
Recreation Program Manager |
1.0 |
|
COMMUNITY SERVICES |
Human Services Supervisor |
1.0 |
|
COMMUNITY SERVICES |
Early Childhood Director |
1.0 |
|
COMMUNITY SERVICES |
Early Childhood Instructor |
1.0 |
|
COMMUNITY SERVICES |
Human Services Senior Coordinator |
1.0 |
|
COMMUNITY SERVICES |
Human Services Assistant Coordinator |
1.0 |
|
PUBLIC WORKS |
Right of Way Ops and Maint Superintendent |
1.0 |
|
PUBLIC WORKS |
Landscape and Bldg Maint Superintendent |
1.0 |
|
PUBLIC WORKS |
Principal Administrative Analyst |
1.0 |
|
PUBLIC WORKS |
Construction Inspector |
2.0 |
|
PUBLIC WORKS |
Traffic Engineer |
1.0 |
|
PUBLIC WORKS |
Engineering & Maintenance Supervisor |
1.0 |
|
PUBLIC WORKS |
Engineering Technician |
1.0 |
|
PUBLIC WORKS |
Division Secretary |
1.0 |
|
PUBLIC WORKS |
Senior Maintenance Worker I |
1.0 |
|
TOTAL |
|
30.0 |
Budget Policy Issue - $315,000 Add in Community Services
Community Services department is requesting an increase of $300,000 in budget authority to cover the following:
• Holiday Program $100,000
• Kids Club $100,000
• Carson Circuit Bus $65,000
• Parks and Recreation $50,000
Budget Policy Issue - $120,000 Youth Employment Summer Program
Human Resources manages the Summer Youth Employment Program. The Program has an annual cost of $120,000, which this year would be fully funded by the General Fund. Grant funds for a portion of the Summer Youth program, previously available from the South Bay WIB, are unavailable this year. They paid for about 25% of the program.
Budget Policy Issue - Up to $150,000 Planner (1.0 FTE)
Community Development department is requesting adding one additional planner (Senior or Associate) to help support the department’s operations and lower the costs of consultants. It is recruiting for an existing senior planner position and would recruit for the second position if it became available.
Budget Policy Issue - $100,000 Citywide Training Program
Human Resources department is on the process of developing a comprehensive citywide training program to meet the training and development needs of all City of Carson employees. The estimated annual budget is $100,000.
Budget Policy Issue - Stroke Center Non-Resident Monthly Fees
Council had given direction on March 5, 2019 to lower the monthly fees for non-residents of Carson from the $70/month imposed in November 2017 to “between $0 and $20.” Further direction included no fee but an understanding that if the Center became oversubscribed, non-resident spots would be replaced by resident spots. Council should confirm this.
Budget Policy Issue - City Clerk and City Treasurer Compensation
The Council discussed a proposed increase in compensation at its February 19, 2019 meeting, but no action was taken. Direction was given to staff to bring the item back as part of the Budget Workshop.
Budget Policy Issue - Special Elections
The Council should consider whether it intends to call any special election for the March 3, 2020 election date and budget accordingly. If the City opts to consider voting by Council districts prior to the 2020 General Election, it should bring an amendment to the Charter at the March 3, 2020 statewide election, plus any other ballot measures.
V. FISCAL IMPACT
There is no immediate fiscal impact. City Council direction will be used to prepare the draft Fiscal Year 2019-2020 budget.
VI. EXHIBITS
A - Fiscal Year 2018-2019 City Events
B - City Events 2018-2019 Insurance Costs
Prepared by: Tarik Rahmani, Director of Finance