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HomeMy WebLinkAboutD-2 Staff Report - Follow-up Fiscal Sustainability AssessmentSCHEDULED ITEM D-2 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL VIA: SERGIO GONZALEZ, CITY MANAGER FROM: TALIKA M. JOHNSON, DIRECTOR OF ADMINISTRATIVE SERVICES DATE: NOVEMBER 4, 2019 SUBJECT: FOLLOW-UP TO FISCAL SUSTAINABILITY ASSESSMENT BACKGROUND: Staff has performed an ongoing Fiscal Sustainability Assessment in order to explore ways to enhance revenues and cut costs to address projected budget deficits ranging from $2.1 to $3.3 million annually over the next five years beginning in Fiscal Year 2019/20, and has provided regular updates to the Council on the progress of the Assessment. A critical component in making recommendations to Council on how to best address the forecasted deficits includes engaging the Community to solicit feedback on their service needs and priorities. This report is a follow-up of the budget sustainability efforts thus far and a report on the current results of the Community responses. Staff is seeking Council’s direction to return at future meetings to request authorization with recommended actions based on assessment performed and feedback from Azusa Residents. RECOMMENDATIONS: Staff recommends that the City Council take the following actions: 1)Direct Staff to return to Council on November 18, 2019 to recommend a future local revenue option for voter consideration; and 2)Direct Staff to return to Council on November 18, 2019 with a resolution to update the percentage of tax assessed on offsite multiuser hazardous waste facilities in the City as permitted by Azusa Municipal Code, Sec. 18-707. - Offsite, multiuser hazardous waste facilities tax; and APPROVED CITY COUNCIL 11/4/2019 Follow-up to Fiscal Sustainability Assessment November 4, 2019 Page 2 of 11 3) Direct Staff to return to Council in the near future at a special study session to receive direction on a plan for reducing long-term retirement liabilities. ANALYSIS: General Fund budget forecasts project annual deficits ranging from $2.1 to $3.3 million over the next five years. While city management regularly seeks ways to streamline City operations by recommending efficiency opportunities and cost savings measures where possible without negatively impacting services to the Community or greatly disrupting the City’s workforce, to address the projected shortfalls, Staff performed an in depth Fiscal Sustainability Assessment in order to ensure the City is: capturing all revenues per contractual agreements, maximizing revenue potential through contracts and franchise agreements, and running its operations as lean as possible without negatively impacting services to Azusa residents and businesses. Part of the ongoing Assessment included Community engagement in order to receive feedback on City services before recommending significant budget cuts to help address the shortfalls, which ultimately means reduction in services, and also included exploring extraordinary revenue enhancements in the event Community polling results show service reductions are not highly desirable. While the Fiscal Sustainability Assessment results thus far recommend some cost cutting efficiencies and other revenue enhancement opportunities via contract/franchise agreement modifications, they also indicate that extraordinary measures are necessary to mitigate the projected budget shortfalls and to maintain sufficient cash reserves in the City’s General Fund in order to maintain the top service priorities identified in the Community engagement process. GENERAL FUND FINANCIAL OVERVIEW The General Fund currently has a $46.9 million operating budget. Over the next five years it’s estimated the budget will grow to $48.6 million. Given the City’s current revenue base, beginning in Fiscal Year (FY) 2019/20 and over the next five years, annual budget deficits are projected ranging from $2.1 million to $3.3 million. While the City has a diverse revenue mix, expenditures are outpacing revenues. Major budget considerations include: • Sixty percent (60%) of the budget is personnel related costs • Over fifty-eight percent (58%) of the total budget is for police and fire safety services • Police budget alone consists of eighty-seven percent (87%) staffing costs • Major non-personnel related costs make-up nearly thirty-one percent (31%) of the budget, which includes over 12% for the fire safety contract The City’s budget policy requires a balanced budget, meaning expenditures should not exceed revenues. Deficit spending means the City must tap into reserves to bridge revenue shortfalls. In addition to a budget policy, the City has a General Fund Reserve Policy which is used as a benchmark tool to assess financial performance. Beginning with the current FY 2019/20 budget Follow-up to Fiscal Sustainability Assessment November 4, 2019 Page 3 of 11 year, reserves are projected to be $580,000 below the target of $10.0 million without an increase to revenues and/or decrease costs. A summary of the forecasted budget results and estimated reserve balances is provided in the following table: 5-Year Budget Forecast and Reserves Analysis The above forecasts assume status quo operations and do not take into account unforeseen events or expenses that may place further strain on the City’s budget. In order to maintain targeted reserve levels in accordance with the adopted policy, either revenues will need to be increased or significant service cuts will need to be considered. Without additional revenue and/or cost cutting measures, the above predicts results in depletion of reserves by end of FY 2023/24. There are three options to address the forecasted budget deficits: 1) Use reserves to cover projected deficits 2) Make budget cuts by reducing services to the community 3) Enhance revenues, including consideration of local funding options In an effort to make recommendations to Council, Staff has performed an ongoing Fiscal Sustainability Assessment in order to explore ways to enhance revenues and cut costs to address projected budget deficits. FISCAL SUSTAINABILITY ASSESSMENT PERFORMED As part of the Fiscal Sustainability Assessment performed, Staff: 1. Reviewed existing contracts and franchise agreements to ensure the City is capturing all contractual obligations 2. Identified contracts to potentially renegotiate 3. Examined areas of organizational efficiency opportunities 4. Explored extraordinary measures to generate additional revenues In addition to the above, Staff also provided Council a study session of the City’s retirement liabilities and potential options to mitigate future escalation of those liabilities. Following presentation of the Assessment, Council directed Staff to: 1) move forward with renegotiation of Actual FY 17-18 Revised FY 18-19 ADOPTED FY 19-20 ESTIMATED FY 20-21 ESTIMATED FY 21-22 ESTIMATED FY 22-23 ESTIMATED FY 23-24 Total Revenues 42,208,830 44,653,924 44,755,099 42,702,543 45,153,801 45,605,339 46,061,393 Total Expenses 44,849,887 42,336,440 46,871,180 46,003,554 47,636,594 48,112,960 48,594,090 Operating Surplus or (Deficit)(2,641,057)$ 2,317,484$ (2,116,081)$ (3,301,011)$ (2,482,793)$ (2,507,621)$ (2,532,697)$ Beginning Available Reserves Balance 12,484,905 9,843,848 12,161,332 10,045,251 6,744,240 4,261,447 1,753,827 Ending Available Reserves Balance 9,843,848 12,161,332 10,045,251 6,744,240 4,261,447 1,753,827 (778,870) Reserves Target 6,265,725 10,265,725 10,625,252 10,825,533 10,734,120 10,829,267 10,911,308 Above/(Below) Reserves Target 3,578,123 1,895,607 (580,001) (4,081,293) (6,472,673) (9,075,440) (11,690,178) Follow-up to Fiscal Sustainability Assessment November 4, 2019 Page 4 of 11 certain franchise agreements/contracts; 2) report back with additional information regarding extraordinary revenue enhancement measures explored; and 3) return to Council with recommended actions for long-term funding strategies related to pension and OPEB liabilities. While performing the Sustainability Assessment, Staff also engaged the Community, with Council’s approval, by soliciting their feedback on City service priorities and to gauge the Community’s response to either reducing services to bridge budget shortfalls or consider revenue enhancements via ballot measures in order to maintain services. Following is a summary of the results of the various components of the Assessment and an overview of responses to the Community engagement thus far. Contracts/Franchise Agreements Review Two contracts/franchise agreements were identified for potential renegotiation in order to increase revenues. These include: re-examining the tax assessed on offsite multiuser hazardous waste facilities and approving expansion of landfill waste activities. Due to environmental and other significant impact analyses needed before Council approves changes to existing landfill agreement(s), additional revenues from this source will take time to realize. Staff believes a viable option for enhancing revenues in the next fiscal year and future years is modifying the tax rate the City assesses on hazardous waste facilities. Per state law and City ordinance, the City may assess up to a ten percent (10%) tax on such facilities. Currently, only two percent (2%) is being assessed. Azusa Municipal Code, Sec. 18-707. - Offsite, multiuser hazardous waste facilities tax, allows the tax rate to be revised via Council resolution up to the ten percent (10%) maximum. Staff has confirmed that this tax was approved by Azusa voters in November, 1988. After careful consideration and communication with the hazardous waste operator within the City, Staff recommends increasing the current two percent (2%) assessment to six percent (6%) over the next five years as follows: Effective Date Percentage Assessed Estimated Revenues Increase From Current Year Current 2.00% $ 500,000 July 1, 2020 3.00% $ 750,000 $ 250,000 July 1, 2021 4.00% $ 1,000,000 $ 500,000 July 1, 2022 4.75% $ 1,187,500 $ 687,500 July 1, 2023 5.50% $ 1.375,000 $ 875,000 July 1, 2024 6.00% $ 1,500,000 $ 1,000,000 This proposed plan will result in gradually increased revenues up to approximately $1.0M per year by end of the five-year plan period. With Council’s direction, Staff would like to return to the November 18th meeting with a resolution for the Council’s consideration to set the five-year plan in place. Follow-up to Fiscal Sustainability Assessment November 4, 2019 Page 5 of 11 Community Engagement Survey Update Staff received Council approval to engage the Community in order to assess their service priorities prior to recommending major reductions in services and to gauge public support of the potential revenue enhancement measures requiring voter approval. Fairbank, Maslin, Maullin, Metz & Associates (FM3) conducted a Community Issues Survey in July within the City of Azusa to examine residents’ general attitudes and concerns about the City and received 363 responses from registered Azusa voters. The study found that most respondents have favorable views of the City of Azusa, but believe there is a need for additional funding. Findings from the study include: • Most respondents have a favorable view of the City. Overall, more than half of all respondents (54%) believe the City of Azusa is headed in the right direction. Only 27 percent believe the city is off on the wrong track, while two-in ten are not sure (20%). Similarly, six-in-ten respondents (60%) believe their local neighborhood is also headed in the right direction, while only slightly over a quarter (28%) believe it's off on the wrong track. • A majority of the respondents believe the City of Azusa has a significant need for more funding. Over three-fourths (76%) of all respondents believe the City has either a great or some need for additional funds to provide the level of city services that Azusa residents identified as priorities, with over a third (36%) indicating that need is great. In contrast, only one in ten respondents (10%) believe the City has no real need for additional funding. In addition to the findings, respondents identified seven key City service priorities they’d like to see addressed or maintained: 1. Continuing police anti-gang enforcement programs 2. Addressing homelessness 3. Maintaining police patrols of neighborhood schools 4. Maintaining police patrols of neighborhoods, parks and recreations areas 5. Preventing reductions to police officer staffing levels 6. Maintaining city services 7. Repairing streets and potholes Post Survey, City Staff furthered engagement with Community members by launching Join the Conversation (JTC), where Residents were asked to take a brief survey to rank how important those seven service priorities were to them. Staff also attended several standing community meetings in September and October to provide an overview of the City’s budget and the results of the Community Issues Survey, and also invited attendees to complete the brief JTC survey. Follow-up to Fiscal Sustainability Assessment November 4, 2019 Page 6 of 11 Thus far, over 350 responses have been received with these City service priorities results: Cost Reduction and Efficiency Measures Examined Staff is still in the process of examining organizational efficiency opportunities to reduce costs without greatly impacting community services. To cover the projected budget shortfalls with budget cuts alone, will result in major reductions in services. For example, reducing the General Fund budget by $1 million could be achieved with elimination of six (6) police officer positions, but a significant deficit would still exist, thus, still requiring further service cuts. Prior to recommending service cuts, Council authorized Staff to engage the Community in order to assess their priorities. Based on the Community Issues Survey and Join the Conversation results, maintaining public safety services is top priority for Azusa Residents. Therefore, Staff would not recommend making service cuts in the area of public safety which would most significantly impact the budget. However, in light of the budget shortfalls, city management has identified a few areas to realize efficiencies and cost cutting measures in the General Fund such as: • Creating an Administrative Services Department by combing Finance and Human Resources/Risk Management – resulting in annual savings of $104,000. Follow-up to Fiscal Sustainability Assessment November 4, 2019 Page 7 of 11 • Using special revenue funds to replace gas fueled vehicles with all electric vehicles resulting in a reduction in fuel and lease expenses – estimated annual savings of $100,000. • Freezing temporarily the vacant Senior Management Analyst position in the City Manager’s office – annual savings of $120,000. Altogether these efforts save approximately $324,000 annually. While city management believes operations across departments are fairly lean and efficient, Staff routinely seeks to take advantage of special revenue funds and grant opportunities to supplant costs to the General Fund while still providing quality services, meeting legal requirements, and mitigating exposure to risk and will continue to do this moving forward. Local Revenue Enhancement Measures Explored As part of the Fiscal Sustainability Assessment, Staff presented Council with two potential options to enhance long-term revenues. The two options are a Transaction and Use (Sales) Tax (TUT) measure and Utility User’s Tax (UUT) modernization measure. Either would require voter approval. UUT modernization – The City’s current UUT ordinance was last adopted in March 2003, and is now behind the curve in terms of the kinds of services most cities are collecting UUT on. Modernizing the UUT did not poll well in the Community Issues Survey as 54% of the respondents said they would not support a ballot measure for this purpose, and therefore, is not recommended for further consideration at this time. Transaction and Use (Sales) Tax – The sales tax rate in Azusa is 9.5%. Legally, a 10.25% sales tax can be assessed with voter approval. According to the Community Issues Survey, 60% of respondents expressed support of a TUT measure. Based on the results, Staff would recommend the Council consider a future TUT measure as an option to place before Azusa voters. Addressing long-term retirement liabilities Several options exist for addressing long-term funding strategies related to pension and other- post employment benefit (OPEB) liabilities. Staff presented Council a detailed overview of the City’s pension liability in March, and is now prepared to present and updated study of OPEB. While current pension and OPEB pay-as-you go figures are included in the five-year financial forecast, both liabilities are growing and should be addressed in order to avoid increased constraint on future budgets. Due to the complexity of tackling these liabilities, Staff recommends returning to Council at a special study session to review all options and make important policy decisions for reducing these liabilities moving forward. Follow-up to Fiscal Sustainability Assessment November 4, 2019 Page 8 of 11 Timeline Staff would like to return to Council on the 18th for consideration of the various budget sustainability options outlined in this report. The deadline to call a local ballot measure is 88 days prior to the election; that means Council has until December 6th to call ballot measures. FISCAL IMPACT: With prudent spending and maintaining current levels of service to the Community, Staff projects budget shortfalls ranging from $2.1 to $3.3 million over the next five years beginning in Fiscal Year 2019/20. These levels of budget deficits will greatly diminish the General Fund’s reserves and create shortfalls from the adopted General Fund Reserves Policy. Without additional revenues or major cost-cutting strategies, General Fund reserves will be depleted by 2024/25. With thorough review and consideration, Staff has taken steps to cut costs with additional operational efficiencies and is recommending courses of action to enhance General Fund revenues, and thereby ensuring sustained operations, maintaining good credit ratings and meeting future financial obligations. Following is a modified 5-Year Budget Forecast and Reserves Analysis table, which includes the cost reduction measures identified earlier in the report and the recommended modification to the Hazardous Waste Facilities Tax: Even with these enhancements, Reserves are projected to be below targeted levels each year. The local revenue enhancement measures explored by staff requiring voter approval could generate the additional revenues required to maintain target reserve levels, help the City maintain and possibly enhance essential services to the Community and meet its financial obligations. Approval of the recommended actions, authorizes Staff to return to Council on November 18th to request formal approval to move forward with revenue enhancement measures. Prepared by: Reviewed and Approved: Talika M. Johnson Sergio Gonzalez Director of Administrative Services City Manager Actual FY 17-18 Revised FY 18-19 ADOPTED FY 19-20 ESTIMATED FY 20-21 ESTIMATED FY 21-22 ESTIMATED FY 22-23 ESTIMATED FY 23-24 Total Revenues 42,208,830 44,653,924 44,755,099 42,702,543 45,153,801 45,605,339 46,061,393 Total Expenses 44,849,887 42,336,440 46,871,180 46,003,554 47,636,594 48,112,960 48,594,090 Operating Surplus or (Deficit)(2,641,057)$ 2,317,484$ (2,116,081)$ (3,301,011)$ (2,482,793)$ (2,507,621)$ (2,532,697)$ Add: Cost Savings Measures 324,000 324,000 324,000 324,000 324,000 Add: Contract/Franchise Enhancements 250,000 500,000 687,500 875,000 Revisd Operating Surplus or (Deficit)(1,792,081)$ (2,727,011)$ (1,658,793)$ (1,496,121)$ (1,333,697)$ Beginning Available Reserves Balance 12,484,905 9,843,848 12,161,332 10,369,251 7,642,240 5,983,447 4,487,327 Ending Available Reserves Balance 9,843,848 12,161,332 10,369,251 7,642,240 5,983,447 4,487,327 3,153,630 Reserves Target 6,265,725 10,265,725 10,625,252 10,825,533 10,734,120 10,829,267 10,911,308 Above/(Below) Reserves Target 3,578,123$ 1,895,607$ (256,001)$ (3,183,293)$ (4,750,673)$ (6,341,940)$ (7,757,678)$