AGENDA #7

MEMORANDUM

TO:                  Mayor and Town Council

FROM:            W. Calvin Horton, Town Manager

SUBJECT:       Update on Current Year Budget and Preliminary Financial Forecast

DATE:             January 19, 2001

The following report projects revenues and costs for major operating funds for the next five years.  Based on information now available and preliminary information on the revaluation of real property effective for next year’s budget, we believe the current total tax rate can be reduced by about 5.l cents next year, from 57.8 cents to 52.7 cents.  Based on the revaluation, we believe this reduction would still allow us to continue current services and programs, fund new technology improvements and provide for limited additional capital maintenance improvements in 2001-2002.

The preliminary revaluation data indicates that the combined equalized tax rate would be 48.2 cents.  Therefore, a potential tax rate for 2001-2002 of 52.7 cents would constitute an effective increase of 4.5 cents over the equalized rate.

Although our projections are based primarily on current services and positions, we must point out that Department Heads may recommend service changes in the budget proposals that they now are preparing.  In addition, our projections at this point do not include potential costs and revenues related to the planned annexation of the Southern Village and Notting Hill areas effective June 30, 2001.  The annexations will be considered as a separate proposal, with the assumption that additional property tax and other revenues expected from annexation will be sufficient for the additional service costs for these areas, with the exception of six firefighter positions partially funded in the current year’s budget.  Full funding for these positions was included in last year’s and in the current revised financial forecasts.  These positions are needed for service improvements in the southern part of Town and to address operations requirements.  

INTRODUCTION AND BACKGROUND

The Council begins the budget process each year by reviewing the Town’s long-range financial forecast as the starting point for budget discussions.

This memo provides an update on the current year budget and includes a revised five-year financial forecast for the Town’s major operating funds, considering the effects of property revaluation effective for next year’s budget. The preliminary forecast also reflects changes based on recent revenue receipts and revised estimated revenues for 2000-2001.  Any changes in revaluation data or additional information indicating an economic slowndown could require revisions to the preliminary forecast.

The major focus of the update is on the General and Transportation Funds. In addition, we include brief discussions of Parking and Housing funds.

Below is a summary of key points of the update, followed by a discussion of the revised forecast for each fund based on the most recent information.  The attached tables provide detailed revenue and expenditure projections.

This preliminary forecast expresses the difference between revenues and expenditures as potential tax rate equivalents, with 1 cent of the tax rate on the estimated tax base equal to about $374,000 in 2001-2002. Balancing the budget can be achieved by cost reductions, service changes, other revenue adjustments, a tax rate adjustment, or a combination of adjustments. The final budget will reflect the Council’s decisions on these issues.

SUMMARY

·        2000-2001 General Fund

Based on the receipt of major General Fund revenues for the first six months of this year, we believe total revenues for the year will be about $400,000 more than originally estimated, and will provide about half of the annual fund balance roll-over needed for next year’s budget.

·        2001-2002 General Fund

Based on preliminary data from both Orange and Durham counties on revaluation of the tax base for 2001-2002, our revised financial forecast indicates the General Fund budget for current services and programs, technology improvements and limited additional capital imrprovements could be funded with a tax rate of 49.1 cents, a reduction of 4.4 cents from the current rate of 53.5 cents.

Based on the preliminary revaluation data, a tax rate of 49.1 cents for the General Fund would constitute an effective increase of 4.5 cents from the estimated equalization rate of 44.6 cents.

·        2001-2002 Transportation Fund

Based on our revised forecast and continuation of the current level of federal and State operating assistance, we believe a Transportation tax rate of 3.6 cents (a reduction of .7 cents from the current rate of 4.3 cents) would be adequate to continue current Transportation services and routes with no change in fare and pass prices.  Considering the revaluation of property, a tax rate of 3.6 cents would be the same as the equalized tax rate, with no effective increase for the Transportation Fund.

·        Combined Tax Rate for 2001-2002

A reduction of 4.4 cents for the General Fund and .7 cents for the Transportation Fund would result in a combined potential tax rate of 52.7 cents for 2001-2002 compared to the present combined rate of 57.8 cents.  With a combined equalization rate of 48.2 cents, the total effective increase for next year would be 4.5 cents, and is shown as follows:

Calculation of Effective Tax Rate Increase

                                                    General Fund                 Transportation Fund                    Total

           Potential Rate for

               2001-2002                        49.1 cents                        3.6 cents                         52.7 cents

           Equalization Rate                44.6 cents                          3.6 cents                         48.2 cents

           Effective Potential Rate

                Increase                            4.5 cents                         0 cents                           4.5 cents

·        2001-2002 Parking Fund

For the Town’s Parking Enterprise Funds, parking revenues are expected to be adequate to cover operating expenses and debt service costs for 2001-2002. 

·        Other Funds

Based on current information available for the Town’s public housing programs, we are not aware of any specific proposals that would reduce federal operating subsidies or maintenance funding for these programs.

GENERAL FUND

Update on Current Year Budget

Based on the receipt of major General Fund revenues for the first six months of this year, we believe total revenues for the year will exceed budget estimates by about $400,000 reflecting the following increases and reductions in previous revenue estimates:

·        Estimated property tax revenue about $162,000 more than budgeted based on an estimated tax base of $3.041 billion, about $20,000,000 more than original estimates.

·        Cable franchise fees and occupancy tax revenues about $70,000 higher than budgeted.

·        Estimated sales tax revenue about $150,000 less than budgeted due to a smaller increase in final sales tax collections last year, resulting in a lower sales tax base than estimated at the beginning of the year.  In addition, apparently economic activity has been slower this year based on receipts in the first two quarters of the current year.

• Estimated franchise tax revenues about $35,000 more than original estimates based on receipts for the first two quarters of this year.

• Powell Bill receipts for street maintenance already received this year increased 4.7% over last year, or $60,000 more than original budget estimates.  Powell Bill funds statewide increased about 4.5% this year as in prior years.

• Interest earnings about $160,000 more than estimated due to the fact that average interest rates this year are about 1% higher than last year.

• Miscellaneous revenues including licenses, permits and transfers about $65,000 more than originally estimated.

Other General fund revenues including service charges and grants are expected to be equal to budget estimates for this year. 

In summary, overall General Fund revenues for this year, based on receipts to date, are estimated to be about $400,000 more than original budget estimates.  This additional revenue will provide about half of the annual fund balance carry-over of $800,000 needed for next year’s budget.  As in past years, we anticipate the other $400,000 will come from the expenditure side of the budget, with final expenditures about $400,000 less than budgeted for the current year.

 These estimates are conservative and preliminary at this point in the budget process.  We will keep the Council informed of any significant changes in revenue estimates.

Update on Five-Year Financial Forecast (2001-2002 through 2005 -2006)

Major issues for the General Fund budget for 2001-2002 include the revaluation of real property in both Orange and Durham counties effective for next year’s budget, and the planned annexation of the Southern Village and Notting Hill areas effective June 30, 2001.  Information on these issues is provided below.

Attached is an updated five-year forecast for the General Fund based on the revaluation and on assumptions noted for both revenues and expenditures.  These projections are preliminary at this point in the budget process and subject to change.

The attached revised forecast (based on the assumptions as discussed below) indicates a reduced potential tax rate of 49.1 cents for the General Fund (a reduction of 4.4 cents) would be sufficient in 2001-2002 to:

·        continue current services and programs

• continue the Town’s compensation program approved by the Council in the last two years,
• provide increased funding for technology improvements
• provide a limited increase in capital maintenance and renovation of existing Town facilities. 

 A tax rate at this level would constitute an effective increase of about 4.5 cents in the General Fund, based on the preliminary revaluation data provided by Orange and Durham counties. 

Tax Base, Tax Rates and Revaluation

The potential reduction of 4.4 cents in the General Fund tax rate results from the revaluation of real property in Orange and Durham counties which is expected to increase about 27%  (including growth), from $2,595,000,000 this year to $3,294,000,000 in 2001-2002.  With these changes, the total tax base, including personal property, motor vehicles and public utilities, would increase from $3,041,000,000 this year to a total estimated base of $3,744,000,000 for next year.  Therefore, the total change in the tax base would be about 23%.  At this level, l cent of the new tax base would equal about $374,000.

With a tax base at this level, the total equalization tax rate for the General and Transportation Funds would be 48.2 cents (44.6 cents for the General Fund and 3.6 cents for the Transportation Fund).  Detailed information on changes in the tax base and calculation of equalization rates is provided in Attachments A, B, C, and D.      

Assumptions on Basic Costs and Estimated Additions for 2001-2002

Our revised forecast includes the cost of current services and programs with basic assumptions as follows and estimated additional costs as noted.

As noted above, we have added two additional items to our previous forecast.  These include an allocation of $300,000 to begin funding technology improvements recommended by the Town’s Technology Committee, and $150,000 in additional funding to expand the capital maintenance program initiated last year for existing Town facilities.  We will provide more information on these proposals as the budget process continues.                                   

Planned Annexation of Southern Village and Notting Hill Areas

As noted previously, the assumptions on expenditures in our forecast do not include the service costs and revenues related to a planned annexation of the Southern Village and Notting Hill areas effective June 30. 2001.  We will be providing an annexation report to the Council on January 22 detailing the expected revenues and costs associated with the proposed annexation.

Based on preliminary data available at this point, we believe the additional property tax and State-shared revenues anticipated from the annexation will be sufficient to cover all costs related to providing services to these two areas. Initial information indicates revenues should be sufficient to cover estimated additional service costs for these areas, with the exception of six firefighter positions added for three months of the current year’s budget.  Full funding for these positions of about $265,000 was included in our financial forecast last year and in the revised forecast for next year and future years.  These positions would supplement services in the proposed annexation area, but are needed to improve service capability in the southern area of Town and to address revised safety regulations effective last year, irrespective of the proposed annexation. 

A preliminary annexation report will be presented to the Council on January 22, and we will provide additional information on the planned annexations as the budget process continues.

TRANSPORTATION FUND

A major issue for the Transportation Fund each year is the level of federal operating and capital grants and State operating assistance for the current year.  Based on our best estimates to date, we expect to receive about $735,000 in federal assistance during the current year, and we have already received $1.3 million in State assistance this year.  For 2001-2002, we have estimated about $750,000 in federal assistance and about $1,000,000 in continuing State assistance based on the amount of State assistance included in the State’s continuation budget for public transportation.

With these assumptions and the revaluation, our revised financial forecast for 2001-2002 indicates that Transportation services could be continued next year at current levels and current fares, and that the Transportation tax rate could be reduced by .7 cents, from 4.6 cents in the current year to 3.6 cents next year.  The potential rate of 3.6 cents would be equal to the equalized rate for the Transportation Fund, with no effective increase in the Transportation tax.

These projections are also preliminary at this point in the budget process and subject to change based on final federal and State funding assistance for the Transit system.

PARKING FUND

Our review of parking revenues and parking activity for the Town’s off-street parking lots this year indicates that parking revenues will be adequate to cover parking expenses and debt service cost in the current year and in future years.  We will keep the Council informed of any significant changes that would affect the parking facilities.

PUBLIC HOUSING FUND

Based on information available to date, we are not aware of any specific proposals that would reduce current federal operating subsidies, rental income or maintenance funding for the Town’s public housing programs.

CONCLUSION

Our revised financial forecast focuses on the General and Transportation Funds.  The forecast indicates differences between estimated revenues and expenditures expressed as tax rate equivalents based on the revaluation of real property effective for the next year’s budget.

Potential Tax Rate Equivalents of Needed Revenue

*See section above

ATTACHMENT

A.                 Tax Base and Revaluation Information (p. 20).

B.                 Calculation of Equalization Tax Rate (p. 21).

C.                 Calculation of Equalization Tax Rates by Funds. (22).

D.                 Potential Effection Tax Rate Increases (p.23).