The City Manager and Financial Services Director are presenting the City Manager’s final budget recommendations for fiscal year 2017-2018 (FY ’18).  Today, the City Council is being asked to direct the City Manager in preparing the City’s final budget document for submission to the State of Nevada.  City staff has filed the tentative budget for FY ’18 (which must be filed with the Nevada Department of Taxation annually by April 15), and the City Council will hold a public hearing to receive public comment on the FY ‘18 tentative budget at its regularly scheduled Council meeting on May 22, 2017.  Immediately following the public hearing on the FY ‘18 tentative budget, the City Manager and Financial Services Director will present the FY ’18 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 ’18 Budget Recommendations book as well as the proposed five-year Capital Improvements Plan (CIP).  The City Manager’s Budget Recommendations 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 ‘18.  Today, the City Manager and the Financial Services Department Director will be presenting the material found in the City Manager’s Budget Recommendations book, and is seeking either approval of the recommendations as presented or alternate direction to prepare the City’s final budget for FY ‘18.

Today, the City Manager is seeking the following:

1. Approval of the FY ‘18 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 ’18 Final Budget Recommendations:

• The City Manager’s final budget recommendations have been prepared based upon direction received from City Council at the February 27, 2017 budget workshop.  See the attached Budget Recommendations book for more detailed information on the City Manager’s final budget recommendations for FY ’18

Summary of the City Manager’s final budget recommendations for FY ’18 per fiscal policy direction received from City Council on February 27, 2017:

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 ‘18
• 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 
• Thus, 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 ‘18
• 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 ’17, and there is no expectation that usage of the Contingency budget will be necessary in FY17.  However, $1,000,000 remains within the Contingency budget for FY ’17 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)
• Per the Council’s adopted policy, the amount of resources to be transferred should include 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 into the Capital Projects Fund of $754,108 for FY ’18 which includes $292,108 for IT hardware needs plus $462,000 for general CIP needs
  • This amount is $1,601,741 short of the approved policy target.  After initial estimates for FY ’18, the City Manager recommended reducing the FY ’18 transfer to the Capital Projects Fund by $1,601,741 to help reach a budgeted ending fund balance valued no lower than 6.0% of expenditures.  The reduction includes planned transfers of $429,000 for IT identified software needs and $1,172,741 for other CIP needs (including deferring the HVAC system at the Police Department, and the Legislative building seat replacement project)
  • Additionally, $200k was also removed from the budgeted FY ’17 transfer from the General Fund to the Capital Projects Fund to help balance FY ‘18’s budget

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 ’18
• In previous years, City Council has stated the desire to wait for revenues and fiscal stability to improve before making further financial commitments to the Fund.  Following Council’s lead, the City Manager is recommending that we continue with that previously stated plan of rebuilding the Fund’s resources slowly
• The Stabilization Fund had a fund balance of $235K at the end of FY ’16.  We are anticipating approximately $252K to be transferred from the Stabilization Fund to the General Fund to help pay for costs related to the January 2017 floods, which more than offsets the $200K commitment of revenue to the Fund as part of the FY ’17 budget.  Thus, we expect the Stabilization Fund balance to decrease to $186K in FY ’17 and rise again to $388K in FY ‘18k should Council approve the recommended $200K commitment of business license revenue into the Fund for FY ‘18

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 ’18 budget recommendations include personnel costs equal to 76.5% of total revenues, and FY ’17 is estimated to be 77.9% of total revenues

Policy #6:  Report the annual Other Post Employment Benefit (OPEB) and Workers Compensation liabilities and annually determine strategies to reduce or fund these liabilities 

• The purpose of this policy is to ensure the City is addressing long-term liabilities related to employee and retiree benefits
• Workers Compensation Fund.  At the end of FY ’16, The City had approximately $4.0 million of assets within the Workers Compensation Fund available to pay for claims.  However, Workers Compensation Fund long and short term liabilities totaled $7.2 million, resulting in a negative fund balance of about $3.2 million. Most liabilities within the Fund are of a long-term nature, but considering that heart/lung/cancer claims often exceed $2M+, it is unclear how long the $4.0 million of assets will last.  During FY ’16, the most recent fiscal year ended, the Workers Compensation Fund experienced a cash balance drop of $1.1M.  Current trends show that resources within this Fund will likely run out by FY ’19 or FY ’20.  Ultimately, the heart/lung/cancer benefits for public safety personnel are established by the Nevada Legislature and can change dramatically by legislative action
• OPEB.  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 ’18 and not create an irrevocable trust fund for 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, yet it is a financial tool with limitations and is inflexible by design, and should be considered carefully before implementation

Other FY ’18 items regarding the City’s General Fund that have already been presented or discussed at the February 27 budget workshop are presented below in greater detail with updated estimates that are captured in the final budget recommendations and fiscal policies listed above.  Fiscal causes of change are also provided within the City Manager’s budget book that is attached to this agenda item.  Highlights of changes and expectations are provided below:

General Fund Revenues:

• Property Taxes are trending higher by 2.9% in FY ’17 compared to FY ’16, and 5.2% higher in FY ‘18
• Property tax caps are based on a complicated formula that factors in the 10-year assessed value average growth rate within Washoe County and the national CPI index (inflation), resulting in a tax cap percentage up to 3% for owner-occupied residential properties and up to 8% for all other properties.  For FY ’18, property tax caps are expected to be 2.6% for all existing properties – meaning, that a tax payer’s bill will not exceed 2.6% from the previous year barring any new property improvements.  The City of Sparks General Fund tax revenues are expected to increase more than 2.6% in FY ’18 due to new developments and property improvements that did not exist in FY ’17 since new developments and property improvements are exempt from the tax cap laws
  • Property tax abatement (i.e., property taxes that are calculated, but removed from property owner’s tax bills because of the tax caps) is expected to equal $4.5M in FY ‘18
• CTAX and Fair Share revenues are trending about 6.7% higher in FY ‘17, with an increase of about 4.9% expected in FY ’18
• License & Permit revenue is also trending higher by about 2.1% in FY ’17, with an increase of about 2.2% expected in FY ’18.  The growth in License and Permit is less than other revenue sources primarily due to low results from franchise fees.  Particularly concerning has been the declining utility rates (gas and electric) over approximately the past two years.  Those particular franchise fees have been in decline since FY ’15 (gas franchise fees declining by 28.2% and electric declining by 11.9% in FY ’18 compared to FY ‘15).
  • FY ’18 license and permit recommended budgeted revenues also include an estimated $60k from a potential fire inspection fee increase as recommended by the Sparks Fire Department
• Overall, total General Fund revenues are trending higher by about 4.0% in FY ’17, followed by an expected increase of 4.1% in FY ‘18
• FY ’17 estimated revenue shortfall compared to budget:  FY ’17 total General Fund revenues are estimated to be approximately $860K, or 1.4%, below FY ’17 budget.  This shortfall is almost fully attributable to the decline in License and Permit revenues discussed previously ($11.2M estimated for FY ’17 compared to $11.8M which was budgeted in FY ’17).  Property tax, CTAX, and Fair Share revenues (which account for 75.3% of total estimated revenues for FY ’17) are only a combined $150K, or 0.3% lower than FY ’17 budget

General Fund Expenditures:

• Salaries & Wages are expected to increase 4.9% in FY ’17 followed by a 1.8% increase in FY ’18.  Savings from vacancies are included in FY ’17 estimates, but positions in the personnel complement are assumed to be filled for the entire year in the recommended FY ’18 budget
  • Two vacant positions within the Community Services Department personnel complement have been removed from the General Fund as part of the FY ’18 budget recommendations, including the elimination of one Property Agent position, and moving a Senior Planner position to the Development Services Fund
  • No wage increases or new positions have been included in the FY ’18 recommended budget
• Benefits are expected to increase 4.8% in FY ’17, followed by an expected 2.8% increase in FY ’18. 
  • We are assuming a 0% increase in health insurance premiums for both FY ’17 and FY 18; however, costs to subsidize retiree premiums are increasing (which is a function of funding OPEB benefits on a “pay-as-you-go” method)
  • Additionally, PERS has announced that no contribution rate changes will occur in either FY ’18 or FY ’19
• Services & Supplies expenditures are expected to increase 17.2% in FY ’17, and budgeted to increase by another 6.0% in FY ’18.  The primary drivers of the large increase seen in FY ’17 include fire apparatus funding that was accounted for as a transfer-out in FY ’16, increased contributions to the self-insurance liability fund due to several legal claims, increased contribution to the Community Assistance Center, and expenditures related to the “S Fire” and the January floods.  The increase in FY ’18 is primarily driven by anticipated potential costs related to D’Andrea abatement, increased forensics costs, higher grant matches, and training requirements
• Total General Fund expenditures are expected to increase by 7.1%, in FY ’17, and by 2.9% in FY ‘18
• 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 
  • No “New Needs” are being recommended for the General Fund in FY ‘18
• FY ’17 estimated expenditure underspend compared to budget:  FY ’17 estimated expenditures are expected to be approximately $688K, or 1.1%, under budget.  Of that amount, personnel costs are expected to be under budget by $532K (1.1% under budget), while expenditures for services and supplies are expected to be under budget by $156K (1.3% under budget)

General Fund Transfers:

• $1.0M transfer-in from the Motor Vehicle Fund is included in the FY ’18 recommended budget to offset the contingency budget by an equivalent amount.  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
• $1,175,000 transfer-out to the Parks & Rec. Fund representing a subsidy of 29.8% of expected expenditures in that Fund for FY ’18.  A transfer of $1,005,000 is expected in FY ’17 representing a subsidy of 26.5% of total expenditures within that Fund
• $754,108 transfer-out to the Capital Projects Fund in FY ’18 for infrastructure, facility, and technology needs as identified in the 5-year Capital Improvement Plan -- see a more thorough discussion previously under Policy #3
• Transfer-out to the Debt Service Fund of $692,912 for the General Fund’s portion of the 2007 CTAX bond debt service for FY ‘18

General Fund Ending Fund Balance:

• A net fund balance decrease of $2.1M is expected in FY ’17 (pretty close to the decrease of $2.2M that was budgeted for FY ’17).  Another small reduction of $107K is budgeted for FY ‘18
• FY ’17 estimated ending fund balance is expected to be approximately $3.9M, or 6.4% of estimated expenditures -- very close to the 6.0% balance which was budgeted for FY ’17
• FY ’18 recommended budgeted ending fund balance is approximately $3.8M, or 6.0% of recommended budgeted expenditures
• FY ’17 beginning fund balance slightly higher compared to budget:  The FY ’17 beginning fund balance (i.e., the FY ’16 ending fund balance carried over into FY ’17) was only $129K higher after the FY ’16 books were closed and audited in late Fall 2016, compared to what was estimated in Spring 2016 and included in the FY ’17 budget

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 or FY ‘18, nor are further subsidies expected for the foreseeable future

Note:  Information on other Funds that are 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 appendix to the City Manager’s FY ’18 Final Budget Recommendations book
• Compared to the CIP plan which was presented at the February 27, 2017 workshop, the City Manager is recommending the pursuit of a resolution (to be presented at a later date) designed to shift a portion of the amount of Franchise Fee revenue that currently is allocated to the Road Fund (Fund #1402), to the Parks and Recreation Project Fund (Fund #1402) for the purpose of accumulating resources to pay for the replacement of fields at the Golden Eagle Regional Park
• Also, the attached proposed Capital Improvements Plan reflects the results from the recommended reduced transfer from the General Fund to the Capital Projects Fund (Fund #1404) of $200k for FY ’17 and $1.6M for FY ’18 -- see the discussion on Policy #3 above for more details

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 the City Manager to prepare a final budget and Capital Improvements Plan for fiscal year 2017-2018 accordingly.

Recommended Motion #1: “I move to approve the City Manager’s final budget recommendations for fiscal year 2017-2018”

Recommended Motion #2: “I move to approve the proposed five-year Capital Improvements Plan for fiscal years 2017-2018 through 2021-2022”