CITY OF TALLAHASSEE
CITY COMMISSION AGENDA ITEM
ACTION REQUESTED ON: January 28, 2009
SUBJECT/TITLE: Mid-Year Update on the FY09 Budget
TARGET ISSUE: Financial Viability of the Government Target Issue

STATEMENT OF ISSUE
This agenda item is the first update related to the fiscal year 2009 budget and covers adjustments for revenue estimates and expenditure budgets based on prior year actual results or revisions provided by the State. Additional updates related to actual receipts and expenditures this fiscal year will be provided when sufficient data are available to make more reliable estimates. An update of estimates for state sales tax and revenue sharing is expected in March. Due to the continuing worsening of the economy, it is probable that these revenue estimates will be further reduced at that time. The discussion focuses on issues affecting the General Fund, and the Deficiencies Fund, in order to set the foundation for developing the FY10 General Fund budget. Other funds will be addressed at a later time.

Preliminary projections indicate FY09 deficits in General, StarMetro and Building Inspection Funds, of approximately $2.5 million in the General Fund, including an additional transfer to StarMetro of $1.0 million, and $1.0 million in the Building Inspection Fund. Recommended options for addressing these deficits are discussed in this item.

FISCAL IMPACT
Mid-year adjustments to the General Fund for FY09 totaling $2.5 million, which includes a $1.0 million additional transfer to StarMetro. Mid-year adjustments to the Building Inspection Fund totaling $584,000. Additional actions will be required in Building Inspection to fully cover the remaining portion of the projected $1.0 million deficit.

RECOMMENDED ACTION
1. De-obligate revenues and expenditures within the General Fund for FY09 in the amount of $2.5 million.
2. De-obligate expenses of $584,000 in the Building Inspection Fund for FY09 and approve reassignment of five positions to the Energy Services Department, and use of CDBG funding to support three additional positions for enhanced code enforcement. Action does not address the total projected deficit but staff will be working with Growth Management to develop additional recommendations.
3. Approve transferring position #0291 from the General Fund to StarMetro to assist in financial management and oversight.

Beckye Simpson, Budget Manager, Office of Budget & Policy

Anita Favors Thompson, City Manager

For Information, please contact: Beckye Simpson, ext. 8467.

SUPPLEMENTAL MATERIAL/ISSUE ANALYSIS
HISTORY/FACTS & ISSUES
FY08 was a difficult financial year. With the impact of property tax reform which resulted in $3 million less in ad valorem revenue to the City as well as deteriorating economic conditions, mid-year cuts to the FY08 budget, including eliminating 34 vacant positions, were required. In spite of these actions, the General Fund ended fiscal year 2008 in a deficit position which required usage of reserve funds. In the FY09 Budget, 22.5 positions were eliminated, 15.5 of these were related to the General Fund. A total of five employees were terminated effective October 1st as a result of these cuts. Some of the reductions included custodial service reductions in City Hall; complete elimination of the DARE program; consolidation of management at the Lawrence-Gregory and LeVerne Payne community centers; reduction in sound services; and elimination of the downtown incentive program. All of these reductions continue to have an impact on our ability to provide the level and quality of services our residents have come to expect. In addition to expenditure reductions, fee increases were also part of the FY09 Budget, including the following: an increase in cemetery plot fees from $400 to $937.50; an increase of $10 per month at the Eastside parking garage to be phased-in over two years; an increase in the fingerprinting fee from $5 to $10; and a new after school fee of $10 per child per week for after school drop-ins at community centers.

Based on a preliminary review of the General Fund and related funds, additional adjustments will be required in order to avoid a deficit position at FY09 year end.

GENERAL FUND
Initial projections indicate that the general fund will have a year-end FY09 deficit of approximately $2.5 million. This deficit is a result of several factors. First, the State of Florida, via the Florida Legislative Committee on Intergovernmental Relations (FLCIR), notified the city in December 2008 that two sales tax driven revenue sources, revenue sharing and ½ cent sales tax, were being reduced as a result of the state’s economic slowdown. This follows similar reductions in these two revenue sources over the last two years. The estimate for electricity tax revenues has been adjusted downward. These are offset by several expenditure adjustments. The following listing provides a detailed summary of revenue and expenditures that need to be formally reduced via City Commission action.

To address the net impact of revenue and expenditure changes listed above, the following expenditure reductions totaling $2,548,325 are recommended.

Institute a hiring freeze effective February 1st: This requires freezing all open positions, except for public safety, effective February 1st. Only the City Manager would be able to provide exceptions to hire positions other than public safety positions after February 1st. Assuming 25 vacant General Fund positions at $33,333 (66.67% of $50,000 to account for eight months vacancy), the potential savings to the General Fund is $833,325.

Freeze capital outlay of $244,000: The capital outlay section within the operating budget contains funding for capital assets, defined as having a value of more than $1,000 and a useful life of more than one year. Items include such things as office furniture, equipment, vehicles and electronics. The main department impacted by this freeze would be Parks, Recreation and Neighborhood Affairs, which accounts for $200,000 of the total funding. Estimated savings to the General Fund as of February 1st is $150,000.

Limit temporary wages and overtime expenditures: The General Fund contains FY09 budgeted amounts for both overtime and temporary wages that exceed $6.9 million. If this total amount between both accounts is reduced 5%, then the savings to the General Fund is $345,000.

Implementing Gas Tax Funding within the General Fund: Many of the public work functions involving traffic management and maintenance can be funded through gas tax dollars. The city currently funds the majority of these functions through the General Fund. There is currently over $529,000 available in gas tax fund balance. It is recommended that $500,000 be utilized to support transportation related operating costs in the General Fund and to continue to budget for this support for the immediate future.

De-obligate $720,000 in GG/CIF Funding: The option presented here is to defer transfer of $720,000 to the general government capital project account from the General Fund. Currently there is $642,000 GG/CIF available fund balance to offset this reduction. The balance of $78,000 reduction will be obtained through balances available from close out of completed projects.

Staff will continue to monitor revenues with particular attention given to interest earnings, the new after school fee, employee parking fee, General Fund building related fees (Environmental, Contractor Licenses, Land Use, Concurrency Etc.), traffic fines, and Ad Valorem taxes. Although not included in the analysis above, any or all of these may need to be adjusted downward. In the aggregate, the listed fee related revenues now appear to be over budgeted by approximately $400,000. Also, it very likely that interest earnings will not meet expectations given the current economy. As indicated in the FY08 closeout agenda item, the collection of ad valorem was less than budgeted in FY08 by $767,000. Although this could be indicative of a trend of under recovery of ad valorem tax in any given year, all of the deferred revenue will eventually be collected. As a result, ad valorem revenue could potentially be higher than expected, or if a longer time is necessary to collect past due amounts, it could be lower. By the end of the second quarter, estimates can be refined for all of these sources.

In order to address any of these items that may materialize, a number of other options are being explored.

· Consider implementation of employee committee recommendations in one or all of the following areas:

o Energy Efficiencies,
o Modification of employee work schedules, and
o Landscape alternatives.

· Increase capitalization of employee costs. The City has capital dollars available in various funds. To the extent that city labor can be used for these projects, the operating budget requirements can be reduced.

· Evaluate ways to reduce subsidies required by other funds.

STARMETRO FUND
As indicated in the chart that follows, over the last two fiscal years, StarMetro has incurred deficits of an additional $1 million, which required unbudgeted year-end transfers from the General Fund. The reasons for the deficit each year vary, but several factors have remained consistent. Two accounts, temporary wages and overtime, continue to be sources of overruns on the expenditure side. Causes for this include a high incidence of workers compensation cases, high turnover, and expanded service levels. Given current expenditure patterns, these amounts are projected to significantly exceed budget in FY09. Although, in FY08, the price of fuel increased dramatically, contributing in part to the $1 million deficit, the fuel budget has been increased and prices have been falling in FY09. It is likely that fuel savings will be realized but are not being projected at this time pending analysis of the impact of the new route structure on fuel usage. As more data becomes available, this will be updated.

The chart which follows provides historical budget vs actual Star Metro subsidy amounts required from the General Fund.

The other area of concern is the projected grant revenue for FY09. Although StarMetro will likely know by March what their federal grant award will be, less grant revenue is possible due to decreased gasoline sales. Preliminary indications are that the Federal Stimulus package will include funding for transit, although only for capital expenditures.

Although a number of actions are being pursued to address this issue, staff is not making specific recommendations to address the additional projected deficit in StarMetro at this point. Strategies include the following:
1. Reduce training time without compromising safety.
2. Monitor workers compensation claims to reduce leave and identify specific safety issues which are causing the claims.
3. Remove special events from employee bid routes.
4. Change the criteria for bidding to include other factors, not just seniority.
5. Explore utilization of college students for campus bus routes.
6. Monitor the usage of catastrophic leave.
7. Utilize temporary help for special events to minimize overtime.

If a hiring freeze is enacted on February 1st, then StarMetro would be included as part of that decision. One of the concerns identified by both the City Auditor and city management is the need for financial management assistance for StarMetro. To this end, position #0291 has been temporarily transferred from the General Fund to StarMetro. This position had been housed in the Department of Management and Administration and permanent assignment is recommended to continue to assist StarMetro management in monitoring and managing the overall finances of the department.

BUILDING INSPECTION FUND
In FY05, legislation was passed requiring that revenue related to implementation of the Florida Building Code be segregated and used exclusively to offset the cost of implementation of the Code. An enterprise fund was established during FY06 to accomplish this. For the first two years of full operation expenditures exceeded revenues by a total of $2.2 million, which was funded by loans from the Deficiencies Fund. For FY09, an additional loan of $293,000 is budgeted although the current estimate for the FY09 deficit in the fund is $1.0 million. Revised revenue and expenditure estimates are shown in the following chart:

Building Inspection Fund

This is due to the slowdown in the housing market and residential construction, the addition of staffing to accommodate increased demand during the earlier up-cycle, and to the fact that fees are not sufficient to fully cover costs. The number of 1 & 2 family residential building permits issued in FY05 was 1,396, 1,088 in FY06, 857 in FY07 and 376 in FY08. This is a reduction of 73% since FY05. Total permits are also down with a reduction of 969 permits in FY08 (28%). This trend is expected to continue in FY09 with recovery not expected in the immediate future.

Two positions were eliminated at the beginning of FY09 and one additional position was eliminated in January 2009. Due to the decreased demand for these services and in order to avoid further depletion of the Deficiencies Fund, additional cost reductions are recommended at this time by repositioning eight positions within the organization.

1) Reassign five positions to Energy Services to meet the increased demand for energy audits. Cost savings: $365,000 (personnel and vehicle costs)

2) Fund three positions from CDBG funding to implement an enhanced code enforcement program.
This would be funded from the administrative allocation of additional funding expected this fiscal year. Cost savings: $219,000 (personnel and vehicle costs)

In addition to the efficiency and cost conservation measures currently being undertaken by the department, additional cost saving measures are being explored in order to totally eliminate the expected deficit position of the fund. Some of these include:

1) Freeze all positions as they become vacant.
2) Eliminate temporary wages.
3) Consider fee adjustment to fully recover costs.
4) Review charges for intradepartmental services provided.

DEFICIENCIES FUND
The Deficiencies Fund is treated as the reserve or fund balance for General Fund operations. The policy target balance is two months operating requirements for the General Fund. At the end of FY08, the policy level is $23.020 million and balance (based on preliminary numbers) is $13.495 million. The budgeted balance at FY09 year- end, if no changes are made, is $10.8 million. This assumes a transfer of $2.374 million to the Fire Fund and $273,000 to the Building Inspection Fund (budgeted amount vs the current estimate of $1.0 million).

Based on preliminary numbers, $4.778 million was required from the Deficiencies Fund for FY08. This includes $2.078 million for the General Fund (due primarily to increased fuel costs and revenue shortfalls related to economic conditions including state revenue sharing, ½ cent sales tax, building related fees (environmental) and utility taxes, as well as uncollected Ad Valorem Taxes. (These Ad Valorem taxes will eventually be collected by the City, however the precise timing is not known.) Transfers were also required for Star Metro ($1.062 million) and Fire Services ($1.637 million).

These reductions in fund balance are representative of a trend over the past four years as shown in the chart that follows.

Continued utilization of the Deficiencies Fund is problematic and could result in total depletion within a short period of time. In addition, continued usage of this fund may further impact the City’s bond ratings. The recent downgrading of the Fitch rating from AA to AA- combined with a negative outlook is in part due to reliance on this fund during the past few years. It is a top priority of management to replenish this fund as soon as possible given the current economic conditions. However, the first step in reversing this trend is to curtail usage of the fund as provided in the strategies indicated above. If the above actions are taken, it will eliminate the need to further reduce the fund balance by $3.084 million in FY09.

Functional consolidation of fire and county EMS, with an appropriate fee schedule, is another step currently in development and expected to be implemented October 1st which will reduce reliance on the fund in future years. Other possibilities include County implementation of an additional gas tax which would allow for reduction of the Star Metro transfer and/or other efficiency or revenue changes to this operation allowing for fund balance to begin to be replenished.

OPTIONS
1. De-obligate revenues and expenditures within the General Fund for FY09 in the amount of $2.5 million.
2. De-obligate expenses of $584,000 in the Building Inspection Fund for FY09 and approve reassignment of five positions to the Energy Services Department, and use of CDBG funding to support three additional positions for enhanced code enforcement.
3. Approve transferring position #0291 from the General Fund to StarMetro to assist in financial management and oversight.