MEMORANDUM

TO:                  Mayor and Town Council

FROM:            W. Calvin Horton, Town Manager

SUBJECT:       Status Report on Development of the 2002-2003 Budget

DATE:             March 26, 2002

REDISTRIBUTED:              APRIL 3, 2002

INTRODUCTION

The purpose of this memorandum is to report the status of work on development of the 2002-2003 budget.

This is not the Manager’s recommended budget.  The Manager’s recommended budget will be presented to the Council on April 22.

 

SUMMARY

General Fund

We believe the cost of providing General Fund basic services next year (with no employee compensation adjustments) would require different potential tax rates based on varying assumptions regarding revenues received from the State.

·        Receiving the same State-shared revenues as in the current year would allow us to provide basic General Fund services with the present tax rate of 46.1 cents. 

·        Assuming retention of the reimbursement revenues ($680,000) by the State, a potential tax rate increase of 1.5 cents could be required to fund basic General Fund services. 

·        Assuming State retention of revenues from the reimbursements, beer and wine, and franchise taxes ($2,930,000) could require a potential tax rate increase of about 7.0 cents to fund basic General Fund services.

·        Providing compensation increases consistent with the labor market would require about a 2.0 cent tax rate increase in addition to any of the above scenarios.

Transportation Fund

Based on preliminary estimates of revenues and costs for the Transportation Fund, we believe that current fare-free Transportation services could be continued next year with no increase in the current Transportation tax rate of 4.3 cents.

 

Budget Process To Date

The Council began the budget development process on January 18, 2002, with discussion at the annual planning retreat, followed by a community forum on January 29.

Nine Town advisory boards made budget requests and comments in work sessions conducted on February 13 and 27.

The Council received budget presentations from fifteen Town departments in meetings conducted on February 27 and March 1.  

Remaining Budget Schedule

The Council will conduct a community forum on the 2002-2003 budget on March 26. 

The Manager will present a budget proposal on April 22, and the Council has scheduled budget work sessions on April 3 and 24, May 15, and June 12 and 19 if needed.  A public hearing on the recommended budget is scheduled for May 8.

The Council is scheduled to consider adoption of the budget on June 24.

 

 

PRELIMINARY GENERAL FUND BUDGET

 

Major General Fund Revenues

 

The major issue for General Fund revenues for the 2002-2003 budget is the uncertainty surrounding significant State-shared revenues because of the State budget crisis this year, a projected State budget deficit next year, and the pace of the economic recovery for next year.  There are three changes affecting revenue estimates since our last presentation to the Council on March 6. 

 

First, the Federal Communications Commission (FCC) recently ruled that cable modem service (Internet connection service) is an interstate information service and not a cable service. The FCC ruling calls into question whether Internet connection service revenues received from Time Warner can be counted when the Town’s franchise fee is calculated.  We are reviewing the ruling and the relevant provisions of our franchise agreement.  Although we initially made a conservative estimate of the increase in franchise revenue for next year, loss of this internet revenue would reduce our franchise fee estimate by about $20,000 in 2002-2003.

 

The second change is a reduction in our estimate of the increase in sales tax revenue from State-wide collections from 3% to 2%, resulting in a total sales tax reduction of $40,000 from our estimates of March 6.  We will not have additional information on sales tax revenue in the current year until the next quarterly distribution due around May 15. 

 

The third change is a reduction in estimated Powell Bill funds for local street maintenance to the same amount as in the current year, a reduction of $47,000.  This change is based on information from about gasoline tax collections this year.  Collections this year form the basis for distribution in September of the next budget year.

 

These three changes in our General Fund revenues estimates are included in the detailed information about revenues as discussed below.  

 

Tax Base and Tax Levy

 

As a result of the revaluation effective this year, the annexations of Southern Village and Notting Hill areas and normal growth, the estimated tax base for the current budget year is expected to be about $4,010,000,000, an increase of $970,000,000, or 32% over the base last year of about $3,040,000,000.               

                                                                                                 

As shown at right based on preliminary information for 2002-2003 provided by Orange County, we expect the total tax base to grow next year to about $4,150,000,000, an increase of about $140,000,000, or 3.5% over the estimated base this year. This increase is the largest attributed to growth alone in many years. We believe a large portion of the estimated growth is occurring in the Southern Village and Meadowmont neighborhoods.

 

At a tax base level of $4.15 billion next year, each  1 cent of the tax rate would generate about $415,000.   The current General tax rate of 46.1 cents on this base would generate about $18,750,000 in property tax revenues

 

Other Local Taxes

 

 

 

 

State-Shared Revenues

 

Sales Taxes

Sales tax revenue from both the 1% sales tax based on Orange County receipts and the two ½ % sales taxes based on State-wide collections declined dramatically this year because of the economic recession.   The graphs below show the estimates for both of these categories for the current year and next year.  As previously reported to the Council, we believe the final sales tax revenue from both sources will be between $500,000 and $600,000 below original budget estimates for the current year, depending on final fourth quarter receipts expected in May.

 

Motor Fuel Taxes (known as Powell Bill funds)

Motor fuel tax revenue is based on receipts from 1 ¾ cents of the State gasoline tax allocated to local governments based on population and local street mileage in each jurisdiction. Because of annexations this year and an increase in the Town’s population, receipts increased from $1,380,000 in 2000-2001 to $1,553,000 in the current year.  However, based on preliminary estimates from the State, we expect this source of revenue to be flat next year, and, therefore, estimate revenue of $1,553,000.

 

State Fire Protection Funds

We anticipate no change next year in the level of State Fire Protection Funds, totaling $850,000.

 

Uncertain Revenues Subject to Retention by the State (Utility Franchise Tax, Beer & Wine Tax and Intangibles and Inventory Tax Reimbursements)

 

The graphs below show the trend line for these revenues, estimated at about $2.9 million, assuming continued distribution to local governments.  As the Council is aware, the Governor’s action this year withholds revenue in these categories to address the State’s current year budget deficit.  Because of great uncertainty about the State’s budget for next year, we believe that we cannot assume that these revenues would be available for the Town’s budget.  We estimate below General Fund revenue levels without these three revenue sources.

 

 

and established reimbursements to local governments based on amounts received in prior years.  The second half of the inventory tax is being withheld by the Governor this year, resulting in a revenue shortfall of about $95,000.  We believe it is likely that the State will withhold all of these funds next year. 

 

 

 

In summary, if no State-shared revenues were retained by the State for 2002-2003, we estimate these revenues would total about $11,495,000.  If the State retained only the intangibles and inventory tax reimbursement revenues next year, we estimate the Town’s State-shared revenues at $10,815,000.  If the beer and wine and franchise tax revenues were also retained by the State, we estimate total State-shared revenues would be reduced by $2.930 million, for a total of $8,565,000.

 

                    State-Shared Revenues

   

 
 
 
 
 
 
 
 
 
 
Other Revenue Categories

 

 

Summary of Revenues

 

In summary, we estimate General Fund revenues would total about $36,875,000 if none of the current sources of revenue were to be retained by the State.  However, we believe we must assume that some of our current revenues will be assumed by the State and need to plan for two alternative revenue levels as follows:

 

·        If the State retained only the intangibles and inventory reimbursement revenues ($680,000), estimated total General Fund revenues would total about $36,105,000. 

·        With the assumption that the State could retain revenues from the reimbursements ($680,000), beer and wine ($205,000) and the franchise tax (2,045,000), total General Fund revenues for next year would be reduced to $33,855,000.

The table at right shows estimates of total General Fund revenues for these three alternative revenue levels.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Fund Costs

 

The base budgets submitted by Departments would allow continuation of basic services, but with little flexibility for unexpected occurrences.  The preliminary operating budgets would total only about $22,000 more than in the present year, even though we will be paying the full-year costs of pay increases authorized for only eight months in this fiscal year.  The additional payroll costs absorbed total about $250,000. The resulting base budget for 2002-2003 totals about $36,748,000 compared to the current year’s original budget of $36,725,000.

   

The table below shows a comparison between the current year’s original budget and estimated costs for General Fund base service levels next year.

The net change of $22,000 for 2002-2003 includes:

 

·        an estimated reserve for increases in medical and worker’s compensation costs ($150,000)

·         a reduction of about $61,000 in annual debt service costs next year

·         an allocation of $238,000 for a modified capital improvements program as discussed below (about $400,000 lower than in the current year.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funding for human service agencies and hotel/motel tax recipients and other agencies would remain at the same level as in the current year. With the Council’s decision in February to postpone the issuance of new bonds, new debt service costs of about $300,000 on these bonds would be postponed until the 2003-2004 budget year.

 

The preliminary expenditure estimates do not include a reserve for pay adjustments (estimated costs of $884,000) and additional costs needed to continue technology improvements ($80,000).

 

We expect to propose a budget that includes an additional allocation for technology improvements.  However, the budget proposal that we submit to the Council on April 22 will not include much needed pay increases unless it is clear that the State will not impound Town revenues again in 2002-2003.  We will present a report to the Council on April 24 that will provide a comparison of the Town’s pay rates to those of other local government and private employers in the Triangle labor market.

 

Capital Improvement Costs

 

For 2002-2003, we propose a capital improvement program that would total about $438,000 and limit costs primarily to funding for current installment debt payments and new installments payments on proposed renovations.  It would include the following projects:

 

     Hargraves Center and A. D. Clark Pool.

     at the Inter-Faith Council shelter and at the Chapel Hill museum.

agreement providing the Town access to the gym at the Meadowmont Elementary School.

 

We propose to fund $145,000 of these costs from fund balance in the Capital Improvements Fund available from reimbursements of sidewalk and energy grants from past years, and $55,000 in estimated revenue from cell tower leases.   With total proposed expenditures of $438,000, the General Fund transfer needed to fund these costs in 2002-2003 is $238,000.  A full discussion of the proposed capital improvements program is provided in a separate memo.

 

 

Grants to Other Agencies

The preliminary General Fund expenditure estimates include funding for grants to the following other agencies in exchange for specific services at the same level as in the current year.

 

 

 

 

 

 

 

 

 

 

Summary of Revenues and Expenditures     

 

With estimated costs as discussed above and no reserve for pay adjustments, total General Fund costs would be about $36,748,000 for 2002-2003, and is compared to estimated revenues at three alternative levels for next year as follows:

 

At these alternative revenue levels, the difference between revenues and expenditures include a surplus of revenues assuming no retention of revenues by the State, a deficit equivalent to a tax rate of 1.5 cents without the reimbursement revenues, and a deficit equivalent to a tax rate of 7.0 cents without reimbursement, beer and wine, and franchise tax revenue.

 

 

 

Options for Further Cost Reductions

 

This preliminary report on the status of budget development already assumes the following:

 

·        holding the General Fund budget at a steady level

·        absorbing payroll costs for the full year that are budgeted for only eight months in the current year

·        significantly reducing cash-funded portions of the Capital Improvement Program

·        deferring issuance of additional bond debt and associated projects

·        absorbing inflation in costs for supplies and materials

·        using “roll over” savings of $800,000 from 2001-2002 to help reduce the need for a tax increase in 2002-2003.

 

We are continuing to search for ways of further reducing costs and will do so throughout the rest of the budget development process.  At this point, we have identified only one other potentially significant cost reduction option that we believe may be viable. Specifically, we think that the Council reasonably could consider establishing a fee of $750-800 annually for once weekly collection of commercial refuse containers. (We would continue to charge a fee for additional collections).   Our preliminary estimate is that such a fee would generate additional revenues in the range of $300,000 - $315,000 if initiated October 1, 2002.  Basic assumptions behind this estimate include:

 

 

We also have explored the possibility of recommending that the Council cease providing commercial refuse collection services.  Ending the Town’s service would require those who now receive it to contract with private collectors.

 

Although there are a number of complicating factors in this approach, the most significant impediment is the agreement between the Town and Orange County regarding operation of the landfill.  The agreement states, in part:

 

“The County and the Towns all agree to deliver, or cause to be delivered, to System Management Facilities for disposal or processing, all Solid Waste and County Recyclables under their respective control.”

 

One could argue that the Town would not have control over solid waste that it did not collect and that was, instead, collected by private haulers under agreements with individual businesses and organizations.  However,  the County could argue that the Town entered into an agreement that requires it to send solid waste from Chapel Hill to the County’s facilities, thus assuring the County of a revenue stream to help fund landfill and recycling programs from which the Town benefits.

 

The Town entered into the agreement that transferred the landfill and recycling services to Orange County after long and careful discussion.  We believe that elimination of the Town’s commercial refuse collection service could have a significant adverse affect on the County’s operation, and that such a change should not be considered without careful deliberation with the County. 

 

The Town’s commercial collections provide about one fourth of the Landfill’s municipal solid waste revenue.  We believe that a significant portion of waste collected by private haulers would be diverted to other landfills rather than delivered to the Orange Regional Landfill, because of price differences and less stringent materials separation requirements at other landfills.

 

At his point, we propose to continue work on the potential for a commercial refuse collection service fee for once weekly service, and will provide a more detailed report to the Council for consideration at the budget work session on April 24.  We propose to do no further work on the idea of eliminating the Town’s commercial collection service unless so directed by the Council.

 

PRELIMINARY TRANSPORTATION FUND BUDGET

 

Preliminary estimates of revenues and expenditures for the Transportation Fund for next year indicate that revenues would be adequate to continue the fare free services initiated this year with no adjustment in the current tax rate of 4.3 cents for transportation. 

 

Expected revenue available for the system is based on preliminary estimates of federal and State operating assistance, and assumptions that contractual arrangements with Carrboro and the University would continue based on current cost sharing agreements.  Discussions are continuing with the University and Carrboro regarding specific services desired for 2002-2003.  The final level of State and operating assistance will not be known until later this Spring.

 

Budget Revenues

 

For the Transportation Fund budget for 2002-2003, revenue sources are expected to remain the same next year with estimated amounts as follows:

 

·        Federal operating assistance is expected to be about $932,000, about the same as in the current year.

·        State operating assistance is expected to about $1,573,000, the same as estimated for the current year from the State’s continuing operating allocation.

·        University payments would be about $3.6 million based on its share of requested services.

·        Carrboro payments would be about $730,000.

·        The Town’s share of costs would be about $2.2 million­­.

 

For 2002-2203, we assume a reduction of about $60,000 in reimbursement revenue from the intangibles and inventory taxes received in prior years for the Transportation Fund.  We assume continuation of vehicle license fees adopted last year.  With assumptions as noted above we estimate total revenues of about $9.3 million next year, including use of about $262,000 in available fund balance.

 

Transportation Budget Costs

 

The cost of providing Transportation services next year is estimated to be about $9,334,000, or about 4.0% over the current year original budget, with key cost increase areas as noted below:

 

·        Based on current fuel costs and the increase in services this year, we estimate total fuel costs next year of about $522,000.

 

·        Most services and routes would continue as in the current year, although discussions continue with the University and Carrboro about specific routes.

 

·        Methods of assigning Driver’s work schedules have changed significantly, resulting in lower overtime pay  costs and less difficulty in recruitment.

 

·        We include a transfer to Capital Reserve Fund of $583,000 for the local share of capital expenditures for bus replacements and initial matching funds for a replacement Transportation facility.

 

·        Preliminary expenditure estimates include about $120,000 in additional personnel costs for a Safety and Training Coordinator, a Marketing Coordinator, a Mechanic Helper, and Maintenance Data Entry Clerk to address increasing workloads associated with the expansion of services this year for the University and the annexed areas, as well as to meet operating standards of the Federal Transportation Administration.

 

With preliminary cost estimates of about $9,334,000 to continue current services and revenues of about $9,072,000, we believe a Transportation Fund budget would be balanced next year by use of $262,000 in fund balance and the current Transportation tax rate of 4.3 cents.

 

OTHER FUNDS

Housing Fund:  Because of the budget schedule required by the Department of Housing and Urban Development (HUD), the Council adopted a budget on March 4 for the Town’s public housing program for 2002-2003.

Estimated costs for next year total $1,614,000, an increase of $143,000 over the current budget of $1,465,000, primarily to fund capital expenditures.  No significant other changes or new personnel were proposed for Housing operations next year.   Federal operating assistance, rents paid by public housing residents, and normal use of fund balance should be sufficient to meet costs and maintain adequate reserves well within federal guidelines.

Debt Service Fund: A transfer from the General Fund of $2,362,000 would be required to make scheduled payments of $2,362,000 for principal and interest on the Town’s debt obligations for next year.

Capital Improvements Fund: Transfers and other revenues will provide limited funding of  $438,000 for projects described in the following report on the Capital Improvements Program.

On-Street Parking Fund: On-street parking revenues will be sufficient to allow a transfer of about $340,000 to the General Fund. 

Off-Street Parking Facilities Fund: Revenues are expected to be about $1,135,000 and costs about $1,105,000. The preliminary budget includes $65,000 for continued maintenance improvements at the James C. Wallace Parking Deck.  We are preparing recommendations for the Council’s consideration that would raise fees for on-street parking, hourly off-street parking and monthly parking leases.

Housing Loan Trust Fund: Projects will be funded as directed by the Council, with costs restricted to be in balance with revenues.

Library Gift Fund: We project a transfer to the General Fund of $45,000, about the same as in this fiscal year.

Downtown Service District Fund: At this stage of budget development, we propose no change in services in the Downtown Service District.  The current tax rate of 6.2 cents is estimated to generate about $70,000 in revenue in the current year and next year. 

Requests by Others

The Council has received a number of funding requests from other agencies.

Some of these are appropriate for consideration through Community Development or HOME Program funding and are discussed in separate reports in this agenda item. Some are appropriate for consideration by the Human Services Advisory Board and have been referred to the Board for their review.

The preliminary budget includes no special grants to other agencies except those listed in the above section titled "Grants to Others."

CONCLUSION

We hope that this status report on development of the 2002-2003 budget will help the Council as it continues its deliberations. We look forward to receiving further feedback, advice and instruction from the Council as we continue work on the Manager’s recommended budget. The Manager’s recommend budget will be presented to the Council on April 22.