MID-YEAR BUDGET REPORT – FISCAL YEAR 2008-09

SUBJECT:

MID-YEAR BUDGET REPORT FOR FISCAL YEAR 2008-09

RECOMMENDATION: That the City Council approve the budget adjustments and recommendations as listed in the Mid-Year Budget Report for Fiscal Year 2008-09.

COUNCIL GOALS: Operate in a Businesslike Manner

• Live within our means, fully funding liabilities and reserves, while forming capital to strategically invest in the future.
• Continue to invest in updated facilities, equipment and technology to promote efficiency.
• Maintain operating systems and controls that ensure sound fiscal management.

FISCAL IMPACT: The recommended actions will affect several fund budgets as outlined in the Mid-Year Budget Report and supporting schedules.

BACKGROUND: This report is the first interim budget report for Fiscal Year 2008-09, including items which would have normally been addressed in a First Quarter Budget Report, and is a product of the financial reporting system developed to provide the City Council with timely and accurate information on which to base its decisions. Government resources are allocated and accounted for in individual funds based upon the purposes for which they are intended to be spent and the means by which the spending activities are controlled. All funds have been reviewed in preparing the Mid-Year Budget Report; and although budget adjustments are recommended across all funds, the emphasis of this report is directed at the General Fund, Capital Projects Funds, and the Special Revenue Funds. The General Fund provides most of the services commonly associated with government (public safety, recreation, library, museum, parks, building and planning). This report concentrates on the City’s budget trends, which are reflective of the current economic crisis, and the recommended actions to address the effects that the economy is having on the City’s revenues and related impacts on the delivery of municipal services.

The main purposes of this Mid-Year Budget Report are as follows:

• Provide a reconciliation of budgeted-to-actual financial data from the prior fiscal year;
• Address annual carry-over appropriations across all funds;
• Recognize project budget amounts for prior year Capital Improvement Projects which are ongoing;
• Revise the City’s budget to reflect the City Council’s actions taken since the beginning of the current fiscal year;
• Recommend personnel and organizational changes to enhance program operations and efficiency;
• Recommend budget changes to align the budget with projected year-end results; and
• Recommend budget adjustments that are consistent with City Council Goals and Objectives.

Given the severity of the downturn of the U.S. Economy and its effects on the City’s budget, the City Council, in its Goals and Priorities Setting meeting with the City Manager, directed that his sole goal for the coming year be to address the City’s fiscal health and work to improve the City’s Economy.

Fiscal Year 2007-08 Results

The City’s financial operating activities for Fiscal Year 2007-08 provided a favorable, unallocated General Fund year-end balance of approximately $7,447,565, net of allocations. This amount is recommended to be allocated to the Capital Improvement Projects fund. When the City first developed its funding plan for the Events Center, a number of potential funding sources were identified, including Redevelopment. As completion of the project wrapped up and the final mix of funding reconciled, it was determined that the use of some of the RDA proceeds previously set aside for the Events Center would be better utilized for future capital projects elsewhere in Project Area 1. Accordingly, it is recommended to utilize the year-end variance to free-up the RDA funds.

Economic Outlook

The Economy at all levels of government (Federal, State and Local) has experienced a continual, accelerating decline over the past several months. At the National level, the American economy shrank 0.5% in the Third Quarter. Up until the current recession, the U.S. economy had experienced a 73 month period of continued growth. Manufacturing fell to a 26-year low this past November, with the ISM Index falling to 36.2 (a score below 50 indicates contraction of the economy - the score was 50.6 last April). Total Household net worth fell $2.8 trillion in the Third Quarter as well, the largest decline since records were kept (1952). Retail sales fell 1.8% in November 2008, representing the 5th consecutive month of declines. Jobless claims reached as high as 586,000, a 26-year high. Consumer confidence dropped to 37.7 in December, again a record since the measure started being used in 1967, and off of the number from January 2007 when it was 87.7. Home prices plunged a record 18.2 % in November 2007 from the same time the prior year.

At the State level, conditions appear to be worse. The State is projecting a $42B deficiency over the next 18 months. The State’s unemployment rate is 9.3%, representing an increase from 8.4% in November, with the State losing 78,200 jobs in December and 1.7 million Californians looking for work. The State’s unemployment fund sank into the red for the first time in its 60 year history and is expected to run out of money this week, but for a $1.84 billion federal loan to enable benefits to be paid through March. The State’s General Fund is expected to run out of cash shortly and the State has issued notices that it will be issuing IOU’s shortly. In December 2008, the State froze $3.8 billion in financing for projects being constructed throughout the State, a majority at the local level. This has resulted in the City not being reimbursed on some of its projects (approximately $8.9 million). Lastly, due in large part to the stock market losses and loss of property values, the California Public Employee’s Retirement System has lost nearly a third of its value. The City will undoubtedly experience large increase in the PERS rate in the near future.

Economists in the Inland Empire expect the downturn to continue for two years. There has been a 3,500% rise in foreclosures since 2005 and experts do not anticipate a bottoming out of the housing market until early 2011, after home prices fall another 28 to 32%.

At the municipal level, a host of cities are struggling to deal to with loss of revenues resulting from the economic fallout. Over the past several months, a number of cities have either implemented or discussed layoffs, furloughs, and/or steep budget cuts. In some instances even Fire and Police budgets have been affected.

Mid-Year General Fund Budget Adjustments

The Mid-Year Budget Report provides recommendations for adjustments to revenue estimates and for the use of funds for projects and activities consistent with Council Goals and Objectives.

Revenue Projections

The City anticipates $2.7M in increased Property Taxes along with a $426,024 increase in Miscellaneous Revenues. Property Tax revenues, however, are projected to decrease in subsequent years due to continued falling property values and the ongoing impacts of foreclosures. The collapse of the general economy has resulted in a severe reduction in both Business and Leisure Travel, as evidenced in the loss of airline carriers and large reduction in flights at LA/Ontario International Airport, resulting in sharp declines in the City’s Transient Occupancy Tax (-$2.7M) and Parking Tax (-$1.1M) revenues. There has been a noticeable decline in the auto sales and building materials sectors, one which is expected to continue to worsen over the next several years. Overall, Sales and Use Taxes are down approximately 18.8% (unadjusted for one-time receipts) when comparing 3rd Quarter 2007 data with 3rd Quarter 2008 data. Although Sales Tax figures are down for the year, the City expects to achieve the budgeted sales tax figure for the current year due to the conservative nature by which the City prepares revenues estimates.

Expenditure Adjustments

With respect to expenditures, most recommendations are considered routine in nature (such as carryover appropriations and prior year capital improvement projects) with minor exceptions noted as follows:

• One-time costs associated with the November 2008 General Election - $125,000
• Costs for the Fire Code Plan and Hazardous Materials Review - $60,000
• SEIR(s) for “Guasti” and “The Avenue” Specific Plans (revenue offset) - $218,933

General Fund Expenditure Reduction Plan

While the City believes overall revenues estimates for the current year will be met, the failing economy has the City projecting significantly lower revenue levels across all categories over the next several years. In reviewing current and projected data, the impacts that the economy is having (and will continue to have) on the City’s revenues will result in significant operating deficits, ones which cannot be overcome without specific action on the City’s part. This will create a need to lower the City’s General Fund base budget. The City’s approach in dealing with the impacts of the current recession is to take a broader look over a multitude of years and not simply deal with the matter in a reactionary manner. This approach will put the City is a better position, one of strength, so that when the Economy does turn around, the City will be at the forefront and be able to take advantage of opportunities as they present themselves.

Pursuant to the Council’s direction, the City will implement a comprehensive strategy, utilizing a combination of available tools including 1) the use of certain fund reserves; 2) two new revenue sources the City has recently developed; 3) temporary reductions in internal service fund transfers; and 4) personnel and operating cost reduction measures.

This budget report begins to implement this strategy through the reduction of personnel and operating costs (having an annual value of $3.93M when fully implemented), and is discussed immediately below. Additional personnel and operating cost reduction measures will be brought forward as part of the FY 2009-10 Budget Development process.

The personnel and operating cost reduction actions include the elimination of 28 full time positions, 11 of which are vacant and are listed in the attached budget report. The remaining 17 positions, the majority of which are expected to be vacated through retirements, promotions and transfers elsewhere within the organization, will be considered in tonight’s Closed Session. The total value of these proposed personnel actions is $2,473,162.

Separate from the actions just stated, a reorganization of the Public Works/Community Services Agency is planned. The Agency would be eliminated in its current form with the creation of two new agencies: the Municipal Utilities Agency and the Community and Public Services Agency. In addition to achieving greater program and operational efficiencies, there are projected net General Fund (approximately $89,400) and Utility Fund savings from the associated actions. The details of this recommendation, including the related position changes, are provided for in the attached budget report.

Lastly, other notable recommendations included in the Plan consist of a $500,000 reduction in operating costs at the Ontario Convention Center; $97,659 in additional costs reductions resulting from the prior closure of the Creekside Golf Course (let the turf go brown like the rest of the SCE right-of-way); a $300,480 funding transfer in Code Enforcement programming costs for the Temporary Homeless Services Area; a reduction in overtime hours ($204,500); and reduction in part-time hours ($90,467).

Personnel and Organizational Changes

Quarterly Budget Reports routinely include recommendations for Personnel and Organizational Changes which are usually requested to enhance program operations and efficiency. For this Mid-Year Report, in addition to the personnel actions associated with the previously discussed General Fund Expenditure Reduction Plan, the positions included with the Systematic Neighborhood Improvement Program, approved by City Council on April 15, 2008, are being added. The revenues offsetting the cost of this program are being added as well. The details of the recommended personnel actions, other than those identified as being part of the noted Closed Session (because of the potential impacts on employees and their families), are provided for in the attached Budget Report.

Adjustments in Other Funds

Notable budget recommendations in Other Funds consist of:

• Continuation of the Noise Insulation program funded from LAWA and the FAA - $3,163,691
• Proposition B funded Transportation projects - $2,628,056
• Continuation of the Mercy House / Emergency Shelter Project - $871,623
• Neighborhood Stabilization program - $2,738,309

• Ø  New Grants – Metropolitan Water District Irrigation Controllers - $317,416

                          Metropolitan Water District Synthetic Turf Grant - $122,464

                          Urban Area Security Grant (Fire Dept) - $700,000

                          Used Oil Block Grant - $181,044

• Systematic Inspection Program (offset by revenues) - $681,017
• Online Permitting System - $600,000
• Ontario Senior Housing Partners Project - $3,283,927
• Colonies Marketplace (2205 S Euclid) Façade Project – $600,000

Conclusion

The Adopted Operating Budget for Fiscal Year 2008-09, as recommended to be modified by the Mid-Year Budget Report, continues to be a well-balanced budget that reflects the City Council’s commitment to foster steady, controlled growth and provide the highest level of service to the Community within City’s available resources. It is anticipated that through the implementation of the recommended General Fund Expenditure Reduction Plan, that the City’s adjusted general fund base will better position the City to be able to ride out the impacts of the current economic conditions; keep the City of Ontario from having to make deeper cuts in the future; and minimizing any disruptions in service levels. While the City’s General Fund budget, as recommended to be adjusted herein, is projected to meet current year estimations, the actions contained herein are geared to keep the City in a proactive position while the general economy works itself out from the current recession. The City will continue to monitor key economic indicators, sources of revenues, and spending levels as part of its sound conservative fiscal approach. Consistent with the City Council’s Goals and Objectives, the City of Ontario has and will continue, through prudent long-range policy decisions and sound fiscal management, to main its position as an economic leader in Southern California.

STAFF MEMBER PRESENTING: Grant D. Yee, Administrative Services/Finance Director