AGENDA #5d
MEMORANDUM
TO: Mayor and Town Council
FROM: W. Calvin Horton, Town Manager
SUBJECT: Mid-Year General Fund Financial Update
DATE: November 26, 2001
SUMMARY
Each year we plan expenditures and conservatively estimate revenues with the expectation that expenditures will be lower than projected and revenues will be higher than projected. The result is that we normally end the year with about $800,000 that can be carried forward to help pay the cost of the next year’s services, if needed. This year, however, economic conditions are worse than originally expected.
We believe that revenues will be lower than projected and that expenditures will have to be restricted in order to maintain a balanced budget. We have identified $975,000 in budgetary changes that we believe are necessary this year.
INTRODUCTION
The purpose of the report is to present an updated financial review based on audit results, first quarter revenues, information about changes in the economy, and State budget expectations. We anticipate revenue shortfalls in the General Fund and believe at this time, that other funds will not be significantly affected.
Based on revised estimates for major General Fund revenues, we project a possible budget shortfall of about $975,000. We have identified changes in planned General Fund expenditures totaling $975,000 that we believe are necessary to guard against the financial impacts of the potential revenue reductions.
Two tables are included that provide detailed information on the revised revenues estimates and on the expenditure reductions we recommend for the current year. Attachment I, extracted from the current year’s adopted budget, provides additional information about each of the State-shared revenues sources and the basis for our original revenue estimates.
We note that the revised revenue estimates are based on information currently available, and that estimates are subject to change as additional information is known or as economic conditions improve or worsen during the current year. We recommend that the Council consider this mid-year financial update at the Council work planning session scheduled for January 18. We will continue to monitor economic conditions and will present information to the Council at the January 18 meeting.
DISCUSSION
Revised Revenue Estimates
Our revised revenue estimates for the General Fund indicate that total revenues for the current budget year could be about $575,000 less than originally estimated. Detailed information on the revised estimates is included in the attached table. The combined shortfall in State-shared revenues, investment income and various fees total about $885,000, but is offset by about $320,000 in additional property taxes resulting from a larger tax base and higher collection tax rate than originally estimated. The resulting projected net shortfall in current revenues at this point in the year is about $575,000.
Below is a brief discussion of the issues resulting in revised estimates for major General Fund revenues.
Property Taxes and Occupancy Taxes
We estimate total property tax collections to be about $320,000 more than original estimates based on an estimated final tax base for the current year of $4.018 billion (versus a budget estimate of $3.962 billion), and an estimated tax collection rate of 98.5%, slightly lower than the actual collection rate last year. At this point, property tax revenue is the only major revenue source expected to exceed original budget estimates.
Currently we project that hotel/motel occupancy tax revenues will decline this year about $40,000 (from $640,000 to $600,000), but this estimate is subject to change (and perhaps further reduction) in the coming months.
State-Shared Revenues
1% and ½ % Sales Taxes
The current budget is based on estimated total sales tax revenues of about $6.65 million. Based on recent advice from the League of Municipalities, we believe sales tax revenues are likely to be flat or potentially lower than last year.
We base our revised estimates on the assumption of no growth in the base sales tax amounts compared to last year. We assume increases over last year attributed to the increase in population reported from the 1990 Census, and increases from the two annexations effective in the current budget year.
With these assumptions, we estimate a total sales tax revenue shortfall of about $365,000 this year. The larger shortfall is projected in the ½ cent sales tax portions distributed on a Statewide basis because we believe sales tax collections will be lower Statewide than in Orange County. We therefore project a smaller shortfall for the one-cent sales tax portion in Orange County.
Powell Bill Funds
Cities and Towns in North Carolina receive a portion of the State gasoline tax revenue that is required to be used for maintenance or construction of local streets within each jurisdiction. A total of 75% of the State distribution of these funds is based on the relative populations of each jurisdiction, and 25% is based on the total local street mileage within each locality. These funds, known as Powell Bill funds, were received in October in the amount of $1,553,000, about $49,000 less than the original budget of $1,602,000.
Although our allocation this year was significantly greater than last year, we attribute the increase primarily to the increase in population and to the increase in street mileage from the annexations. We believe the shortfall compared to budget estimates is due to the lower per capita and street mileage allocations by the State this year, and to lower growth in total gasoline tax collections Statewide (l.7% this year compared to 6.0% in the prior year).
Utility Franchise Tax
To date, only the first quarter payment has been received, which was about the same as last year. We project a small shortfall of about $17,000 for the current year, but this estimate is subject to change based on additional quarterly receipts.
Intangibles and Inventory Tax Reimbursements
The intangibles tax reimbursement paid annually was initially delayed this year pending adoption of the State budget, but was received in September in the amount of $503,000 for the General Fund portion, only $7,000 less than budgeted. The first half of the inventory tax reimbursement was also received in September (slightly less than budgeted). However, we believe the second half payment from this source scheduled for March may be withheld by the State due to State budget problems. At this point, we estimate a shortfall of about $95,000 from this source, assuming retention of the second payment.
Other State-shared Revenues
We estimate other State-shared revenues to be received as scheduled and budgeted, including State Fire Protection Funds ($850,000), and Beer and Wine Taxes ($205,000).
Investment Income
Due to the decline in interest rates received on Town investments since June from about 4.5% to about 2.0%, we estimate a significant shortfall in investment income compared to last year. At the current rate of about 2%, we estimate total earnings of about $200,000 compared to original budget estimates of $434,000. This estimate could change depending on the course of interest rates over the next several months.
Other Revenues and Fees
For other significant revenues and fees such as inspection fees ($600,000) and development review fees ($300,000), we estimate a small shortfall of about $25,000 based on activity to date. For the new commercial garbage collection fees budgeted at about $293,000 this year, we are unable to confidently estimate total collections for the year. This program began in October. Initial billings based on the choices of businesses indicate a lower level of extra collections than originally estimated, but we believe it is too early to accurately project total revenue this year. We note that the decline in business activity usually produces a decline in commercial refuse. For this analysis, we assume a potential shortfall of about $100,000 in this revenue source, subject to change as the program continues.
In summary, our revised revenue estimates at this point in the fiscal year indicate a total shortfall in current revenues of about $575,000.
Maintaining Fund Balance and Current Financial Position in the General Fund
At the beginning of the current fiscal year, the Town’s undesignated fund balance in the General fund was about $4.25 million, or about 12% of the current year beginning budget of $36.7 million. This amount is in the lower level of amounts recommended by the Local Government Commission for cash flow, emergencies and unforeseen financial opportunities. It is also among the lowest amounts held by our peer governmental units according to statistics maintained by the Commission. Our objective is to at least maintain this level of fund balance and overall financial position at the end of the current budget year.
The General Fund budget is balanced this year as in past years by a carryover amount of fund balance totaling about $800,000 (in addition to the reserve of $4.25 million noted above). In normal budget years, we rely on this $800,000 to be regenerated for use in subsequent budgets. Normally, revenues are about $400,000 more than budgeted and expenditures are about $400,000 less than budgeted, thereby achieving about $800,000 in savings that is carried over to balance the next year’s budget. Each year, we monitor the budget to make sure that we achieve the targeted amount of $800,000 in savings.
Because revenues may be about $575,000 short of budget estimates, there will be no contribution from the revenue side of the budget to make up the target amount of $800,000 in total savings. Thus, the total budget shortfall projected at this point will need to be addressed from the expenditure side of the budget. To address the total budget shortfall, we recommend restricting expenditures in the current year to save about $975,000 as discussed below.
Reductions and Changes in Expenditures
The attached table lists changes and reductions in current year expenditures totaling $975,000 that we believe are necessary to address the potential budget shortfall. Below are brief discussions of items on the list.
Projected Savings In Annexation Costs ($200,000)
The current year’s budget included about $1,365,000 in additional costs (primarily additional personnel in the Police, Fire and Public Works Departments) to provide service in the newly annexed areas. We estimate that the lag time in hiring new employees (particularly in the Police and Public Works Departments) will result in salary savings of about $200,000 in the current year.
Projected Savings in Vehicle Replacement Program ($250,000)
The Town’s surplus property sale in October (mostly vehicles) resulted in total surplus property revenue in excess of $220,000, resulting in $100,000 of extra revenue for the vehicle replacement program for the current year. As a result of the extra revenue, we will be able to reduce planned General Fund charges to the Vehicle Replacement Fund by $100,000 in the current year.
In addition to these savings, we also plan to delay vehicle lease-purchases for the current budget year until after January 1, 2002. Delaying the purchases will allow us to restructure the planned financing of these vehicles so that there will be no new payments for this program in the current fiscal year. We estimate the savings from this change will be about $150,000 in the current year. We note that, although in recent years we have implemented the financing package for vehicles in the fall, most of the vehicles are actually ordered after January l, and many are not available from State contracts until the spring of each year.
Continuing vehicle replacements in the spring of each year would allow us to achieve a one-time savings this year without increasing the annual costs in future years. With the extra surplus property revenue, we estimate a total reduction in the current year vehicle replacement program costs to be about $250,000.
In addition to these estimated current year savings, we believe we will also be able to reduce the total number and amount of vehicles to be purchased this year, because some vehicles in the fleet will not need to be replaced as soon as originally anticipated. We also anticipate a lower interest rate on the purchases this spring than originally estimated, so there may be some additional savings from this program when the actual lease-purchase bids are taken in the spring.
Financing Planned Capital Improvements after January 1, 2002 ($300,000)
The current year’s Capital Improvements budget includes about $300,000 (a transfer from the General Fund) for debt payments on capital improvements to be financed through installment purchase contracts. We recommend financing these projects after January 1, 2001, with payments to begin six months after the financing date. Therefore, the debt payments would not begin until next fiscal year. Since we had planned a full year’s debt payment next year, the delay this year would not increase the total annual payments, rather the payments would start next year instead of in the current year. This change would also be a one-time savings, and would reduce total payments (and the General Fund transfer) by $300,000 this year.
Fund Balance in the Capital Improvement Fund ($125,000)
About $100,000 in fund balance in the Capital Improvements Fund is available to reduce the General Fund transfer in the current year. This consists of $50,000 in savings last year that the Council held in reserve until the final State reimbursement revenues were received, and $75,000 from an older streetscape grant reimbursement recently received from the State.
General Expenditure Reductions ($100,000)
We are currently asking all departments to identify savings beyond normal lapsed salary that would collectively total about $100,000 in the General Fund. In this effort, we are attempting to identify real savings, not just a postponement of a known expenditure until next year, and we are reviewing positions vacancies on a case-by-case basis to determine if delays in filling positions are feasible.
SUMMARY
Our mid-year review of General Fund revenues indicates a potential shortfall of about $575,000 in current revenues. Combined with the need for about $400,000 in surplus revenues in order to maintain our current financial position, the combined potential shortfall for the current budget could total $975,000. We note that these estimates are based on revenue received to date and on information currently available. The overall financial picture is subject to change based on new information, actual revenue receipts in future months, and on changing economic conditions.
We will continue to monitor the overall revenue picture as the year progresses, and will keep the Council informed of any significant changes that may affect revenues and expenditures in the current year for the General Fund and other operating funds. Our next financial report and update will be made at the Council’s annual planning session scheduled for January 18, 2002.
11-26-01
REVISED ESIMTATES FOR MAJOR GENERAL FUND REVENUES
2001-2002
|
REVENUE SOURCE |
2001-2002 ORIGINAL BUDGET |
2001-2002 REVISED ESTIMATE |
OVER (UNDER) BUDGET |
STATUS |
|
|
|
|
|
|
Local Taxes |
|
|
|
|
|
Current Year Taxes |
17,888,000 |
18,245,000 |
357,000 |
Final except for vehicles |
|
Occupancy Tax |
640,000 |
600,000 |
(40,000) |
Subject to change |
|
Subtotal Taxes |
18,528,000 |
18,845,000 |
317,000 |
|
|
|
|
|
|
|
State-Shared Revenues |
|
|
|
|
|
1% Sales Taxes |
2,591,000 |
2,543,000 |
(48,000) |
Subject to change |
|
½ % Sales Taxes |
4,056,000 |
3,740,000 |
(316,000) |
Subject to change |
|
Utility Franchise Taxes |
1,984,000 |
1,967,000 |
(17,000) |
Based on 1st qtr. Subject to change |
|
Powell Bill |
1,602,000 |
1,553,000 |
(49,000) |
Final |
|
Intangibles Tax Reimbursement |
510,000 |
503,000 |
(7,000) |
Final |
|
State Fire Protection |
850,000 |
850,000 |
- |
Received quarterly |
|
Beer & Wine |
205,000 |
205,000 |
- |
Not yet received |
|
Inventory Tax Reimbursement |
170,000 |
74,500 |
(95,500) |
Assume Governor will withhold second payment |
|
Food Stamp Reimbursement |
12,000 |
11,500 |
(500) |
Final |
|
|
|
|
|
|
|
Subtotal State-shared |
11,980,000 |
11,447,000 |
(533,000) |
|
Other Major Revenues |
|
|
|
|
Planning Fees |
300,000 |
275,000 |
(25,000) |
Subject to change |
Inspection Permits |
600,000 |
600,000 |
- |
Subject to change |
Commercial Garbage Collection Fees |
293,000 |
193,000 |
(100,000) |
Subject to change |
Investment Income |
434,000 |
200,000 |
(234,000) |
Subject to change |
Subtotal Other |
1,627,000 |
1,268,000 |
(359,000) |
|
|
|
|
|
|
|
Grand Total |
32,135,000 |
31,560,000 |
(575,000) |
Subject to change |
11-26-01
PROPOSED REDUCTIONS/CHANGES IN BUDGETED GENERAL FUND EXPENDITURES FOR 2001-2002
Cumulative
Amount Total
Savings in annexation costs from slower implementation
due to necessary delays in hiring annexation employees $ 200,000 $ 200,000
Reduction in General Fund vehicle charges due to additional
unanticipated funds from sale of surplus property 100,000 300,000
Delay 2001-02 vehicle replacements until after January 1 with
financing terms six months in arrears (no additional
Finance planned Capital Improvement Projects after January 1
with semi-annual payments in arrears (no payments
future years) 300,000 750,000
General Fund Reductions beyond normal savings (all
Departments) 100,000 850,000
Fund Balance in Capital Improvements Fund 125,000 975,000
ATTACHMENT
- Excerpt from the 2001-2002 Adopted Budget (p. 9).
ATTACHMENT 1
FROM THE 2001-2001 ADOPTED BUDGET
General Fund Revenue Sources
Descriptions and Estimates
TAX REVENUES
Property Tax Revenues. Property tax revenues finance about 51% of expenditures for General Fund services. State statutes permit the valuation of personal property each year and real property at least once every eight years.
With the revaluation effective for 2001-2002, we estimate a total tax base of $3,962,600,000, which includes about $80,000,000 in normal growth, $622,000 due to revaluation, and about $218.6 millionfrom annexations effective June 30, 2001. At this level, the proposed tax rate of 46.1 cents is expected to provide about $17,902,000 in property tax revenue for the General Fund in 2001-2002. One cent on the tax rate would equal $396,000. The recommended tax rate of 4.3 cents for the Transportation Fund for 2001-2002 will also generate about $1,670,000 for the Town’s public transportation system.
 |
Property Tax Base
Property Taxes Collections
 |
Cable Franchise Fees. Franchises are special privileges granted by the Town to engage in certain types of business. Town revenue in this category is from fees received from Time Warner, which operates a cable television franchise in the Town. Cable companies are required to provide the Town 5% of their gross profits. For 2001-2002 we estimate total cable franchise fees of $335,000, or about $10,000 as in the current year.
Occupancy Tax. The occupancy tax is a locally administered tax levied on the occupancy of hotel and motel rooms and other comparable transient facilities. The Chapel Hill occupancy tax is 3% and is in addition to the sales tax imposed on room charges. We estimate total occupancy taxes of $670,000 in the coming year.
STATE -SHARED REVENUES
State-shared revenues continue to be the second largest category of revenues for General Fund services, comprising about 33% of total revenues. These State-shared revenues include several taxes enacted by the North Carolina General Assembly, collected by the State and shared with local governments based on a variety of distribution formulas.
Local Option Sales Taxes. The North Carolina General Assembly established a 1% local option sales tax in 1967, a ½% tax in 1984, and another ½% tax in 1986. The total 2% tax is collected by the State of North Carolina and returned to cities and counties quarterly in accordance with State law and State distribution formulas.
The 1% local option sales tax is the original 1% tax based on local retail sales within Orange County. The Town’s portion of this tax based on relative population within the County is estimated to be $2,290,000 for the current year. For 2001-2002, we estimate about a 5% increase to $2,591,500, with an additional $117,000 from annexations effective June 30, 2001.
1% Local Option Sales Tax
 |
The two ½ % local option sales taxes are also collected and returned to local governments by the State on a statewide per capita basis. These two sales taxes are expected to generate about $3,584,000 in the current year, and about $3,872,000 in 2001-2002, an increase of about 5% from normal growth and increase in the Town’s population. An additional $184,000 expected from the annexations would bring total revenue to $4,056,000.
Combined ½% Local Option Sales Taxes
 |
Utility Franchise Tax. The utility franchise tax is a State-collected revenue, with a portion of collections distributed to local governments on the basis of utility and piped natural gas gross sales within governmental jurisdictions. A franchise or excise tax of 6% of utility sales is levied by the State with 3% being distributed to municipal governments.
 |
Although formerly retained by the State, most of the growth in this revenue has now been restored to local governments. For the current year, we expect about $1,815,000 in utility franchise revenue, and estimate $1,984,000 for 2001-2002 including normal growth and $97,000 in additional revenue from annexations.
Utility Franchise Tax
Powell Bill. The Powell Bill revenue is a distribution of state gasoline taxes and a North Carolina Highway Fund allocation. In 1987, the North Carolina General Assembly raised the tax distributed to local governments to l.75 cents per gallon. The distribution to local governments is based on local system street mileage and on population. The General Assembly has restricted the use of this revenue to street related expenses.
The Town’s share of these funds for the current year totaled $1,380,000. For 2001-2002, we estimate an increase of about 10.5% from normal growth and a significant increase in population, to $1,421,000 from this source, and $76,000 in additional revenue from annexations (total of $1,602,000 for 2001-2002).
 |
Powell Bill
Intangibles Tax Replacement. The former intangibles tax was levied on money, stock and bond values, and other forms of intangible personal property. The tax was shared between the County and municipalities within the County based on a State distribution formula.
The North Carolina General Assembly has repealed the intangibles tax and has replaced it with a reimbursement that attempts to hold each county at least at its former level of distribution. The distribution within the county continues to be based on the relative tax valuations and tax levies of the governmental units. Because Orange County has had larger increases in its tax levy relative to the Town in recent years, the Town’s share of this revenue has declined from $590,000 in 1994-95 to $510,000 in the current year. We expect the Town’s share of this revenue to remain at about $510,000 for 2001-2002, although there is a possibility that the State Legislature may retain this revenue for the State, due to the State’s overall budget forecast for 2001-2002.
Intangibles Tax Replacement
State Fire Protection Funds. In 1983, the N. C. General Assembly appropriated funds to partially reimburse local governments for providing fire protection to State properties throughout the State. The Town’s allocation of these funds was $296,000 annually each year until 1997.
In 1997, the General Assembly appropriated an increase in funding for State fire protection, resulting in an increase in the Town’s allocation to $850,000 last year and in the current year. We expect this level of funding to continue in future years and estimate $850,000 for 2001-2002.
State Fire Protection Funds
 |
Other State-Shared Taxes. The other State-shared revenues received by the Town change little from year to year. They include Beer and Wine taxes of about $195,000 annually, and Inventory and Food Stamp Exemption taxes totaling about $182,000 each year. About $170,000 in inventory taxes is also subject to retention by the State in 2001-2002 based on the State’s budget forecast.
Total State-shared revenues over the last five years have increased from about $8.6 million in 1996-97 to an estimated $11.98 million in 2001-2002 as shown below.
Total State-Shared Revenues
 |
GRANTS
This category of revenues include local, State, and federal grants for various purposes totaling about $429,000 for 2001-2002.
The primary local grants include appropriations from Orange County to supplement the Town’s Parks and Recreation programs and services and the Town’s Library. The Parks and Recreation appropriation has remained relatively constant over the last ten years at $71,000, with a small increase to $81,000 for 2000-2001. The Library appropriation has increased from $146,000 in 1996-97 to about $241,000 in the current year. For 2001-2002, we estimate the same appropriation as in the current year.
There are no other major grants for 2001-2002, except an expected State appropriation for Library services of $34,000. All major grants for local law enforcement activities will expire in the current year.
CHARGES FOR SERVICES
This category of revenues reflects various fees and charges for a variety of services and programs offered by the Town, and totals $1,317,500 or about 4% of total General Fund revenues.
Planning. These fees are associated with the Town’s planning and development activities. The major revenue sources in this category are site plan reviews and subdivision applications. For 2001-2002, we recommend continuation of fees adopted last year to recover the cost of development review by all departments. The increases are expected to continue to generate an additional $160,000 bringing total planning fees to about $261,000 for 2001-2002.
Public Works - Sanitation. These fees are associated with the collection of garbage for commercial residents within the Town.
Public Works - Streets. The major revenue source in this category is payment from the State to the Town for the provision of maintenance of signals, signs and street markings along State roads within the Town.
Parks and Recreation Fees. A variety of fees and charges associated with the revenue generated from the operation of parks and recreation programs are levied to recover a portion of the expenses incurred by various programs.
LICENSES/PERMITS/FINES/FORFEITURES
Privilege Licenses. These are fees levied on various trades, occupations, professions, businesses, or franchises that are located or do business within the Town. The fee schedule is approved by the Town Council based on guidelines from the North Carolina General Assembly, with revenues totaling about $35,000 annually in the past. For 2001-2002, we recommend an increase in the license tax for miscellaneous businesses which is expected to bring total revenues to about $81,000.
Vehicle Licenses. The Town currently imposes a fee of $15 on all vehicles registered within the Town limits. The fee is attached to the citizen’s tax bill and collected by the County. For 2000-2001, the Council adopted an increase of $5 per vehicle, allocated to the Transportation Fund. The additional revenue from the $5 increase is estimated to provide $125,000 for the Transit Fund this year and in 2001-2002. Total revenue for the General Fund is expected to remain about the same as in the current year, or $407,000.
Permits. This category includes charges for services provided by the Planning and Inspections Department staffs. These include inspection, engineering, and special use permits. Revenue in this category is closely tied to the local economy, and is currently generating about $810,000 annually.
Library Fines and Fees. The majority of revenue in this category comes from fines charged for over due library materials. Revenue has been relatively constant since 1994-95 totaling about $110,000.
INTEREST ON INVESTMENTS
The General Fund share of all interest earned on the Town’s investments is recorded in this category. Interest rates have averaged about 6% initially this year, but have declined recently to about 4.5%. For 2001-2002, we estimate about $441,000 in investment income for the General Fund.
MISCELLANEOUS, TRANSFERS, AND FUND BALANCE
Miscellaneous Revenues. The primary miscellaneous revenues include sale of fixed assets and cemetery lots, and court cost reimbursements. Miscellaneous revenues total about $223,600 for 2001-2002.
Transfers. This category reflects funds transferred from other Town funds to the General Fund, primarily to recover administrative and indirect costs from other Town enterprise funds and services. For 2001-2002, these include estimates of $351,000 from Parking Enterprise funds, and $657,000 from the Transportation Enterprise Fund. The transfers total $1,051,000, or 3.0% of total General Fund revenues.
Appropriated Fund Balance. This represents an appropriation of fund balance for general operations. In accord with Town financial policies and practices, this amount is approximately equal to the expected surplus in budgeted revenues each year, and the under-spending of budgeted appropriations each year, normally totaling about $800,000. This appropriation has remained constant over the past ten years. For 2001-2002, we recommend the same amount, $800,000.