TITLE
Recommendation to receive and file the Fiscal Year 2011 Second Quarter Budget Performance Report. (Citywide)
DISCUSSION
This report reflects the City's Fiscal Year 2011 (FY 11) budget performance through March 31, 2011. The report includes financial information for all funds and departments. While this budget performance report primarily discusses the General Fund, exceptional performance (both positive and negative) in other funds is highlighted where applicable.
Summary
As of March 31, 2011, the City's Adjusted Budget for all funds was $3.1 billion. With 50 percent of the fiscal year complete, expenditure performance in all funds is at 34.8 percent of budget, or $1.1 billion. Year-to-date revenues for all departments and all funds were at $1.2 billion, or 56.1 percent of the $2.2 billion in budgeted revenue.
The total Adjusted General Fund Budget as of March 31, 2011 was $385.6 million. With 50 percent of the fiscal year complete, expenditure performance in the General Fund spending reached 45.5 percent of budget, or $175.4 million. Approximately $198.3 million, or 51.7 percent, of anticipated General Fund revenue has been collected year-to-date. Staff is projecting a $5.1 million revenue shortfall for FY 11, and recommendations are made later in the report to address this shortfall.
FY 11 Expenditures - All Funds
While it is not expected that department or fund expenditures will occur equally throughout the fiscal year, measuring fund performance in quarterly intervals allows for review of the revenue and expenditure trends, thus giving policymakers and administrators the ability to make the necessary changes to ensure a balanced budget.
The City's Adopted FY 11 Budget for all funds includes $2.5 billion of annual funds, $397.9 million of carryover (multi-year grants and capital project funds), prior year encumbrances (goods and services ordered in FY 10 but received in FY 11) and City Council-approved budget amendments, which combined as of March 31, 2011, bring the total Adjusted City Budget to $3.1 billion. Please see Attachment A for a breakdown of Citywide expenditures by fund.
As illustrated in Exhibit 1 above, the City's 37 funds are grouped into six fund types comprising the $3.1 billion adjusted budget. Most of these funds are restricted, such as the Harbor Fund, Gas Fund and Tidelands Funds that are designated for specific and limited activities. The majority of core community services provided in the City, such as police and fire services, libraries and parks, are largely supported by the General Fund, which comprises only 12.4 percent of the entire Adjusted City Budget. For a discussion of notable fiscal performance in non-General Fund areas, please see the Other Funds section of this report.
FY 11 General Fund Revenue
While there is a tenuous economic recovery in the private sector, budgetary strains in the public sector are increasing as a result of lagging economic impacts and increases in employee-related costs. General Fund revenues are heavily dependent upon those parts of the economy hardest hit by the recession - the real estate market and consumer spending.
Secured property tax is the single largest General Fund revenue for the City. Adjusting revenue to account for the State property tax take-away in 2010 results in a 3 percent decline in secured property tax revenue. Recent data issued by the Los Angeles County Assessor's Office indicates that the assessed valuations for the City of Long Beach have declined further by 2.8 percent over the prior year and delinquencies continue to be at approximately 3 to 4 percent. Declines in revenue from parking-related fees and citations demonstrate the changes over past years in consumer behavior to avoid parking fees and citation. Revenues related to parking-related fees have experienced year-over-year declines of approximately 10 percent.
One of the few revenues coming in above budget is Sales and Use Tax. Growth in Sales Tax revenue can be largely attributed to the increased sales tax generated by Edison Materials and Supply (EMS), the number one sales tax generating entity in Long Beach. EMS has experienced over 33 percent growth over the previous year. It is important to note that Long Beach does not keep all of the sales tax generated by EMS; per a location agreement with EMS, 75 percent of the sales tax revenue they generate over a base of $3 million is rebated to EMS.
The Department of Financial Management continues to monitor revenue performance on a weekly basis and modifies forecasts based on evolving economic performance data. Current and projected revenue performance is based upon a variety of factors, and includes both structural and one-time revenues. It is important to note the risks inherent in projecting revenue, as the City has limited, if any, authority to affect certain revenue streams. The table below highlights performance through March 31, 2011 for selected General Fund revenues.
FY 11 General Fund Revenue by Department
As of March 31, 2011, General Fund departments had generated $198.3 million or 51.7 percent of budgeted revenues. Among the top revenue producers were the Financial Management Department with $11.5 million, the Public Works Department with $10.5 million, the Police Department with $7.0 million, the Fire Department with $5.9 million and Parks, Recreation & Marine Department with $3.9 million. Attachment C provides a more detailed breakdown of General Fund revenue performance and variances by department. Many of the departmental variances are captured in the footnotes to this attachment.
General Fund revenue is currently projected to end the year at approximately $5.1 million or 1.3 percent under-budget. Declines in revenue such as those we are experiencing this year are driven by factors largely external to the City's control. At this time, five departments are estimating revenues to end the year between 2 and 8 percent under budgeted levels. Fire, Police and Parks, Recreation and Marine are projecting the largest revenue shortfalls. Part of the shortfall can be attributed to national economic factors within business and industry, such as the drastic declines in construction projects and the massive deficits affecting governmental entities with which the City has contracts for services. Additional underperforming revenues are within categories such as parking citations, meters and off-street parking, and recreation-related activities, which are rooted in changes in individual behaviors. Of these underperforming revenues, $3.3 million have been consistently underperforming and need to be structurally corrected.
The table below highlights consistently underperforming revenue as of March 31, 2011 in the General Fund revenues.
FY 11 General Fund Expenditures by Department
As of March 31, General Fund departments are estimating to end the fiscal year at $389.2 million, or 0.92 percent over Adjusted Budget. The majority of Departments are estimating to end the year within their adjusted budgets and, to ensure the General Fund remains fiscally sound, the City Manager has issued a directive to Departments to end the fiscal year at their mid-year estimates-to-close. The remaining overage can be attributed to the Police and Public Works Departments. The Police Department was overstaffed in the beginning of FY 11 in sworn personnel, generating the majority of the overage. The Public Works Department will inherit the parking operations budget over the next few months from Development Services, which has been consistently under-funded. These two departments are managing their costs and are committed to ending the year at no more than their adjusted budgets. Financial Management will be working closely with these two departments over the next few months to guarantee there are no expense overages.
Exhibit 3 shows the City's Top 10 General Fund year-to-date expenditures in FY 11 by department as a percentage of total General Fund expenditures. Together, Police and Fire account for 68 percent of General Fund expenditures. The Police, Fire, Public Works, Parks, Recreation and Marine, and Library Services departments account for 85 percent of General Fund expenditures.
FY 11: Addressing the Structural Shortfall in the General Fund
While all departments are taking measures to prevent expense overages, revenue shortfalls are driven by a combination of external factors including the down economy and behavioral changes within the community. To address the current year shortfall within certain consistently under-performing revenues, as well as other current revenue declines, and given the current strong oil revenue performance in the Upland Oil Fund, the City Manager is proposing to increase the structurally budgeted price per barrel of oil from $45/bbl to $55/bbl in the current fiscal year. This will increase the FY 11 budgeted revenue transfer from the Upland Fund to the General Fund by $5.1 million. Given the historically high volatility of the oil commodity, it would be imprudent to structurally budget oil above $55/bbl. In mid 2008, when the oil price was even much higher than today's prices, the City increased its structurally budgeted price of oil for the FY 09 from $45/bbl to what was believed a conservative $85/bbl. Within 6 months of that decision, the price dropped to a $25/bbl, creating a large budget shortfall that necessitated mid-year budget reductions. Therefore, an increase, within reason, in the current structural budgeted price of oil is prudent and supportable.
The current year revenue shortfall is comprised of both structural and one-time revenue declines. The structural component consists of $3.3 million in under-performing revenues, which have plagued the General Fund for several years. Staff proposes to use the $5.1 million in additional oil revenue to solve the structural $3.3 million problem. The remaining $1.8 million shortfall is not currently considered a structural problem and can be addressed by the use of one-time oil revenue rather than requiring additional reductions in departments, which would result in negative service impacts.
In addition to the structural adjustment to the budgeted price of oil recommended above, staff anticipates additional oil revenue funds of approximately $10.5 million at Fiscal Year End. In keeping with the current Council policy of using one-time money for one-time uses, staff proposes the additional revenue be used for the following to the extent possible:
· Underground tunnel connecting the Police Department jail to the new County courthouse for prisoner transport;
· Technology improvements to address automated Payroll Time Entry; and
· Unfunded infrastructure needs.
Both the underground tunnel and the automated payroll system would be one-time investments that would eliminate future ongoing General Fund costs.
Other Fund Highlights
Employee Benefits Fund (Restricted)
The Employee Benefits Fund (EBF) was created to finance and account for employee paid time off and fringe benefits, such as retirement, pension obligation bond, health insurance, dental insurance, Social Security and Medicare. Every City department and fund is charged a rate that is collected through payroll overhead charges and placed into the EBF. The goal of this rate is to ensure that the department allocations will fully cover the costs of the fringe benefits listed above.
Due to significant increases in the City's cost for health insurance claims, collections from departments through the payroll overhead charges are not enough to cover the full costs being incurred. Although the City did project an increase in health-related expense during the FY 11 budget process, the actual increases being realized are much higher than anticipated. The overhead rate has been increased to fund the higher costs, and departments have been charged approximately 10 percent more than budgeted. Most departments have been able to absorb the increases, but others are struggling to cover the increases and remain within budget.
Towing Fund (Restricted)
The Towing Fund supports towing responses to clear vehicle accidents, impound vehicles and facilitate the sale of unclaimed vehicles. The Towing Fund began FY 11 with a balance of $612,471, which is a drop from the FY 10 beginning fund balance of $1 million. Due to a decline in revenue resulting from fewer police initiated tows, Towing Fund revenue will not be sufficient to fulfill the budgeted $3 million transfer to the General Fund and end the fiscal year with a positive fund balance. Financial Management continues to work with the Towing Fund to identify a solution to this problem. An update on this issue will be provided as part of the Fourth Quarter Performance Report.
Conclusion
Mid-way through the fiscal year, the City is faced with numerous financial constraints resulting from the economy, departmental expenditure trends, revenue shortfalls beyond the control of the Departments, and increases in employee-related costs. Corrective steps have been taken to bring the General Fund within balance and, with the recommended use of oil revenue, FY 11 will end the year structurally balanced. As the remainder of FY 11 plays out, the Department of Financial Management will be closely monitoring the General Fund expense and revenue actuals.
TIMING CONSIDERATIONS
City Council action on this matter is not time critical.
SUGGESTED ACTION
Approve recommendation.
Respectfully Submitted,
DAVID NAKAMOTO
ACTING DIRECTOR OF FINANCIAL MANAGEMENT
APPROVED:
PATRICK H. WEST
CITY MANAGER