SR-05-27-2015-4AFrom: Gigi Decavalles- Hughes, Director of Finance
Subject: Financial Status Update, FY 2015 -17 Proposed Biennial Budget, and
FY 2015 -16 Proposed Capital Improvement Program (CIP) Budget
Recommended Action
Staff recommends that the City Council:
1) Receive the FY 2015 -16 through FY 2019 -20 Financial Status Update;
2) Receive City Departments' presentations on the FY 2015 -17 Proposed Biennial
Budget; and
3) Review and provide direction to staff on the FY 2015 -17 Proposed Biennial
Budget and FY 2015 -16 Proposed Biennial Capital Improvement Program (CIP)
Budget (Attachment A).
Executive Summary
This report presents the City of Santa Monica's FY 2015 -17 Proposed Biennial Budget
and Capital Improvement Program Budget for FY 2015 -16, as well as the May 2015
Financial Status Update (Update) for the General Fund for Fiscal Years 2015 -16
through 2019 -20. The Update includes the numbers set forth in the Proposed Budget
as well as new information received since the Five -Year Financial Forecast was
presented to Council on January 27, 2015.
The FY 2015 -17 Proposed Biennial Budget is balanced, with resources dedicated to
strengthening municipal services, including public safety, water conservation, mobility
and planning efforts, affordable housing, human services, and a number of initiatives to
increase enforcement of administrative laws. Citywide, departments will be referring to
the newly - released Wellbeing Index as a principal guide for their efforts during the
course of the biennial budget period. The Proposed Biennial Budget is $564.3 million in
FY 2015 -16 and $614.6 million in FY 2016 -17. The significant increase in FY 2016 -17
is due to the inclusion of capital improvement projects funded using bond and
settlement proceeds.
The May 2015 Financial Status Update is slightly more positive than the forecast
provided to Council on January 27, 2015. The January forecast anticipated structural
deficits of $0.4 million in FY 2017 -18, $0.1 million in FY 2018 -19 and $2.9 million in
FY 2019 -20. Since January, departments have had a chance to review and revise their
projections for fees and charges, for parking revenues and for savings related to early
payments of PERS contributions, based on current year actual data, and these updates
have increased the General Fund's baseline revenue projections by 1 %, or
approximately $4 million in FY 2015 -16. The higher revenue projections had the effect
of erasing the deficit and also allowing additional capacity to meet community priorities.
The updated forecast shows positive balances until FY 2019 -20, at which point a deficit
of $1.9 million is projected.
The financial status of non - General funds remains relatively stable. However, the
Housing Authority and Cemetery Funds continue to require General Fund subsidies
through the end of the forecast period. The Pier Fund will also require subsidies as
operating and large capital expenditures are outpacing the growth of revenues during
the forecast period.
Background
On January 27, 2015, Council reviewed and commented on the FY 2015 -16 through
FY 2019 -20 Five -Year Financial Forecast and FY 2014 -15 midyear budget update.
Most notably, the midyear update showed that the City's revenue growth had surpassed
projections, resulting in a $7 million increase to ongoing baseline revenues. Council
used this opportunity to address a number of priorities, including the conversion of
as- needed and contract staffing to 23.4 full -time equivalent (FTE) permanent in -house
positions, the addition of 10.75 FTE public safety personnel to strengthen deployment in
response to increasing call volume, and the dedication of funds to cover long term
liabilities related to employees, including retirement, post - employment medical benefits
and workers' compensation expenses. The number and types of changes approved in
January were atypical for a midyear check -in, but they were grounded in renewed
confidence in the City's economic stability on the heels of the great recession and the
dissolution of redevelopment, and the City's ability to nimbly address needs with the aid
of available and stable resources.
The Forecast included a range of scenarios noting best to worst cases. In the probable
scenario, the General Fund would see a potential deficit of $0.4 million in FY 2017 -18,
which increased to $2.9 million in FY 2019 -20. In the best case, the General Fund fiscal
condition would be positive over the next five years, while the worst case showed a
deficit of approximately $5.3 million in FY 2015 -16 that increased to $14 million (4% of
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the total expenditure budget) in FY 2019 -20. At that time, Council directed staff to
develop a fiscally sustainable budget based on a controlled spending plan.
Economic Update
The national economy is recovering slowly as it continues to grow at a mild pace.
Economic growth has averaged only 2.2 % annually for the last five years, well below
typical rates for periods of economic recovery, and the anticipated growth over the next
two years is only slightly higher. The labor market has improved with over 3 million
added jobs in 2014 helping to drop the national unemployment rate to 5.5 %. The
housing market has begun to improve after a period of slowing during 2013 and most of
2014 and, based on recent economic forecasts, home prices and sales are anticipated
to continue to grow over the next two years. Inflation is expected to remain low.
Like the national economy, the State economy is expected to show modest
improvement over the next few years. Unemployment in the State has fallen below 7%
after peaking at 12.4% in 2010, and is projected to continue dropping to nearly 6% by
the end of 2016. Housing sales and median prices have been strong and the
commercial real estate market has also showed signs of strength with lower vacancy
rates and higher asking rents. The Governor has submitted a balanced budget for the
third year in a row. Revenues are expected to show solid growth and, as mandated by
Proposition 2, any temporary spikes in revenue will be set aside for future recessions.
However, rising costs from health care reform, wildfire protection and spending
increases for prisons will provide fiscal challenges. In addition, the overall impact of the
drought and water restrictions is not known at this time.
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Santa Monica's diversified tax base and geographic location have led to a typical strong
recovery from the most recent economic downturn. The City's economically driven tax
sources have recovered significantly to reach or exceed pre- recession levels. This
strong recovery will moderate in the future as the City transitions out of its recovery
period.
Property values in the City have shown strong increases the last three years and remain
the third highest in Los Angeles County. Assessed values are expected to increase by
4% in FY 2015 -16 and 3% annually in future years. Sales tax receipts have recovered
over the last five years after declining sharply during the recession. Growth is expected
to be slower going forward, reflecting a shifting of sales to online platforms as well as
the departure of several large retailers. Tourism, which provides a strong stimulus to
the local economy by creating jobs and producing revenues, continues to be one of the
strongest performing components of the local economy. Transient Occupancy Tax
revenue growth has averaged 10% annually over the last four years. Additional growth
is expected over the budget period as average room rates continue to increase and two
new hotel properties are scheduled to come online in FY 2016 -17. Business license
taxes are expected to grow slowly, impacted by the loss of several large taxpayers.
Utility Users Taxes are expected to grow 1 -2% annually over the next five years.
General Fund Financial Status Update
The May General Fund Financial Status Update reflects revised revenue projections as
well as staff's proposed operating and capital budget recommendations included in the
Proposed Budget. The Update includes the strategies approved by Council in 2014 to
continue to pay down the City's unfunded retirement liability and prefund the City's
limited retiree medical benefits, known as other post employment benefits, or OPEB. All
remaining assumptions related to retirement contributions and healthcare costs remain
unchanged since the January forecast.
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With regard to revenues, as part of the budget preparation process, departments
reviewed and revised their projections for fees and charges, for parking revenues, and
for savings related to early payments of PIERS contributions, based on current year
actual data. These changes have increased the General Fund's baseline revenue
projections by 1 %, or approximately $4 million in FY 2015 -16. These additional revenue
projections provided additional capacity to meet community priorities in addition to
eliminating deficits in years three and four of the forecast. Under the Probable Case
Scenario, the General Fund shows positive balances until FY 2019 -20, at which point a
deficit of $1.9 million is projected.
The Best Case Scenario reflects slightly higher revenues than are projected in the
Proposed Budget as well as lower healthcare costs. In the best case, the General Fund
fiscal condition would be positive over the next five years, with a positive balance of
$7 million in year 5.
The Worst Case Scenario reflects lower revenues than are projected in the Proposed
Budget (reflecting the effects of a potential recession) as well as continued increases in
workers' compensation claims and the impact of the Patient Protection and Affordable
Care Act's "Cadillac Tax ", an excise tax on high -cost health plans, in the latter part of
the forecast. The worst case shows a potential deficit of approximately $3.3 million, or
0.9% of the City's General Fund budget in FY 2015 -16, increasing to $13.2 million
(3.8% of the General Fund budget) in FY 2019 -20.
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Projected Fund Balance
The chart below shows the three forecast scenarios.
General Fund Projected Fund Balance
($ in millions)
$15 -
-- _-- -- -- - -- - -.___..-- -- --
$10
$TO
$s
_
$0
($5)
...
($132)
Revised FY 2015 -16 FY 2016 -17 FY 2017 -18 FY 2018 -19 FY 2019 -20
FY 2014 -15
-- Probable Case _ - Best Case Worst Case
FY 2015 -17 Proposed Biennial Budget
The Proposed Biennial Budget for the City of Santa Monica, presented as
Attachment A, is balanced and totals $564.3 million in FY 2015 -16 and $614.6 million in
FY 2016 -17. The FY 2015 -16 Proposed Budget is $27.4 million or 4.6% less than the
FY 2014 -15 Revised Budget due to decreased capital spending.
The largest component of the budget is the General Fund, where most municipal
services are funded. The proposed General Fund budget is $347.5 million in
FY 2015 -16 and $409.5 million in FY 2016 -17. FY 2015 -16 General Fund expenditures
increase $13.8 million or 4.1% over the FY 2014 -15 Revised Budget. FY 2016 -17
expenditures increase $62 million or 17.8% due to the inclusion of capital improvement
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projects funded using bond and settlement proceeds.
The budget dedicates additional resources to strengthen municipal services and
addresses specific areas of focus, including.
® Mobility and Planning Efforts: new staffing and buses to implement the 888 service
integration plan with Expo Light Rail; staffing and start -up funding for the new bikeshare
program; existing resources dedicated to area planning projects, parking, and traffic
circulation.
® Adapting to Climate Change/Water Conservation: newly- allocated Water Fund
resources for the Water Shortage Response Plan implementation; continued progress
on the Water Self Sufficiency Program, the Resource Recovery and Recycling Fund's
Zero Waste program, and the greenhouse gas emissions reduction strategy under the
15x15 Climate Action Plan.
® Public Safety: increased Police and Fire staffing to respond to higher call volumes and
the additional visitors and circulation changes resulting from the opening of Expo Light
Rail, and training resources for the joint dispatch center.
® Affordable Housing: set aside a minimum of $1.2 million in residual property tax
increment revenue each year for affordable housing production.
• Santa Monica Airport: continued work to eliminate aviation uses on non- aviation land,
to adjust lease rates, and to initiate a feasibility and preliminary design study for the
expansion of Airport Park.
® Optimize Core Services: enhanced funding in the areas of community and cultural
services grants; restoration of ongoing funding for community festivals such as the
annual Santa Monica Festival; enforcement of the short term vacation rental ordinance
and implementation of the seismic retrofit program; conversion of remaining contracted
and as- needed staff identified in the January 13, 2015 As- Needed and Contracted
Staffing study to permanent status per Council direction.
® Open Data: continued work to find new ways to provide data to the public through
easily accessible portals.
® Civic Engagement: continue to develop new forums to help the public stay connected
to their government.
Wellbeing: departments will be referring to the newly- released Wellbeing Index as a
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principal guide for their efforts during the course of the biennial budget period.
Fiscal Policies: an expanded set of fiscal policies, including a more comprehensive
debt policy, is included in the budget document.
With the programs, measures and policies contained in this budget, the City builds on
its commitment to transparency and integrity. A new open data portal allows the public
easy access to a growing database of information, ranging from tree information to
employee compensation, in addition to the Opengov application that allows users to
view the City's budget from a number of perspectives. On the recommendations of both
the City's external and internal auditors, the City will convene a new Audit Committee in
FY 2015 -16. This Committee will, among other things, monitor the work and reports of
the City's internal and external auditors and the progress made on process
improvements proposed in the recently - completed internal controls review of financial
operations throughout the City. In addition to the internal controls review, the City
completed the Institute for Local Government's (ILG) Good Governance Checklist,
which assessed a broader range of processes, including stewardship of public
resources, personnel, campaigns and transparency in decision making. While the City
fared well in both assessments, there is always room for improvement and staff is taking
measures to meet best practices, including developing and training citywide staff on a
code of ethics.
Other Funds
Other major funds that are included in the Financial Status Update fall into two
categories: 1) funds that operate with sufficient revenues to sustain necessary
operation and capital needs, and 2) funds that have a structural deficit where ongoing
revenues are not sufficient to cover ongoing expenditures.
Self - Sustaining Enterprise Funds
The Resource Recovery and Recycling (RRR), Water and Wastewater Funds have
sufficient revenue to cover current operations, due to recent rate increases in the Water
and RRR Funds that will allow the implementation of the Sustainable Water Master Plan
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and the Zero Waste Master Plan, respectively, while also maintaining reserve levels.
The Wastewater Fund continues to have adequate revenues and reserves to meet
current operational and capital expenditures.
The Big Blue Bus service integration plan with Expo Light Rail will result in 56,000
additional revenue service hours, 10 new buses on the road, 18 new motor coach
operators, as well as 8 additional staff dedicated to the expanded operation and
2 additional positions to align with workload. This service increase will require a rate
increase in January 2016.
The Beach and Airport Funds will also generate adequate revenues to sustain their
operations throughout the next five years.
Funds Requiring General Fund Subsidies
The Cemetery Fund is anticipated to require an annual $0.2 million subsidy from the
General Fund, pending Council's adoption of a strategic plan to increase burial plots
and provide green burial services.
The Housing Authority Fund also has a projected operating structural deficit of
approximately $0.5 million annually due to the loss of Redevelopment funding for the
administration of the senior voucher program, and the reduction of U.S. Department of
Housing and Urban Development (HUD) allocations.
The Pier Fund is not able to sustain an adequate balance to cover its operating costs
and large capital expenditures. As a result, the General Fund will provide a $0.9 million
subsidy in FY 2015 -16 in addition to funding $3.3 million of the Pier Electrical Upgrades
project.
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Position Changes
The Citywide Proposed Budget includes a net increase of 48.6 Full Time Equivalent
(FTE) positions in FY 2015 -16 and 4.0 FTE positions in FY 2016 -17. New positions are
related to public safety, arrival of Expo Light Rail and remaining conversion of
as- needed positons to permanent status as approved by Council on January 13, 2015.
The General Fund includes a net increase of 15.6 FTE permanent positions, mainly in
the Police and Planning and Community Development Departments (increase of
18.4 permanent FTE, offset by decrease of 2.8 FTE temporary FTE). Non - General
Funds include a net increase of 33.0 FTE permanent positions, mainly in the Big Blue
Bus and Public Works Departments (increase of 33.8 permanent FTE, offset by
decrease of 0.8 temporary FTE). In FY 2016 -17, the General Fund includes a net
increase of 4.5 FTE permanent positions, all in the Fire and Police Departments
(increase of 9.0 permanent FTE, offset by decrease of 4.5 limited -term FTE).
Non - General Funds include a net decrease of 0.5 FTE permanent positions.
Capital Improvement Program (CIP) Budget
On June 24, 2014, Council adopted the first year and approved the second year of the
FY 2014 -16 Biennial Capital Improvement Program Budget. The changes outlined in
the CIP Addendum portion of the Proposed Budget are revisions to the second year of
the approved Biennial Budget, FY 2015 -16. These changes are limited to urgent needs
that cannot be deferred until the next biennial budget process.
Revised CIP Budget Summary
The revised FY 2015 -16 CIP Budget totals $86.1 million. This represents a decrease of
$30.9 million from the originally proposed FY 2015 -16 CIP Budget. The decrease from
what was originally proposed is due to moving the Fire Station 1 project into the
FY 2016 -17 Budget Plan. Of the total FY 2015 -16 CIP budget, the General Fund
portion represents $24.5 million or 28 %.
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General Fund CIP Budget Changes
The Proposed CIP Budget includes approximately $5.4 million in General Fund budget
increases for the FY 2015 -16 Exception Based CIP Budget that are funded using capital
project savings, capital reserves, and loan proceeds. Changes include unanticipated
scope expansions to the Pier Electrical Upgrades project and the Swim Center
Maintenance project, as well as an LED Streetlight Improvements project, Site
Improvements related to the Fire Station 1 Land Exchange, Park Lighting Upgrades,
and a Feasibility Study for the Airport Park Expansion.
A $1.1 million loan from Southern California Edison (SCE) is anticipated to fund the LED
Street Light Improvements and Site Improvements projects. This loan will be paid back
over time using electricity savings through SCE's on -bill financing program.
The FY 2015 -16 proposed CIP budget is significantly lower than the budget plan
approved by Council in June 2014 due to updated plans for the construction of Fire
Station 1, the Fire Training Facility, and the Fire Station 3 Seismic Improvements. The
FY 2014 -16 Adopted Biennial Budget assumed that these projects would receive bond
financing and begin construction during FY 2015 -16. As reported to Council on
January 27, 2015, Fire Station 1, which is still in the design phase, will continue to
require bond financing, which will occur in FY 2016 -17 to correspond with construction
timelines, while the Fire Training Facility and Fire Station 3 Seismic Improvements
(costing approximately $1.5 million each) were incorporated into the FY 2014 -15
budget at Midyear, as those projects were ready to proceed.
Non - General Fund CIP Budget Changes
The total net change proposed for the Non - General Fund CIP budget is approximately
$1 million. Increased budget for existing projects includes an expanded scope for the
Parking Structure 5 Transit and Parking Services Center and the Water Booster Pump
and Actuators Replacement, construction budget for Palisades Park Landscape
Improvements and the Water Resources Building Improvement, and accelerated
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funding for the Airport Noise Management Equipment replacement. New projects in
non - General funds include Green Burial at the Woodlawn Cemetery, the purchase of a
new Risk Management Tracking software system, Traffic Signal Improvements,
neighborhood street lighting, and environmental studies at the Airport.
All but one of the proposed budget increases can be fully supported by an existing
enterprise fund balance or special revenue source; the Cemetery Green Burial project
may require a General Fund loan of $0.2 million to be repaid when project revenues are
realized.
Several budget reductions largely offset the budget increases. The most significant
budget reduction is the elimination of $2 million in the FY 2015 -16 budget for the Water
Fund's Automatic Meter Reading project per Council direction on water rates.
Approximately $0.4 million will also be eliminated from the FY 2015 -16 Big Blue Bus
CIP budget for the Downtown Temporary Use TOD Site per Council direction to reduce
project scope.
Next Steps
Council will convene a public hearing on June 23, 2015 to consider, receive public
comment, make revisions to, and adopt the first year and approve the second year of
the Biennial Budget, as well as to adopt the second year of the Capital Improvement
Program Biennial Budget.
Members of the public may provide comments on the Proposed Budget by sending an
email to council smgov.net or by giving public testimony at the May 27 and May 28
study sessions and Budget Adoption hearing on June 23, 2015.
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Financial Impacts & Budget Actions
There is no immediate financial impact or budget action necessary as a result of the
recommended actions. Staff will return to Council on June 23, 2015 to recommend
adoption of the first year and approval of the second year of the FY 2015 -17 Proposed
Biennial Budget.
Prepared by: Susan Lai, Budget Manager
Approved:
A`� : >l r t
gi'�D avall es- ghes
Director of Finance
ZOT .-. .
Elaine M. Polachek
Interim City Manager
Attachment A: FY 2015 -17 Proposed Biennial Budget
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Reference:
Attachment A is available at
the City's Clerk's Office
Filed within 202 -001