The City Manager and Financial Services Director are presenting the City Manager’s final budget recommendations for fiscal year 2018-2019 (FY19).  Today, the City Council (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 FY19 (which must be filed with the Nevada Department of Taxation annually by April 15), and the Council will hold a public hearing to receive public comment on the FY19 tentative budget at its regularly scheduled Council meeting on May 29, 2018.  Immediately following the public hearing on the FY19 tentative budget, the City Manager and Financial Services Director will present the FY19 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 that 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 FY19 Budget Recommendations book as well as the proposed 5-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 FY19.  Today, the City Manager and the Financial Services Department Director will be presenting the material found in the City Manager’s Budget Recommendations book that was prepared according to direction received from Council at the February 26, 2018 budget workshop; and are seeking approval of the recommendations as presented or alternate direction to prepare the City’s final budget for FY19.

Today, the City Manager is specifically seeking the following:

1. Approval of the FY19 City Manager’s final budget recommendations; and
2. Approval of the proposed 5-year CIP.

Item #1 -- Information Regarding the City Manager’s FY19 Final Budget Recommendations:

• The City Manager’s final budget recommendations have been prepared based upon direction received from Council at the February 26, 2018 budget workshop.  See the attached Budget Recommendations book for more detailed information on the City Manager’s final budget recommendations for FY19.

Summary of the City Manager’s final budget recommendations for FY19 per fiscal policy direction received from Council on February 26, 2018:

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 FY19.
• 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 not lower than 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.
• Council did not choose to alter their formally adopted policy of achieving a minimum ending fund balance of 8.3% which was established in FY11 as part of the City’s effort to comply with the accounting standards set by the Governmental Accounting Standards Board (GASB) Statement 54.
• Thus, even though Council provided guidance that the budgeted General Fund ending fund balance be no lower than 6.0% in FY19, achieving actual results of at least 8.3% remains as the formally adopted Council policy target.
• After updating revenue and expense estimates since the February 26, 2018 workshop, the City Manager is recommending a budgeted General Fund ending fund balance equal to 6.4% for FY19.

Policy #2:  General Fund Contingency Budget

• The purpose of this policy is to provide budget authority and flexibility to address unexpected fiscal needs in FY19.
• The City Manager’s final budget recommendations include a Contingency budget of $1,000,000 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 might be used.
• So far, $0 has been spent from the Contingency budget in the current FY18, and there is no expectation that usage of the Contingency budget will be necessary in FY18; however, $1,000,000 remains within the Contingency budget for FY18 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 ensure resources are allocated for infrastructure, facility, and technology needs as identified within the 5-year 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 $2,576,813 for FY19 which includes $1,400,000 for general CIP needs, $676,000 for IT software needs, and $500,813 for IT hardware needs.
  • The recommended amount of $1,400,000 represents approximately 2.0% of total General Fund revenues which is about $377,000 short of the full 2.5% policy.  The City Manager is recommending this shortfall to maintain a General Fund budgeted ending fund balance greater than 6.0% per Council direction regarding Fiscal Policy #1 (see discussion above).  This will only affect general CIP needs as it is the City Manager’s recommendation to fully fund identified IT needs in accordance to Council policy.
• Additionally, Council has provided direction that the allocation of Electric and Gas Franchise Fees as well as revenue from marijuana licensing fees will be annually determined.
  • Per Council approval for the current FY18, 1% (or approximately $983,000) of Electric and Gas Franchise Fees, were re-directed from the Road Fund to the Parks and Recreation Projects Fund to provide resources for turf replacement at the Golden Eagle Regional Park.  For FY19, Council has provided direction that these resources will once again be fully allocated to the Road Fund.  Thus, for FY19, the 5% Electric and Gas Franchise Fees will be allocated as they had been prior to FY18 -- including 2% to the General Fund, 2% to the Road Fund, and 1% to the Parks & Recreation Project Fund.
  • Council also provided direction that FY19 budgeted revenues from marijuana licensing fees totaling $1,400,000 will be allocated to provide for turf replacement and maintenance at the Golden Eagle Regional Park ($500,000) as well as IT hardware and software needs ($900,000).

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 FY19, which mirrors the amount that was committed during the current FY18.
• In previous years, Council has stated the desire to wait for revenues and fiscal stability to improve before making further financial commitments to the Stabilization 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.
• $251,910 was transferred from the Stabilization Fund to the General Fund in FY17 to help pay for costs related to the January 2017 floods.  However, with the $200,000 commitment in both the current FY18 and the recommended FY19 budget, we expect the ending fund balance to be approximately $590,645 by the end of FY19.  The City is currently in the process of seeking financial assistance from the Federal Emergency Management Agency (FEMA) and the Nevada Division of Emergency Management (NDEM) for expenses incurred during the 2017 flood events, and as of the time of publishing this document, the City is still awaiting final approval.

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 FY19 budget recommendations include personnel costs equal to 74.8% of total revenues, while FY18 is estimated to be 74.1% of total revenues.

Policy #6:  Report employee and retiree benefit liabilities and determine strategies to either reduce or fund these liabilities 

• The purpose of this policy is to ensure the City is addressing long-term liabilities specifically related to employee and retiree benefits.
• Workers Compensation.  The liabilities within this fund represent the present value of future costs that will be paid on past and present employees for general workers compensation claims and Heart/Lung/Cancer (HLC) claims from police and fire personnel.
  • At the end of FY17, The City had $2,880,532 of liquid assets within the Workers Compensation Fund available to pay for claims.  This is down from $3,908,036 in FY16.  This “cash-burn” is expected to continue, and even accelerate, as HLC claims increase, and as such, the City Manager is recommending increasing the contributions into this fund during FY19 from other City funds to a total of $940,883 (the General Fund impact being $863,866, which is about triple the amount of current FY18 General Fund contributions).  However, the additional funding in FY19 will not completely erase the expected “cash-burn” and another increase, of comparable size, will be needed in FY20.  Without these increases in funding, we are expecting cash resources to be eliminated by FY20. 
  • By FY20, the City needs to be in a position where adequate resources are allocated to the Workers Compensation Fund annually to meet claims costs as they come due, since previously accumulated resources will no longer be available.
  • Workers Compensation Fund short-term and long-term liabilities totaled $6,798,850 in FY17, resulting in a negative fund balance of $3,781,772.  Ultimately, the HLC benefits for public safety personnel are established by the Nevada Legislature and can change dramatically by legislative action.
• Other Post-Employment Benefits (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 FY18 and not create an irrevocable trust fund for funding the City’s OPEB liability. 
  • GASB statement 75, which will be implemented by the City in FY18, will change the way this liability is presented on the City’s balance sheet, and the liability recorded on the City’s books is expected to increase from $9,087,068 in FY17 to over $32,000,000 (which is the approximate amount of the full actuarial accrued OPEB liability in FY17).  Utilizing an irrevocable trust to fund this liability may become the recommended course of action in subsequent years; yet it is a financial tool with significant limitations and is inflexible by design and should be considered carefully before implementation.
• Sick Leave Conversion.  This liability equaled $5,143,950 at the end of FY17 and represents balances available to retirees who elected to remain on the City’s health insurance plan and have their premiums paid from their accumulated sick leave balance in accordance with their employment contract at time of retirement.
• Compensated Absences.  This liability equaled $13,905,438 at the end of FY17 and represents the current value of all leave balances for active employees only (such as annual leave and sick leave).
• Pension.  This liability equaled $87,624,211 at the end of FY17 and is a rather odd liability that is required to be included on the City’s government-wide balance sheet in compliance with GASB Statement 68; yet does not really represent a future liability of City.  Rather, this liability represents the City’s portion of the total unfunded liability for Nevada PERS (the City is a participating agency of Nevada PERS).  The only way to reduce this liability is by reducing the total unfunded liability for Nevada PERS which is ultimately controlled by the Nevada Legislature.  Additionally, retiree pension benefits are established by the Nevada Legislature as are the amount of contributions from the various local government agencies.  Thus, the City has no control or ability to manage this liability.

Other FY19 items regarding the City’s General Fund that have already been presented or discussed at the February 26 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 5.3% in FY18 and by 5.2% higher in FY19.
  • 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 FY19, property tax caps are expected to be 3.0% for owner-occupied residential properties and 4.2% for all other properties (new property and new improvements are exempt from these caps).
  • 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 approximately $4,425,824 in FY19 according to latest information compiled by the Nevada Department of Taxation.
• CTAX and Fair Share revenues are trending about 8.7% higher in FY18, with an increase of about 5.3% expected in FY19.
• License & Permit revenue is also trending higher by about 15.1% in FY18 (primarily driven by approximately $1,300,000 of new revenue from marijuana licensing fees), with only a slight increase of about 1.4% expected in FY19.
• Overall, total General Fund revenues are trending higher by about 10.4% in FY18, followed by a recommended budgeted increase of 4.4% in FY19.

General Fund Expenditures:

• Salaries & Wages are expected to increase 2.7% in FY18 followed by a recommended budgeted increase of 3.5% in FY19.  Savings from vacancies are included in FY18 estimates, but positions in the personnel complement are assumed to be filled for the entire year in the recommended FY19 budget (in other words, no vacancy savings are built into FY19 recommended budget).
  • The City Manager is recommending “New Need” positions (totaling 3.3 Full-Time Equivalent or FTE positions) for FY19 with a fiscal impact totaling $298,097 for the General Fund.  More detailed information on the City Manager’s recommended “New Needs” for FY19 can be found in Appendix B of the City Manager’s Recommendations book attached to this agenda item.
  • Wage increases have only been included in the recommended FY19 budget for those employees with settled employee contracts and resolutions.  No COLAs or other compensation changes have been included for those employees whose employment contracts and resolutions have yet to be settled.
• Benefits are expected to increase 1.1% in FY18, followed by an expected 8.8% increase in FY19.
  • Most of this increase stems from a recommended 3.0% increase in health insurance premiums for FY19 and from increased contributions from the General Fund to the Workers Compensation Fund.
  • Additionally, PERS contributions are set each biennium by the Nevada Legislature, so no increase will occur in FY19 as established by the 2017 Legislature.
• Services & Supplies expenditures are expected to increase 5.1% in FY18, and by another 10.1% in the recommended FY19 budget.  The primary drivers of the increase in FY19 include necessary increases in vehicle and equipment maintenance and cost recovery rates, as well as increased contributions to the General Liability Self-Insurance Fund.
• Total General Fund expenditures are expected to increase by 2.7%, in FY18, and by 6.4% in FY19.

General Fund Transfers:

• $1,000,000 transfer-in from the Motor Vehicle Fund is included in the FY19 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 to provide 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.
• $1,422,000 transfer-out to the Parks & Recreation Fund representing a subsidy of 33.4% of expected expenditures in that fund for FY19.  A transfer of $1,330,000 is expected in FY18 representing a subsidy of 32.5% of total expenditures within that Fund.
• $2,300,000 transfer-out to the Capital Projects Fund in FY19 for infrastructure, facility, and technology needs as identified in the 5-year Capital Improvement Plan -- see a more thorough discussion previously under Policy #3.
• $708,804 transfer-out to the Debt Service Fund for the General Fund’s portion of the 2007 CTAX bond debt service for FY19.
• $500,000 transfer-out to the Parks & Recreation Capital Project Fund to provide resources for turf replacement and maintenance at the Golden Eagle Regional Park (see Policy #3 discussion above for more detail).

General Fund Ending Fund Balance:

• A net fund balance increase of $2,351,711 is expected in FY18 while a net decrease of $806,177 is recommended to be budgeted for FY19.
• The net ending fund balance is expected to be approximately $5,065,789 in FY18 (8.1% of expenditures) and recommended to be budgeted at approximately $4,259,612 for FY19 (6.4% of expenditures).
• FY18 Estimated Ending Fund Balance compared to Budget:  FY18 ending fund balance is expected to end up approximately $1,278,088 higher than what was budgeted – with the final ending fund balance representing approximately 8.1% of expenditures compared to the budget of 6.0%.  Essentially, the increase is due to new revenues from marijuana licensing fees which was not included in the FY18 budget.  Without those additional revenues, the FY18 ending fund balance would be right on target compared to the FY18 budget.

General Fund Subsidy of the Redevelopment Agency:

• Although General Fund subsidies were necessary in previous years for Redevelopment Area #2, subsidies are not expected for either Area #1 or Area #2 for FY18 or FY19, 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 FY19 Final Budget Recommendations book attached to this agenda item.

Item #2 -- Information Regarding the City’s 5-Year CIP:

• The CIP document can be found in Appendix A to the City Manager’s FY19 Final Budget Recommendations book.

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 5-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.

Council could choose alternatives other than the recommendations presented today and direct the City Manager to prepare a final budget and Capital Improvements Plan for FY19 accordingly.

Recommended Motion #1: I move to approve the proposed 5-year Capital Improvements Plan for fiscal year 2018-2019 through fiscal year 2022-2023.

Recommended Motion #2: I move to approve the City Manager’s final budget recommendations for fiscal year 2018-2019.