Presentation on theme: "City of Modesto Comparative Benchmarking and Ten-Year Budget Forecast City Council Study Session December 9, 2014 1."— Presentation transcript:
City of Modesto Comparative Benchmarking and Ten-Year Budget Forecast City Council Study Session December 9, 2014 1
Conduct an independent assessment of Modesto’s fiscal condition and prepare a long- term financial forecast Compare Modesto with similar cities to obtain meaningful comparison information relative to budget, staffing and service levels 2 Project Purpose
Review the results of the benchmarking analysis Review the City’s current and projected financial condition and underlying budget assumptions Discuss the implications of the long-term forecast on Modesto’s ability to achieve financial sustainability in the future Review next steps 3 Tonight’s Focus
Peer Benchmarking Demographics General Fund Total Staffing Crime Rates 4
Peers were selected based on the following criteria: Population size Full-service city County seat Median household income Crime levels Geographic area 5 Comparison Cities
6 Municipal Populations in 2014 Source: California Department of Finance, Population Estimates 2014
7 Median Income in 2012 Source: US Census 2012, 3-year estimates, American Community Survey.
8 General Fund Expenditures per Capita FY 2008-09 and FY 2014-15 Sources: FY 2008-09 Adopted City Budgets and FY 2014-15 Proposed and/or Adopted City Budgets. City of Modesto staff provided additional detail for Modesto’s FY 2014-15 information, which is reflected above.
9 Modesto’s General Fund Revenue and Expenditures from FY 2008-09 to FY 2014-15 Source: Budget Forecast Model, information has been provided by Modesto city staff.
10 General Fund Sales Tax Revenue per Capita FY 2008-09 and FY 2014-15 Sources: FY 2008-09 Adopted City Budgets and FY 2014-15 Proposed and/or Adopted City Budgets. City of Modesto staff provided additional detail for Modesto’s FY 2014-15 information, which is reflected above.
11 General Fund Property Tax Revenue per Capita FY 2008-09 and FY 2014-15 Sources: FY 2008-09 Adopted City Budgets and FY 2014-15 Proposed and/or Adopted City Budgets. Stockton’s information for FY 2008-09 is from the Stockton Budget Model due to limitations in its adopted budget. Modesto’s FY 2014-15 information has been provided by the City.
12 General Fund Property Tax Revenue Percent Change from FY 2008-09 to FY 2014-15 Sources: FY 2008-09 Adopted City Budgets and FY 2014-15 Proposed and/or Adopted City Budgets. Stockton’s information for FY 2008-09 is from the Stockton Budget Model due to limitations in its adopted budget. Modesto’s FY 2014-15 information has been provided by the City.
13 Total Authorized FTE per Capita FY 2008-09 and FY 2014-15, in thousands Sources: FY 2008-09 Adopted City Budgets and FY 2014-15 Proposed and/or Adopted City Budgets.
14 Part 1 Crimes per 1,000 Residents 2009 and 2012 Sources: FBI Uniform Crime Report 2009; FBI Uniform Crime Report 2012
17 Part 1 Crimes per Police Authorized FTE (Sworn and Non-Sworn) FY 2008-09 and FY 2014-15 Sources: FY 2008-09 Adopted City Budgets and FY 2014-15 Proposed and/or Adopted City Budgets; FBI Uniform Crime Report 2009 & 2012. Modesto has filled 289 of the 299 authorized positions by the adopted budget.
Budget Forecast Model Model Features Revenue and Expense Assumptions 18
Balance the Budget Pension/health cost increases Labor agreements Status quo vs. workload/population increases Maintain adequate reserves: contingencies, economic uncertainty Address unfunded liabilities Deferred maintenance Inadequate replacement funds for IT, vehicles Insurance reserves OPEB and pension Fund Capital Needs Streets, buildings, parks & drainage New facilities (with potential ongoing O&M costs) 19 Budgetary Challenges
Budget model: Identifies structural imbalances resulting from known increases and continuation of current programs and policies without corrective actions Is transparent about assumptions Ten-year forecast avoids perils of short-term focus Identifies long-term impacts of current policy decisions Can evaluate impact of alternate policies and economic outcomes Helps staff/Council make informed, prudent, timely fiscal decisions Can be updated periodically by staff to show progress toward goals The budget forecast estimates are realistic, not conservative Shows Most Likely vs. Optimistic vs. Pessimistic revenue levels The ability to weather an economic recession must be considered in the context of a ten-year financial plan 20 Role of Budget Model
Property Tax: growth model based on HdL data (3.6% growth) Sales Tax: based on MuniServices projections (3.9% growth) Utility Users Tax (UUT): based on MuniServices projections (0.7% growth) Other Revenues: varies by source, overall 1% growth Staffing: FY 2015 budget with no change over time (status quo) Salary/Benefits: FY 2015 budget including merits and recent Misc compensation changes from Dec 2014 – March 2016 PERS: based on CalPERS 6/30/13 valuation projections, with extended forecast, PEPRA and payroll adjustments Retiree Medical: pay-go costs per Actuarial (adjusted by staff to reflect benefit reductions from recent negotiations) Non-Personnel Costs: FY 2015 budget @ CPI growth 21 Basis for Assumptions: Best Information Available
Concentration of revenues Property, sales, utility taxes comprise 67% of total Sales tax make-up comparable to statewide averages 22 Revenue Overview
Sales Tax: rate much lower than average 16 th percentile statewide Utility Users Tax: 6% gas/electric, 5.8% telecomm, 3% cable Compares to 5.3% average statewide for UUT cities 23 Revenue Overview (continued)
Forecast provides disciplined approach that avoids wishful thinking about capacity for revenue growth There are constraints in tax revenue growth potential that will generate less revenue than projected expense levels, if the city addresses unmet needs and labor market pressures 24 Revenue Overview (continued)
Higher near-term growth due to Prop 8 (ongoing growth of 3.2%) Model projects following elements using HdL data: Prop 13 inflator (0.454% in FY2015 vs. usual 2%) Prop 8 value recovery (phases out over next 5 years) New construction based on historical non-residential trends and ramping up to 400 units/year over next 7 years (vs. 627 average 1997-2007) Ownership Transfers (current median sales price $200,000) 25 Property Tax
MuniServices “most likely” ongoing growth of 4% Includes adjustments for business changes and 2% inflation “Triple-Flip” ends in FY 2016 with one-time cash flow gain 26 Sales and Use Tax
Conservation impacts, technology issues Wired communication revenues have been declining steadily since 2008 Shifts to non-taxable internet Expect slow growth for gas and electric Overall UUT long-term trend (“most likely” per MuniServices): flat 27 Utility Users Tax
Recessions have occurred on average every 6.5 years since 1928 Severity and duration are difficult to predict Prudent to assume a modest recession during forecast period 28 Potential for Recession National California
Personnel costs in FY 2015 are 70% of total General Fund expenses (includes fire staff) Labor costs held down in past through cuts and vacancies; not a sustainable long-term strategy for “service solvency” 29 Expenditure Overview
CalPERS employer rate increases Statewide issue, unavoidable increases City Discretion: Future salary and benefit changes Level of funding for currently unmet needs Staffing levels (assumes no change – status quo) Other Key Assumptions: OPEB costs at pay-as-you-go levels (after negotiations to reduce costs), not ARC (unfunded liabilities will grow) Vacancy savings levels declines from 6% to 3% over 3 years Continuation of adopted FY 2015 budget adjustments Growth in non-personnel costs is 2% over 2015 levels 30 Major Cost Drivers
Substantial Pension Rate Increase CalPERS 2013 valuation projects rates through FY 2021 Forecast includes: Rate smoothing/ amortization Discount rate of 7.5% Mortality improvements PEPRA impact with employee turnover Impact of payroll deviation from CalPERS forecast Extended forecast reflects paydown of unfunded liability 31 44% increase from FY 2015 to peak
PERS rate increases add $43M through FY 2023 Pension costs as percent of total General Fund expense rises from 12% to 18% 32 CalPERS Pension Cost Impact $43M
Competition with labor market Unrealistic to expect no change over time Example: ongoing COLAs at CPI (2%) for salary and health add $51M in cost through FY 2023 33 Salary and Health COLAs $51M
Unmet Needs Not Funded in Baseline Budget Forecast FY 2016 – FY 2023 Internal Services$17.3M Infrastructure Maintenance$33.1M Public Safety $78.0M 8-Year Totals $128.4M Average Annual$16.0M 34
Fund Vehicle Replacement Backlog Costs for backlog of vehicles beyond their useful life and for which replacements are needed for the current levels of service; $1.6M over next three fiscal years Fund Information Technology Systems Replacement Sets aside funds for the major systems that require replacement over time, including Enterprise Resource Planning (ERP) software; average $1.1M/year, $8.5M through FY 2023 Increase Workers’ Compensation Reserve Increase reserve from $10M to $18M over eight years to achieve funding at 70% confidence level $7.2M through FY 2023 (GF is 90% of total based on claims experience) 35 Unmet Needs Internal Services
Fund Facility Maintenance Backlog One-time backlog identified by Public Works is $1.25M; will likely be unfunded needs in future years as well Increase Park Maintenance Public Works identified $1.5M in annual maintenance needs (eliminated in past budget cuts) in Modesto’s extensive network of 75 parks; $12.9M through FY 2023 Surface Transportation Maintenance of Effort In the five prior years the General Fund paid $1.7M/year; this was stopped in FY 2015; would assist with local matching funds if a countywide sales tax for road improvements is approved; average $1.7M/year, $13.5M through FY 2023 Continue Centre Plaza Subsidy Budget stopped subsidizing the convention center one-third into FY 2015; if subsidy reinstated, restructuring of how the service is provided should continue to be pursued; ave. $600K/year, $5.4M through FY 2023 36 Unmet Needs Infrastructure Maintenance
Reopen Fire Station #6 Adopted budget assumed closure of Station #6 in FY 2015; fire service subsequently brought back in-house from MRFA; Council has directed staff to report on the impact of keeping Station #6 open (work in progress) Average $2.2M/year (without staffing level changes), $20M through FY 2023 Rebuild Fire Station #1 Staff has identified a need to rebuild the aging main fire station located downtown Estimated at $9M from FY 2016 to 2020 (assumes no other available funding source) 37 Unmet Needs Public Safety - Fire
Increase Police Staffing Budget cuts reduced sworn staffing levels from 1.42/1,000 population in 2009 to an estimated 1.04/1,000 in FY 2015 ─ 68 cut from a peak of 287 to 219 in FY 2015 Example: ─ adding 32 FTE officers would increase sworn staffing levels to 1.20/1,000 ─ Average cost of $6.9M/year, $49M total through FY 2023 ─ Cost includes proportionate increases in support and supervisory positions 38 Unmet Needs Public Safety - Police
Budget Scenarios A.Baseline Budget without COLAs B.Add Cost of Funding Unmet Needs 39
Scenario A: Baseline Budget Without Additional COLAs Most likely revenue level meets or exceeds baseline expense without COLAs Optimistic revenue level significantly exceeds total expense Pessimistic revenue level generally at or below total expense 40
Scenario A: Baseline Budget Without COLAs Maintains adequate total reserves (above 15% of total expense) Scenario A is unrealistic: does not address inflation in labor costs (potential recruitment and retention issues over time) and no funding for unmet needs (can’t sustain current service levels) 41
42 Scenario A Forecast Summary: Baseline Budget Without Unmet Needs
Scenario B: Baseline Budget With Unmet Needs No level of revenue, even optimistic, can cover baseline plus unmet needs over the full forecast period 43
Scenario B: Baseline Budget With Unmet Needs Annual shortfalls of $5 to $21M result starting FY 2016; shortfall averages $16M; labor market not addressed long-term Absent corrective budget actions, unassigned balance negative starting FY 2017, with a cumulative unassigned balance deficit of $110M by FY 2023 44
45 Scenario B Forecast Summary: Baseline Budget With Unmet Needs
Absent proactive steps by City, Modesto will experience a gradual degradation of its financial position, its service delivery system, and the public’s investment in infrastructure and other capital assets To be a sustainable city, Modesto must balance its budget with an adequate reserve, given a realistic projection of resources, and find a way to fund labor agreements, unfunded liabilities, and unmet capital and public service needs Use budget model to help identify appropriate funding solutions to accomplish these goals 46 Conclusion