Executive Summary. Model Structure. General Economic Environment and Assumptions

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1 Executive Summary The (LTFP) report is an update from the preliminary report presented in January 2009 and reflects the Mayor s Proposed Budget for Fiscal Year 2010 and Fiscal Year Details of the primary assumptions, strategies, and resulting projections can be found in the Preliminary Long-Term Financial Projection report. This final report reflects the Mayor s proposed budget amounts for FY 2010 and FY Key changes from the preliminary report are summarized as part of this final report. As in the preliminary report, the final report contains three different forecast scenarios, focusing on a Recommended Scenario forecast, a Pessimistic Scenario, and an Optimistic Scenario. The Recommended Scenario is presented with the same economic assumptions from the Economic Forecast report prepared by ECONorthwest in January 2009, but is based on the Mayor s proposed budget for FY 2010 and FY The Pessimistic Scenario shows financial changes based primarily on the impact of a slower growing economy and higher growth rates for specific costs. The Optimistic Scenario presents a projection model with the assumption that economic growth is similar to that experienced during strong economic years. Model Structure The primary focus of the LTFP is the City s General Fund. The General Fund is the City s main operating fund, used to pay for such basic municipal services as police, fire rescue, planning and general governance, recreation, parks and libraries. The City deposits all property tax revenue, sales tax revenue and liquor tax revenue (both shared with the State) into the General Fund, as well as revenues from various user fees, licenses, permits and fines. The revenue and expenditure projections within the LTFP are developed independently, based on a variety of known and assumed factors that drive each revenue and expenditure category. The model also reflects the marginal increase in the General Fund reserve to maintain the then-current percentage of base operating revenues if applicable. The strategy to use end-of-year one-time monies is assumed to continue to assure the City Council s goal of achieving General Fund reserves equal to 8% of revenues by All scenarios summarize the bottom line results as a Net Surplus/ (Shortfall) (with negative results, representing operating deficits, presented in parentheses). It is important to reiterate that a negative result in a forecast is not a projection that the City will be operating at a deficit. Under Idaho State Code, the budget must be balanced every year. If needed, the City may expend more than what may be received during any given year by drawing down on prior year operating surpluses or savings, but the City cannot operate with ongoing deficits. While the LTFP may forecast deficits under a number of scenarios, the City prepares strategies to address budget gaps as part of Strategic Planning and Business Planning processes. The budget allocation process will then document the financial impact of approved strategies eliminating operating budget deficits through increased revenues and reduced expenditures. General Economic Environment and Assumptions Overall, the Boise area is projected to show a weakened economy during FY 2009, near zero growth throughout FY 2010, and a slow economic recovery in FY The annual average population growth from 2000 through 2007 was 1.2%. Population growth from 2008 through 2011 is estimated to be less than 0.2% annually. The population is anticipated to decline by approximately 200 people during 2009 primarily due to job losses with very modest growth thereafter. As projected, state unemployment will peak during 2009 above 7.5% and remain between 6.5% and 7.0% during 2010 and Total personal income will increase less than 1.7% during 2009, with per capita income increasing a mere 0.25%. During 2010 and 2011, it is assumed that growth in personal income will continue at very modest levels of less than 2.0%, with per capita income remaining relatively flat. 53

2 Statewide taxable retail sales will further weaken during 2009 by more than 3.4%, then increase 4.0% in 2010 and more than 8.0% in Liquor sales, both statewide and Boise City, continue to grow throughout 2011 but at a slower rate than historically experienced. Commercial and residential construction values for Boise will be approximately 40% to 50% lower than levels experienced during the 2007 peak period. Construction value will continue to decline through 2010 and then slowly recover during The full January 2009 presentation of the Economic Forecast can be found on the City s web page. Final Net Projections The Recommended Scenario has a shortfall of $3.7 million by the end of the six-year projection window (FY 2015). The rate of growth in expenditures, primarily personnel costs, continues to outpace that of revenues impacted by the change in economic conditions and a slow recovery. The shortfall estimated in the Preliminary LTFP was $13.9 million by FY The shortfall gap was significantly reduced primarily due to the following: proposed parking fine and penalty increases; proposed recreation fee increases; transitioning to full-cost accounting in FY 2010 and the requirement to have internal revenues reflect reimbursement for current year costs versus lagging two years; accelerating the employee cost share plan for health care benefits by one year; several departments implementing staffing reorganizations and eliminating several positions; replacing base salary increases for general employees with one-time salary increases during FY 2010; and, numerous other department cost saving measures and updated revenue analysis. The Pessimistic Scenario has a net shortfall of nearly $14.7 million by the end of the six-year projection window (FY 2015). This scenario primarily assumes an economic recession with continued high health care costs. The shortfall estimated in the Preliminary LTFP was $23.9 million by FY The Optimistic Scenario reflects a net surplus of $5.3 million by the end of the six-year projection window (FY 2015). This scenario primarily assumes quick economic recovery. The shortfall estimated in the Preliminary LTFP was $2.3 million by FY Revenues Revenues are projected based on analyses of the general economic factors driving the City s revenue base and the specific revenue sources available to the City. While the City s economy tends to outperform the State s economy due to its economic diversity and more stable primary revenue source (property tax), the State of Idaho limits the types and amounts of most revenue sources that the City can utilize. Moreover, since the State limits the City s revenue sources, the City is increasingly affected by decisions made by the State regarding local revenue. Nearly 75% of the City s revenue sources for general governmental services (General Fund only) are controlled by State legislation and formulas. Total revenue for the Optimistic Scenario and Pessimistic Scenario is comprised of two categories: property tax revenue and all other revenue. Property tax revenue is the City s most stable revenue source due to the funding formula. A majority of other revenues correlate strongly with the economic environment. Therefore, the Optimistic Scenario reflects a fast healing and moderately expanding economy, projecting property tax revenue to be 60.5% of total revenues. Conversely, the Pessimistic Scenario, projects an increasing dependency on property tax revenue, from 64.0% in FY 2010 to 65.5% by FY 2015, representative of an economy that further deteriorates and experiences a longer recovery period. In the past nine years, there was only one year, 2002, when property tax revenue was 62%. However, property tax is projected to equate to 62.5%, or more, of the revenue portfolio for FY

3 The following summarizes the City s major General Fund revenue sources as shown in the Recommended Scenario model. The final report highlights the key differences from the preliminary report. Details of each revenue category are explained in detail as part of the Revenue Manual. Property Tax Property Tax remains the single largest General Fund revenue, representing about 60% of total General Fund portfolio according to the FY 2009 Adopted Budget. This matches the actual annual average from the past 10 years of 60% as reflected in the Financial Trends report. During times of strong economic expansion, property tax revenues represented approximately 58% to 59% of the total revenue primarily due to the increased development revenue received during these times. Conversely, during recessionary times, property tax revenue represented 61% to 62% of total revenues. This revenue relationship determines the Pessimistic and Optimistic scenarios. The final projection for property tax revenue is based on a more challenging recession than experienced in the last ten years and the estimate for construction value and annexation value from the Ada County Assessor Office. The combined amount for construction and annexation value is about $204 million approximately $4 million more than the preliminary estimate. Thus, the amount proposed for property tax revenue is nearly unchanged. Sales Tax Sales tax revenue has traditionally been the City s second largest revenue source, on average amounting to approximately 10% of the General Fund revenue portfolio. However, for FY 2010 and FY 2011, based on the economic projection, sales tax revenue is approximately 8% of the revenue portfolio, and is the City s third largest revenue source behind internal fee. The basis for the City s share of revenue is statewide taxable sales. Sales tax revenue is highly sensitive to economic conditions and reflects the factors that drive taxable sales, including unemployment, job growth, consumer confidence, per-capita income, bankruptcies, and business investment. Based on the economic forecast for employment and wages, statewide taxable sales, and potential changes in Boise s proportionate share of population and market value compared to other cities, sale tax revenue is estimated to decrease about 13.8% in FY 2010 compared to the FY 2009 Adopted Budget and remain nearly unchanged during FY Thereafter, revenue growth will modestly increase by 1.0% in FY 2012 and reach 2.0% by FY Sales tax revenue projections remain unchanged from the preliminary estimate. Fines and Forfeitures Fines and forfeitures include revenue generated from monetary sanctions associated with the violation of a law or regulation such as traffic violations, City parking and other ordinance violations. Traffic violations are the largest component in this category. Of the near $1.1 million increase in the budgeted amount compared to the preliminary projected amount, $782,000 reflects resolution of programming issues related to the implementation of a new court system believed to have temporarily misallocated fine monies. The remaining $328,000 increase is attributed to the Mayor s recommendation to increase parking fines and penalty amounts for late payments. Franchise Fees Franchise fee revenue depends on many factors such as consumption, rate increases, household growth, and economic and environmental conditions. The budgeted amount is increased slightly based upon a review of actual revenue receipts received since the preliminary estimate. Growth rate assumptions remain unchanged in years FY 2012 through FY Interest Income Interest income is unchanged from the preliminary estimate. Interest penalty on delinquent property taxes owed the City is budgeted in this category as well. Liquor Tax Revenue Liquor Tax revenue is slightly more than originally projected, but is not significant, based on a more detailed analysis of liquor sales in Boise. Internal User Fees These are primarily charges by internal City departments for services provided to other City departments. The growth rate for internal user fees is largely based on estimated wage and benefits increases. The budgeted amount decreased about $152,000 for FY 2010 and $300,000 for FY 2011 compared to the preliminary estimate. This is largely due to the combination of increased indirect revenue related to the transition to full cost accounting and a decrease in the reimbursement amount for airport policing services. 55

4 External User Fees These are charges by the City to users of a service or product. The budgeted amount increased approximately $1.3 million to $1.5 million compared to the preliminary estimate. The primary difference between the preliminary amount and the final budgeted amount was for reimbursement for fire services provided to Whitney Fire District, increasing $585,000, and police services provided to Boise State University, increasing $100,000. Parks and Recreation Department budgeted slightly less than the FY 2009 Adopted Budget, including proposed fee increases. The preliminary estimate for FY 2010 and FY 2011 assumed a 5.0% decrease from the FY 2009 Adopted Budget due to increasing unemployment and a presumed decrease of discretionary income. Development Revenues Development revenue amounts are slightly less than the preliminary estimate, but are not significant. Other Revenues Other revenue is mainly non-development licenses and permits, such as animal licenses and alcohol licenses, grants, and other miscellaneous revenues. The primary change in this category is budgeted grant revenue. Expenditure Forecast The assumptions for most cost categories remain the same for the Recommended Scenario, the Pessimistic Scenario and the Optimistic Scenario. The growth in health care costs and inflation for maintenance and operating expenditures are the two cost categories that differ between the scenarios. The changed growth rate for health care costs also affects the annual retiree health care liability. The changes between the preliminary projection and the budgeted amounts are summarized as follows: Total Salary Costs Total salary costs include the Mayor s recommendation to decrease staffing by 38.2 FTEs and hold 26.0 FTEs vacant. Salary costs do not include any base compensation increases for general employees during FY 2010; however, base compensation increases and nonbase compensation increases are included for general employees during FY The financial strategy to recognize and compensate general employees for excellent performance during FY 2010 is to rebudget funding from FY 2009 into FY 2010 and provide one-time compensation increases. Other specific increases in the FY 2010 budget include police union contingency for the pending contract effective April 1, A police union contingency and fire union contingency (fire contract effective October 1, 2010) are both included in the FY 2011 budgeted amount at the same increase rate as general employees. Health Care Costs Health care costs are budgeted based on actual premiums for plans as elected by each eligible employee. A contingency is budgeted to accommodate potential percentage increases in health care premiums. The contingency is calculated based on the strategy to limit the City s growth rate for health care benefits to 2.0% above the assumed increase percentage for wages by FY The Mayor s proposed budget recommends acceleration of the cost-share plan by one year. No funding is recommended to cover the liability of retirement health care subsidies (GASB 45). Other Benefit Costs This budgeted cost category is nearly unchanged compared to the preliminary estimate. A few specific accounts related to position costs, such as retirement and social security taxes, decreased due to staffing reductions. Conversely, other specific accounts increased such as deferred compensation, unemployment insurance, and annual buy back benefits. Maintenance and Operating Costs (M&O) The budgeted amount is approximately $1.4 million more than the preliminary estimate. It is believed that a majority of the difference is caused by classifying minor equipment in the FY 2010 and FY 2011 budgets as a maintenance and operating expenditure instead of major equipment in accordance with the City s capitalization threshold of $5,000. Additionally, contingent appropriation, such as the Revenue Neutral Contingency and Property Tax Contingency, has been budgeted,. All contingent appropriation expenditures have offsetting contingent appropriation revenues, classified as Other revenue. 56

5 Equipment This cost is updated to reflect the equipment replacements according to the revised plans of departments during the FY 2010/2011 Biennial Budget development process. For FY 2010 and FY 2011, equipment costs are budgeted nearly $900,000 less than the preliminary estimates. This may be the result of departments classifying minor equipment as maintenance and operating expenditure in accordance with the City s capitalization threshold of $5,000. This would also reasonably explain the increase in maintenance and operating costs budgeted compared to the preliminary estimates. Of key concern, however, is the significant increase of 127.0% and 97.5% in FY 2012 and FY 2013 over the budgeted amount for FY Debt Service There is no change in debt service. Cash Flow Reserve There is no change in cash flow reserve amounts. An allocation of at least $1,150,000 of end-of-year monies is required to continue the funding strategy approved four years ago in order to achieve an 8% cash flow reserve by the end of FY Operating Costs for New Approved Projects All scenarios assume projected operating costs of approved and budgeted capital projects for FY 2010 and FY 2011 based on the departments six-year capital plan. For future planned projects, operating capacity will be required. This could be achieved through a variety of methods such as use of the strategic planning contingency, operating efficiencies not currently recognized, user fee increases, and new revenue sources. Strategic Planning Contingency No change and assumes the $500,000 contingency is allocated to other base programs. Pessimistic Scenario Costs Health Care Costs Health cares costs in the Pessimistic Scenario assume an overall 15.0% increase in the City s health care cost. Plan participant contributions are assumed to increase at the same rate as claims costs. Other Post Employment Benefit Liability (GASB 45) This annual liability amount is assumed to grow at the same rate as health claims costs. Therefore, a higher claims cost increase under this scenario results in higher funding requirements following the funding strategy outlined in the Recommended Scenario. Maintenance and Operating Costs (M&O) This assumes a 3.50% average increase on total maintenance and operating costs. This increase is 2.0% higher than the Recommended Scenario and primarily assumes stronger than anticipated inflation for large cost items and relatively few process improvements and technological advances that result in cost savings. Optimistic Scenario Costs Health Care Costs Health cares costs in the Optimistic Scenario assume a downward trend in claims costs and/or higher participant cost share, with a 10.0% increase in the City s cost in FY 2010, 7.3% in FY 2011, and 6.2% thereafter. Other Post Employment Benefit Liability (GASB 45) This annual liability amount is assumed to grow at the same rate as health claims costs. However, like the Recommended Scenario, there is no funding for this liability. 57

6 Financial and Service Issues The Mayor s proposed is a strong financial plan that continues to move the City in accordance with its Strategic Plan. However, the long-term financial projection shows that the City must remain vigilant in its efforts to create financial capacity in order to achieve its goals to provide critical City services, maintain a favorable business climate, and maintain a sound financial structure. Service Demand with Decreased Resources The Mayor s recommended financial plan for the next two years proposes the elimination of several positions and the requirement that several more positions remain unfilled. Many of the positions eliminated and/or to be held vacant are related to changes in workload, improved or changed service delivery methods, or modified internal service levels. However, the City will need to monitor the sustainability of these personnel changes particularly related to those services in which there is not a change in workload or customer expectations. Market Value The City s gross market valuation has decreased by approximately 6.3% according to the Ada County Assessors Office as of May After homeowners exemptions, the taxable valuation is estimated to decline by 7.1%. The decreased valuation will result in an increase in the levy rate. Individual taxpayers will be impacted depending on their taxable value and the established levy rate. The City s share of the state sales tax revenue is based its proportionate share of taxable market value to other cities. Therefore, it is important for the City to remain focused on economic development and other activities that minimize further declines in market value. Development permits and fees are largely based on the valuation of the construction project. With the recent downward reappraisal of properties, new projects may not be valued as highly as they would have been during the boom years. Therefore, it is reasonable to assume that when construction activity increases that average revenue per project will be less. Major Equipment Replacement The Final LTFP report reveals a potential issue in years 2012 through 2015 regarding the replacement cost for major equipment. A more detailed analysis and strategy may be required. Capital Projects Some City facilities are inadequate to meet the existing demand for services, such as the Main Library and the Fire training facility, or require significant repairs due to aging, like the parking garage at City Hall. These projects must compete with several growth related projects for the limited funding available. A solid financial strategy to address the many needs will be required. Healthcare Costs and GASB 45 Requirements The migration in FY 2005 to partial self-insuring the City s health care plans has been very beneficial and resulted in several million dollars of savings. Since that time, the City s annual average growth rate has been less than the national average. Additionally, the City has reviewed and modified its health care plans so that they are more tailored to meeting the needs of its employees. Effective January 1, 2010, the City will launch a new flexible benefit program for its general employees. A key financial goal of these actions is to contain the City s total health care costs to 2% above the assumed percentage increase of wage compensation by January The Mayor has recommended that the health strategy be accelerated by one year and achievement of this goal be reached by January Negotiation with union staff and resolution of retiree health benefit funding will continue over the next few years. 58