The City Manager and Financial Services Director are presenting the City Manager’s final budget recommendations for fiscal year 2019-2020 (FY20).  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 FY20 (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 FY20 tentative budget at its regularly scheduled Council meeting on May 28, 2019.  Immediately following the public hearing on the FY20 tentative budget, the City Manager and Financial Services Director will present the FY20 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 FY20 Budget Recommendations book as well as the proposed five-year Capital Improvements Plan (CIP).  The City Manager’s Budget Recommendations book is a resource document 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 FY20.  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 City Council at the February 25, 2019 budget workshop; and are seeking approval of the recommendations as presented or alternate direction to prepare the City’s final budget for FY20.

Today, the City Manager is specifically seeking the following:

1. Approval of the FY20 City Manager’s final budget recommendations; and
2. Approval of the proposed five-year Capital Improvements Plan (CIP).

Item #1 -- Information Regarding the City Manager’s FY20 Final Budget Recommendations:

•The City Manager’s final budget recommendations have been prepared based upon direction received from City Council at the February 25, 2019 budget workshop.  See the attached Budget Recommendations book for more detailed information on the City Manager’s final budget recommendations for FY20.
 

Summary of the City Manager’s final budget recommendations for FY20 per fiscal policy direction received from City Council on February 25, 2019:

Fiscal 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 FY20.

•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 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.

•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 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 FY20, 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 25, 2019workshop, the City Manager is recommending a budgeted General Fund ending fund balance equal to 6.0% for FY20.

Fiscal Policy #2:  General Fund Contingency Budget

•The purpose of this policy is to provide budget authority and flexibility to address unexpected fiscal needs in FY20.

•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 FY19, and there is no expectation that usage of the Contingency budget will be necessary in FY19; however, $1,000,000 remains within the Contingency budget for FY19 should an unexpected need arise between now and the end of the current fiscal year.

Fiscal 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 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 $2,817,242 for FY20 which includes $1,900,000 for general CIP needs, $433,400 for IT software needs, and $483,842 for IT hardware needs (specifically, that the IT needs will be funded from marijuana licensing revenue as discussed below).

•These amounts represent full funding at Council policy level per direction received at the February 25, 2019 budget workshop.

•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.

•Council directed that the Electric and Gas Franchise Fee Fund allocation remains the same in FY20.  Namely, that the allocation is 2% to the General Fund; 2% to the Road Fund; and 1% to the Parks & Recreation Project Fund.

•Council also provided direction that FY20 budgeted revenues from marijuana licensing fees (estimated to be about $1,800,000) will be allocated to provide for turf replacement and maintenance at the Golden Eagle Regional Park (in the amount of $882,758) as well as IT hardware and software needs (totaling $917,242 detailed above).

Fiscal 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 FY20, which mirrors the amount that was committed during the current FY19.

•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 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.

•It’s anticipated that previous actions combined with the FY20 recommendations will result in an ending fund balance of approximately $800,676 within the City’s Stabilization Fund in FY20.

Fiscal 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.

•This policy was originally adopted in FY11 and subsequently modified in FY13 based on historical expenditure and fiscal stability trends.

•The City Manager’s final FY20 budget recommendations include personnel costs equal to 77.4% of total revenues, while FY19 is estimated to be 72.1% of total revenues.

Fiscal 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 FY18, The City had $2,282,281 of liquid assets within the Workers Compensation Fund available to pay for claims.  This is down from $2,880,532 in FY17 and $3,908,036 in FY16.  This “cash-burn” is expected to continue, and even accelerate, as HLC claims in particular increase.  Accordingly, the City Manager is recommending increasing the contributions into this Fund during FY20 from other City Funds to a total of $1,505,061 from $946,109 in FY19 (the General Fund impact increasing to $1,469,445 in FY20 from $806,582 in FY19).  However, the additional funding in FY19 will not completely erase the expected “cash-burn” and another increase, of comparable size, will likely be needed in FY21.

•Additionally, these benefits are dictated by the Nevada Legislature, and we are watching several bills this legislative session that could have significant impact to the City’s worker’s compensation costs.

•Workers Compensation Fund short-term and long-term liabilities totaled $6,688,884 in FY18, resulting in a negative fund balance of $4,406,603.

•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 FY20 and not create an irrevocable trust fund for funding the City’s OPEB liability.

•GASB statement 75, which was implemented by the City in FY18, has significantly changed 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 $34,637,555 in FY18 (which represents the approximate amount of the full actuarial accrued OPEB liability in FY18).  To provide context, had this new accounting rule been in place in FY17, the amount reflected on the City’s balance sheet would have been $32,793,951.

•Utilizing an irrevocable trust to fund this liability may become the recommended course of action in subsequent years; however, 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 $4,848,680 at the end of FY18 and represents balances available to retirees who have converted their accumulated sick leave balance in accordance with their employment contract at time of retirement.

•Compensated Absences.  This liability equaled $14,950,456 at the end of FY18 and represents the current value of all leave balances for active employees only (such as annual leave and sick leave).

•Pension.  This liability equaled $86,625,696 at the end of FY18 and is a rather odd liability in that it is required to be included on the City’s government-wide balance sheet in compliance with GASB Statement 68; yet does not represent a future liability of the 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).  This liability can be reduced by either reducing retirement benefits afforded to retired members, or by increasing contributions from contributing agencies.  Both the benefits and contributions from contributing agencies are approved by the Nevada Legislature.  Nor will the City ever be responsible for paying pension benefits directly to former City employees.  Thus, the City has no control or ability to manage this liability and is only recorded on the City’s balance sheet to comply with GASB Statement 68.

Other FY20 items regarding the City’s General Fund that have already been presented or discussed at the February 25 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 FY20 Budget Recommendations book that is attached to this agenda item to provide an even greater level of detail.  Highlights of changes and expectations are provided below:

General Fund Revenues:

•Property Taxes are trending higher by 6.2% in FY19 and by 6.8% in FY20.

•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 (often referred to as the “residential cap”) and up to 8% for all other properties (often referred to as the “general cap”).  For FY20, property tax caps are expected to be 3.0% for owner-occupied residential properties and 4.8% 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 $6,052,701 in FY20, which is up from $4,425,824 in FY19 according to latest information compiled by the Nevada Department of Taxation and the Washoe County Treasurer’s office.

•Based on the most recent Washoe County Assessor’s valuation, assessed value within the City of Sparks is projected to increase 11.1% in FY20 to $3,155,373,495, representing an all-time high.

•CTAX and Fair Share revenues are trending about 6.2% higher in FY19, with an increase of about 4.1% expected in FY20.

•License & Permit revenue is also trending higher by about 6.8% in FY19 (primarily driven by general business license activity) and by 4.5% expected in FY20.

•Overall, total General Fund revenues are trending higher by about 6.4% in FY19, followed by a recommended budgeted increase of 5.2% in FY20.

General Fund Expenditures:

•Salaries & Wages are expected to increase 4.6% in FY19 followed by a recommended budgeted increase of 10.8% in FY20.  For context, it’s important to note that savings from vacancies are included in FY19 estimates, but positions in the personnel complement are assumed to be filled for the entire year in the recommended FY20 budget (in other words, no vacancy savings are built into FY20 recommended budget).

•The City Manager is recommending 22 Full-Time Equivalent “New Need” positions for FY20 with a fiscal impact totaling $2,256,829 for the General Fund (of that amount, $2,188,000 consists of personnel costs).  More detailed information on the City Manager’s recommended “New Needs” for FY20 can be found in the Supplementary City Wide Information section of the City Manager’s Recommendations book attached to this agenda item.

•All employee groups excluding Battalion Chiefs and the Municipal Court have settled contracts through FY21.  The FY20 recommended budget includes a 2.9% Cost of Living Adjustment (COLA) effective July 2019, based upon the Consumer Price Index (CPI) change as of December 2018, for all groups with settled contracts excluding Fire Fighters (who separately settled for COLA’s equaling 1.5% in July 2019 followed by another 1.5% increase in January 2020).

•Benefits are budgeted to increase 6.9% in FY19, followed by a budgeted increase of 16.3% in FY20.

•The budgeted increase in FY20 is primarily driven by 1) increased worker’s compensation contributions as discussed previously; 2) PERS contribution rate increases approved by the Nevada Legislature of 2.0% points for Police/Fire members and 1.25% points for Regular members; 3) a 1.5% increase in health insurance premiums; and 4) no assumption of vacancy savings.

•PERS contribution rates are established each biennium by the Nevada Legislature and set as a percentage of eligible pay equaling 42.5% for Police/Fire members, 29.25% for Regular members, and 22.5% for Judicial members for FY20 and FY21.

•Services & Supplies expenditures are expected to increase 18.1% in FY19, and by another 6.5% in the recommended FY20 budget.  The primary drivers of the increase in FY20 include increased contributions to the General Liability Self-Insurance Fund.

•Total General Fund expenditures are expected to increase by 7.8%, in FY19, and by a budgeted amount of 11.7% in FY20.

General Fund Transfers:

•$1,000,000 transfer-in from the Motor Vehicle Fund is included in the FY20 recommended budget to offset the contingency budget by an equivalent amount.  This transfer-in 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.

•$1,405,000 transfer-out to the Parks & Recreation Fund representing a subsidy of 33.1% of total budgeted expenditures in that Fund for FY20.  A transfer of $1,422,000 is expected in FY19 representing a subsidy of 32.9% of total expenditures within that Fund.

•$2,817,242 transfer-out to the Capital Projects Fund in FY20 for infrastructure, facility, and technology needs as identified in the 5-year Capital Improvement Plan -- see a more thorough discussion previously under Fiscal Policy #3.

•$710,841 transfer-out to the Debt Service Fund for the General Fund’s portion of the 2014 CTAX refunding bond debt service for FY20.

•$882,758 transfer-out to the Parks & Recreation Capital Project Fund to provide resources for turf replacement and maintenance at the Golden Eagle Regional Park (representing a partial allocation of budgeted marijuana revenues -- see Fiscal Policy #3 discussion above for more detail).

General Fund Ending Fund Balance:

•A net fund balance increase of $1,210,375 is expected in FY19 while a net decrease of $3,560,735 is recommended to be budgeted for FY20.

•The net ending fund balance is expected to be approximately $8,025,594 in FY19 (12.0% of expenditures); and recommended to be budgeted at $4,464,859 for FY20 (equaling 6.0% of expenditures).

•FY19 Estimated Ending Fund Balance compared to Budget:  FY19 ending fund balance is expected to end approximately $3,730,940 higher than what was budgeted – with the final ending fund balance representing approximately 12.0% of expenditures compared to the budget of 6.4%.  The primary drivers of this increase stem from a higher beginning Fund balance of $1,749,434 than was budgeted (i.e., a higher ending Fund balance in FY18 which rolled into FY19 after the FY19 budget was filed), and increased revenues from general business licenses, marijuana fees, and Consolidated taxes (CTAX).

Note:  Information on other Funds that are maintained by the City and Redevelopment Agency can be found in the City Manager’s FY20 Final Budget Recommendations book attached to this agenda item.

City Manager Reorganization Plan:

The City Manager is recommending a reorganization of City staff that flows according to five operational functions including:

1. Police
2. Fire
3. Compliance
4. External Operations
5. Internal Operations

A proposed organizational chart which summarizes this new structure is provided in the City Manager’s FY20 Budget Recommendations book within the “City Leadership” section attached to this agenda item.  The City Manager is seeking Council approval of this plan which will be accomplished through a motion to approve the City Manager’s FY20 Final Budget recommendations.  If approved, the City Manager is suggesting immediate implementation of his reorganization plans.

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 FY20 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 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 choose alternatives other than the recommendations presented today and direct the City Manager to prepare a final budget and Capital Improvements Plan for FY20 accordingly.

Recommended Motion #1: “I move to approve the proposed five-year Capital Improvements Plan for fiscal year 2019-2020 through fiscal year 2023-2024”.

Recommended Motion #2: “I move to approve the City Manager’s final budget recommendations for fiscal year 2019-2020”.