AGENDA #3

BUDGET ISSUES AND PRELIMINARY ESTIMATES

FOR 2005-06 BUDGET

GENERAL FUND

Brief Update on Current Year Budget

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

• Powell Bill revenues are above budget by $158,000 because of an increase in State dollars available for Powell Bill distribution overall.
• Sales tax revenues are anticipated to be above budget by about $155,000 based on present trends. 
• Interest earnings are anticipated to be higher than budgeted by about $36,000 because rates are expected to remain higher than originally projected.
• Licenses and permit revenue is anticipated to be $50,000 greater than originally budgeted because of fees charged to developers for traffic impact studies; however, this amount is offset by costs of the same amount.
• Property tax revenues are anticipated to be below projections by about $100,000 because of reduced collections in prior year taxes.  The County has improved collections, and as more taxes are collected in the current year, the amount of past due taxes collected is reduced.

We believe that revenues at year end are likely to be about $300,000 above the original budget.  At this point, we also believe that expenditures may be about $500,000 below the original estimate.  Therefore, we should be able to maintain a balanced budget in the General Fund and save $800,000 for use next year, consistent with practice in previous normal years. 

Overall Budget Issues for 2005-06

Key issues for the upcoming budget for 2005-06 include:

• The one-time transfer from the Stormwater Management Fund of $402,000 will not recur.

• The budget in 2004-05 included a one-time use of $491,000 in fund balance which will not be available for the 2005-06 budget.  Late in 2002-03 the State released funds that had previously been withheld from local governments.  The Council decided to use $491,000 of the released funds as a part of the 2004-05 budget. 

• New debt service for initial work on the Town Operations Center ($2,000,000).

• New debt service for General Obligation bonds ($277,000), included in current bond payments.

• A continued slow pace of economic recovery for the Town and for the State as a whole.

• The need for a pay plan to maintain competitive compensation that continues to attract quality Town employees, based on prevailing wages in the Triangle labor market ($750,000).

• Projected potential increase of about $462,000 (15%) in employee medical costs as this sector of the economy becomes less competitive and medical costs continue to rise.  A projected potential increase of about $40,000 (5%) in workers’ compensation costs because of increased medical costs, even though experience has improved.

• No donation from Carol Woods is included in the initial estimates; in 2004-05 Carol Woods contributed $125,000.

Property Taxes and Revaluation

Every four years Orange County revalues all County properties to adjust real property for changes in market values.  The County just completed a revaluation and has established current values for County properties as of January 1, 2005.  The new values will be the basis for assessing property taxes for fiscal year 2005-06. 

We estimate that real property values have increased about 22% over previous values, based on information now available and exclusive of normal growth of $50 million.  Below we calculate an estimated equalization rate that would allow the Council to raise the same amount in revenues as would have been raised without the revaluation.  Current tax rates are 51.6 cents and 5.9 cents for the General Fund and the Transportation Fund, respectively, with a combined rate of 57.5 cents.  The estimated equalization rates are 41.9 cents and 4.9 cents for the General Fund and the Transportation Fund, respectively, with a combined equalization rate of 46.8 cents.

The chart below shows the estimated equalization rate for the Town’s property tax rates based on the revaluation:

Note: All tax rates are calculated in cents per $100 of assessed value.

Before revaluation, the property tax base was estimated to increase by about 50 million to $4.45 billion next year, assuming about a 1.5% growth over an estimated base this year of $4.4 billion.  Revenue on the estimated base would be about $22.6 million.  After revaluation, the property tax base was estimated to be about $5.4 billion.  Using the equalization rate of 41.9 cents, the General Fund would collect the same $22.6 million.

Assumptions and Preliminary Estimates of Major Revenues in the General Fund for 2005-06

• The State economy will continue at the current pace in 2005-06.

• Sales tax revenue is expected to increase about 1%, to $7.5 million. 

• Franchise tax revenue is expected to be about $2.1 million.  This is an increase of about $60,000 over the current year budget estimate.

• Beer and Wine tax revenue of about $210,000, $5,000 more than in the current year.

• Powell bill funds for street maintenance total $1.4 million, about the same as received this year.

• Interest earnings of about $160,000 are based on rates increasing gradually to about 2.5%.

• State fire protection funds will continue at the same level as in this year ($850,000).

• Other service charges, fees, permits, licenses and transfers at current levels, with the exception of a decrease in engineering permit fees.

In summary, we estimate total General Fund revenue of about $41.8 million, including normal use of $800,000 saved from this year for use in 2005-06.

General Fund Cost Issues and Preliminary Estimates for 2005-06

Base Budget

• Debt payments for the Town Operations Center ($2,000,000).

• Paying full year costs of pay increases authorized for 9 months in 2004-05 ($210,000).

• Providing funds for a projected increase in medical insurance ($462,000) and workers’ compensation costs ($40,000).

• Continuing funds for the recommended 15-year Capital Improvements Program, projects under contract ($631,000).

• Increase in landfill tipping fees ($22,000).

• No provision has been made for increases in operating costs except for $67,000 in increased utility costs, $9,000 in computer replacement costs and $100,000 in vehicle replacement costs as necessary to prudently maintain equipment replacement funds.

Potential Additions

• Continuing adequate employee compensation adjustments to remain competitive in the Triangle labor market ($750,000).

• Continuing funds for technology improvements ($70,000).

• Continuing funds for the recommended 15-year Capital Improvements Program, additions not under current contract ($1,114,000).

• Continuing level payments for human service contracts and other grants to outside agencies ($557,700).

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

Considering the issues notes above, attached is a summary of our preliminary cost estimates for a base budget for 2005-06, and estimates for potential additions to the base budget.

Beyond 2005-06

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, vehicle and computer replacement.  Attached is a graph of the Town’s possible future debt payments using current plans for borrowing.  The chart shows that Town debt is expected to increase gradually because of the planned General Obligation sales in 2006-07 ($7,750,000), 2008-09 ($8,805,000) and 2009-10 ($8,805,000). 

General Fund Conclusion

• 1 cent on the tax rate in 2005-06 is estimated to generate about $540,000.

• The estimated base General Fund budget (excluding compensation adjustments and grants to other agencies) totals about $44.5 million and, if funded with estimated total revenues of $41.8 million, including appropriated fund balance, would leave a shortfall of about $2.7 million or 5.0 cents on the tax rate.

• Potential additions to the base budget, include:

• Compensation adjustments ($750,000),
• Additional life insurance coverage ($12,000),
• An additional computer analyst ($70,000),
• Grants to other agencies at prior year levels ($557,700), and
• Capital projects not currently under contract ($1,114,000).

These additions could require additional revenue of about $2.7 million next year, equivalent to about 5.0 cents on the tax rate.

· A base budget of $44.5 million plus $2.5 million in potential additions would result in a total General Fund budget of $47 million and would require a tax rate of 51.5 cents or, 9.6 cents above the equalization rate.

TRANSPORTATION FUND

Preliminary Revenue Estimates for 2005-06

· 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.

· Our preliminary estimate of federal operating assistance includes an anticipated increase from $1,024,000 to $1,116,000, or about $92,000. 

· We anticipate that we will receive State operating assistance of $2,894,000 for 2005-06, the same amount that we expect to receive in 2004-05.

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

· We anticipate an increase in operating revenues for Tar Heel Express and special events of approximately $40,000.  Revenues for these services have been trending upward over the past several years. 

· Our preliminary estimate of total revenues available for next year would be about $12.6 million.

· The tax rate for Transportation for 2004-05 is 5.9 cents.  The equalization rate for Transportation is estimated as 4.9 cents.

Preliminary Cost Estimates for 2005-06

Base Budget

· Our preliminary estimate of costs to continue current routes and fare-free service is $12.4 million.

· Estimates include expected medical insurance increase of 15% ($144,000) and workers’ compensation increases of 5% ($13,498).

· We anticipate an increase in the cost of fuel from about $700,000 to about $900,000 ($200,000), using a rate of $1.50 per gallon to cover an anticipated increase in the average cost per gallon.

· The total base costs would be about $12.4 million next year using these estimates. Expenditures at this level could require no additional Town revenue.  

Potential Additions

· Continuing adequate employee compensation adjustments to remain competitive in the Triangle labor market ($209,000).

Transportation Fund Conclusion

1 cent on the tax rate in 2005-06 is estimated to generate $540,000.

The estimated base Transportation Fund budget (excluding compensation adjustments) totals about $12.4 million.

Compensation adjustments of $209,000 are a potential addition to the base budget.

The addition would leave a balanced budget in the Transportation Fund.  No increase in the tax rate would be required based on these preliminary estimates.

Combined Potential Tax Rate Effects of General Fund and Transportation Fund

We have not received or reviewed budget proposals from Department Heads and have not heard the requests of Advisory Boards or citizens that will be presented at upcoming public forums.  We also have not received requests from our Transit partners, the University of North Carolina at Chapel Hill and the Town of Carrboro, regarding their interests.

The table below summarizes the preliminary budgets for the General Fund and the Transportation Fund and gives the property tax rate equivalents for the preliminary estimates.

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.

· For the Town’s public housing program, we anticipate a subsidy no higher than what we actually will be receiving in 2004-05.  Public housing’s subsidy was about $25,000 less than originally budgeted, because of changes if the way the federal government calculates the subsidy that were made subsequent to Town budget preparation.  In addition, changes in costs occurred after adoption of the Town’s Housing Department budget in April.  (The early schedule is required by federal regulation.)  The changes in cost are shown below:

§ $8,000       Federal Housing and Urban Development Department addition of resident participation allocation requirement

§ $18,000     Addition of Orange County recycling fee

§ $14,000     Addition of Town stormwater management fee

As a result of the additional costs and reduced subsidy, the Public Housing Department must decrease its spending by about $65,000 from the original 2004-05 budget.  We anticipate similar subsidy and cost issues for 2005-06 and will adjust the budget accordingly.

ATTACHMENTS

1. General Fund Preliminary Revenue Estimates for 2005-06 (p. 9).

2. General Fund Preliminary Cost Estimates for 2005-06 (p. 10).

3. Transportation Fund Preliminary Revenue Estimates for 2005-06 (p. 11).

4. Transportation Fund Preliminary Cost Estimates for 2005-06 (p. 12).

5. Components of Excess of Costs over Revenues in the General Fund (p. 13).

6. An Overview Potential Future Debt Service (p. 14).

7. Council Budget Calendar (p. 15).