Ms. Johnson presented the Town�s preliminary budget, stressing that it was a status report and not yet the Manager�s recommended budget.  She reviewed the factors affecting the budget, which include economic conditions, services and stability, debt service costs, the downtown development initiative, capital improvements, pay and benefits, and new facilities.

Ms. Johnson said the Town�s base budget was $50.237 million and it included $134,000 for the Town Operation Center, $224,390 for the Aquatics Center, and $60,020 for the Community Center.  There was a grant match for 12 new firefighters, totaling $117,000, a vehicle replacement fund at $226,867, and streets reconstruction at $90,000, she said.

Ms. Johnson noted that last year�s projections had included the use of $1 million in fund balance.  At that time, the Town had looked at almost a two cents shortfall in the General Fund and a four-tenths cent Transportation Fund shortfall, she said.  Ms. Johnson pointed out that there had been changes since the time of those projections, and she listed those changes.   

Ms. Johnson presented the General Fund estimated revenues for 2007-08.  She said there was a projected base budget shortfall of $310,000, and she reviewed priority additions that the Council had wanted.  Ms. Johnson explained that total available funds were approaching $50 million, and costs, including the additions, were $54.893 million.  This leaves a a shortfall of close to $5 million, she said. 

Ms. Johnson explained that there was approximately $2.1 million in fund balance that could reasonably be used.  This would still allow enough money for the proposed amounts of use for fund balance in future years to offset some of the debt, as planned, she said.  Ms. Johnson said that would still leave the fund balance at approximately 15 percent.   

With regard to the Transportation Fund, Ms. Johnson told Council members that projections were largely as anticipated, with a shortfall of $168,000.  She reviewed priority additions and explained that the shortfall would be approximately $385,148 with those added.  

Ms. Johnson mentioned other funds, such as stormwater management, parking, and public housing, and said they were as expected.  She discussed future budget considerations, and  presented a budget preparation schedule. 
   
Mayor Foy asked for clarification of a grid showing base budget inclusions and a deficit of about a half cent on the tax rate.  He noted that funding additions, which were listed in a column next to that grid, would create a nine cents difference.  Ms. Johnson replied that this would be correct if the Town used no fund balance, noting that a $1 million carry forward had been planned, as had the $1 million for debt service.

Mayor Foy asked what the fund balance would be without using anything but the $2 million that the Town had already planned to use.  Ms. Johnson replied that there was a roughly $9 million unreserved fund balance at the end of last year.  Mayor Foy ascertained that using another $2 million would bring the balance down to about $7 million (approximately 15 percent), which would protect the Town�s bond rating.  He verified that if the Town chose to use the $2 million the priority additions would still cost about five cents on the tax rate. 

Mayor Foy commented that the message from the staff was that the Council needed to prioritize, as they had in the past, and that there would be greater difficulty this year when trying to satisfy requests for funds.

Mayor pro tem Strom inquired about sources for the extra $100,000.  Ms. Johnson explained that this money had been set aside for use.  She noted that Town departments had been asked to cut their budgets and had been given a dollar figure to which they would be held.  

Mr. Stancil explained that $2 million was a planned appropriation of the fund balance.  The $2.1 million that could be applied to the gap between revenues and expenditures was in addition to that $2 million, he said.

Mayor pro tem Strom verified with Ms. Johnson that she had arrived at the $2.1 million figure after asking department heads to reduce their budgets. Mr. Stancil added that the Town would recommend that it be applied to one-time expenditures and the Council�s priorities.

Council Member Harrison asked if there were any bonds left to issue for open space or for sidewalks and traffic calming.  Ms. Johnson replied that there was available bond money left for sidewalks, street calming, and so forth.  However, the Town had issued all of the bonds that voters had authorized for public buildings energy bonds and for open space, she said, adding that there was a little more than $200,000 remaining for open space.

Karen DeHart, representing the High School Athletic Association, asked for continued support from the Town. There had been a decline in the number of events being held in the community due to recent issues, she said.  Ms. DeHart said the Association had been able to keep about 15 events in the Chapel Hill and Orange County areas.

Mayor Foy announced that Council Member Ward and Mayor pro tem Strom had met with members of the High School Athletic Association staff, the Chamber of Commerce, and Orange County Commissioner Chairman Moses Cary.  They had discussed the increase in funding that would be required to keep the Association�s headquarters in Town and to bring some championship events back to Chapel Hill, he said.   Mayor Foy explained that the group had made a commitment to find funds from sources other than the Town to accomplish this.

Council Member Kleinschmidt ascertained from Ms. DeHart that the Association needed funds from the Economic Development Fund and that this would come from the hotel/motel tax.

Council Member Thorpe asked if there was anyone from Chapel Hill on the Association�s board of directors.  Ms. DeHart replied that there was not and she explained their bylaws formula.  Council Member Thorpe said he would have a hard time giving away taxpayers� money without there being a representative from Chapel Hill on the board.

Whitney Kuhn, with the Chapel Hill-Carrboro YMCA, requested Community Block Development Grant (CDBG) funds for the after school program at the YMCA.

Traci Davenport, director of the Chapel Hill Museum, announced a permanent exhibit beginning in October 2007 to celebrate the history of Franklin Street.  She reviewed the plan, described fund-raising efforts, and requested $15,000 and $10,000 from the 2007-08 and 2008-09 fiscal budgets, respectively.

Michael Donaldson, representing The Franklin Hotel, discussed tourism in Town and noted that the average occupancy in Chapel Hill was 60 percent.  That means the Town was not making money on the remaining 40 percent, he said, and he pointed out that his request was low when compared to similar budgets in nearby towns.  Mr. Donaldson also spoke on behalf of hospitality employees, asking that they be given more consideration in Town discussions.
 
Robert Dowling, director of Orange Community Housing and Land Trust (OCHLT), requested a $29,000 increase in funding from the Town to be used for a property manager to maintain 125 properties and those that would be added in the future.

Daniel Prendergast, general manager of the New Residence Inn by Marriott, asked the Council to raise its  allocation to the Chapel Hill Carrboro Visitors Bureau by 1 percent, from $85,000 to $125,000 of gross hotel collections.

Susan Levy, representing Habitat for Humanity, spoke about CDBG and HOME allocations for affordable housing.  She said the HOME Consortium had supported Habitat�s request for $250,000 for second mortgages for 12 homes.  The total budget for those 12 homes was $1,235,000, or just over $100,000 per home, with an expected market value of $125,000 to $155,000, Ms. Levy said.

Ms. Levy explained that $929,000 of the total (or 75 percent of funding) would come from sources other than local government.  So, HOME funds, and the other funds that would be provided locally, would be leveraged four to one, she said.  Ms. Levy told the Council that Habitat had also requested $150,000 in CDBG funds for infrastructure costs for a subdivision  where Habitat hopes to build at least 30 single family homes and also partner with the Land Trust and EmPowerment to build another 20.  The total budget for that project is $3.9 million and local government funding projections, if all Habitat�s applications are successful, would account for about 35 percent of that, she said.  Ms. Levy also expressed hope that the Rogers Road Small Area Plan would take shape by the spring of next year.

Delores Bailey, director of EmPowerment Inc., reviewed EmPowerment�s history and activities and requested $50,000 from the Town�s 2007-08 general budget for operating expenses. 
 
Mark Sherbourne, chair of the Chapel Hill-Orange County Visitor Bureau, requested Town support for additional funding for marketing initiatives for the hospitality industry.

Laurie Paliocelli, director of Chapel Hill-Orange County Visitors Bureau, asked for $125,000, which would be a 1 percent increase in Town support.  With 40 percent unoccupied rooms, she said, there was a need for new audiences.  Ms. Paliocelli noted that every new person increase in occupancy yields $400,000 in additional room revenue for the Town.  She said they were aiming for a 10 percent increase, which would yield $4 million.

Mayor Foy noted that Ms. Johnson had characterized some things as one-time expenses and others as ongoing expenses and had said it was appropriate to use fund balance for one-time expenses.  He asked if at least some of the contributions to agencies (a $740,000 expenditure) could be moved to the one-time characterization.  Ms. Johnson replied that doing that would be possible, and Mayor Foy suggested thinking about some of them as one-time expenditures.

Council Member Harrison asked about the relationship between two lists for additions to staff.  Mr. Stancil explained that some of the positions were those that the Council had prioritized at its retreat.  He was proposing that they receive the highest attention, he said, adding that it would be somewhat unlikely, given the state of the Town�s financial condition, that other positions would be moved to that list. 

Mayor pro tem Strom said he wanted to think about those positions a bit more.  He asked Ms. Johnson about current development fees and other revenue sources.  Ms. Johnson replied that the Town was not collecting the full cost of the services provided by some development fees.  She said that Town departments had been asked to look at their fees.   

Mayor pro tem Strom noted that development applications had been coming in that differed from those in the past.  The Town might be in a stronger position to pay fees that represent the full cost of the service, he said.  Mayor pro tem Strom asked for more information regarding Town contributions to Orange County programs, such as senior centers.  He wondered if there was a way to push that obligation back to Orange County.  Mayor pro tem Strom noted that the Town no longer had a seat on the JOCCA Board.  He wondered if the Town should continue making that contribution, he said.  Mayor pro tem Strom said that he would have some recommendations for changes to the CIP when it comes up at the next Budget Work Session.

Mayor Foy pointed out that Parks and Recreation showed the greatest percentage change in its budget of any department.  He said about $280,000 of that was from the Aquatics Center and the Community Center. However, even without that amount, it is still almost a 10 percent increase from last year�s budget, said Mayor Foy.  Ms. Johnson offered to separate out those costs for the next Budget Work Session.

Mayor Foy commented that Chapel Hill would be operating the Aquatics Center for the entire County, just as it had with the Town Library. He remarked that this was a big burden on the Town.

With regard to EmPowerment�s request for $50,000, Mayor Foy noted that they had received a HOME grant for $250,000.  He asked if EmPowerment could use $50,000 of that grant for administrative expenses rather than receiving it from the Town. 

Housing and Neighborhood Services Coordinator Loryn Clark replied that HOME funds could be used for operating expenses in some circumstances.  She said it was possible that EmPowerment could tie their request to administrative costs for implementing certain projects.  Ms. Clark explained that EmPowerment would have to make the request to Orange County and discuss it with the HOME Consortium to clarify that use of the funds.  The $250,000 was specifically tied to development-related costs, but it is possible that they could reallocate their request, Ms. Clark said. 

Mayor Foy asked Ms. Clark to work with Dolores Baily on that.

Council Member Greene mentioned a letter from Orange County Commissioner Moses Carey regarding a request for funding for the Homelessness 10-Year Plan.  She asked Ms. Johnson if this had been included in the Town�s budget, and Ms. Johnson replied that it had not.

Council Member Greene noted that the plan had been adopted by the County, which would be asking the four government bodies to contribute to first year funding for a director for the plan.  Since the Council had endorsed the plan, she wanted to nominate it as a priority budget item, she said.

Mayor Foy commented that this needed to be on the table for further discussion. He said The Downtown Partnership had requested $85,000 from the Town.  They had a commitment of $85,000 from UNC, and the Town needed to calculate in $85,000 from the development district tax, he said.

a.	Retiree Health Insurance Liability.

Mayor pro tem Strom verified, with regard to the base budget, that the increase in fleet use charges was "real money" and was related to increased Public Works expenses.  He also requested more information about Carrboro�s consideration of limiting long term liability for health insurance in order to save costs over time. 

Mayor Foy commented that the $45 million figure seemed "alarming" when he read it.  He asked Ms. Johnson to explain it to the Council and public.  Ms. Johnson replied that there had been a change in accounting standards and that the actuary had calculated retiree health benefits differently based on assumptions about the future.  She said the number could change based on different assumptions.   

Mayor Foy noted that the figure would vary each time the actuary calculates it because the variables will change.  He ascertained from Ms. Johnson that the Town�s insurance was not capped by date or time of Medicare as some other agencies are. Mayor Foy asked why the Town would not simply provide Medigap and let Medicare be the primary insurer.  Ms. Johnson replied that doing so was a choice that the Town had not historically made.

Council Member Hill verified that the $45 million was the liability for the life span of the Town�s current group.  He ascertained from Ms. Johnson that this amount was higher than other municipalities because the Town�s retiree plan is better than others and because many employees have stayed for a long time. 

Mayor Foy asked why it was a better plan, and Ms. Johnson clarified the the Town�s health insurance was a very good benefit for retirees.

Council Member Hill recommended examining this, adding that it did not make sense to continue a plan that costs more if there is no real benefit. 
 
Mayor pro tem Strom suggested considering different scenarios and what their implications would be. He mentioned that the employee health liability line item of $560,000 seemed like an option this year, adding that this would be almost a penny on the tax rate.  Ms. Johnson replied that acknowledging the liability and having a plan to address it is essential if the Town wants to continue being favorably perceived by the bond rating agencies.  She said at least a short term plan and a plan to reevaluate later is the minimum that the Council should do.  In response to a question by Mayor pro tem Strom, Ms. Johnson explained that many other local governments had elected to continue "pay-as-we-go" for the time being. She said, however, that since Chapel Hill�s liability is larger than some of theirs she would recommend making a commitment to funding in some fashion.       

Mayor Foy verified with Ms. Johnson that the base budget under Personnel included basic pay, direct benefits to employees, retiree health benefits, current year health benefits, current year workers compensation, and unemployment insurance.   He asked her to break those numbers out for the Council, and she agreed to bring that back at the next Council meeting.  

Council Member Kleinschmidt clarified that $45 million is what the Town would have to pay out in the course of the retirement lives of the current retirees and current employees in their retirement lives.  The liability would go up if the number of employees increased, he said.  

Ms. Johnson explained that the $5.6 million figure, which includes current year, or normal, costs, was important to the Council in terms of what the actuary calculated for the cost for this year.  She said it was the Town�s choice whether to fund any, all, or some of that.

Council member Kleinschmidt asked how the $5.6 million is an expense if it is not being spent. Ms. Johnson explained that only $600,000 of that (for people who are currently retired) needed to be paid out in cash, but the rest must be shown in the Town�s financial statements. 

The Council discussed various factors that would change the numbers.  Mr. Stancil noted that the Town had not erred in any way and that the only change had been in accounting standards.  The expense issue was changing from a modified accrual basis to a full accrual basis, he said, explaining that this means that an expense is an expense when it is incurred and not when you spend it.  That is why the Town has some flexibility in how to address it, Mr. Stancil said, emphasizing that what matters to the bond rating agencies is that the Town have a plan for dealing with that.

Mayor pro tem Strom asked the staff to look into other alternatives that would affect future employees but not current employees.

Ms. Johnson emphasized that the Town should have a plan, possibly a short-term plan.

In response to questions by Council Member Ward, Ms. Johnson explained that the Town had an exceptionally high bond rating when compared to other towns and that the rating is based on overall good management and fiscal policies.  Changing any one factor would not jeopardize the Town�s bond rating, she said, adding that having a retirement plan is the most essential part. 
 
Mayor Foy asked about a $29,000 increase for a property manager that OCHLT had requested.  He wondered if there was a way to adjust a $640,000 fund to include that $29,000.

Mayor Foy asked to see the 15-year spreadsheet concerning capital improvements.  He also inquired about the $300,000 courthouse renovation.  Ms. Johnson replied that discussions were not complete on what would happen to the courthouse so this is a holding number for possible renovations.

Mr. Heflin explained that the Town had deferred a renovation project for a number of years, awaiting a decision about future uses of the building.  He said some of the repairs would have to be done regardless of who the tenant was.  Mayor Foy verified that this would be clear in the 15-year breakdown of the plan. 

Council Member Hill asked about renovations to Town Hall, and Mr. Heflin outlined some of those.  

b.	Town Contributions to Human Service Agencies.

Council Member Kleinschmidt ascertained from Ms. Johnson that last year�s and this year�s totals for the performance agreement were exactly the same and that, right now, the budget was showing total contributions to the Public Arts Commission and other agencies as flat with last year. 

Council Member Thorpe verified that the Town�s internship program had been included in the budget at the same funding as last year.