1. Finance Department Presentation to the City of Houston Budget and Fiscal Affairs Committee FY2011 Budget Overview and General Fund Five Year Scenario May 17, 2010 Michelle Mitchell, Director

2. 2 Table of Contents Section Page Fiscal Year 2011 Budget Overview 3 General Fund Budget Revenues 9 General Fund Budget Expenditures 17 Management Strategies 31 General Fund Five Year Plan 34 Five Year Plan Revenues 36 Five Year Plan Expenditures 44 Debt Service 49 Five Year Management Strategies 50

3. Finance Department Fiscal Year 2011 Budget Overview

4. 4 Overview This budget overview highlights financial challenges in all departments. Demonstrates effect of the recession. Highlights structural financial imbalances to be addressed through accelerated use of process reengineering and consolidation.

5. 5 Houston Employment (Not Seasonally Adjusted) Source: Texas Workforce Commission

6. 6 Rotary Rig Count Monthly Working U.S. Source: Baker Hughes

7. 7 Summary Of All Funds ($ Millions) FY2010 Adopted Total Budget = $4,008.3 Note: FY2010 Adopted Total Budget = $4,008.3 % Change FY2010 Adopted to FY2010 Current Budget = 3.95% % Change FY2010 Adopted to FY2011 Proposed = 2.85%

8. 8 Summary Of All Funds FY2011 Total Budgeted Expenditures of $3,537,284 FY2010 Total Current Budget Expenditures of $3,514,658 Note: FY2010 Adopted Total Budget Expenditures = $3,575.7 % Change FY2010 Adopted to FY2010 Current Budget = -1.7% % Change FY2010 Adopted to FY2011 Proposed = -1.1% (Including Debt Service, $ Thousands) Change = $22,626 % Change = 0.64%

9. Finance Department General Fund Budget Revenues

10. 10 General Fund Revenues ($ Thousands) FY2011 Total Revenues of $1,771,365 FY2010 Total Estimated Revenues of $1,769,989 Change = $1,376 % Change =0.08% Note: FY2010 Adopted Budget Revenues = 1,843,781 % Change FY2010 Adopted to FY2010 Estimate = -4.0% % Change FY2010 Adopted to FY2011 Proposed = -3.9%

11. 11 General Fund Revenues FY2002-FY2011

12. 12 Property Tax Revenue We assume decline in property tax revenue of 5.06%, $45.1 million lower than FY2010. We assume no change in the current tax rate ($0.63875 per $100 valuation). We assume collection rate of 96.6%. We assume $15.2 billion in TIRZ taxable value (10.6% of City taxable value). Revenue is net of tax increment zone payments and includes delinquent collections.

13. 13 Trends in Property Tax Revenues FY2008-FY2011

14. 14 Sales Tax Revenue We assume a small recovery in sales tax revenues of 2.99% in FY2011, $13.8 million higher than FY2010. We assume 12 new Limited Purpose Annexations in FY2011.

15. 15 Trends in Sales Tax Revenues FY2008-FY2011

16. 16 Other Revenues and Sources of Funds We assume asset sales of approximately $43.5 million (includes routine right-of-way transactions). Includes revenue target of $15 million to be achieved through a review of user fees. We assume transfer from excess Ike funds in the amount of $13.5 million. We assume replenishment of Rainy Day Fund to $20 million, but it will become part of the undesignated year-end fund balance. We assume $53.9 million drawdown in fund balance.

17. Finance Department General Fund Budget Expenditures

18. 18 Expenditure Comparison ($ Millions)

19. 19 General Fund Expenditures by Category FY2010-FY2011 (Excluding Debt Service)

20. 20 General Fund Expenses FY2002-FY2011 (Including Debt Service)

21. 21 Expenditures Summary All pay increases in the total amount of $30.7 million have been met per contract for all three employee groups. We assume an increase in pension contribution for municipal and classified employees in the total amount of $12.2 million. We assume an increase in health benefits for all employees in the amount of $6.8 million. We assume $2 million in operating costs for new facilities.

22. 22 General Fund Public Safety Expenditures FY2002- FY2011

23. 23 Highlights – Police Two new cadet classes will be added (140 cadets). The total number of officers will increase from 5,173 to 5,303, net of attrition. Includes classified pay increase of 2% in the amount of $8.3 million per contract. Includes funding for 8 additional inspectors for Neighborhood Protection and have identified at least 35 officers to be moved to the street from administrative positions. Overtime in the amount of $5.6 million funded through TIRZ, an increase of $1.6 million. Assumes reduction in General Fund discretionary spending of 1.8%, or $12.3 million. The projection does not include funding from Grant Funds and Other Special Funds.

24. 24 Police Full Time Equivalent Staffing Growth (All Funds, FTEs/Not Headcount, Includes Overtime)

25. 25 Highlights – Fire We assume three new cadet classes will add 125 firefighters. Fire classified staffing will decrease by 29, as a result of attrition, to 3,876. We assume an increase per the contractual agreement for Fire classified for $10.2 million (3.75% in July; 2% in January). Pension plan contribution rate stays at 29.4%, higher than the actuarially required rate of 24.1% (cost to the City of $14.0 million). Assumes reduction in discretionary spending of 1.5%, or $5.4 million.

26. 26 Other Highlights We assume an increase in pension contribution for municipal employees in the amount of $2.5 million. We assume a pay increase for municipal employees in the total amount of $12.2 million (3% base pay, 1.25% pay for performance). We assume a reduction of discretionary spending consisting of 3% for most departments and 1% for City Secretary and City Council ($10.3 million total). We assume a savings in Solid Waste landfill fees in the amount of $1.0 million.

27. 27 General Fund Health Benefits Expense COH Contribution as a Percent of Payroll*

28. 28 General Fund Full-Time Equivalents

29. 29 General Fund Pension Contributions FY2002-FY2011 (Excludes $300 million for Municipal Pension Fund in FY2009)

30. 30 Management Strategies We assume a Management Initiative Savings target of $22 million to be achieved from: –Consolidations of Human Resources, Fuel, Fleet Management, Payroll and Information Technology. –Restructuring of purchasing and inventory of parts utilizing NAPA citywide and reduction of take home vehicles to cut down on maintenance costs. –Managing city facility hours of operation more effectively. –Continued re-negotiations of contracts. Identify full cost of service recovery opportunities. Identify further cost cutting initiatives and implement through process improvements.

31. 31 General Fund Debt Service FY2002- FY2011 (Includes Departmental Transfers to Debt Service for Fleet and Other Equipment)

32. 32 General Fund Undesignated Ending Fund Balance FY2002-FY2011

33. Finance Department General Fund Five Year Plan FY2011 – FY2015

34. 34 Overview This 5-year plan is based on the FY2011 Proposed Budget. This plan highlights the financial issues facing us over the next five years and illustrates the choices we must make. Expenditures include legal mandates, staffing for new facilities, and contractual escalators. Capital outlay/equipment acquisition are not included. Assumes debt service for capital projects.

35. Finance Department Five Year Plan Revenues

36. 36 Revenue Summary ($ Thousands)

37. 37 Revenue Projections Property Tax Revenues –$45.1 million or 5.06% decrease in FY2011. –Assumes 1.16% decrease in FY2012, 1.48% increase in FY2013, 3.60% increase in FY2014 and 6.17% increase in FY2015. –Assumes current tax rate of $0.63875 per $100 of assessed valuation. Sales Tax Revenues –$13.8 million or 2.99% increase in FY2011. –Assumes 5.23% increase in FY2012, 5.72% in FY2013, 5.64% in FY2014 and 6.27% in FY2015. –Assumes LPA portion of revenue continue to grow faster than overall revenue.

38. 38 Revenue Projections Franchise Revenues –Electric franchise revenues increase by $1.2 million or approximately 1% in FY2011. –Gas franchise revenues assume a relatively flat growth in FY2011 with an increase of 1.0% per year thereafter. –Telephone franchise revenues decline 4.13% in FY2011 and reflect approximately 1.75% decline in growth per year. –Other franchise revenues decline 1.30% in FY2011 with an increase of 3.25% per year thereafter.

39. 39 Revenue Projections Industrial Assessments –During FY2010, assessments dropped 12.7%; assumes decrease of 4.0% in FY2011. –Assumes decrease of 1.0% in FY2012, increase of 1.50% in FY2013 and 3% per year thereafter. Intergovernmental –Assumes additional $22 million in METRO reimbursement offset by a decrease of $8 million in CIP Interfund.

40. 40 Revenue Projections Licenses & Permits –Assumes 0.06% decline in FY2011, 3.50% growth in FY2012 and 2% growth thereafter. Charges for Services –Assumes 2.88% growth in FY2011 and 2.5% growth thereafter.

41. 41 Revenue Projections Direct Interfund Charges –Assumes decline of 9.2% in FY2011 due to METRO funding and 4.55% growth thereafter due to interfund Police and Fire service to Airport. Municipal Courts Fines & Forfeits –Assumes slight increase of 0.38% in FY2011 and 2% growth thereafter. Miscellaneous –Assumes $15 million in management initiative through review of user fees.

42. 42 Revenue Projections ($ Thousands)

43. Finance Department Five Year Plan Expenditures

44. 44 Expenditure Summary ($ Thousands)

45. 45 Cost Increases Compensation increases as a result of contracted pay increases for civilian and classified employees. Health benefits increases: $6.8 million in FY2011, $9.0 million in FY2012 million, $9.4 million in FY2013, $9.9 million in FY2014, $10.4 million in FY2015. Police Department increases associated with recent staffing growth, contract increases, and pension payment increases.

46. 46 Cost Management Decrease solid waste landfill fees by 1 million in FY2011 and $500,000 thereafter. Limit operating costs for new facilities to $2.0 million in FY2011, $1.0 million in FY2012, $1.5 million in FY2013 and $1.0 million per year thereafter.

47. 47 Revenue & Expenditure Summary ($ Thousands)

48. 48 Debt Service ($ Thousands)

49. 49 Five Year Management Strategies Identify further cost-cutting and productivity improvements within departments Maintain the capital improvement plan and continue to keep it affordable. Identify revenue collection improvement opportunities. Explore refinancing opportunities of the general obligation debt, reducing the amount of increase for the next few years