The City Manager and Financial Services Director are presenting the City Manager’s final budget recommendations for fiscal year 2016-2017 (FY ’17).  Today, the City Council is being asked to direct staff in preparing the City’s final budget document for submission to the State of Nevada.  City staff will file the tentative budget for FY ‘17, and the City Council will hold a public hearing to receive public comment on the FY ‘17 tentative budget at its regularly scheduled Council meeting on May 23, 2016.  Immediately following the public hearing on the FY ‘17 tentative budget, the City Manager and Financial Services Director will present the FY ’17 final budget document which will be prepared based upon direction received today.  The final budget must be filed with the Nevada Department of Taxation by June 1 annually.  During years in which the Legislature is in session, should the Legislature take action which affects the City’s budget for the subsequent fiscal year, an additional 30 days would be granted to file an amended budget if necessary with the Nevada Department of Taxation.

Attached to this agenda is the City Manager’s FY ’17 Budget Recommendation Book as well as the proposed five-year Capital Improvements Plan (CIP).  The City Manager’s Recommendation Book is a resource manual designed to present results and expectations that encapsulate the City Manager’s budget recommendations for the various Funds maintained by the City of Sparks and the Sparks Redevelopment Agency for FY ‘17.  Today, the Financial Services Department Director will be presenting the material found in the City Manager’s Recommendations book, and is seeking approval of the recommendations as presented or alternate direction to prepare the City’s final budget for FY ‘17.

Today, the City Manager is seeking the following:

1. Approval of the FY ‘17 City Manager’s final budget recommendations;
2. Approval of the proposed five-year Capital Improvements Plan (CIP)

Item #1 -- Information Regarding the City Manager’s FY ’17 Final Budget Recommendations:

• The City Manager’s final budget recommendations have been prepared based upon direction received from City Council at the February 29, 2016 budget workshop.  See the attached Budget Recommendations Book for more detailed information on the City Manager’s final budget recommendations for FY ’17. 

Summary of the City Manager’s final budget recommendations for FY ’17 according to fiscal policy direction received on February 29, 2016:

Policy #1:  Establish a General Fund Minimum Ending Fund Balance

• The purpose of this policy is to establish a minimum ending fund balance target within the General Fund -- addressing both budget and actual results
• Council provided direction to submit a final budgeted ending fund balance no lower than 6.0% of expenditures in FY ‘17
• City Council acknowledged that a fund balance of 12.5% is preferable to meet the City’s year-round cash flow needs; however, they also provided direction that a budgeted ending fund balance of 6.0% will provide the fiscal flexibility in the budget that is being requested by the City Manager to meet the City’s service level requirements
• City Council did not choose to alter their formally adopted policy of achieving a minimum ending fund balance of 8.3% which was established in FY ’11 as part of the City’s effort to comply with the accounting standards set by GASB Statement #54 
• So, even though the budget shows 6.0%, achieving actual results of at least 8.3% remains as the formally adopted Council policy target

Policy #2:  General Fund Contingency Budget

• The purpose of this policy is to provide budget authority and flexibility to address unexpected fiscal needs in FY ‘17
• The City Manager’s final budget recommendations include a contingency budget of $1.0M within the General Fund, offset by a transfer-in of an equal amount from the Motor Vehicle Internal Service Fund
• The contingency budget is established for use only upon Council approval to cover unexpected one-time budget shortfalls.  The transfer-in from the Motor Vehicle Fund will only be used should resources within the General Fund be insufficient to meet the need for which the Contingency budget is used
• So far, $0 has been spent from the Contingency budget in the current FY ’16, and there is no expectation that usage of the Contingency budget will be necessary in FY ’16.  However, $1,000,000 remains within the Contingency budget for FY ’16 should an unexpected need arise between now and the end of the current fiscal year

Policy #3:  Transfer Resources from the General Fund to the Capital Projects Fund

• The purpose of this policy is to help pay for infrastructure, facility, and technology needs as identified within the Capital Improvements Plan (CIP)
• The amount of resources to be transferred includes 2.5% of budgeted General Fund revenues plus identified IT hardware and software needs as outlined in the 5 year CIP
• The City Manager’s final budget recommendations include a transfer of approximately $2.7 million for FY ’17 including $1,575,000 for general CIP needs plus $1,080,240 for technology needs

Policy #4:  Commit Business License Revenue to the Stabilization Fund

• The purpose of this policy is to set aside resources to help stabilize operations during two specific scenarios:  A) should General Fund revenues decline by at least 4% from the previous year; or B) to help pay expenses incurred to mitigate the effects of a natural disaster upon formal declaration by the City
• The City Manager’s recommendations include a commitment of $200,000 of Business License Revenue to the Stabilization Fund for FY ’17
• Keeping true to direction from Council during budget workshops in previous fiscal years, the expectation for this policy is that funding for the Stabilization Fund might commence once again beginning in FY ’17.  In previous years, City Council has stated the desire to wait for revenues to improve and fiscal stability to improve before making further financial commitments to the Fund.  Following Council’s lead, the City Manager is recommending that we stick to that previously stated plan and begin building resources within the Stabilization Fund beginning in FY ‘17
• The Stabilization Fund had a fund balance of $231K at the end of FY ’15, which should grow to approx. $436K by the end of FY ’17 should this recommendation be approved

Policy #5:  Personnel Costs are Less than 78% of Total General Fund Revenues

• The purpose of this policy is to ensure that expenditures within the General Fund do not become out of balance and that budgeted allocations for personnel costs do not out-pace the growth of General Fund revenues
• The City Manager’s final FY ’17 budget recommendations include personnel costs equal to 77.7% of total revenues

Policy #6:  Determine Strategies for Reducing Liabilities Related to the City’s Other Post-Employment Benefit (OPEB) and Workers Compensation (Public Safety Heart/Lung/Cancer Benefits). 

• The purpose of this policy is to ensure the City is addressing long-term liabilities related to employee and retiree benefits
• At the end of FY ’15, The City had approximately $5.1 million of assets within the Workers Compensation Fund available to pay for claims.  However, Workers Compensation Fund liabilities totaled $6.1 million, resulting in a negative fund balance of about $1.0 million. The liabilities will be paid over a long period of time, but considering that heart/lung/cancer claims often exceed $2M+, it is unclear how long the $5.1 million of assets will last.  The heart/lung/cancer benefits for public safety personnel are established by the Nevada Legislature, and action taken during the 2015 legislative session ended up decreasing the City’s total long-term liability in FY ’15 by about $4M compared to FY ‘14
• Based on discussion and direction received at the February budget workshop, the City Manager is recommending that the City continues to fund its OPEB liability on a “pay-as-you-go” basis in FY ’17 and not create an irrevocable trust fund for the purpose of funding the City’s OPEB liability.  During the February budget workshop, it was acknowledged that GASB statement #75, which will be implemented by the City in FY ’18, will change the way this liability is presented on the City’s balance sheet, and that the healthcare industry is still mired in a state of flux, leading to the recommendation that an irrevocable trust not be established at this time.  However, an irrevocable trust may become the recommended course of action in subsequent years

Other FY ’17 items that have already been presented or discussed at the February 29 budget workshop are presented here with updated estimates that are captured in the final budget recommendations and fiscal policies listed above:

General Fund Revenues:

• Property Taxes are trending higher by 7.5% in FY ’16 compared to FY ’15 which would be about $650K higher than FY ’16 budget.  The increase is due primarily to stronger new growth and development which is exempt from the property tax caps
• However, FY ’17 property tax growth is expected to be much lower at only 1.6% -- despite the fact that the City’s assessed value is increasing by 7.1% in FY ’17.  This is due to the property tax cap formula resulting in only a 0.2% growth cap for existing residential and commercial properties in FY ’17 (rather than caps of 3% for residential and 3.2% for other properties that were in place in FY ’16).  This will result in abated revenue of approximately $4.5M in FY ’17.  Property tax caps are not applicable to new development
• CTAX revenues are trending about 8.7% higher in FY ‘16, with an increase of about 7.5% expected in FY ’17
• License & Permit revenue is also trending higher by about 4.8% in FY ’16, with an increase of about 2.8% expected in FY ’17.  FY ’17 is expected to grow at a lower rate than FY ’16 since $200K of Business License Revenue will be committed to the Stabilization Fund (see discussion above regarding fiscal policy #4)
• Total G.F. revenues are trending higher by about 6.9% in FY ’16, followed by an expected increase of 4.4% higher FY ’17

Special Explanation of Property Tax Revenues for FY ’17 (per a statement prepared by the Nevada Dept. of Taxation and published on their website):

• General Property Tax Cap.  For all property except residential property, State law provides a formula that takes the greater of 1) twice the consumer price index (“CPI”) percent change in the prior year; or 2) the rolling percentage average change of assessed value over a ten year period for each county.  If the greater of these two calculations is more than zero and less than 8%, the greater of these two calculations is the General Tax Cap for that county.  The law provides a floor of zero so that if the CPI or average growth is negative, then the general abatement percentage cap cannot fall below zero.  For Washoe County, including the City of Sparks, the formula will result in a General Tax Cap of 0.2% for FY ’17.
• Residential Tax Cap.  State law also provides that the residential property tax cap is 3%.  However, if the General Tax Cap is less than 3%, then the Residential Tax Cap must be reduced to equal the General Tax Cap.  For Washoe County, including the City of Sparks, the Residential Tax Cap will equal the General Tax Cap of 0.2% for FY ’17.
• Tax Applicability for fiscal year 2016-2017.  Applying the statutory tax cap rules to the current forecast year, in 2015, the annual average percentage change in the CPI published by the federal Bureau of Labor Statistics was unusually low at 0.1%.  At the same time, the rolling percentage average change of assessed value for several counties over a ten-year period was lower due to the effects of many years during the recession when assessed values were dropping.  Accordingly, the General Tax Cap for nine counties in the State is less than 3% and, therefore, the Residential Tax Cap will be reduced to the same level as the General Tax Cap in those nine counties.  The result is flat or lower property tax revenue available to local governments and school districts for the 2016-2017 fiscal year.

General Fund Expenditures:

• Salaries & Wages are expected to increase 3.6% in FY ’16 followed by 4.3% increase in FY ’17.  Savings from vacancies are included in FY ’16 estimates, but most positions in the personnel complement are assumed to be filled for the entire year in the recommended FY ’17 budget
• Benefits are expected to increase 12.6% in FY ’16, followed by an expected 8.4% increase in FY ’17.  We are assuming a 0% increase in health insurance premiums for FY ’17; however, costs to subsidize retiree premiums are increasing (which is a function of OPEB “pay-as-you-go”)
• Services & Supplies expenditures are expected to increase 5.9% in FY ’16, and budgeted to increase by another 5.7% in FY ‘17
• Total G.F. expenditures are expected to increase by 6.6%, in FY ’16, and budgeted to increase by 6.9% in FY ‘17
• The City Manager’s recommended New Needs book is presented today as Appendix B to the City Manager’s recommendations book attached to this agenda item. 
  • In total, $605,556 of New Needs in the General Fund is being recommended by the City Manager to include 7.2 new full-time equivalent (FTE) positions into the FY ’17 budget.  New Needs recommended for other Funds total $1,189,800, including 5.8 FTE’s

FY ’16 General Fund Transfers:

• $1.0M transfer-in from the Motor Vehicle Fund to offset the contingency budget.  This is only expected to be utilized if General Fund resources are insufficient to meet any contingency budget usage.  This budget item is recommended solely for the purpose of providing financial flexibility that might be needed to fund unforeseen expenditures.  It must be recognized that a transfer from the Motor Vehicle Fund would damage the fiscal stability of that Fund and should be made only as a measure of last resort
• $54K transfer-in from the Municipal Court Administrative Assessment Fund to pay for costs resulting from the Court’s reorganization
• $813K transfer-out to the Parks & Rec. Fund representing a subsidy of about 23% of expected expenditures in that Fund
• $2.7M transfer-out to the Capital Projects Fund for infrastructure, facility, and technology needs as identified in the 5 year Capital Improvement Plan
• Transfer-out to the Debt Service Fund of $694K for the City’s 2007 CTAX bond debt service needs.  Unspent bond proceeds were used to pay this debt service during FY ’14, FY ’15, and FY ’16, but the debt service payments need to be added back into the General Fund in FY ’16 as the bond proceeds have now been exhausted

General Fund Ending Fund Balance:

• A net decrease of $569K is expected in FY ’16, followed by a budgeted reduction of $2.2M in FY ’17
• FY ’16 estimated fund balance is expected to be approximately $5.9M, or 10.2% of estimated expenditures
• FY ’17 budgeted fund balance is approximately $3.7M, or 6.0% of budgeted expenditures

General Fund Subsidy of the Redevelopment Agency:

• Although subsidies were necessary in previous years for Redevelopment Area #2,  subsidies are not expected for either Area #1 or Area #2 for FY ’17, nor are subsidies expected for the foreseeable future

Note:  Information on other Funds maintained by the City can be found in the City Manager’s final budget recommendations book attached to this agenda item.

Item #2 -- Information Regarding the City’s Five-Year Capital Improvements Plan (CIP):

• The CIP document can be found as an attachment to the City Manager’s FY ’17 Final Budget Recommendations book
• No significant changes have been made to the CIP document that was presented to City Council at the February 29 budget workshop

Nevada Revised Statute (NRS) 354.59801 requires that each local government have on file, a copy of its plan for capital improvements.  NRS 354.5945 further requires a five year capital improvement plan be submitted to the Department of Taxation, Debt Management Commission of Washoe County, and the Director of the Legislative Counsel Bureau.  In addition, NRS 354.5945 requires that copies be available for public record and inspection at the offices of the Sparks City Clerk and the Washoe County Clerk.

City Council could also choose alternatives other than the recommendations presented today, and direct staff to prepare a final budget and Capital Improvements Plan for fiscal year 2016-2017 accordingly.

Recommended Motion #1:  “I move to approve the City Manager’s final budget recommendations for fiscal year 2016-2017”.

Recommended Motion #2:  “I move to approve the proposed five-year Capital Improvements Plan for fiscal years 2016-2017 through 2020-2021”.