The adoption of the FY2017-18 budget marks the third year since the City implemented a strategy to balance General Fund operational expenses with operational revenues, without the use of one-time funds. We will be making some one-time capital acquisitions with one-time Council approved funds that were available after the close of the prior fiscal year. This strategy has now become institutionalized into the budget philosophy and has helped contribute to the financial stability of the City. As in previous years this balancing of resources involves compromises when funding competing priorities of the City. The FY2017-18 proposed budget addresses many of these priorities; and although it is balanced, it does not fully fund all of the City’s obligations. This is a goal towards which the City has made progress the past two years, however long-term obligations are still not completely funded.
With cost pressures continuing to rise and revenue increases continuing to slow, the priority in this year’s budget was once again to pay our mandatory obligations first, such as existing contracts, PERS costs, debt, and salaries, and then to prioritize services with remaining resources. In an effort to balance the budget during the recession, several categories of operating expenses were underfunded. As the economy has improved, City Council has made significant progress towards reversing this trend and attaining long-term fiscal soundness. As a result, the City has successfully implemented several long-term solutions. Among these solutions is the policy to fully fund the Workers’ Compensation internal service fund (ISF), the Vehicle Replacement ISF, the General Liability ISF, and the Litigation Reserve Fund.
This chart shows the required vs. actual funding levels of three ISFs for four years. As can be seen, these three funds have now been fully funded for three years. The Litigation Reserve Fund is not treated as an ISF but it is funded at 100 percent.
In addition to these three internal service funds, for FY2017-18 the City created two new ISFs to more accurately report the true costs of our operating functions. These new ISFs are in the areas of information technology and building maintenance. As with the other ISFs, these services will now be included as a line item expense, and paid directly by our operating departments instead of being treated as separate IT and Central Services departments. The total budgeted costs for Police; Fire; Parks, Recreation & Libraries; and all other departments will now include their share of these service costs.
Budget Challenges Facing the City
The following information outlines some of the challenges we are still facing and is followed with a discussion identifying what the City is doing to address them.
Capital Improvement Plan and Rehabilitation of Assets - Costs for infrastructure maintenance and replacement is increasing in all areas— from building maintenance to technology to capital improvements and rehabilitation. The 10-year capital improvement plan has identified approximately $56 million of underfunded needs or about $5.6 million per year. For the past several years the General Fund has been funding about $1 million per year when the actual funding level should have been closer to $5 million. This has resulted in deferred maintenance occurring throughout the City. The proposed FY2017-18 budget will fund $1.6 million of General Fund revenue towards this program, and defer $4 million to future years. The following chart shows the required vs. actual funding level of the various CIP accounts being proposed for the FY2017-18 budget.
Streets and Roadways - Funding challenges for roadway infrastructure have caused the City to fall behind on its maintenance schedule for streets. The passing of SB1 by the State Legislature in April 2017 will enhance our ability to maintain our roadways but won’t close the gap. Currently, roadway maintenance is about $50 million underfunded. The gas tax is the primary funding source for streets and roadways. Gas-tax rates, accrued on a per-gallon basis, were developed without an adjustment for inflation, minimizing their purchasing power with every year that passes. Gas-tax revenues have fallen also due to more fuel-efficient vehicles being on the road, reducing the demand for gasoline. The City has identified an average, annual ongoing need of $9-10 million per year. The City annually funds $4-5 million per year from Gas Tax, Local Transportation, Utility Impact Reimbursement, and Federal Regional Surface Transportation program funds, leaving a shortfall of $5 million per year, or $50 million for the next 10 years.
The FY2016-17 budget included $13.37 million for roadway maintenance which addresses the reconstruction of 3.7 miles of roadway. For FY2017-18, the City is budgeting another $7.27 million for 16 miles of roadway resurfacing. It should be noted that the funding levels for both FY2016-17 and FY2017-18 are an anomaly and have unusually high dollar amounts due to a number of one-time factors, as well as a consolidation of multiple- year spending. These anomalies are described below:
- This summer’s storm-drain work has been planned for several years. Over that time, the City has accumulated over $2 million in the storm-drain account for storm-drain repair/upgrades.
- The City obtained a Federal Congestion Mitigation and Air Quality (CMAQ) grant to help fund handicap-ramp improvements.
- Several projects, including the roller-compacted concrete pilot project, are being funded from a one-time $6.5 million contribution from the Transportation Fund.
- Two non-Gas Tax funded capital improvement projects are paying for some of the street reconstruction work.
- Funding for FY2018-19 and beyond is expected to return to the normal $4-5 million level.
Citywide Parks - Roseville has an extensive and beautiful park system, and the community is highly motivated to maintain the high standards to which it has become accustomed. However, funding these standards has a cost that must be considered.
The funding of parks can be grouped into two categories: funds required to build a park and funds required to maintain a park. In many instances, parks are built by developers and maintained by community fees. However, citywide parks do not fall in this category, resulting in all costs being borne by the General Fund.
We are taking a pause on construction of citywide parks, including additional phases of existing parks, due to concerns regarding additional maintenance costs to an already stressed General Fund. As potential viable maintenance funding alternatives are identified, it could allow us to proceed with construction projects for Crabb and Central parks; however, each park will likely require additional phases to complete the projects due to escalating constructions costs in the area. While delays are not ideal, it provides time to engage the community in dialogue about balancing desired service levels and project priorities with corresponding revenues.
Labor Costs - Since municipal government is primarily a service provider as opposed to a manufacturer, a significant portion of the City’s budget is related to salary costs. As a result, any cost increases to labor have a significant impact on budgeted expenses. The City Council’s policy direction is intended to provide long-term fiscal stability related to labor costs by ensuring consistency among labor groups within our workforce and developing strategies to contain costs. In partnership with our labor groups, we have taken proactive steps over the past couple of years, which included:
Controlling pension costs by transferring the responsibility to employees to fund 100 percent of the employees’ share of pension costs: This has significantly reduced pressure on the City’s budget.
Capping liability for retiree-health benefits: A defined-contribution plan is offered to new employees instead of the defined-benefit plan that previously existed. This means that employees, along with the City, contribute to saving for their retiree-medical benefits; and that the City’s cost associated with the defined-benefit plan will eventually be zero.
Setting salary-level targets at median levels in labor-market comparison: Salary schedules for new employees have been reduced up to 21 percent to reflect median salaries in the labor market.
Reducing the rate of annual merit-based increases within each salary range: The previous pay scales allowed for 5 percent increases between each step in a salary range. Now, new employees are eligible for increases no greater than 2.5 percent between each step in the range. This extends the time it takes to reach the highest level in the pay range, which can now be up to 15 years, slowing the growth rate of this expense.
Retiree Health or "Other Post-Employment Benefits (OPEB)"- Costs for those employees who will receive retiree health benefits are continuing to grow as healthcare premiums and Medicare costs increase. As discussed later, the City eliminated this benefit for employees hired after 2012. However the latest available actuarial report as of June 30, 2015, for those employees who receive this benefit, shows a General Fund actuarial accrued liability (AAL) of $206 million. Of this amount, the General Fund has an unfunded liability of $102 million and the City in total has an unfunded liability of $152 million. The proposed FY2017-18 budget will fund $7.6 million toward this liability, while the actual annual amount needed to fully fund this liability is closer to $12 million per year. The City has taken a two-fold approach to ensuring long-term fiscal stability related to these retiree health costs by creating policies to appropriately fund current obligations and limit future liabilities.
Funding current obligations - To provide long-term sustainability for retiree medical expenses, the City created an OPEB trust in February 2011 with an initial contribution of $34 million. Since that time, the City has been committed to funding this obligation by directing a certain percentage of annual salary costs to the fund. That percentage has been about 3 percent of total salary for the General Fund for the past several years. Since the current required payment to meet a fully funded status is approximately 8 percent of salary, a new policy has been put in place to increase the funding of this obligation each year. It should be noted that the utilities have been funding 100 percent of their obligation.
Beginning in FY2016-17, the new policy directs the annual General Fund payment to the trust to increase by $750,000 each year until the annual funding level is equal to the annual required contribution (ARC) determined by the actuaries. As compared to FY2015-16 funding, the funding level in FY2016-17 was increased by $750,000; in FY2017-18 it was increased by $1.5 million and in FY2018-19 it is expected to increase by $2.25 million. If this pattern continues, the City is expected to contribute the full ARC in FY2023-24. This time frame is dependent upon several variables such as market rate of returns and employee retirements, and thus will be updated annually.
The trust has performed well in the equity markets, and when combined with the increased contributions, had a fund balance of $54 million as of June 30, 2015 which has now grown to $63.6 million as of December 31, 2016. Based on the information we have today, the $63.6 million fund balance as compared to the $206 million total liability as of June 2015, we are currently funded at 31 percent. An updated actuarial report is expected in late 2017.
Limiting future liabilities - As mentioned earlier, over the past year, the City has negotiated new contracts with its bargaining units, with the goal of capping unfunded liabilities and slowing payroll growth. As a result, the defined benefit retiree health benefit was eliminated in 2012 for new "Tier 3" employees and replaced with a defined contribution benefit after five years of employment. These new employees are required to contribute into a Retirement Health Savings account that can be used for future medical, dental, and vision expenses after retirement.
The following chart shows the forecast funding level for the OPEB Trust, assuming the City continues to fund at the current 3 percent level. The blue line reflects the required 8.1 percent ($12 million) of salary funding level and the red line represents the current 3 percent ($7.6 million) level as it is increased due to the new policy.
Pension or "PERS" Costs - Costs for the employee pension plan are related to the:
Particular retirement plans the City participates in,
Annual contribution made by the City and the employees, and
Returns experienced in the stock market.
The latest actuarial report identifies a $165 million unfunded liability for "miscellaneous" (non-public safety) employees and a $71 million unfunded liability for public safety employees for a total of $236 million. The annual payment to PERS for pension costs is calculated by PERS and sent to its member agencies. As has been the case in previous years, the FY2017-18 proposed budget will fully fund the payment due to PERS for the fiscal year. Looking forward, in order to reduce, and ultimately eliminate, the unfunded liabilities that cities currently have, PERS has developed an accelerated payment plan that is expected to eliminate the unfunded liability in approximately 25 years. The actions taken by PERS to correct the unfunded liability will result in cities being required to fund higher annual costs as PERS recalculates the requirements each year. As an example, the increased cost for the City of Roseville for FY2016-17 totals $3.4 million, which includes $2.2 million for the General Fund.
Other Outside Influences on Labor Costs—Proactive management of expenses continues to play a key role, especially for labor costs. Although the City has some control over salary costs, several components are outside its control, including the following:
Increases in the mandated minimum wage that will add salary and benefit expenses to our compensation costs, as well as those of our vendors (which will be passed on to the City), and
The future of the Affordable Care Act, which affects healthcare expenses for temporary employees.
While difficult to forecast at this time, the FY2017-18 proposed budget will fund the expected impact of these cost increases for the fiscal year. These forecasts will be refined as the full impact is realized.
Actions taken toward Fiscal Soundness during FY2016-17
Capital Improvement Plan and Rehabilitation of Assets - During the FY2016-17 fiscal year, City staff completed a project to overhaul the process by which it identifies and funds the ongoing replacement of assets.
This effort created an accounting system that fully accounts for all assets that the City is required to replace in future years, including when and how much they will cost. These costs are now incorporated into the operating budgets for all appropriate departments. This effort has resulted in a number of important improvements to the current system:
Creation of a centralized database of all assets including life span and cost,
Development of a replacement-funding mechanism for all assets,
An accurate picture of the full cost of running each department,
Reduction or elimination of the need for one-time exaggerated bumps in the budget, making future budgets smoother, and
Reduction or elimination of last-minute scrambling for funds.
Internal Service Funds - The City has successfully used the concept of an internal service fund (ISF) for certain citywide expenses. The calculation and tracking of these expenses is performed in a centralized manner, in which the identification and funding of the costs are clearly presented. These costs are funded, via the operating budget, by the department that actually incurs the expense. An excellent example of this is the Automotive Replacement Fund (ARF). During the FY2016-17, City staff completed the task of creating ISFs for the IT Department and the Building Maintenance and Facilities Division. As with the ARF, this effort:
Created an accurate assessment of the costs of delivering these services, and
Transferred responsibility for identifying the funding of the expenses to the users of the services.
Cost-Recovery Fee Strategy - The collection of fees reimburses the City for expenses requested by a single party, as compared to the public at large. Fairly allocating service costs creates value and predictability for our customers. Fees are created to ensure equity: Those who benefit from the service should pay for the service. During FY2016-17, staff completed a thorough study of the fee-based services provided by the City. This study determined the total cost of providing each service as well as the current cost-recovery level. In addition it compared our fees with neighboring or similar jurisdictions, and recommended appropriate fees and charges based on the analysis. The data was assembled into a single, comprehensive book of all fees charged for services and was approved by the City Council.
Based on current projections, along with a 2 percent Consumer Price Index adjustment, these user fees are expected to generate an additional $350,000 in FY2017- 18 to help recover the costs to provide services that are currently being subsidized by the General Fund.
Increased Level of Emergency Reserves - In accordance with City Council policy, the City maintains a reserve level of 10 percent of the General Fund’s total estimated operating costs. Potentially increasing the emergency reserve level to three months’ worth, or 25 percent, of total expenditure would strengthen the City’s ability to weather economic downturns and also allow the City to achieve the lowest cost of borrowing. Finance staff has identified this as a long term goal. Although it is not feasible to accomplish this in the near term, redistributing excess funds each year from the prior year’s budget will help build these reserves. Currently, the City’s General Obligation Bond rating stands at AA+ from Standard & Poor’s; and increasing the reserves can help the City achieve the next (and highest) rating possible of AAA, thereby lowering the City’s borrowing costs.