TITLE
Recommendation to receive and file the Fiscal Year 2009 First Quarter Budget Performance Report. (Citywide)
DISCUSSION
This report provides an update on the City's Fiscal Year 2009 (FY 09) budget and operational performance through December 31, 2008. The report covers a broad spectrum of financial information for all funds and departments with multi-year comparisons, charts and graphs to provide a clear picture of the City's financial situation. While the focus of the financial report is the General Fund, exceptional performance (both positive and negative) in other funds is highlighted where applicable.
Summary
The total Adjusted City Budget for all funds as of December 31, 2008 was $3.51 billion.
With 25 percent of the year complete, expenditure performance in all funds is at approximately 15.1 percent year-to-date. The total adjusted General Fund expenditure budget was $404.7 million, with budgeted revenue of $405.1 million. After the first three months of the fiscal year, based on current appropriation authority, overall expenditures are on target, but revenues will fall well short of budgeted expectations. With 25 percent of the fiscal year complete, approximately 22.1 percent of anticipated General Fund revenue has been collected.
FY 09 General Fund Revenue
Given large quarterly payments and proceeds from the annual TRAN issued by the City, received early in the fiscal year, year-to-date General Fund revenue appears close to the expected performance after the first quarter of the year at $89.6 million, or approximately 22.1 percent of total budget. However, it is expected that Sales & Use Tax, Vehicle License Fees, Business License Taxes, Transient Occupancy Tax, Interest-Pooled Cash, Real Property Transfer Tax, Upland's Oil and other economically sensitive revenues will come in well below budget due to the impact of the current recession. Foreclosures, delinquent payments, and property reassessments due to the decline in the real estate market are expected to negatively impact Secured Property Tax payments growth over the previous year, hence collections are expected to come in slightly under budget. Current assessments of year-to-date Secured Property Tax collections reveal that the FY 09 budget, with its conservative growth projection over FY 08 performance, may have compensated for the large part of the impact of the initial declines in the real estate market for this fiscal year, with the increased impacts likely to be experienced later in the fiscal year or in FY 10.
Staff is vigilantly monitoring revenue performance on a weekly basis and modifying 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's 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 December 31,2008 for selected General Fund revenues.
A summary of the top 40 General Fund revenues is included in Attachment A. Exhibit 1 below shows the City's top 10 General Fund revenue sources in FY 09 as a percentage of total year-to-date General Fund revenue.
FY 09 Revenue by Department
Attachment 8 provides a breakdown of General Fund revenue performance by department.
Many of the departmental variances are captured in the footnotes to this attachment. The Financial Management Department realized the highest level of General Fund revenue to date of all operating departments at $6.6 million, followed by the Police Department at $3.5 million and the Department of Public Works at $2.5 million. As noted earlier, despite 22 percent of revenue collected, due mostly to payments received during the first quarter, actual revenues are trailing well below budget.
FY 09 General Fund Expenditures
The Adopted General Fund budget for FY 09 was $403.9 million. As of December 31,2008, the total adjusted General Fund budget was $404.7 million, due to carry-over for prior year encumbrances. The overall year-to-date General Fund spending is $92.8 million, or 22.9 percent of budget, with 25 percent of the Fiscal Year complete. This represents an on-going trend from FY 08 as a result of cost savings measures implemented by the City Manager early in fiscal year 2008. On December 9, 2008, the City Manager issued departmentspecific savings targets, instituted a hard hiring freeze, reduced limits on Department contracting authority and deferred State-funded Capital projects to ensure the City ends the year in balance.
FY 09 General Fund Expenditures by Department
Though there were few expenditure performance exceptions at the department level, those worth noting include:
• The Police Department is at 22.4 percent of budget. The department has made a concerted effort to limit overtime expenses and has currently spent 30.2 percent or $2.6 million of its overtime budget, reflecting higher salaries. This same time last year, the department had spent 40.8 percent or $2.3 million of its budgeted overtime. For FY 09, the Police Department overtime budget was increased by $3.1 million to more appropriately reflect the level of resources required.
Exhibit 2 shows the City's top 10 General Fund year-to-date expenditures by department. In aggregate, the Top 10 represents $88.6 million or 95.5 percent of General Fund expenditures. The majority of General Fund expenditures comprise public safety services.
Of the $92.8 million expended to date, the Police Department (49 percent) and Fire Department (20 percent) comprise 69 percent of the total General Fund year-to-date expenditures, compared to 66 percent of the budget at the same time last year.
Attachment C provides a listing of all departments' year-to-date General Fund expenditure performance.
FY 09 Expenditure Performance - All Funds
The City's Adopted FY 09 Budget for all funds includes $3.1 billion of annual funds, carryover (multi-year grants and capital projects funds) of $386.4 million, prior year encumbrances (goods and services ordered in FY 08 but received in FY 09), and City Council approved budget amendments. Combined, the total Adjusted City Budget as of December 31, 2008 was $3.51 billion. Please see Attachment D for a breakdown of Citywide expenditures by fund.
While it is not expected that department or fund expenditures will occur equally throughout• the fiscal year or be fully expended in the current fiscal year due to the inclusion of multiyear projects, monitoring the rate of expenditure is a helpful indicator of resource management. With 25 percent of the year complete, expenditure performance in all funds is at approximately 15.1 percent year-to-date. This includes the Harbor and Redevelopment Funds currently performing at 8.2 percent and 17.3 percent, respectively.
Other Significant Issues
State Budqet Impacts
Long Beach's financial outlook is influenced by multiple factors, including national and local economic trends. The State of California is in the midst of addressing its serious cashflow and budgetary issues which have already affected funding intended for local government.
The previous modest growth experienced in personal income just a year ago has been replaced with unemployment reaching 10.1 percent in the state largely due to a loss in jobs in the housing and financial sectors. During the remainder of FY 09, California may continue to experience declines in home sales and new construction and an increase in the number of foreclosures resulting from the national and regional housing slump related to the subprime mortgage crisis.
Despite the protections that local governments were afforded in the Proposition 1A constitutional amendment, the State still has the ability to borrow property tax, gasoline tax and State grant funds, which will impact Long Beach's key General Fund and grant revenues in FY 09 and beyond. Not only has the State stated it will delay gasoline tax payments, and other AB 55 Loan Disbursements Funds, but it may still borrow gasoline tax funds and repay the City over three years. While these revenue sources can only be borrowed twice in ten years and must be paid back with interest within three years, even the temporary loss of these revenue streams would significantly impact the City's ability to provide core services. Redevelopment funds are not protected by Proposition 1A provisions and $6 million was shifted to the State in FY 09, thereby directing yet another revenue source away from the City. The. Department of Financial Management is closely monitoring the implementation of the State budget, as several proposals requiring voter approval are necessary to balance the budget.
Proposition H Funding
On May 1, 2007, the voters approved a special tax of 25 cents on every barrel of oil produced to be used specifically for police officers and firefighters known as the Police and Fire Public Safety Oil Production Tax (Prop H). In FY 09, $3.8 million in expected revenue supported an equal amount of new appropriation in the Adopted Budget. Given the precipitous decline in the price of oil during the first quarter of the fiscal year, the operators of Long Beach's oil fields have implemented plans to scale back their oil production activities.
While the first quarter production exceeded expectations, production declines are expected starting in the second quarter, decreasing Prop H funding by $191,000 in FY 09. The City Manager is working with the Police and Fire Departments to assess the operational impacts of this revenue decline and develop options to keep the fund in balance.
FY 09 General Fund Savinqs Tarqets
In light of the economic challenges and State budget issues, the City has implemented tighter fiscal controls to manage department budgets and ensure that the General Fund remains in balance. On December 9, 2008, the City Manager transmitted FY 09 General Fund operational Savings Targets to departments including some related funds, ranging from 1-3 percent, to generate $6 million in savings for FY 09. This is in addition to the 2.25 percent Attrition Savings built into each department's adopted budget. Realization of these savings is essential to maintaining fiscal balance and mitigating the possible impacts of the State's fiscal emergency described above, among other factors.
Since those targets were assigned, the General Fund revenue outlook has worsened.
Current estimates to close indicate a $19.2 million loss of General Fund revenue for FY 09.
Given the worsening fiscal condition, and the negative budgetary outlook for FY 10 and beyond, the City Manager has begun a more aggressive budget balancing approach, as discussed with the City Council at the March 3, 2009 Special Meeting on the budget.
The new approach increased the department savings targets to 2-6 percent, or $12 million.
The program and service reductions made to achieve this target must be structural in nature. While one-time savings are also welcome, it is important that the City begin to address its multi-year budgetary shortfalls. With only seven months of the fiscal year remaining at the time of this writing, it is expected that approximately $9 million will be saved in FY 09. In addition, the $12 million in structural budget reductions will apply to the FY 10/FY 11 budget reductions required to adopt a structurally balanced budget.
Employee Furlough or Alternate Savings
Another critical budget balancing strategy is to work with employee unions to reduce the cost of employee compensation and benefits. The City Manager has the authority to implement an employee furlough; however, he has chosen to engage in a dialogue with each union to determine if savings equaling a 5-day (40-hour) furlough can be generated in FY 09 through alternate approaches. The City Manager expects all employee unions and employees to participate, generating $4 million in General Fund savings for FY 09. The Director of Human Resources will conclude meetings with the unions in the short-term. The City Council will be kept informed of the options and implementation.
Other FY 09 Budqet Balancing Strategies
As approved by the City Council, all unbudgeted one-time monies will be deposited into a Budget Stabilization Fund (BSF). To date, the $6 million Sempra settlement and $3 million of FY 08 ending fund balance have been deposited into the BSF. The BSF will be maintained to the greatest extent possible to address contingencies that may arise during the fiscal year.
On December 9, 2008 the City Manager instituted a hard hiring freeze. Departments are asked to limit their hiring to essential personnel for core services, ensuring that delivery of life and safety services are not impacted. The City has also begun to limit the number of new, outside hires, as appropriate, to maximize existing employees as the organization prepares for budget reductions.
In addition to the enhanced oversight of City purchases, departmental authority to issue contracts without City Manager approval has been lowered by 50 percent. City Manager approval is now required for purchases above $25,000 where $50,000 was the previous threshold.
Conclusion
Numerous financial constraints continue to challenge the City's ability to end the fiscal year in balance, especially in the General Fund. These include revenues impacted by the slowing national and regional economy, forthcoming solutions to the State's current year budget deficit, and certain departmental expenditure trends that will exceed the adopted budget. These challenges make it imperative that we maintain a firm position of fiscal restraint. Realigning resources to provide core services will take much sacrifice on the part of the community and workforce, as substantial current year and future service reductions will have a direct impact on City employees as well as the community members accustomed to a certain level of public services from the City.
TIMING CONSIDERATIONS
City Council action on this matter is not time critical.
FISCAL IMPACT
There is no fiscal impact associated with the recommended action.
SUGGESTED ACTION
Approve recommendation.
Respectfully Submitted,
LORI ANN FARRELL
DIRECTOR OF FINANCIAL MANAGEMENT/CFO
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APPROVED: |
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PATRICK H. WEST |
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CITY MANAGER |