At tonight’s City Council meeting, City Manager Bill Lindsay and Finance Director Belinda Warner will deliver a balanced $144,881,043 budget proposal with a cash reserve of at $11.9 million, which is nearly $1.9 million above the minimum amount required per the City Council’s reserve policy.

The agenda/packet for the Tuesday, June 16, 2015, Regular Successor Agency and Richmond City Council Meeting is on the web.  Follow the link below to view:  
http://sireweb.ci.richmond.ca.us/sirepub/meet.aspx.

Predictions of doom and gloom have been rampant in the media and by some Council members but appear to have been premature. For example, on June 11, Sean Pyles wrote in As History of Deficits Plagues 2015 Budget, City Staff Seek Creative Solutions: “The stakes are high as the city prepares its 2015-16 budget for approval at the end of this month. The budget shortfall may reach nearly $9 million this year, almost $3 million deeper in the red than last year’s budget.”

On May 29, Karini Ioffe wrote in Moody's downgrades Richmond, cites pension debt, increased spending: “The city is facing a $9 million structural budget deficit, something City Manager Bill Lindsay has said he is committed to eliminating by next fiscal year, which starts July 1.”

While the budget is balanced, the City Manager is clear that there will be more future work to do on unfunded Other Post-Employment Benefits (OPEB), and the unfunded future pension obligations remain unaddressed.

Following is the budget staff report:
                                                                                                                                                                       
DATE:            June 16, 2015

TO:                 Mayor Butt and Members of the City Council

FROM:            Bill Lindsay, City Manager
                        Belinda Warner, Finance Director

SUBJECT:     INITIAL REVIEW OF THE FISCAL YEAR 2015-16 OPERATING BUDGET

STATEMENT OF THE ISSUE:

Staff is requesting that the City Council receive an overview (presentation) on the draft budget and the steps that have been taken to achieve structural balance.  Because the Council will not have had adequate time to review the budget proposal, we do not recommend that the Council make budget decisions at this meeting.

As it currently stands, the operating budget is balanced for FY 2015-16 with operating revenues and expenditures at approximately $144.2 million.  The draft proposed budget shows an ending cash reserve (as of June 30, 2016) at $11.9 million, which is nearly $1.9 million above the minimum amount required per the City Council’s reserve policy.

RECOMMENDED ACTION:

RECEIVE the draft fiscal year 2015-16 operating budget.

FINANCIAL IMPACT OF RECOMMENDATION:

A summary of the budget that was adopted on July 1, 2014, mid-year adjustments approved in February 2015, projected actual operating results for FY 2014-15, and the draft proposed budget for FY 2015-16 is on the following page:

*           Civic Center Refinancing cost savings originally estimated at $9,300,000 for FY 2014-15, will be in the actual amount of $9,386,000 to be received in two installments.  This is presented in the table to provide a comparable estimate of the ending balance for FY 2014-15.

In sum, staff anticipates beginning FY 2015-16 with a General Fund balance approximately $4 million higher than was projected at mid-year, and one that meets the City Council’s adopted reserve policy.  Please also note that, during FY 2014-15, the operating reserve was maintained using one-time funds generated from the Civic Center bond refinancing.  While staff is also expecting one-time revenues during FY 2015-16, which should significantly improve the City’s balance sheet, these are not being used to balance the budget, and staff does not recommend that these funds be programmed until they actually materialize.

DISCUSSION:

FY 2015-16 Proposed Budget

The FY 2015-16 Budget Summary – All Funds (Attachment 1) provides a financial overview of the City.  As it currently stands, the General Fund budget is balanced for FY 2015-16 with operating revenues and expenditures at approximately $144.2 million.  The draft proposed budget shows an ending cash reserve (as of June 30, 2016) at $11.9 million, which is nearly $1.9 million above the minimum amount required per the City Council’s reserve policy.  There are two specific items of note in the proposed operating budget:

• Staff has included an expenditure reduction labeled “Targeted Cost Savings” in the amount of $500,000.  Staff established this “contra-expenditure” category during the mid-year review of FY 2014-15, with the idea that opportunities for program savings would be identified and realized as they become known during the day-to-day budget management process.  Actual savings realized using this procedure for FY 2014-15 were $1,686,453.  As a result, staff is confident that this procedure can be utilized for FY 2015-16 to achieve savings of at least $500,000.  This will be measured and reported during the mid-year budget review.

• Consistent with City Council policy, no one-time revenues are being used to balance the operating budget.  While staff does, in fact, anticipate some significant one-time cash increases during FY 2015-16, staff recommends that any financial programming of these funds not occur until they actually materialize.

Revenue

For FY 2015-16, General Fund revenues and transfers total approximately $144.4 million.  Attachment 2, entitled General Fund Revenue Summary for FY 2015-16, lists the various revenue streams that go into the General Fund.  It includes historical revenue data from FY 2012-13 through projected revenue for FY2015-16. The notes analyze the difference between FY 2014-15 and the projected amount for FY 2015-16. The top three revenue streams that make up over 80% of the General Fund (GF) Operating Revenues are property taxes, sales taxes and utility user taxes.

There are two significant changes in General Fund revenue for FY 2015-16:

• Sales and use taxes are projected to increase by $8.5 million, with $8,000,000 of that increase resulting from the voter-approved increase (Measure U approved in November 2014);

• The revenue agreement with Chevron, which first impacted FY 2009-10, has a scheduled decrease in revenue in the amount of $6,000,000.

Expenditures

For FY 2015-16, General Fund expenditures total approximately $144.4 million. Attachment 3, entitled Budget Historical Comparison, provides a summary of expenditures for each department, and provides historical expenditure data from FY 2011-12 through proposed expenditures for FY2015-16.

As shown in the Budget Historical Comparison, ten of the sixteen departments have reduced expenditures for FY 2015-16 compared to their budget for FY 2014-15, and total General Fund expenditures are increased by 3.80%.

Personnel Changes

Attachment 4 to this report provides a Multi-Year Comparative Position Listing from FY 2011-12 through the proposed FY 2015-16 budget.  As shown in this report, between FY 2011-12 and FY 2015-16, there was a reduction of 63 positions (7.9% reduction in workforce).  For non-safety positions, the number of positions reduced was 49 (11.7% reduction in workforce).

Historical and Future Outlook

In recent years, during the severe recession, one-time, non-operating revenues have been a significant factor in maintaining the City’s annual operating budget.  Last year, and on several occasions during the recession, the City of Richmond used these one-time revenues to maintain its policy-mandated fund balance while it incurred operating deficits.

In last year’s budget report, staff wrote:

(The City of Richmond) has, and will continue to have, a structurally unbalanced budget unless strategic changes are made to the City of Richmond organization. A structural budget deficit results from a fundamental imbalance in revenues and expenditures, as opposed to a deficit based on short-term factors.

Staff also wrote in this report that:

Staff is being mindful not to be short-sighted by proposing drastic reductions in programs and personnel from which the City would have difficulty in recovering in the long term, or by deferring important investments that will become more expensive if delayed. 

During the past year, many strategic budget changes have been made that have allowed for this balanced budget to be presented, and staff believes that this has been done without long-term damage to services.

However, there are still many investments that are being deferred, notably in areas of infrastructure.  Staff believes that one-time investments in infrastructure (such as a significant investment in street and road reconstruction) should be strongly considered when (or if) significant one-time revenues are received during FY 2015-16.

The following are general areas that staff will continue to examine in its budget management activities:

• Continue to analyze the structural integrity of all funds, which includes funds subsidized by the General Fund;
• Implement organizational restructuring;
• Work with bargaining units to discuss the City’s future budget constraints and possible solutions, especially as they relate to Other Post-Employment Benefits (OPEB);
• Research future revenue opportunities for new and existing projects and programs;
• Continue seeking grant funds;
• Continue to take steps to eliminate General Fund subsidies for revenue-based programs;
• Work with departments to identify additional cost reductions and efficiencies.

Staff recommends the following continued review schedule for FY 2015-16:

June 23:          Detailed City Council review;
Department head question and answer;
Development of City Council budget “checklist.”

June 30:        (Please note that this is a 5th Tuesday, special meeting).

Staff written response to City Council questions and “checklist” items identified at the June 23rd meeting.

Adoption of FY 2015-16 budget.

DOCUMENTS ATTACHED (See http://sireweb.ci.richmond.ca.us/sirepub/meet.aspx):

Attachment 1 – FY 2015-16 Budget Summary – All Funds
Attachment 2 – General Fund Revenue Summary for FY 2015-16
Attachment 3 – Budget Historical Comparison
Attachment 4 – Multi-Year Comparative Position Listing