AGENDA #2a

MEMORANDUM

TO: W. Calvin Horton, Town Manager

FROM: Kay Johnson, Finance Director

SUBJECT: Budget Issues and Preliminary Estimates for 2006-07 Budget

DATE: January 12, 2006

Attached is a discussion of Budget Issues and Preliminary Estimates for the 2006-07 Budget. The paper reviews the status of the current year’s budget and presents preliminary estimates for next year’s budget. The estimates for next year have been prepared in a format which shows a base budget with possible additions for both the General Fund and the Transportation Fund.

The estimates are only preliminary, because we have not yet received departmental budget requests, advisory board requests or held public hearings. We have only made preliminary estimates of the costs for the move to the new Town Operations Center.

We look forward to receiving Council direction as we proceed in budget preparation.

BUDGET ISSUES AND PRELIMINARY ESTIMATES

FOR 2006-07 BUDGET

GENERAL FUND

Brief Update on Current Year Budget

Revenue in the current year is on target with budgeted amounts except:

Sales tax revenues are anticipated to be above budget by about $500,000. Actual receipts for last year were greater than expected; however, we have only received three month’s sales tax for the current fiscal year.
Interest earnings are anticipated to be higher than budgeted by about $200,000 because of interest rate increases. We received a better banking agreement when CCB changed over to SunTrust, and we received over $4 million in property tax from a single mortgage company two months early.
Other taxes and licenses are anticipated to be $90,000 greater than originally estimated because cable franchise fees increased substantially in 2005-06.
The State subsidy to the transit system is now estimated to be $3,390,000, $896,000 more than the State estimated last year when we prepared the budget. The State subsidy is based on the total funds available and the relative size of system ridership within the State.

General Fund expenditures appear to be reasonable in comparison with the budget. We have imposed limits on department costs in recent years’ budgets that make it less likely that there will be significant unused funds at the end of this year. In the past, the Police Department has often been able to return a substantial amount in lapsed salaries back to the General Fund. Because of recruitment and retention efforts undertaken this year, we do not anticipate a material underexpenditure relative to the budget this year. In addition, as fuel prices have increased, we still may face the need to take budget originally allocated for other purposes to cover the fuel cost increases in the General Fund.

In the Transportation Fund, personnel costs, fuel costs and maintenance costs are running higher than normal at this time of year. Personnel costs may be underbudgeted because of overtime needs. Unusually low maintenance costs in 2004-05 have not recurred in 2005-06. The volatility of fuel prices significantly impacts the Transportation budget, and we are concerned that costs may exceed our original estimates for 2005-06. However, these possible additional costs would be covered by the increased amount of State subsidy.

Overall Budget Issues for 2006-07

Key issues for the upcoming budget for 2006-07 include:

Economic conditions. While it is still early, we anticipate a slowing of the economy for the State. See the article in Attachment 1.

Fuel Costs. We anticipate increased fuel costs over the amounts budgeted for 2005-06 of approximately 20 cents per gallon for all types of vehicle fuel.

Bond Sale. Per the Council’s proposed schedule, we would have a bond sale of $7.75 million in fall of 2006-07. The sale would require an interest only payment in spring of 2007 of approximately $200,000.

Downtown Development Initiative. We made a preliminary recommendation that the Council use $500,000 from existing funds to support parking for affordable housing at the development of Lot 5 and the Wallace Deck. We anticipate that we would have a reduction in parking revenues when building begins on Lot 5 in early 2007. There would also be some additional costs for management oversight and related costs.

Cost of operating the new Town Operations Center. These costs include increased operating costs, such as utilities, for the larger-sized plant. We also estimate that we will need additional fuel because the new site is further from the center of Town than the current site. In addition, we anticipate a three-month transition period during which we will need to have both the new and the current site in use.

Capital Improvements. We need to carefully review the 15-year capital improvements plan to ensure that we are meeting capital maintenance needs for Town facilities.

Pay Plan. The Town pay plan needs to maintain competitive compensation that continues to attract quality Town employees, based on prevailing wages in the Triangle labor market.

Benefits. Medical benefits are currently projected to increase about 11% town-wide. Workers’ compensation costs are expected to rise about 3% in all funds except transportation, where we anticipate a 12% increase in costs. The increased costs relate in part to increased medical costs and in part to actual experience.

Assumptions and Preliminary Estimates of Major Revenues in the General Fund for 2006-07

The State economy is expected to stay the same or slow from the current pace.

We estimate the property tax levy to grow by about $225,000 to $25.2 million. The largest component of the property tax is the levy on real property. We have received preliminary estimates from Orange County and have based the estimate on preliminary information together with historic trends for the overall tax base. We estimate an increase of about 1.5% overall.

Estimated sales tax revenue of about $9.0 million would be about $260,000 (or 3%) over projected sales tax revenues for 2005-06.

Franchise tax revenue is estimated to be about $2.1 million. This is an increase of about $160,000 over the current year budget.

Beer and Wine tax revenue is estimated at $210,000, $5,000 more than in the current year budget.

Fuel tax (Powell bill funds) for street maintenance is estimated to total $1.5 million, about $37,000 more than received this year.

Interest earnings of about $340,000 are estimated to equal the current year’s interest earnings.

State fire protection funds are included at the same level $850,000 as in recent years. We anticipate receiving an additional amount which is yet to be determined by the State. We will adjust projections once we learn how much in additional funds the Town will receive from the overall increase approved by the State legislature.

In summary, we estimate total General Fund revenue in 2006-07 of about $47.0 million. In addition we anticipate a normal use of $800,000 in funds carried forward from 2005-06.

General Fund Cost Issues and Preliminary Estimates for 2006-07

Base Budget

The base budget includes revenues and costs to continue current Town programs at the current level of service.

The full year costs of pay increases authorized for nine months in 2005-06 will require an additional $131,000.

The projected increase in medical insurance for the current level of service is estimated to cost $341,500.

We estimate that we will not need to increase the budget for workers’ compensation in the General Fund for 2006-07. While our estimates of the 2005-06 workers’ compensation costs for the Town were accurate in total, we overallocated costs to the General Fund and underallocated costs to the Transportation Fund. As a result, no budgetary increase is required in the General Fund.

Contractual arrangements for capital projects currently under contract for the recommended 15-year Capital Improvements Program total $283,000.

Fuel cost increases are estimated to be $44,000 because of the increased cost per gallon of fuel of approximately twenty cents.

Fuel costs are expected to increase because of greater distance to the new Town Operations Center for six months ($40,000).

Increase in electricity costs for 6 months in the new Town Operations Center is estimated preliminarily at $122,000.

Transition costs for three months from current facilities to new Town Operations Center are expected to be a one-time cost in 2006-07. We estimate that there will be a three month period during which we will be moving from our current facilities to the Town Operations Center. During that time there will be duplicate costs for items such as utilities and custodial services. We have not yet estimated the total costs, but have estimated that utilities will be approximately $14,000.

Vehicle replacement costs are estimated to increase by $86,000 to cover the full year cost of the debt service on the fire truck, two garbage trucks purchased in 2005-06 and other regularly scheduled purchases.

Potential Additions

Employee compensation adjustments to remain competitive in the Triangle labor market, approximately 4% of payroll ($760,000).

A communications and computer systems analyst for six months ($45,000).

Grants to other agencies at prior year levels ($718,400).

Funding for the recommended 15-year Capital Improvements Program, additions not under current contract ($1,909,000).

Bond debt payment for possible new bond issuance ($200,000).

No provision has been made for increases in operating costs, except as noted above.

Considering the issues noted above, attached is a summary of our preliminary cost estimates for a General Fund base budget for 2006-07, and estimates for potential additions to the General Fund base budget.

Fund Balance in the General Fund

Changes in accounting and reporting regulations caused fund balance to increase by almost $2 million at the end of 2004-05. The Town no longer has to maintain a reserve equivalent to the value of employee leave balances. As a result, fund balance is at 18% of our budget for 2005-06, higher than the Town policy recommendation of at least 12%. Preservation of fund balance at about 13.5% would be prudent, because our debt service payments are high in comparison with our total expenditures. At the time we financed the Town Operations Center, bond rating agencies noted that the Town’s ratio of debt service to total expenditures would increase above the average rate for similar governments with our bond ratings after that new borrowing. The bond rating agencies will value the fund balance as an offsetting factor when evaluating the overall economic health of the Town. We expect that a higher fund balance could help us retain our AAA and AA+ bond ratings, which allow us to have a low cost of borrowing.

Nonetheless, the Council could reasonably consider using about $2 million for one-time capital improvements projects or other one-time costs. Fund balance could still remain at about 13.5% of the budget. The Council could also consider using a portion of the balance for projects that we might otherwise finance through debt, for example, the possible improvements to the Community Center.

Beyond 2006-07

The Council will need to continue to review the plan for the issuance of the remaining General Obligation debt of $25 million, authorized in November 2003, along with issuances for planned capital improvements. If the Council proceeds with the planned bond sale in fall of 2006, we anticipate an additional debt service payment of about $800,000 in 2007-08. Debt service on existing debt will increase by about $326,000 from 2006-07 as well, since we elected to pay reduced principle on the Town Operations Center debt in the first two years, to ease debt service payments in 2005-06 and 2006-07.

General Fund Conclusion

1 cent of the General Fund tax rate in 2006-07 is estimated to generate about $535,000.

The preliminary General Fund base budget (excluding compensation adjustments and grants to other agencies) is estimated to total about $45.1 million and could be funded with estimated total revenues of $49.0 million including appropriated fund balance and $2 million in one-time use of fund balance, leaving about $3.9 million for potential additions to the base budget.

Potential additions to the base budget, include:

Employee compensation adjustments ($760,000).
A communications and computer systems analyst for six months ($45,000).
Grants to other agencies at prior year levels ($718,400).
Capital projects not currently under contract ($1,909,000).
Bond debt payment for possible new bond issuance ($200,000).

These additions would require additional revenue of about $3.6 million next year for a total estimate of $48.8 million in expenditures. We have shown the total revenues available including $2.8 million in fund balance comprised of $800,000 in normal carry-forward and $2 million in a one-time use, with a remaining balance available of $266,000 in revenue over costs.

As the Council establishes the budget for 2006-07 other factors would need to be considered. We have not yet received departmental budget requests; although, we anticipate requests for additional police services for the downtown, additional fire protection services and more complete estimates of the costs associated with the new Town Operations Center. We also anticipate that additional costs associated with long-range transit planning.

TRANSPORTATION FUND

Preliminary Revenue Estimates for 2006-07

A major issue for the Transportation Fund each year is the level of federal operating and capital grants and State operating assistance available for transportation services. Revenue estimates include:

· Our preliminary estimate of federal operating assistance includes almost flat funding of $1,115,000.

· We anticipate that we will receive State operating assistance of $3,396,000 for 2005-06, $896,000 more than we budgeted. A portion of the increase is one-time and a portion is continuing. We estimate that in 2006-07 we will receive $2,934,000, an increase of $434,000 over the 2005-06 budget.

· We anticipate that the University and Carrboro will continue to contribute to the system at current levels.

· Our preliminary estimate of total revenues available for next year would be about $12.7 million.

Preliminary Cost Estimates for 2006-07

· Estimates include expected medical insurance increase of 11% ($111,000).

· Workers’ compensation increases of 12% over the current year’s estimated actual for a budget increase of $66,000.

· Unemployment costs are estimated to increase by $11,000.

· We have increased the fuel budget from about $1,253,000 to about $1,763,000 ($510,000). We used a rate of $2.50 per gallon and $2.20 per gallon to cover an anticipated increase in the average cost per gallon for buses and other transportation vehicles, respectively. Of that total increase, $130,000 is attributable to the additional miles required for six months working from the new Town Operations Center. We made our calculations using the number of total weekdays for half a year multiplied by the average number of buses leaving per day together with the additional round trip distance (8 miles) from the current site to the new Town Operations Center site.

· We had preliminarily estimated that electricity costs will increase by $63,000 ($12,000 because of price increases, $46,000 for the additional cost for the new Town Operations Center, and $5,000 for transition costs).

The total preliminary estimate of costs to continue current routes and fare free service is about $13.2 million next year. Expenditures at this level could require about $460,000 in additional revenue of which approximately $154,000 would need to come from the Town with the balance from our partners.

Potential additions to the base budget for transportation include general market and merit adjustments beginning in October of 2006 of about $223,000. With the addition of the pay adjustments, costs exceed revenues by about $683,800. If the potential additions were funded, the Town would need to contribute approximately $228,000 and the balance would need to come from our partners. The Transportation Fund has adequate fund balance at the 12% of budget level, but does not have additional fund balance available for the 2006-07 budget.

OTHER FUNDS

Initial review of parking revenues and parking activity for the Town’s off-street parking lots this year indicates that parking revenues would be adequate to cover parking expenses and debt service. However, Parking Lot 5 is expected to close in early 2007. We estimate that we will forgo approximately $130,000 in revenue from the lot in 2006-07. We have calculated that some of the current use will go towards filling other lots and on-street parking at a higher rate than we currently have. Since we do not have a regular lot attendant, we do not anticipate a significant cost reduction associated with closing Lot 5.

For the Town’s public housing program, we expect a reduced subsidy in 2006-07. Estimation is made more difficult, because the federal government is requiring a new budgetary year for public housing. The federal subsidy will be determined on a calendar year basis; although we will continue to budget on a fiscal year basis. As a result, we may need to amend the public housing budget mid year, when we learn of the amount of the subsidy for public housing for the second half of the fiscal year.

ATTACHMENTS

1. Article on Bond Strategists: Top Forecaster Sees U.S. Recession from Bloomberg.com, January 2, 2006 (p. 8.1).

2. General Fund Preliminary Revenue Estimates for 2006-07 (p. 10).

3. General Fund Preliminary Cost Estimates for 2006-07 (p. 11).

4. Transportation Fund Preliminary Revenue Estimates for 2006-07 (p. 12).

5. Transportation Fund Preliminary Cost Estimates for 2006-07 (p. 13).

6. General Fund Projections 2005-06 to 2009-2010 (p. 14).