The City Manager and Chief Financial Officer are presenting the City Manager’s final budget recommendations for fiscal year 2020-2021 (FY21).  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. 

The final budget recommendations come as the result of a process which began the previous October involving many staff members from each City department.  Each department is tasked with reviewing their current budgets and spending patterns to make recommendations for FY21 budget needs to continue meeting required service levels.

For the past several years, City staff has expended a great deal of effort to prepare “zero-based” budgets on the largest discretionary spending categories.  In past years, these have included travel and training, professional services, overtime and call back, and software budget categories.  For FY21, we’ve expanded this process again to include maintenance/repairs, and equipment/furnishings.  “Zero-based” budgeting essentially means a department is required to review every expenditure within each budget category and assign each budget dollar a specific purpose.  Said another way, each department starts with a $0 budget in each budget category and is required to purposefully build their budget from there, thus, justifying each recommended expenditure.  This process helps to ensure budgets are built with purpose while equally helping to eliminate unnecessary expenditures, resulting in dramatically improved budgeting accuracy.

Additionally, departments are asked to identify what is termed as “New Needs” for FY21.  These are new expenditure requests identified by City departments needed in the coming fiscal year designed to improve our services levels to help meet the needs of the citizens of Sparks.

All this work was done leading up to the Council FY21 budget workshop which was held on February 24, 2020.  One goal of this workshop is to present the highlights of the expected expenditures and New Needs as identified by the departments as well as the preliminary revenue expectations as researched by the Financial Services Department.  Another goal of this workshop is to review the results of the expected revenues and expenditures as they pertain to the City Council’s fiscal policies and seek Council direction on whether any policies need to be revised in order to meet the fiscal expectations and budgeting needs within the coming fiscal year.

From the work done by City departments to evaluate their budget requests; the expectations of City revenues as researched by the Financial Services department; and direction received at the February 24, 2020 FY21 budget workshop, the enclosed City Manager FY21 budget recommendations are presented.

This process was adopted by City staff beginning in FY12 in order to ensure we are building a budget for Council consideration which is based on Council approved fiscal policies that are reviewed and approved each fiscal year.  The resulting City Manager’s Budget Recommendations book is designed to be a transparent resource document to help Council, City staff, and Sparks Citizens become familiar with the City’s budget.

Additionally, based on the work that was begun in October and presented to Council on February 24, City staff has filed the tentative budget for FY21 (which must be filed with the Nevada Department of Taxation annually by April 15).  As required by Nevada law, the City Council will hold a public hearing to receive public comment on the FY21 tentative budget at its regularly scheduled Council meeting on May 25, 2020.  Immediately following the public hearing on the FY21 tentative budget, the City Manager and Chief Financial Officer will present the FY21 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.

Today, the City Manager and Chief Financial Officer 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 24, 2020 budget workshop; and are seeking approval of the recommendations as presented or alternate direction to prepare the City’s final budget for FY21.  Approval of the five-year Capital Improvement Plan (presented as Appendix A in the City Manager’s Budget Recommendations book) is also being sought today.

STATEMENT REGARDING THE COVID-19 PANDEMIC CRISIS AND FY21 BUDGET EXPECTATIONS:

Most of the financial information and expectations found in the attached City Manager’s FY21 Budget Recommendations book are based on data available prior to the COVID-19 pandemic crisis.  City staff expects a significant decline in revenue, with specific emphasis on lost Consolidated Tax (CTAX) revenue which is primarily composed of sales taxes. 

The most significant losses are expected to occur during the 4^th quarter of FY20 (2^nd quarter of calendar year 2020); however, the lingering effects are expected to last well into FY21, and possibly beyond as the recovery time from an expected resulting recession is unknown.  Since this crisis happened so suddenly, there is insufficient data to make financial impact estimates with any sense of accuracy. 

As such, the City Manager and Chief Financial Officer are recommending filing a budget for FY21 based on the data that is currently available which will afford the City the financial and budget flexibility we believe will be necessary to weather this financial storm. 

We acknowledge the proposed budgeted revenues and expenditures being presented today are too high and won’t accurately reflect effects from the pandemic crisis that is likely to result in much lower revenues.  However, filing the recommended budget as presented today is expected to allow us the financial and budgetary flexibility we will likely need to manage the effects of this crisis and adhere to the fiscal policy direction provided by City Council at the February 24^th budget workshop. 

Filing the FY21 budget based on pre-pandemic data will also allow us to have a good baseline from which to judge the financial effects which will ultimately unfold as a result of the pandemic.

Therefore, readers of the City Manager’s FY21 Budget Recommendations book will note that there are relatively few references to the COVID-19 pandemic crisis.  Most actions mentioned related to the pandemic will occur in FY20 to mitigate the expected loss of revenue and cash flow needs.  This is done intentionally as most of the data is representative of expectations prior to the pandemic.

Today, the City Manager is specifically seeking the following:

1. Approval of the FY21 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 FY21 Final Budget Recommendations:

• The City Manager’s final budget recommendations have been prepared based upon direction received from City Council at the February 24, 2020 budget workshop.  See the attached Budget Recommendations book for more detailed information on the City Manager’s final budget recommendations for FY21.

Summary of the City Manager’s final budget recommendations for FY21 per fiscal policy direction received from City Council on February 24, 2020:

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 5.0% of expenditures in FY21.
• 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 5.0% 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 5.0% in FY21, achieving actual results of at least 8.3% remains the formally adopted Council policy target.
• After updating revenue and expense estimates since the February 24, 2020 workshop, the City Manager is recommending a budgeted General Fund ending fund balance equal to 5.0% for FY21.

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 FY21.
• 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 FY20, and it’s currently unclear whether usage of the Contingency budget will be necessary in FY20 to provide budget authority related to COVID-19 expenditures.  As of this publication, $1,000,000 remains within the Contingency budget for FY20.
• However, City staff is expecting to transfer the $1,000,000 from the Vehicle Fund as is currently budgeted in FY20 to help with the General Fund’s cash flow requirements during the COVID-19 pandemic crisis.

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 $1,205,300 for FY21 which includes $900,000 for general CIP needs, $72,300 for IT software needs, and $233,000 for IT hardware needs.
  • These amounts represent only a partial funding at Council policy level per direction received at the February 24, 2020 budget workshop, as a reduction from policy was deemed necessary to help fund identified New Needs.
• 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 FY21.  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 FY21 budgeted revenues from marijuana licensing fees (estimated to be about $1,900,000) will be partially allocated to provide for turf replacement and maintenance at the Golden Eagle Regional Park (in the amount of $800,000) as well as IT hardware and software needs (totaling $305,300 detailed above).  The remaining fees will be designated to the ending fund balance to help maintain a minimum ending fund balance of 5.0% (see Fiscal Policy #1).

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 FY21, which mirrors the amount that was committed during the current FY20.
• 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 FY21 recommendations will result in an ending fund balance of approximately $1,037,749 within the City’s Stabilization Fund in FY21.
• EXPECTED COVID-19 IMPACT:  City staff is expecting to seek Council approval to utilize the Stabilization Fund in July or August 2020 to help stabilize operations and mitigate the financial impact from the COVID-19 pandemic.

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 FY21 budget recommendations include personnel costs equal to 77.8% of total revenues, while FY20 is estimated to be 73.5% 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 FY19, The City had $1,891,894 of current assets within the Workers Compensation Fund available to pay for claims.  This is down from $2,282,281 in FY18, $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.  As evidence of this expectation, a single large claim has emerged that necessitated an estimated additional transfer of $1,400,000 from the General Fund in FY20 in order to maintain minimum reserve levels. 
  • Staff is recommending maintaining a minimum reserve balance of $1,000,000 for FY21 with the realization that reserves need to be increased to at least $3,000,000 in subsequent years.  Achieving and maintaining reserve levels at $3,000,000 at a minimum is deemed to be necessary since that’s the amount of costs the City would need to cover per HLC claim prior to insurance coverage under the current stop-loss insurance policies maintained by the City.  Going forward, reserves are expected to remain insufficiently low to handle large HLC claims as well as regular claims, and long-term funding solutions will need to be implemented.
  • Workers Compensation Fund long-term liabilities totaled $7,313,134 in FY19.
• Other Post-Employment Benefits (OPEB).  Based on discussion and direction received at the February 24^th budget workshop, the City Manager is recommending that the City continues to fund its OPEB liability on a “pay-as-you-go” basis in FY21 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, requiring the City to now record the full actuarial value of the liability, which increased the amount recorded from $9,087,068 in FY17 to $34,637,555 in FY18 and $35,835,214 in FY19.  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 $5,279,911 at the end of FY19 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 $15,265,336 at the end of FY19 and represents the current value of all leave balances for active employees only (such as annual leave and sick leave).
• Pension.  This liability equaled $88,692,434 at the end of FY19 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 an actual 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.  The City will never be responsible for paying pension benefits directly to former City employees.  Thus, the City has no control or ability to manage this liability and it is only recorded on the City’s balance sheet to comply with GASB Statement 68.

Other FY21 items regarding the City’s General Fund that have already been presented or discussed at the February 24th 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 FY21 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 (reminder, this section does not consider the COVID-19 pandemic effects due to the lack of data at time of publication):

General Fund Revenues

• Property Taxes are trending higher by 6.4% in FY20 and by 5.9% in FY21.
  • 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 FY21, property tax caps are expected to be 3.0% for owner-occupied residential properties and 5.0% 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 $6,634,792 in FY21, which is up from $6,052,701 in FY20 according to latest information compiled by the Nevada Department of Taxation and the Washoe County Treasurer’s office.
  • Based on the final revenue projection from the Nevada Department of Taxation, assessed value within the City of Sparks is projected to increase 5.5% in FY21 to $3,330,057,738 (net of tax-exempt parcels) representing an all-time high.
• CTAX and Fair Share revenues are trending about 8.1% higher in FY20, with an increase of about 4.8% expected in FY21.
• License & Permit revenue is also trending higher by about 2.8% in FY20 (primarily driven by general business license activity) and by 2.9% expected in FY21.
• Overall, total General Fund revenues are trending higher by about 6.5% in FY20, followed by a recommended budgeted increase of 4.4% in FY21.

General Fund Expenditures:

• Salaries & Wages are expected to increase 6.4% in FY20 followed by a recommended budgeted increase of 8.9% in FY21.  For context, it’s important to note that savings from vacancies are included in FY20 estimates, but positions in the personnel complement are assumed to be filled for the entire year in the recommended FY21 budget (in other words, no vacancy savings are built into FY21 recommended budget).
  • The City Manager is recommending 9 Full-Time Equivalent “New Need” positions for FY21 with a fiscal impact totaling $1,430,600 (including equipment and supplies) for the General Fund.  The 9 “New Need” positions recommended for FY21 include 2 Emergency Dispatchers, 6 Police Officers, and 1 Police Office Assistant.  More detailed information on the City Manager’s recommended “New Needs” for FY21 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, Police Non-Supervisory, Police Supervisory, Police Lieutenants, and Municipal Court have settled contracts through FY21.  The FY21 recommended budget includes a 2.8% Cost of Living Adjustment (COLA) effective July 2020, based upon the Consumer Price Index (CPI) change as of December 2019, for all groups with settled contracts excluding Fire Fighters (who separately settled for COLA’s equaling 1.5% in July 2020 followed by another 1.5% increase in January 2021).
• Benefits are expected to increase 9.1% in FY20, followed by a budgeted increase of 13.2% in FY21.
  • The budgeted increase in FY21 is primarily driven by 1) increased worker’s compensation contributions as discussed previously; 2) a 1.5% increase in health insurance premiums; and 3) 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 19.8% in FY20, and by another 3.3% in the recommended FY21 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 10.0%, in FY20, and by a budgeted amount of 9.0% in FY21.

General Fund Transfers:

• $1,000,000 transfer-in from the Motor Vehicle Fund is included in the FY21 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. 
  • COVID-19 PANDEMIC NOTE:  In anticipation of negative financial impacts from the COVID-19 pandemic crisis, the City is expecting to execute the FY20 budgeted transfer of $1,000,000 from the Motor Vehicle Fund in June 2020.  However, the extent of the financial impacts resulting from the COVID-19 crisis and whether the transfer will ultimately be needed will not be known until after the FY21 budge is filed and therefore this transfer will not be included in the FY20 estimates that are reported in the final FY21 budget document.
• $1,111,580 transfer-in from the City’s Redevelopment Agency Area #2 is also being planned for FY20.  This will repay the City’s General Fund for subsidies made from the General Fund to the Redevelopment Agency for debt service that the Redevelopment Agency Area #2 could not make on its own during FY13 and FY14 due to the significant loss of property tax revenue within Redevelopment Agency Area #2 during the Great Recession.  Specifically, the General Fund subsidized the Redevelopment Agency Area #2 with a transfer of $250,000 in FY13, followed by another transfer of $861,580 in FY14.  Now that the Redevelopment Agency Area #2 has sufficiently recovered from the financial impact from the Great Recession, the City Manager is recommending transferring those prior year subsidies back to the General Fund in FY20.  Approval from the Redevelopment Agency will be sought during the Redevelopment Agency meeting scheduled for today immediately following today’s City Council meeting.
• $1,760,000 transfer-out to the Parks & Recreation Fund representing a subsidy of 34.1% of total budgeted expenditures in that Fund for FY21.  A transfer of $1,405,000 is expected in FY20 representing a subsidy of 34.2% of total expenditures within that Fund.
• $1,205,300 transfer-out to the Capital Projects Fund in FY21 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.
• $815,552 transfer-out to the Debt Service Fund for the General Fund’s portion of the 2014 CTAX refunding bond debt service for FY21, and the City’s portion of the new P25 radio system to be financed through Washoe County.
• $800,000 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 decrease of $1,373,800 is expected in FY20 while a net decrease of $3,021,589 is recommended to be budgeted for FY21.
• The net ending fund balance is expected to be approximately $6,982,702 in FY20 (9.6% of expenditures); and recommended to be budgeted at $3,961,113 for FY21 (equaling 5.0% of expenditures).
• FY20 Estimated Ending Fund Balance compared to Budget:  FY20 ending fund balance is expected to end approximately $2,517,843 higher than what was budgeted – with the final ending fund balance representing approximately 9.6% of expenditures compared to the budget of 6.0%.  The primary drivers of this increase stem from higher CTAX revenues and vacancy savings.

Note:  Information on other Funds that are maintained by the City and Redevelopment Agency can be found in the City Manager’s FY21 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 FY21 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.

1. City Council could approve the FY21 budget recommendations and five-year Capital Improvements Plan as presented today.
2. City Council could reject the FY21 budget recommendations and five-year Capital Improvements Plan and provide direction to the City Manager.

Recommended Motion #1: “I move to approve the proposed five-year Capital Improvements Plan for fiscal year 2020-2021 through fiscal year 2024-2025”.

Recommended Motion #2: “I move to approve the City Manager’s final budget recommendations for fiscal year 2020-2021”.