HomeMy WebLinkAbout1991-05-07; City Council; 11147; Fiscal condition update1
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CITY ATTY MTG, 5/7/91
DEPT. FIN CITY MGR:
RECOMMENDED ACTION:
c UPDATE OF FISCAL CONDITION
No action required.
ITEM EXPLANATION:
On December 19, 1990, the City Council was briefed on the fiscal condition of
the City. The staff overview indicated that Carlsbad was feeling little effect of
the Gulf War and the economic recession, and that 1990-91 would end with a
balanced budget,
Staff has monitored revenues and expenditures since the December report and
has found some reversals in earlier trends. The drought, recession and war have
all influenced the weakened revenues we are now seeing. Property tax revenues
are suffering from reduced turnover of property, which, when turned over is
assessed at higher values. Sales tax revenue for December was below that
received for that month for the previous two years. March sales tax is below
those revenues received for the past three years. Transient occupancy tax is also
weak, falling behind last year's pace. Development related revenue in general
appears to be maintaining the levels projected in December, 1990. These most
significant revenues to the City, in addition to all others, has resulted in a
reduction of $2.7 million in anticipated 1990-91 revenues.
In order to insure that the City would end the year balanced, several actions were
between now and year end. Budget transfers for new programs or equipment are
being held to a minimum. Departments worked together to identify areas where
savings would be made, which resulted in the identification of $2.9 million of
reduced expenditures. These actions appear to balance the 1990-91 budget.
The weak economy has had a further impact upon the preparation of the 1991-
92 budget. While in December, 1990, some growth in revenues was suggested,
that picture has changed. Revenues continue to be sluggish and future growth
is formulated on a lower base. While a 10.9% increase in 1990-91 to 1991-92
revenues was believed possible in December, that has now fallen to a 5% increase
for a total of $43.4 million. The result is a budget being designed with no new
staffing or programs. This approach allows the City to enter the new fiscal year
with a balanced budget, and with the expectation that if the economy in Carlsbad
improves, budgets can be revised. The Council still needs to be aware of a
possible raid on City revenues by the State as they attempt to balance their $13
billion deficit. The City's exposure to revenues which flow through the state
range from 2% to 5% of the General Fund budget. State claims on these funds
will result in bringing Carlsbad's spending level down to or below the 1990-91
level.
taken. An informal hold has been put on all but the most necessary hiring
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Page Two of Agenda Bill No. 'f lq?
It is unknown when the economy will recover, and whether a full or partial
recovery will occur. Important to understand is the near future plans to
construct the library, Larwin Park and Alta Mira Park and their operational impacts on the General Fund. These added facilities coupled &th a depressed
revenue base show expenditures growing at a faster rate than revenues.
EXHIBITS:
1. Memo to City Manager dated May 1, 1991 outlining the City's fiscal
condition.
May 1, 1991 a 0
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TO: CITY MANAGER
FROM: Financial Management Director
UPDATE ON mSCAL CONDITION
On December 19, 1990, the Council held a workshop session to discuss a variety of topics
including the fiscal condition of the City. At that time, staff provided an overview of the
local economic climate based on information available through the first part of December.
Since that time, war in the middle east, the recession, global economics and the drought
have all taken a shot at the regional economy. It is clearly time to revisit the question of
Carlsbad's fiscal future and review both 1990-91 and 1991-92 in light of the most recent
data.
In December, it appeared that Carlsbad had not yet been adversely affected by the national
economic recession. Staff anticipated that General Fund revenues would exceed projected
expenditures by approximately $2.85 million, primarily due to savings rather than
additional revenues. Although there appeared to be no immediate problem, Council asked
that staff continue to closely monitor revenues and expenditures in light of the uncertain
economic picture.
Since that report, the economy has continued to soften and the effect of the recession has
hit critical proportions for the state and many of our neighbors. This report will bring the
Council up to date on the fiscal condition of the City for the remainder of this fiscal year
and will review some of the forecasts for 1991-92.
Our April, 1991 review indicates several areas of concern. First, General Fund revenues
are falling below the December projections. Total revenues are now expected to total
$41.65 million by year end, down $2.7 million or 6% from the December 12th estimate.
Areas which have suffered most from the soft local economy are outlined below. Graphics
demonstrating the revenue discussion may be found at the back of this report.
PROPERTY TAX - $13.4 million, down $500,000
Property taxes are usually one of the most consistent sources of revenue for the City
of Carlsbad. Over the years the growing tax base has provided substantial support
for expanding services and programs. This year, however, the property tax base has
softened along with the rest of the economy. A large portion of the tax base is tied
to the increase in property values as property is sold on the market. The extremely
slow real estate market combined with the slower than normal growth in the value
of property has combined to slow the City's revenue from property taxes this year
as well as next.
Property tax revenue estimates have been reduced by $500,000 from the prior
estimate of $13.9 million to reflect the projected collectable county opening charges
and supplemental tax billings. Opening charges represent the base property tax
revenue calculated on the value of property at the last lien date and total about
$13.2 million. 4 collections in Carlsbad usually ex !!? ed the total opening levy
because of supplemental tax collections during the year. Supplemental taxes are
collected as property is sold at values higher than the assessed value. The original
estimate of tax collections now appears to have been optimistic because
supplemental taxes will be depressed due to the soft real estate market.
SALES TAX REVENUE - $9.4 don, down $1.4 million
Sales tax revenue has softened since the last report to the Council. The fiscal
forecast prepared in December was based on data available through November,
1990, and included several months of payments which are estimated by the state.
Sales tax information is now available through March, 1991, and includes the
critical month of December. First,
December sales tax payments are the first indications of how the holiday shopping
season will go. Although the process of paying sales taxes to the City is somewhat
complex, it is accurate to say that a portion of the December tax payment includes
some of the late November shopping rush. Second, since the December payment
includes only a portion of the holiday season, it can be used as a predictor of sales
tax revenue for the next three months when the remainder of the tax revenue is
received.
Sales for December were disappointing at best. Tax revenues were lower than the
amounts received in December 1989 or 1988. March revenues were even lower,
falling behind tax revenues for the same period for the past three years. These
major shortfalls, plus the expected shortfall for June resulted in a major decrease
in the sales tax revenue estimate for this year. Projections indicate that sales tax
revenue will be $9.4 million, approximately equal to last yeds (1989-90) receipts.
December is important for two reasons.
TRANSIENT OCCUPANCY TAX - $3.2 million, down $400,000
Revenues from Transient Occupancy Taxes have mirrored the declines in other
segments of the economy. Current TOT collections have fallen slightly behind last
year's pace and show no signs of strengthening. The recommended reduction will
bring the estimate to $3.2 million, or about $400,000 below last year's total of $3.6
million.
DEVELOPMENT REVENUE - No overall change.
While some development revenues have slacked off, others have exceeded their
targets. Reduced revenues are expected in building permits, down $SSO,OOO from
December 1990, as the number of permits issued continues to be lower than
projected. Engineering fees are also down from the December projection by
$300,000. Planning activities are still strong in Carlsbad, reflected in a $140,000
increase in revenue over the December projection. Indications are that at year end,
development revenues will be at the same level as 1989-90.
The table on the following page compares the revenues projected in December 1990
and April 1991 and the resulting changes. Estimated revenues for 1991-92 are
shown to the right of the solid line.
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Total Expend's 41,500,000 41,689,800 0
Net Revenue (Deficit) 2,853,556 5,200 (2,658,556)
43.965.000 5.46%
0 -100.00%
Salary savings a1 @ are not enough to balance the 1, e 0-91 budget. In order to insure that expenditures will not exceed revenues, departments were asked to look
for areas where additional savings could be realized. Through this process, the City ,
has reduced its projected expenditures by $2.9 million, which will result in a
projected $5,200 excess of revenues over expenditures. If this financial position can
be maintained, the City will end the year with a balanced budget. In addition to
managing the hiring of personnel, budget transfers for new programs or equipment
are being held to a minimum. The goal is, of course, to maintain a balanced
budget.
Approximately 30% of the savings identified were in the areas of salaries and
benegts. Deferral of consultant projects accounts for 8% of the total, while capital
outlay accounts for 3%. Some projects within the street overlay program will be
deferred and total 15% of the savings. Reducing the level of contingency by
$500,000 comprises 17% of the total reduction resulting in an available balance of
$100,000. Other savings were identified in numerous maintenance and operation
accounts which account for 27% of the total.
The table below details the current revenue estimate, current appropriation, and the
impact of identified savings on the year end balance.
ESTIMATED REVENUES 40,895,000
GAS TAX REVENUE 800,000
APPROPRIATIONS 44,577,300
LESS DEPARTMENTAL BUDGET SAVINGS (2.887.500)
RESERVES
The General Fund entered 1990-91 with $12.4 million in reserves. This figure was
reduced by $2.4 million for 1989-90 commitments (encumbrances and budgeted
expenditures) and planned 1990-91 assistance to other hnds (tree and median
maintenance, cultural arts, vehicle replacement, data processing, and general capital
construction) and results in a balance of $10 million.
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Of this $10 millies4 million was set aside for land e a,,.pisition at Alta Mira park
and pooled insurance requirements. After meeting these reserve comntirrnents arid
loans for James Drive storm drain and golf course construction, the available reserve
balance at year end is forecasted to be $6.2 million.
The table below demonstrates the applications of reserves and the resulting fund
balance.
1991-92 GENERAL FUND RESERVES
GENERAL FUND BALANCE - 6/30/90
BUDGETED COMMITMENTS
89-90 ENCUMBRANCES & CARRY FORWARD
12.4
(1.1)
90-91 BUDGET FUND TRANSFERS (1.3) (2.4)
AVAILABLE RESERVES AT 6/30/90 10.0
COUNCIL RESERVE 4.0
UNDESIGNATED 6.0
USE OF COUNCIL RESERVE
ALTA MlRA PARK 2.5
GEN'L LlAB POOL INSURANCE 06 (3.1)
USE OF UNDESIGNATED FUNDS
GOLFCOURSE 0.3
JAMES DRIVE STORM DRAIN 0.3
OTHER 0.1
(0.7)
VAILABLE BALANCE - 6/30/91 6.2
1991-92 BUDGET
The weak economy in 1990-91 is causing fiscal ripples that will rock the budget
boat for 1991-92. According to the editors of The Economist, a well respected
economic journal, the world can expect the recession to continue into the summer,
but recovery may be around the corner. We may see signs of improving economic
conditions as early as the fall of 1991 and certainly by the beginning of 1992. The
Wall Street Journal editors and writers generally echo these sentiments with
predictions of recovery as early as fall of 1991.
Predictions of an economic revival due to the war in the middle east, and a post war
recovery linked to the spending of battle pay on durable goods (such as
automobiles) have proven to be wrong. On a national and local level the Sun Diego
Union as well as the other sources cited above reported that the rebound has not
occurred, or if it has, it is much less than was expected.
The State Department of Finance, in their publication Calijioriria Ecoitoinic Indicators,
adds their voice to the chorus with a prediction of recovery in 1992. They are
cautious about 1991 by saying that "There are a number of reasons to expect that
the economic upturn will be less vigorous than the typical pattern ..." Among these
are the financial problems of some of the nation's largest retailers, and the hesitaricy
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of the nation's acial institutions to finance an exp a 'ng economy in the wake
of the Savings & Loan crisis.
Translating all of this into a form useable at the City of Carlsbad is a formidable
task. Although Carlsbad has a diverse economic base mixing retail, tourism, and
industry with a strong property tax base, the City will not be immune to the
continued effects of a weak economy. Projected revenues for 1991-92 have been
modified to reflect what is known about the current revenues, and the expectation
that the economy is not primed for a near term recovery. A total of $43.4 million
is projected for 1991-92 revenues, which is approximately 5% higher than the $41.6
projected for 1990-91. The constrained revenues of the 1990-91 fiscal year coupled
with a modest increase in the base for 1991-92 result in a narrow range for growth
services with no new positions. In order to accomplish this, however, substantial
decreases have been made in maintenance and operation and capital outlay
accounts. This results in fewer projects and programs slated for completion during
91-92. The outlook for 1991-92 is a "hold the line" approach with the expectation
that, as economic conditions improve, the Council will be in a strong position to
consider revisions to the budget. The preferable position is one that allows the City
to enter the new fiscal year with a balanced budget based on the most conservative
revenue picture. As we gain confidence that additional revenues will be available
on a long term basis, we can reconsider programs on the basis of merit.
There is one additional cloud on the budget horizon that bears watching. The State
of California is facing a record $13 billion budget shortfall for 1991-92. Although
the governor and legislature are working on a variety of measures to raise
additional revenue and cut costs, there is a fear that they will look to local
government revenue sources as a means to balance the deficit. It is likely that the
state will attack some or all revenue sources that flow through their control as a
means of spreading the fiscal pain. These sources include the Motor Vehicle In-Lieu
Fee ($2.2 million or 5% of the General Fund) and other state subventions
($450,000). In addition, a proposal by the Governor to allocate new sales tax
growth on a per capita basis rather than situs (point of sale) would have a
devastating effect on Carlsbad's long range economic condition. The City's exposure
could represent from 2% to 5% of the General Fund budget depending on how the
proposal is drafted. If these or other revenue sources are disturbed by legislation,
Carlsbad will be facing budget reductions in the 1991-92 budget that may bring
spending down to or below the 1990-91 level.
in expendituresl The 1971-92 budget is balanced and contains full staffing and
FIVE YEAR FORECAST
The erosion of a solid financial base upon which to build future revenues can have a significant impact on the near future. Within the next five years, the City has plans to construct a library, Larwin Park, and Alta Mira Park. There are significant
cost factors involved in bringing these facilities on line. Funding the operations of
the new facilities results in a forecast showing that expenditures are growing at a
rate faster than available revenues. Council may wish to consider deferring the
construction of some of these projects as the new CIP is considered in June.
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Again, the we ak@ onomy plays a major role in this 1 @ than positive forecast. If
we assume that Carlsbad's revenue base will return to its pre-recession levels by the
end of 1991-92, the long range forecast improves dramatically, If we assume that
the damage done by the recession is never fully recovered and that the base for
forecasting future revenues is the existing picture, the outlook becomes even bleaker.
In preparing a long range plan it is essential that the City remain flexible in the
timing of projects and new programs. The City cannot afford to be forced forward
with major capital projects unless there is some certainty that revenues will be
available to support the operation of the facility.
The staffs job is to keep the City on the leading edge of budgeting and long range
planning, cost recovery, fee setting, and cost containment; and to keep the Council
informed on the condition of the budget and the foreseeable fiscal future. By staying informed, the Council and staff can avoid being surprised by the state, the
7economy or the cost of operating programs developed during better economic times.
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CITY OF CARLSBAD
SALES TAX HISTORY BY MONTH
Thousands 1200
1000
800
600
400
200 JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN
Month
1987-88 + 1988-89 X 1989-90 -e- 1990-91 ..-.._
CITY OF CARLSBAD SALES TAX HISTORY = CUMULATIVE
Millions 10
8
6
4
2
0 JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN
Month
1987-88 - 1988-89 X 1989-90 - 1990-91 __.__
6
5-
4-
3-
2-
1-
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P. ,\ I,
1, I\ ,
k..
----___ _._ - - - . - o+----- t/---=? I I
14
12
10
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CITY OF CARLSBAD
TOT TAX HISTORY BY MONTH
Thousands
_<.-- _____
JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN
Month
--.-- 1988-89 + 1989-90 - 1990-91
CITY OF CARLSBAD
TOT TAX HISTORY - CUMULATIVE
Thousands 4000
3500
3000
2500
2000
1500
1000
500
0 JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN
Month
----- 1988-89 f 1989-90 ;IC 1990-91
3/15/91 ESTIMATE - $3.2 MILLION
500
400
300
200
100
0
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