Budget Message: 2014-2015 Fiscal Year
Honorable Mayor and Members of La Verne City Council:
I am proud to present this budget for City Council consideration as it allows for the continuation of existing services and even provides for expansion of some. In total, this document represents funding to support all operational and capital activities of the City for the coming year and does not require the use of any reserves. Funding for activities supported by the General fund totals $29.1 million.
Although one time resources are again needed to fulfill all the necessary obligations, the amount is being reduced from what was required in the prior year by $400,000. Most of the temporary resources used are from appropriated but unspent funds of the prior year, with a small amount from additional revenue generated as a result of a continuation of stronger than normal development activity. The primary reason one-time resources were able to be reduced was growth in General fund expenses was only $100,000.
This budget fulfills the operational objectives requested by each department while balancing the Council goal of narrowing the gap between recurring expenses and revenues, making use of General fund reserves unnecessary. As for the status of reserves, the balance exceeds the Council’s policy of 15% of expenses. However, as noted in the conclusion, the future outlook does create some concern that should be addressed.
Overall the growth of revenues for the coming year is expected to increase by $600,000 compared to the prior year’s budget. While this 3% growth is noteworthy, a further examination within the specific sources reveals that the growth is not a widespread trend with only a select few increasing while others were on the decline and most major sources remaining flat.
On the rise are revenues from property tax, franchise fees, and business license. While increase in franchise fees and business licenses were sizeable compared to the prior year, they only represent growth of a small portion of overall revenue. The most significant increase was $700,000 in property tax which is attributed to the elimination of the redevelopment agency and resulted in more property tax being available for General fund purposes. The amount does not make up for what was lost when RDA was eliminated, but will yield a slight benefit nonetheless.
The most significant reduction came in revenue from building permits which is projected to generate $1.3 million. In comparison, last year more than $1.7 million was budgeted which reflected a high point for this category. With this year’s reduction, the projected amount still exceeds a normal year which averages $900,000. The current spike in building activity is primarily attributed to housing development where projects that had been approved several years ago are now being constructed. Also helping this projection are three industrial developments that are expected to be undertaken during the coming year.
A more significant concern than the drop in building permit revenue is the lack of growth in revenues from Utility Users Tax, Sales Tax and Vehicle In Lieu Fees. In total, these three represent almost 40% of our General Fund resources and over 70% of revenues that are expected to grow from year to year. This is significant and will be detailed more in the conclusion section below. However, more revenue growth will be essential if we expect to keep pace with the anticipated growth in expenses.
Fortunately, since expenditure requests for this year only netted minimal increases, the limited growth in revenue was still sufficient to absorb these costs.
This budget requires $29.5 million to fund all General fund supported activities. This represents an increase of less than $100,000 when compared to the prior year’s appropriations. However, the minimal increase in the aggregate only tells part of the story. Analyzing the specifics shows that several changes incorporated in this year’s budget resulted in savings of approximately $400,000 which masked the true impact of these expense increases. These included expanding of employee concessions and department restructuring due to retirements.
Overall, with the exception of a reduction in costs related to less building permit activity and added funding for the election in March 2015, major changes in expenditures are related to personnel costs. These include partial funding to reinstitute a traffic motor officer, funding for a part-time communications officer, and reallocating personnel from the Successor Agency to the City.
Funding for Motor Officer – This budget provides for the addition of a motor officer beginning January 2015. Unfortunately, due to budgetary limitations, it was necessary to disband the traffic motor assignment from the Police Department in 2010. Since that time, calls for traffic related enforcement have been dealt with on an “as available” basis and not through proactive patrol. By redeploying a traffic officer on a full time basis, the department will be able to provide more effective response in dealing with neighborhood traffic concerns, and allow for patrol units to handle more general law enforcement related calls for service.
Part Time Communications Officer – Two issues will be addressed by the addition of this position. Initially, it will provide two-person coverage in the dispatch center for all but 4 hours a week. Additionally, once the new 911 system is able to accept video and text messages, it is anticipated that there will be additional demands on the communications officers and this position will ensure dispatch has adequate staffing to handle the increased demand.
Successor Agency Personnel – As we continue to unwind obligations related to the redevelopment agency, funding the same level of personnel from the Successor Agency budget becomes less practical. As a result, it was necessary to move existing personnel costs in Community Development out of the Successor Agency cost center and into the portion of their budget supported by the General fund.
As highlighted previously, several cost saving measures instituted were key in reducing the burden of these added costs. The one that had the most significant effect was employees picking up more of the cost for their retirement. The changes implemented for this year will net a reduction of approximately $300,000. This effort began in 2010 and will reach its full savings impact in January of 2016 as all employees will be paying their portion (8% or 9%) of the retirement costs. Also, instrumental in keeping cost increases to a minimum was reorganization in the City Manager’s office which coincided with the planned retirement of the current Finance Officer.
PROPOSED CAPITAL EQUIPMENT PURCHASES AND CAPITAL PROJECTS
Capital equipment purchases for all funds are $825,000. Of that amount, just $94,500 falls within the General fund. In summary, most of the equipment purchases ($400,000) are related to replacement of City vehicles that are beyond useful service life.
Additionally, there is approximately $4.7 million of capital improvement projects included in this year’s budget. This amount represents the projects anticipated for the coming year that were scheduled on the City’s five year Capital Improvement Plan (CIP) and as such have the appropriate dedicated funding sources. The CIP is a separate document adopted by Council that provides an outlook of projects the City expects to undertake over the next five years along with their associated costs. In summary, the CIP anticipates the City will complete 49 projects totaling $22.5 million in all funds over the next five years. In order to fulfill these goals, an ongoing funding commitment is needed. While in most cases funds are collected from outside sources such as development impact fees, state disbursements, and grants, it is also necessary to dedicate General fund dollars. To that end, it is anticipated that each year a minimum of $200,000 will be directed from the General Fund towards upcoming capital projects. Following is a list of the major projects that are expected to be initiated in the coming year.
|Major Projects for 2014-15||Allocation||Funding Source|
|Pavement Management Program||$950,000||Gas Tax/Measure R|
|Emergency Generator at Public Safety||$180,000||General/Asset Forfeiture|
|Purchase of Ladder Truck||$1,030,000||CFD's 90-1/Large Bldg|
|Traffic Signal at D and Dover||$300,000||Prop C /General Fund|
|Re-roofing of City Yard||$125,000||General Fund|
|Well & Reservoir Rehabilitation||$225,000||Water Fund|
The above reflects only the major projects that are to be initiated in the coming year. In total, this year there are 25 projects or allocations to future projects that will be supported through the 2014-15 CIP.
This year we once again made strides towards fulfilling the Council’s intent of bringing ongoing revenues in line with recurring expenses. Although this is a noteworthy accomplishment, in recent years this has been achieved primarily through reductions in costs and not a growth in revenues. So the question remains what steps will be used to fill the gap in the future years? Adding to the complexity of managing this anticipated gap is the news that retirement premiums are expected to grow and remain well above historical levels. Over the next five years, it is estimated that the recurring funding gap would likely grow to $3 million.
While our management team’s philosophy continues to focus on finding cost effective ways to fulfill operational objectives, it is inevitable that expenses will continue to rise. Additionally, although several cost reducing measures were instrumental at ensuring previous budgets were balanced, unless the Council gives direction to negotiate additional employee concessions, there are only a limited number of opportunities to achieve additional effective savings through cuts. Given this, it would be my recommendation that the existing level of services not be expanded unless there is an ongoing dedicated funding source.
Typically, presenting a budget in this state, with the potential for revenue growth would be rewarding. However, given the report that costs associated to retirement are expected to rise significantly, it becomes more of a necessity that revenue growth exceeds historical patterns. Because if it does not, I fear we will again be challenged with the ability to fund the current level of services. Therefore, in order to ensure our fiscal viability, we must look at how we anticipate revenues will grow and where changes can be made to yield a better result.
Unfortunately, of all major revenue sources, it is anticipated that only one (Property Tax) will experience substantial growth in the coming years. Specifically, this source will have sizable growth due to two changes: 1) A portion of the former Redevelopment Agency has reached the maximum limit of tax increment revenue and will result in $300,000 – $500,000 of revenue being directed to the General fund; and 2) several major projects being added to the property tax rolls will increase the value and amount of properties to be assessed.
Of the remaining major sources (Sales Tax and UUT), there is nothing on the horizon that leads me to believe their growth will exceed that of the last several years, which has been minimal. Projections are for the Utility Users Tax to remain stagnant. The proliferation of prepaid phones and calling cards is on the rise and those transactions are currently exempt from local UUT which is having a noticeable impact on this revenue. Legislation was proposed to alleviate this loophole; however, it was vetoed by the Governor last year but a replacement bill is currently being considered in the legislature.
Sales Tax did experience a significant rebound from 2008-2011, but that growth pattern has tapered off over the last several years. Recognizing that, last year marketing efforts were expanded to promote retail vacancy in concert with brokers, and developing financial incentives that would be available to preferred tenants. However, at this time, there is no assurance that either of the two vacant anchor stores along the Foothill corridor will be occupied in the near future. Compounding this are indications that existing larger retailers whose sales are not meeting their company’s projections and are up for lease renewal may opt to relocate or close completely. So while there is opportunity to increase productive use along the corridor, there is also the potential for existing projections to be reduced if the rumors become reality.
One measure currently underway to increase revenue is to evaluate existing business license practices. To that end, a firm was commissioned to examine the City’s current code in comparison with that of surrounding agencies. Once that review is complete, staff will be able to determine how existing formulas could be updated and what those changes would yield in the way of added revenue. Recognizing any changes will result in an increase in the cost of doing business in the City, we will need to be sensitive that this does not become a deterrent to our business attraction efforts. In either case, any changes brought before the Council will also need to be approved by the electorate during the March 2015 General Election.
Another opportunity exists in being a service provider for the City of Claremont. While still in the early stages, City staff is working with Claremont on how La Verne could operate the water system should they acquire it from the current operator. Depending on the model that is selected, it is likely that revenue will be generated that could be used to help offset some of these increases.
Lastly, and probably more speculative, is the impact that new development might have on improving certain revenue streams. As discussed previously, several projects that have resulted in increased building permit revenues will create a sustainable benefit as they will create more than 250 new housing units. In addition, the recent acquisition of the 23 acres at the terminus of Wheeler Avenue by Gilead Sciences, Inc, a major pharmaceuticals company, will result in a self-contained campus with 400,000 square feet of buildings and over 300 new employees to the City. While it would be hard to quantify what the net effect of these added developments will be, it is reasonable to assume that it will be positive.
It is important to note that individually none of the above approaches will solve the pending problem and some may not come to fruition at all. In that event, it would be easy to assume that our reserves could absorb the shortfall; while we have been fortunate to increase our reserves in recent years, I must caution that almost all of that increase has been the result of one-time money that we have received as a result of the dissolution of the Redevelopment Agency. So while those resources could be used as a short-term fix, use of reserves is not a sustainable strategy to deal with projected funding gaps.
Over the last several years, balancing the budget has been challenged by matching limited resources with departments’ increasing needs. While that pattern held true this year, due to numerous reasons, most of the department requests were able to be fulfilled without much sacrifice. Unfortunately, at this time, the major challenge lies in looking ahead and how we plan for the impending shortfall. How well we are able to define our approach now will enable us to more proactively deal with the situation and prevent the need for less desirable reactionary approaches later on.
While it is unknown which path will be taken to address those problems, I know this organization has an outstanding group of managers and department heads that constantly look at how they can serve the community in the most efficient manner possible. This point gives me confidence that every effort will be made to reduce the effects of any shortfalls from being disruptive to the residents we serve.
In closing, I first want to thank the management team for their untiring efforts at working on common goals, especially during these times. It does not go unnoticed or underappreciated. While it is a group effort that brings this document together, for the last 27 versions, no one has dedicated more time or energy to its creation than Ron Clark. The City has benefited greatly from his guidance and oversight during his tenure. While this will be the last budget with his name on it, his influence will have a lasting effect for many years to come. I know I owe him a personal thank you for holding off on a well-deserved retirement to help navigate us through some challenging times. It is a great group of individuals that work for this organization and his story is just one example of what makes La Verne a special place.
Finally, to the City Council, as individuals, you do not take the responsibility of being good fiscal stewards lightly. Your concern for the particulars and constructive guidance help validate this document. As a collective group, you employ incredible displays of leadership and a true sense of teamwork when navigating through challenging issues. This trait feeds throughout the organization and enables the team to do their job in the most effective manner possible. Thank you for setting the example and having confidence in me and the management team’s ability to do the best for the La Verne community and its constituents.