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CITY COUNCIL AGENDA ITEM NO. 14

Meeting Date: January 22, 2008

Subject/Title: Approve a resolution amending the 2007/08 Operating Budget and approving the recommended mid-year budget adjustments

Submitted by: Kerry Breen, Business Services Manager

Approved by: Pam Ehler, Director of Finance and Information Systems

RECOMMENDATION
Approve a resolution amending the 2007/08 Operating Budget and approving the recommended mid-year budget adjustments.

PREVIOUS ACTION
On June 22, 2007 the City Council approved Resolution No. 2007-150 adopting the 2007/08-2008/09 Operating Budget for the City of Brentwood.

BACKGROUND
The City operates on a two year budget cycle. Every two years City Council approves an individual operating budget for each of the coming two fiscal years. Our current two year budget cycle covers fiscal years 2007/08 and 2008/09.

The City of Brentwood, like much of the nation, is experiencing a severe downturn in both residential development and property valuations. Staff began preparing for a development slowdown several years ago with a series of budget initiatives including systematically moving employees funded by development fees to non-development funding sources and by putting a virtual stop on the hiring of new positions in the General Fund. Measures such as these were intended to offset a controlled decline in development, where permit issuance would slow to 400-500 per year. Unfortunately, the severity and immediacy of the downturn were not expected. The City has gone from issuing over 1,450 permits in 2004/05 to approximately 100 permits this year. The sudden and dramatic loss of revenue has prompted staff to recommend a substantial reduction in both the City’s revenue and expense budgets. This is necessary in order to continue operating in a fiscally responsible manner where operational expenditures are funded through current revenues.

The State of California is also experiencing difficulty with its budget. Unfortunately for local governments, the State has a history of balancing their budgets through takeaways and “loans” from cities and counties. On January 10th, the Governor declared a fiscal emergency to enact mid year 2007/08 spending cuts and simultaneously released his 2008/09 proposed State budget.

To fill the gap in the current fiscal year, the Governor will sell the remaining $3.3 billion of economic recovery bonds meaning the sunset of the “triple flip” will be pushed back to 2012 or later. This will not have a significant budgetary impact as we have been living with the triple flip for several years now. The two main impacts from the triple flip are a loss of investment income and cash flow concerns as the State continues to delay the remittance of our sales tax by several months. The Governor is also seeking to delay payment of approximately $500 million in gas tax revenues during the April – August 2008 timeframe. The City’s 2007/08 budget for this revenue source is $929,584 – however the details of this proposal have yet to be worked out so we are unable to provide the total impact for the City at this time.

To address the gap for the 2008/09 fiscal year, the Governor has proposed cutting State Agency funding by 10%. While we are relieved that the Governor did not propose taking property taxes under Proposition 1A or suggest cutting transportation funds under Proposition 42, there are some cuts which will impact the City. Fortunately, the impact of these cuts does not appear to be as significant as the impacts of cuts during previous budget crunches. At this point, the Governor’s proposed reduction in booking fees and COPS grant funding are projected to cost the City $25,000 - $50,000 next year. As discussed previously, the delay of gas tax revenue payments will impact the City as well but we are not able to provide a fiscal impact at this time. The Budget negotiations at the State level will continue and there could be additional proposals that will impact the City. Staff will keep the City Council informed of all developments from the State as updates become available.

Successfully guiding the City through this difficult economic time will not be easy. Difficult decisions will have to be made and further reductions may be required. City staff remains committed to operating in a fiscally sustainable and responsible manner and to presenting a balanced budget, meaning revenues meet or exceed operational expenditures.

General Fund

Revenues

The largest source of revenue for the General Fund is property taxes. Historically the City has enjoyed 20-25% annual increases in assessed valuation which was attributable to both rising residential values and the added impact of vacant raw land being converted into homes and commercial centers. Staff believes that our existing property tax projections are only slightly high and recommends reducing this revenue source by $150,000, a decrease of 1.6% from our original budget.

Sales tax revenues are the General Fund’s second largest source of revenue. A lack of construction spending in the City, decreases in home values which restrict the use of home equity lines and mortgage refinancing to help fund large purchases, and small population increases have caused sales tax revenues to suffer. The slowdown in sales tax growth has been dramatic – we have fallen from annual increases of 20-25% to 3% despite the opening of major retailers in the City. This has led us to recommend a decrease of $2 million in sales tax revenue.

Real Property Transfer tax is received by the City when homes are sold in the City. The slowdown in the residential market has resulted in lower property values and significantly fewer real estate transactions. The number of units sold in Brentwood has fallen substantially over the past few years, and at this point we recommend reducing our Real Property Transfer Tax revenue by $200,000.

Building, Planning, and Engineering fees, which are development driven revenues, are yet another revenue source suffering from the residential slowdown. In 2005/06 the City received $8.8 million from these three sources. Our original 2007/08 budget called for $5.4 million which we now feel is not attainable. We recommend a reduction of $2.485 million in these areas.

There are a few additional reductions to the budgeted General Fund revenues. Bypass Authority Administration fees are projected to come in $150,000 under budget since the City is reimbursed on a per unit basis for the collection and administration of the Bypass Authority pass-through money. We are also forecasting the following: 1) $115,000 reduction in Assessment District Administration due to assessment district areas not coming on line as originally projected, 2) a $50,000 reduction in rental income due to a modified agreement with Precision Cabinets, who negotiated lower lease payments for an extended period of time, and 3) a $50,000 reduction in transient occupancy tax as the opening of the new hotel will not be in time to generate revenue this fiscal year.

The Emergency Preparedness fund was established several years ago with a transfer of $5 million of General Fund reserves. Since that time, the account balance has grown to $5.9 million through interest earnings. Staff recommends that the interest earned in this fund during 2007/08 be transferred back to the original Fund which contributed the cash. This would mean a net revenue increase to the General Fund of $200,000.

In total, these revenue reductions and interest income increases net to a total revenue decrease of $5,000,000 for the General Fund.

Expenses

City staff recognizes the need for operational expenses to be fully funded by current revenues. As such, staff investigated all potential sources for expense reductions to ensure that our revenue reductions would not lead to an operational deficit. Every department analyzed their budget for expenses that could be reduced or postponed. The following proposed reductions represent the collaborative effort of every City Department.

• Salary and Benefit expense reduction of $1,023,923. This savings is achieved primarily through having budgeted positions remain unfilled during the year.

• General Office Expense reduction of $263,690. This savings is due to a lowered depletion rate of supplies with the development downturn as well as through staff’s efforts to reduce purchases to a minimum threshold.

• Equipment, Maintenance, and Rentals reduction of $106,859. Staff is able to recommend this reduction as we have had only minimal maintenance and repairs expenses for the first half of the fiscal year.

• Special and Contractual Services reduction of $948,873. Reductions in special services and contractual services are generally one of the first sources of savings when budgeting is tight. While there are some contractual obligations which the City must continue to fund (i.e. the annual audit), the slowdown in development allows either the postponement of certain expenses or the elimination of other expenses as staff brings some of the work in house.

• Travel and Training reduction of $318,098. The City has historically been extremely generous and proactive in offering top quality training and conference opportunities to staff. This reduction does not eliminate training – it balances what the City can realistically afford and the ongoing educational needs of City staff.

• Legal expense reduction of $180,000. With the addition of the new assistant City Attorney, staff has been able to handle a greater amount of legal matters in house.

• Capital Purchases reduction of $350,000. Staff will be delaying purchasing fixed assets and vehicles when viable and appropriate.

Staff was also able to find additional areas of expense savings to help offset the reduction in revenues. The primary source of savings will be from PERS and Worker’s Compensation costs. The Insurance Internal Service fund receives the savings realized from PERS and Worker’s Compensation. In effect, this transfers the savings of having unfilled positions and prepaying PERS to the Insurance Fund. Due to the size of the fund and the need to reduce General Fund expenses, the savings from PERS and Worker’s Compensation will not be transferred in this year which is forecasted to save the General Fund $1,025,000 this fiscal year. An additional savings of $150,000 will be achieved due to a liability refund from our insurance company which will be credited back to the appropriate funds.

The Insurance Fund currently has a $5.8 million balance and earns significant interest every year. Staff recommends that the interest earned in this fund also be transferred back to the original Funds that contributed to the cash reserves. Prorating the interest income back based on this calculation would mean a net revenue increase to the General Fund of $160,000.

Another source of savings will come through our Vehicle Replacement, Building Replacement, and Facilities Maintenance Internal Service Funds. We are able to reduce the General Fund Transfer into these funds by a combined total of $485,480. This reduction in funding in the Internal Service Funds will be offset by expenditure savings and, in the case of the Facilities Maintenance Fund which has no need to carry a fund balance, use of existing fund balances.

In total, we are suggesting a reduction in appropriations in the General Fund in the amount of $5,011,923.

Fund Balances/Reserves

The City continues to have healthy reserves. While revenues are projected to exceed operational expenses, the use of reserves will be required to pay for $35,000 for signage to assist motorists with locating Brentwood’s downtown area. In addition, the Brentwood Center (Los Medanos College and Business and Technology Center) has historically required a subsidy from the General Fund. The existing 2007/08 Operating Budget included a subsidy of $200,000; however, staff now recommends that this subsidy be increased by $260,430 for a total subsidy of $460,430.

Staff projects a fund balance of $23.5 million at June 30, 2008. Of this amount, $11 million is designated as follows:

Compensated Absences $1.3 Million
Village Community Resource Center $.6 Million
Pavement Management $1.5 Million
Civic Center $6 Million
Street Lights $.2 Million
City Park $1.4 Million

The remaining $12.5 million is considered undesignated reserves. This money can be used to help the City through economic uncertainties, local disasters, contingencies for unseen operating or capital needs, and is also necessary for cash flow requirements. The City’s Budget and Fiscal Policy require us to strive to maintain our undesignated reserves at 30% of the annual appropriations in the General Fund. After the mid year budget amendments the City will have General Fund appropriations of $41,535,944. The City’s undesignated reserves of $12.5 million represent 30% of our budgeted appropriations.


Affordable Housing In-Lieu

The Affordable Housing In-Lieu Fund accounts for development fees collected for affordable housing. The monies are used to ensure 10% of all new dwellings are affordable for low and very low income households. This fund has also been impacted by the downturn in development. Staff recommends reducing the development impact fee revenue by $3,241,591 and the contributions to other agencies expenses by $2,000,000. After these budget changes, this fund is projected to have a fund balance of $7.2 million on June 30, 2008.

Capital Improvement Program Administration

The Capital Improvement Program Administration accounts for the administrative expenses for the operation of the Capital Improvement Program. The slowdown in development has brought a severe decline in the development fees used to run the program. Staff is recommending a reduction of $118,500 in supplies and services, $35,000 in capital outlay, and $62,500 in personnel budged expenses. It is important that this fund operate solely from development revenues and not require subsidization by the General Fund. This fund does not operate with a fund balance as transfers are made to cover current expenses.

Agriculture Administration

The Agriculture Administration receives 20% of the fees collected for Agriculture Preservation and accounts for the administrative expenses for the operation of the Agriculture Land Fund. Staff is recommending a reduction of $16,000 in revenue and $49,750 in expenses. After these budget changes, this fund is projected to have a fund balance of $.9 million on June 30, 2008.

Agriculture Land

The Agriculture Land Fund accounts for 80% of the fees collected for Agriculture Preservation. Staff is recommending a reduction of $95,000 in revenue and $894,500 in expenses. After these budget changes, this fund is projected to have a fund balance of $7.5 million on June 30, 2008.

City Rentals Enterprise

The City Rentals accounts for the activities of the Brentwood Technology Center. This fund has struggled to operate independently and has always required a subsidy from the General Fund. Staff is recommending a reduction of revenue of $35,167 and a reduction of expenses of $130,407. After these budget changes, this fund is projected to have a net assets balance of $.1 million on June 30, 2008.

Housing Enterprise

The Housing Enterprise accounts for the administrative and operational expenses for the Housing Division and Housing rental stock. This fund requires a reduction in budgeted development impact fee revenues of $876,102 and a reduction of operational revenue of $17,672. Operational expense reductions of $25,090 are also being recommended. After these budget changes, this fund is projected to have a net assets balance of $2.5 million on June 30, 2008.

Solid Waste Enterprise

Staff is requesting offsetting increases to the Solid Waste Enterprise. Solid Waste received $24,855 in funding from the State of California Department of Conservation which must be spent on recycled beverage containers. Staff is requesting a $24,855 increase in both revenues and expenses to account for this funding. The net assets of the Solid Waste Enterprise Fund are projected to be $7.6 million on June 30, 2008 (total includes infrastructure).

Water Enterprise

Staff is requesting an increase in the purchase water budget in the amount of $547,314. This is necessary due to the extended drought in Northern California.

In addition, staff is recommending the restructuring of debt service payments. The restructuring of the debt will require an increase of $302,765 in the budgeted debt service expenses for the Fund. After these budget changes, the fund balance of the Water Enterprise Fund is projected to be $63.4 million as of June 30, 2008 (total includes infrastructure).

Wastewater Enterprise

There are no budget amendments recommended by staff for the Wastewater Enterprise Fund. The fund balance of the Wastewater Enterprise Fund is projected to be $62.8 million as of June 30, 2008 (total includes infrastructure).

Lighting and Landscaping Districts

The Lighting and Landscaping Districts are requesting an increase of $6,800 to purchase tamper proof boxes to help protect copper wiring from theft. The City experienced a $14,000 loss earlier this year due to copper wire theft. The total cost of the tamper proof boxes is $43,550; however the Lighting and Landscaping Districts are only responsible for $6,800 of this. The remainder will be paid by the City Wide Park District and Parks and Recreation, who will absorb this cost into their current operation budgets.

Tuition Reimbursement

The Tuition Reimbursement Fund provides a source of funding for expenditures relating to continuing education. Staff has determined that an additional $10,000 in budgeted expenditures are necessary to avoid declining reimbursement requests. The Tuition Reimbursement Fund has sufficient fund balance to absorb this cost without increasing charges to the rest of the City’s Funds.

Emergency Preparedness

The Emergency Preparedness Fund provides a source of funding in the event of a City emergency. Staff is recommending lowering the interest income budget to $0 to reflect that the General Fund will receive the interest for this fiscal year. After this change, the Emergency Preparedness Fund is expected to have a Fund Balance of $5.9 million at June 30, 2008.

Vehicle Replacement

The Vehicle Replacement Fund provides a source of funding for the systematic replacement of City Vehicles. Staff is recommending lowering the transfers in the budget by $419,752 to reflect that there are sufficient reserves and accumulated savings and interest income to safely allow for a reduction. After this change, the Vehicle Replacement Fund is expected to have a net assets balance of $11.7 million at June 30, 2008.



Building Replacement

The Building Replacement Fund provides a source of funding for the major repairs and replacement of the City’s buildings. The new City Hall will provide two major short term benefits to this fund. First, we will attempt to defer all non-critical repairs on the existing buildings as they will soon be torn down, and second, the new City Hall should not require a great deal of repairs during the first several years of it’s life giving staff the time to begin building up reserves. Staff recommends that the fund balance be maintained at the current level of $1 million. This allows for a reduction of $235,001 in charges made to the other funds while allowing the fund to have a $1 million fund balance at June 30, 2008.

Facilities Maintenance

The Facilities Maintenance Fund provides a source of funding for the custodial and janitorial needs of the City. Staff is recommending a reduction of $70,000 for supplies and services and a reduction of $30,000 in personnel and benefits expenses. In addition, staff is recommending a reduction in transfers in from other funds in the amount of $100,000. The expense reduction is attributable to having lower contractual services costs and to having budgeted positions remain unfilled. These savings can then be passed on to the users of the fund resulting in a $100,000 reduction in transfers in. This change will not impact the anticipated reserves of the Facilities Maintenance Fund which is expected to have a Fund Balance of approximately $45,000 at June 30, 2008.

Insurance Fund

The Insurance Fund provides a source of funding for the retiree medical and insurance costs of the City. The fund was also established to accumulate PERS and Workers Compensation savings. The savings could then potentially be used to help start a trust fund for future retiree medical costs. This fund has accumulated a $5.8 million balance and staff is recommending suspending this year’s transfer of PERS and Worker’s Compensation savings. Staff also recommends that the interest earned in this fund be transferred back to the original Funds that contributed to the cash reserves. This will result in a budgeted revenue reduction of $1,000,000 for the PERS and Workers Compensation savings and a $225,000 reduction in interest income. Finally, a revenue transfers in reduction of $215,000 is recommended as we will rebate a liability refund from our insurance company back to the appropriate funds. The fund balance of the Insurance Fund is expected to be $5.4 million at June 30, 2008.

FISCAL IMPACT
The budget amendments proposed would be consistent with the City’s belief that current revenues should cover current operational expenses. The Finance Department is currently working on updating the 10-year fiscal model to incorporate the development slowdown and will bring this to Council within the next few months. Staff will also provide additional updates on State budget developments as they become available.

Attachments
Resolution
Exhibit “A”







RESOLUTION NO.

A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF BRENTWOOD TO APPROVE AMENDING THE 2007/08 OPERATING BUDGET AND APPROVING THE RECOMMENDED MID-YEAR BUDGET ADJUSTMENTS

WHEREAS, on June 22, 2007 the City Council approved Resolution No. 2007-150 adopting the 2007/08-2008/09 Operating Budget for the City of Brentwood; and

WHEREAS, the City of Brentwood, like much of the nation, is experiencing a severe downturn in both residential development and property valuations; and

WHEREAS, the City has gone from issuing over 1,450 permits in 2004/05 to approximately 100 permits this year; and

WHEREAS, budgeted revenue reductions total $5,000,000 for the General Fund; and

WHEREAS, budgeted appropriation reductions for operations total $5,011,923 for the General Fund; and

WHEREAS, budgeted appropriation increases for non-operations total $260,430 for the General Fund; and

WHEREAS, staff recommends reducing the development impact fee revenue by $3,241,591 and the contributions to other agencies expenses by $2,000,000 in the Affordable Housing In-Lieu Fund; and

WHEREAS, staff recommends a reduction of $118,500 in supplies and services, $35,000 in capital outlay, and $62,500 in personnel costs in the Capital Improvement Program Administration Fund; and

WHEREAS, staff recommends a reduction of $16,000 in revenue and $49,750 in expenses in the Agriculture Administration Fund; and

WHEREAS, staff recommends a reduction of $95,000 in revenue and $894,500 in expenses in the Agriculture Land Fund; and

WHEREAS, staff recommends a reduction of revenue of $35,167 and a reduction of expenses of $130,407 in the City Rentals Enterprise Fund; and

WHEREAS, staff recommends a reduction in budgeted development impact fee revenues of $876,102, a reduction of operational revenue of $17,672, and a reduction in operational expenses of $25,090 in the Housing Enterprise; and

WHEREAS, the Solid Waste Enterprise Fund received $24,855 in funding for the State of California Department of Conservation which must be spent on recycled beverage containers so staff is requesting a $24,855 increase in both revenues and expenses to account for this funding; and

WHEREAS, staff is requesting an increase in the purchase water budget in the amount of $547,314 and an increase in the debt service budget in the amount of $302,765 for the Water Enterprise Fund; and

WHEREAS, staff is recommending an increase of $6,800 in the Lighting and Landscaping District’s expense budget to purchase tamper proof boxes to help protect copper wiring from theft; and

WHEREAS, staff is requesting an additional $10,000 in budgeted expenditures in the Tuition Reimbursement Fund in order to not have to begin declining reimbursement requests; and

WHEREAS, staff is recommending lowering the interest income budget to $0 in the Emergency Preparedness Fund; and

WHEREAS, staff is recommending lowering the transfers in budget in the Vehicle Replacement Fund by $419,752 to reflect that there are sufficient reserves and accumulated savings and interest income to allow for the reduction; and

WHEREAS, staff is recommending lowering the transfers in budget in the Building Replacement Fund by $235,001; and

WHEREAS, staff is recommending a reduction of $70,000 for supplies and services, a reduction of $30,000 in personnel and benefits expenses, and a reduction of transfers in from other funds in the amount of $100,000 for the Facilities Maintenance Fund; and

WHEREAS, staff recommends a budgeted revenue reduction of $1,000,000 for the PERS and Workers Compensation savings, a $225,000 reduction in interest income, and a $215,000 reduction in revenue transfers in the Insurance Fund; and

WHEREAS, the City Council of the City of Brentwood has reviewed the 2007/08 Operating Budget Amendments.

NOW, THEREFORE BE IT RESOLVED that the City Council of the City of Brentwood hereby adopts the appropriations and revenue adjustments to the 2007/08 Operating Budget for the City of Brentwood as further specified in the attached Exhibit “A” which is incorporated herein by reference.

PASSED, APPROVED AND ADOPTED by the City Council of the City of Brentwood at a regular meeting held on the January 22, 2008 by the following vote:

Exhibit “A”

Appropriations and Revenue Adjustments to the 2007/08 Operating Budget for the City of Brentwood:

2007/08 General Fund Revenue
Decrease $150,000 for Property Taxes
Decrease $2,000,000 for Sales Tax
Decrease $200,000 for Real Property Transfer Tax
Decrease $2,485,000 for Building, Planning, and Engineering Fees
Decrease $150,000 for Bypass Authority Administration Fees
Decrease $115,000 for Assessment District Administration
Decrease $50,000 for Rental Income
Decrease $50,000 for Transient Occupancy Tax
Increase $200,000 for Interest Income

2007/08 General Fund Expenses
Decrease $1,023,923 for Salaries and Benefits
Decrease $263,690 for General Office Expense
Decrease $106,859 for Equipment, Maintenance, and Rental Expense
Decrease $948,873 for Special and Contractual Services
Decrease $318,098 for Travel and Training
Decrease $180,000 for Legal
Decrease $350,000 for Capital Purchases
Decrease $1,025,000 for PERS and Worker’s Comp Savings
Decrease $795,480 in transfers to the Internal Service Funds
Increase $260,430 in transfer to City Rentals Enterprise (Non-Operational)

2007/08 Other Funds Revenues
Decrease $3,241,591 in the Affordable Housing In-Lieu Fund
Decrease of $16,000 in the Agriculture Administration Fund
Decrease of $95,000 in the Agriculture Land Fund
Decrease of $35,167 in the City Rentals Enterprise Fund
Decrease of $893,774 in the Housing Enterprise Fund
Increase of $24,855 in the Solid Waste Enterprise Fund
Decrease of $200,000 in the Emergency Preparedness Fund
Decrease of $419,752 in the Vehicle Replacement Fund
Decrease of $235,001 in the Building Replacement Fund
Decrease of $100,000 in the Facilities Maintenance Fund
Decrease of $1,440,000 in the Insurance Fund

2007/08 Other Funds Expenses
Decrease $2,000,000 in the Affordable Housing In-Lieu Fund
Decrease of $216,000 in the Capital Improvement Program Administration Fund
Decrease of $49,750 in the Agriculture Administration Fund
Decrease of $894,500 in the Agriculture Land Fund
Decrease of $130,407 in the City Rentals Enterprise Fund
Decrease of $25,090 in the Housing Enterprise Fund
Increase of $24,855 in the Solid Waste Enterprise Fund
Increase of $850,079 in the Water Enterprise Fund
Increase of $6,800 in the Lighting and Landscaping Districts Fund
Increase of $10,000 in the Tuition Reimbursement Fund
Decrease of $100,000 in the Facilities Maintenance Fund
 
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