From the City Manager's budget message:
The adoption of the FY2016-17 budget marks the second year since the City implemented a strategy to balance operational revenues with operational expenses without the use of one-time funds. This balancing of resources during the development of the budget involves many compromises when funding the various needs of the City. The FY2016-17 proposed budget addresses many of these needs; and although it is balanced, it does not fully fund all of the City’s obligations.
With cost pressures continuing to rise and revenue increases continuing to slow, the priority in this year’s budget is to pay our mandatory obligations first, such as PERS costs, debt, and salaries, and then to prioritize the remaining resources to deliver services. 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 many proactive decisions towards reversing this trend and attaining long- term fiscal soundness.
As a result, the City has successfully implemented long-term solutions in four critical areas. In last year’s budget, and again in this year’s budget, these four categories are now fully funded: Workers’ Compensation internal service fund (ISF), the Vehicle Replacement ISF, the General Liability ISF, and the Litigation Reserve Fund (newly funded in FY2015-16).
The chart shows the required vs. actual funding levels of the three ISFs for four years. As can be seen, these three funds have now been fully funded for the last two years.
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 $55 million of underfunded needs. The General Fund has been funding $1 million per year when the actual funding level should be closer to $5 million. This has resulted in deferred maintenance occurring throughout the City. The proposed FY2016-17 budget will fund $1 million of expenses from the General Fund, and after utilizing all available resources, defer $3.7 million to future years. The following chart shows the required vs. actual funding level of this account if we do not improve the funding in future years.
Streets and Roadways—Funding challenges for roadway infrastructure have caused the City to fall behind on its maintenance schedule for streets. 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 the General Fund, leaving a shortfall of $5 million per year, or $50 million for the next 10 years.
The FY2015-16 budget includes $15 million for roadway maintenance which addresses 34 miles of roadway. For FY2016-17, the City is budgeting another $7.25 million for roadway resurfacing. It should be noted that the funding levels for FY2015-16 and FY2016-17 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:
The arterial resurfacing project is the combination of three years’ worth of arterial resurfacing funds all rolled into one project – FY2013-14, FY2014-15, and FY2015-16.
In FY2013-14, due to some staffing shortages and regulatory changes regarding handicap-ramp installations and upgrades, no resurfacing was completed. That allowed the FY2013-14 funding to roll forward into future years.
Staff is combining the FY2014-15 Federal Regional Surface Transportation Program (RSTP) apportionment with a future apportionment being advanced from FY2017-18.
This summer’s storm drain work has been planned for several years. Over that time, the City has accumulated over $2 million dollars 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.
The Gas Tax Fund received a large repayment from a Redevelopment Agency loan.
Some resurfacing money that was being held in reserve pending the outcome of a State gas tax audit was released for resurfacing after the audit’s successful completion.
The Alternative Transportation Division was able to allocate $5.4 million for street maintenance purposes via current and past Transportation Development Act funding years.
Funding for FY2017-18 and beyond are expected to return to the normal $4-5 million level.
Citywide Parks—Roseville has an extensive and beautiful parks system, and Council is highly motivated to maintain the high standards to which our community 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.
Included in this budget is funding for the construction of Phase 2 of Harry Crabb Park and Phase 2 of Central Park. The expansion of the parks system to include these two parks will obligate the General Fund to an additional $200,000 in annual maintenance costs. These additional maintenance costs are not included in this budget since the parks will be constructed during the year and thus not require maintenance costs until FY2017-18. As a result, a funding source will have to be determined at that time.
While it is fully expected that the General Fund will fund these costs in FY2017-18, further expansion of citywide parks will require the identification of additional funding strategies.
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. During the recent labor negotiations, the Council took a two-fold approach to ensuring long-term fiscal stability related to labor costs by reducing the growth of future labor
expenses. This was accomplished by increasing the number of salary step or “step” increases and modifying the amount of the increase earned in each step.
Increasing the number of steps within a pay scale—The number of steps was doubled, effectively doubling the length of time required to reach maximum pay within a job classification. This new schedule implements a
2.5 percent merit increase instead of 5 percent when an employee is eligible for a step increase. Going into FY2016-17, the change in the number of steps applies to Roseville Police Officers Association, Roseville Police Association, Local 39, IBEW, and Management/ Confidential.
New salary schedule—During the recent negotiations, a new salary schedule for new employees to the City was created. These new pay scales were based on market surveys with the goal of targeting a median pay range. Going into FY2016-17, the schedule applies to Roseville Police Officers Association, Roseville Police Association, Local 39, IBEW, and Management/Confidential.
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. The latest actuarial report shows an unfunded liability of $152 million. The proposed FY2016-17 budget will fund $7.6 million toward this liability, when the actual annual amount needed to fully fund this over time is $12 million per year. The City has taken a two-fold approach to ensuring long-term fiscal stability related to retiree health costs by funding current obligations and limiting 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 remained committed to funding this obligation by directing a certain percentage of annual salary costs to the fund. That percentage currently is three percent of total salary for the General Fund, while the utilities are funding 100 percent of their obligation. The current required payment to meet a fully funded status is 8.1 percent of salary. The trust has performed well in the equity markets, and when combined with the increased contributions, now has a fund balance of about $55 million, which represents a 26 percent funding level.
- 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 retiree health benefit has been eliminated for new “Tier 3” employees. 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. These expenses will now be funded by the retiree as opposed to the City. 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 green line represents the current 3-percent ($7.6 million) level.
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 $71million 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. The FY2016-17 proposed budget will fund the expected 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 a modified payment plan that will eliminate the unfunded liability in approximately 28 years. Although PERS has identified and implemented the actions necessary to correct the unfunded liability, cities will be 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.
The following chart provides a summary of the various funds discussed and includes the latest actuarial information from PERS.
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 Affordable Care Act, which could add healthcare expenses for temporary employees.
While difficult to forecast at this time, the FY2016-17 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.
Future Goals Toward Fiscal Soundness
Capital Improvement Plan and Rehabilitation of Assets—During the FY2016-17 fiscal year, City staff will be undertaking an overhaul of the process by which it identifies and funds the ongoing replacement of assets. This effort will create 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 will then be incorporated into the operating budgets for all appropriate departments. This effort will result in a number of important improvements to the current system:
Creation of a centralized database of all assets to include 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 fiscal year, City staff will be undertaking the task of creating ISFs for the IT Department and the Building Maintenance and Facilities Division. As with the ARF, this will
This will also provide opportunities to improve efficiency and to expand funding sources. In effect, it will transfer accountability to the departments to manage these costs and require them to thoughtfully decide if the impact of an expense increase can be absorbed in their budget. These new, accurate budget models will generate a comprehensive picture of what each city department actually costs to operate. For example, instead of funding all IT needs from a centralized fund that is not owned or funded by any operating department, an IT expense line will exist in each department’s budget.
Cost-Recovery Fee Strategy—Fairly allocating costs to the services provided creates value and predictability for our customers, and reimburses the City for expenses requested by a single party, as compared to the public at large. Fees in general ensure equity; those who benefit the most should pay the most, and pricing ensures that users pay appropriate fees. The City is currently determining the total cost of providing each City service and the cost-recovery target, comparing our fees with neighboring or similar jurisdictions, and recommending appropriate fees and charges based on the analysis. Once the data is collected and analyzed, these recommendations will be brought forward to the City Council for consideration. When fees are approved, the City will prepare a comprehensive fee booklet that will consolidate all fees charged for services, which are currently maintained by respective departments.
An example of this analysis is being performed in the Parks, Recreation, and Libraries Department. In alignment with its pricing policy, the City is currently evaluating strategies for recovering costs for facility expenses. One new fee being considered is a 5 percent capital improvement fee on all programs. This would help to offset the direct costs incurred by users of the facility. Based on current projections, this fee would generate $350,000 annually toward filling the gap in our capital improvement plan for Parks, Recreation, and Library facilities. This fee is not included in the current budget but will be evaluated during FY2016-17.
Increase 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. However, increasing the emergency reserve level to at least two to three months’ worth of total expenditures (16-25 percent) will strengthen the City’s ability to weather economic downturns and also allow the City to achieve the lowest cost of borrowing. Although this won’t happen overnight, 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.