The City Manager and Chief Financial Officer are presenting the City Manager’s final budget recommendations for fiscal year 2021-2022 (FY22).  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 that began in earnest last October involving many staff members from each City department.  Each department is tasked with reviewing its current budget and spending patterns to make recommendations for FY22 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.  These categories include travel and training, professional services, overtime and call back, software, maintenance and repairs, and equipment and furnishings. “Zero-based” budgeting essentially means a department reviews every expenditure within each budget category and assigns each budget dollar a specific purpose.  Said another way, each department starts with a $0 budget in each budget category listed above and purposefully builds the budget from there, justifying each recommended expenditure. This process helps to ensure budgets are built with purpose while equally helping to eliminate unnecessary expenditures and dramatically improving budgeting accuracy.

Additionally, departments are asked to identify what are commonly called "New Needs” for FY22.  These are new expenditure requests identified by City departments as being needed in the coming fiscal year to improve the City’s service levels and help meet the needs of the citizens of Sparks. This process was adopted by City staff beginning in FY12 in order to ensure staff builds a budget that is based on and supports fiscal policies that are reviewed and approved by City Council each fiscal year.  The resulting City Manager’s Budget Recommendations book is designed to be a transparent resource document to help City Council, staff, and the public understand the City’s budget.

All this work was done leading up to the Council FY22 budget workshop, which was held on February 22, 2021.  One goal of this workshop is to present the highlights of the expected expenditures 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 adopted fiscal policies and seek City 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.

Based on 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 FY22 budget workshop, the enclosed City Manager FY22 final budget recommendations are presented. Additionally, City staff has filed the tentative budget for FY22, which must be filed with the Nevada Department of Taxation annually by April 15 of each year.  As required by Nevada law, the City Council will hold a public hearing to receive public comment on the FY22 tentative budget at its regularly scheduled Council meeting on May 24, 2021.  Immediately following the public hearing on the FY22 tentative budget, the City Manager and Chief Financial Officer will present the FY22 final budget document, which will be prepared based upon direction provided during this agenda item.  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.

The City Manager and Chief Financial Officer will present the City Manager’s Budget Recommendations book that was prepared according to direction received from City Council at the February 22, 2021 budget workshop. Staff is seeking approval of the recommendations as presented or additional direction to prepare the City’s final budget for FY22.  Staff is also seeking approval of the five-year Capital Improvement Plan (presented as Appendix A in the City Manager’s Budget Recommendations book).

Today, the City Manager is specifically seeking the following:

1. Approval of the FY22 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 FY22 Final Budget Recommendations:

• The City Manager’s final budget recommendations have been prepared based upon direction received from City Council at the February 22, 2021 budget workshop.  See the attached Budget Recommendations book for more detailed information on the City Manager’s final budget recommendations for FY22.
• The American Rescue Plan Act (ARP) became law on March 11, 2021.  This Act is designed to provide approximately $1.9T of economic stimulus and financial relief for millions of Americans in response to the COVID-19 pandemic.  Included in the ARP is $65.1B that is intended to provide assistance directly to metropolitan cities and allocated according to the 1974 CDBG funding model.  At the time of this publication, it is unknown how much of these funds will be available to the City of Sparks, and the federal Treasury Department has not yet provided guidance for how these funds may be used.  Thus, the City Manager is recommending that no funds related to the ARP be included in the FY22 budget.  Rather, once funds are allocated, the City will augment the FY22 budget as is common practice with any grant received after the final budget is filed with the State of Nevada.

Summary of the City Manager’s final budget recommendations for FY22 based on fiscal policy direction received from City Council on February 22, 2021:

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 -- to help provide fiscal stability for the City’s primary operations.
• City Council provided direction to submit a final budgeted ending fund balance no lower than 8.3% of expenditures in FY22.
• City Council did not choose to alter the 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.
• After updating revenue and expense estimates since the February 22, 2021 workshop, the City Manager is recommending a budgeted General Fund ending fund balance equal to 8.3% for FY22.

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 FY22.
• The City Manager’s final FY22 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 that was established for the current FY21, and as of this publication, $1,000,000 remains available within the Contingency budget for FY21.

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).
• Pursuant to the Council’s adopted policy, the amount of resources to be transferred includes approximately 2.5% of budgeted General Fund revenues plus identified IT hardware and software needs as outlined in the CIP.
• The City Manager’s final FY22 budget recommendations include a transfer into the Capital Projects Fund of $2,753,580, which includes $2,100,000 for general CIP needs, $274,580 for IT software needs, and $379,000 for IT hardware needs. These amounts represent full funding as City Council directed at the FY22 budget workshop.
• Additionally, City 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 as part of fiscal policy #3.
  • City Council directed that the Fund allocation for the 5% Electric and Gas Franchise fees remain unchanged in FY22.  Namely, 2% is allocated to the General Fund; 2% to the Road Fund; and 1% to the Parks & Recreation Project Fund.
  • Council also provided direction that FY22 budgeted revenues from marijuana licensing fees (estimated to be about $1,950,000) 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 $653,580 as detailed above).  The remaining fees will be designated to the ending fund balance to help maintain a minimum ending fund balance of 8.3% (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.
• 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.  During the FY22 budget workshop on February 22, 2021, Council provided direction that, compared to previous years, a modest $50,000 increase to the amount committed to the Stabilization Fund is now prudent as the City emerges from the effects of the COVID-19 pandemic.
• Thus, based on direction received, the City Manager’s FY22 final budget recommendations include a commitment of $250,000 of business license revenue to the Stabilization Fund for FY22, which is an increase of $50,000 from what was committed during the current FY21.
• Previous revenue commitments combined with the $250,000 in FY22 will result in a budgeted ending fund balance of $1,266,625 within the City’s Stabilization Fund in FY22.

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 outpace the growth of General Fund revenues.
• This policy was originally adopted in FY11 and subsequently modified in FY13 based on historical expenditures and fiscal stability trends.
• The City Manager’s final FY22 budget recommendations include personnel costs equal to 78.2% of total revenues, while FY21 is estimated to be 73.2% 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.
  • During the past several years, the City has been experiencing higher claims and a reduction of current assets within the Workers Compensation Fund available to pay for those claims.  The FY22 final budget recommendation includes an approximate increase of 13.8% of contributions into the Workers Compensation Fund from other City Funds in order to maintain fiscal stability of this Fund. 
  • Cash reserves in the Workers Compensation Fund are expected to be approximately $2.7M by the end of FY22.  The Financial Services Department is recommending that these cash reserves should be increased to a minimum of $3,000,000 in subsequent years, which is the equivalent of the coverage requirement per HLC claim prior to insurance coverage under the current stop-loss insurance policies maintained by the City.  Going forward, as HLC claims are expected to continue to rise, long-term funding solutions will need to be implemented.
  • Workers Compensation Fund long-term liabilities totaled $8,502,962 in FY20.
• Other Post-Employment Benefits (OPEB).  Based on discussion and direction received at the FY22 budget workshop, the City Manager is recommending that the City continues to fund its OPEB liability on a “pay-as-you-go” basis in FY22 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.  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.  This liability continues to rise and totaled $43,493,794 at the end of FY20, the most recent valuation available.
  • 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, is inflexible by design, and should be considered carefully before implementation.
• Sick Leave Conversion.  This liability equaled $5,275,717 at the end of FY20 and represents balances available to retirees who have converted their accumulated sick leave balance in accordance with their employment contract at the time of retirement.
• Compensated Absences.  This liability equaled $15,861,763 at the end of FY20 and represents the current value of all leave balances for active employees only (such as annual leave and sick leave).
• Pension.  This liability equaled $89,439,220 at the end of FY20 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 but 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 of Sparks 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.  However, both the benefits afforded to Nevada PERS member retirees and contributions from participating agencies are approved by the Nevada Legislature.  The City will never be responsible for paying Nevada PERS 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 FY22 items regarding the City’s General Fund that were presented or discussed at the February 22 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 FY22 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 FY21 and by 6.4% in FY22.
  • 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 FY22, property tax caps are expected to be 3.0% for owner-occupied residential properties and 6.2% 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 owners' tax bills because of the tax caps) is expected to equal approximately $5,713,017 in FY22, which is down from $6,634,792 in FY21 according to latest information compiled by the Nevada Department of Taxation and the Washoe County Treasurer.
  • Based on the final revenue projection from the Nevada Department of Taxation, assessed value within the City of Sparks is projected to increase 5.8% in FY22 to $3,524,585,790 (net of tax-exempt parcels), an all-time high.
• CTAX and Fair Share revenues are trending about 10.6% higher in FY21, with an increase of about 4.2% expected in FY22.
• License & Permit revenue is also trending higher by about 2.5% in FY21 and by 1.3% expected in FY22.
• Overall, total General Fund revenues are trending higher by about 7.6% in FY21, followed by a recommended budgeted increase of 3.0% in FY22.

General Fund Expenditures:

• The City Manager is recommending the following “New Needs” that were submitted by City departments and are intended to meet expected service requirements for FY22 and beyond.  The New Needs listed below include 11 positions requested to be approved and added to the City General Fund complement, which would add approximately $1,023,412 to the FY22 budget; and two non-personnel items adding $90,000 to the FY22 budget.  In total, the City Manager is recommending $1,113,412 in New Needs for the General Fund FY22 budget including:
  • Two Emergency Communications Dispatchers (Police Department).
  • Two Mental Health Counselors (Police Department).
  • One Administrative Division Manager (Police Department).
  • Three Firefighters that will be funded 100% by a S.A.F.E.R. grant for three years if awarded (these positions will only be filled if the grant is obtained).
  • One Grant Administrator (Management Services Department).
  • One Risk Manager (Management Services Department).
  • One Assistant City Attorney II Civil (City Attorney Department).
  • Backup internet connection (Financial Services Department).
  • Code enforcement truck (Community Services Department).
  • NOTE:  More detailed information on New Needs recommended for other Funds and those not being recommended for approval can be found within the Supplementary Information section at the back of the FY22 City Manager’s Final Budget Recommendations book attached to this agenda.
• Salaries and Wages are expected to increase 4.4% in FY21 followed by a recommended budgeted increase of 8.7% in FY22.  For context, savings from vacancies are included in FY21 estimates, but positions in the personnel complement are assumed to be filled for the entire year in the recommended FY22 budget (in other words, no vacancy savings are built into the FY22 recommended budget).
  • All employee groups have settled contracts through FY21.  All bargaining group contracts are currently under negotiations for FY22, thus no pay or benefit adjustments that are part of the negotiation process are included in the FY22 recommended budget.
• Employee benefit costs are expected to increase 4.1% in FY21, followed by a budgeted increase of 12.5% in FY22.
  • The budgeted increase in FY22 is primarily driven by 1) increased workers compensation contributions as discussed previously; 2) the addition of 11 New Needs positions; 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 44.0% for Police/Fire members (1.50%-point increase), 29.75% for Regular members (0.50%-point increase), and 22.5% for Judicial members (no change) beginning in FY22.
  • The ending fund balance within the City’s Group Health Self-Insurance Fund is at the highest level since the City emerged from the Great Recession and is in a fiscally healthy position.  Health expenditure trends appear to be favorable, and thus the City Manager is recommending no change to contribution and premium rates for FY22.
• Services & Supplies expenditures are expected to increase 63.5% in FY21, and drop by approximately 17.6% in the recommended FY22 budget.  The large increase in FY21 was due to expenditures related to the COVID-19 pandemic, which were funded primarily from the CARES Act.
• Total General Fund expenditures are expected to increase by 15.9% in FY21, and by a budgeted amount of 2.4% in FY22.

General Fund Transfers (total of $1.0M transfers-in and $9.5M transfers-out):

• $1,000,000 transfer-in from the Motor Vehicle Fund is included in the FY22 recommended budget to offset the contingency budget by an equivalent amount in accordance with Fiscal Policy #2 approved at the February 22, 2021 budget workshop. 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. 
• $3,000,000 transfer-out to the Capital Projects Fund in FY22 intended to be saved for future construction of Fire Station #6.
• $2,753,580 transfer-out to the Capital Projects Fund in FY22 for infrastructure, facility, and technology needs identified in the 5-year Capital Improvement Plan -- see a more thorough discussion previously under Fiscal Policy #3.
• $1,900,000 transfer-out to the Parks & Recreation Fund representing a subsidy of 39% of total budgeted expenditures in that Fund for FY22. 
• $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).
• $711,785 transfer-out to the Debt Service Fund for the General Fund’s portion of the 2014 CTAX refunding bond debt service for FY22.
• $250,000 transfer-out to the General Liability Self-Insurance Fund in FY22 to help offset recent liability losses and maintain a minimum cash balance in the Fund.
• $107,800 transfer-out to the newly created Landscape Maintenance Fund that was approved at the February 22, 2021 City Council meeting in compliance with Governmental Accounting Standards Board (GASB) Statements Nos. 54 and 84.

General Fund Ending Fund Balance:

• The net ending fund balance is expected to be approximately $17,061,822 in FY21 (20.7% of expenditures); and recommended to be budgeted at $7,019,438 for FY22 (equaling 8.3% of expenditures).
• FY21 Estimated Ending Fund Balance compared to Budget:  FY21 ending fund balance is expected to be approximately $13,087,266 higher than what was budgeted – with the final ending fund balance representing approximately 20.7% of expenditures compared to the budget of 5.0%.  This can primarily be attributed to the influx of resources into the General Fund from the CARES Act distributed to the City of Sparks.

Note:  Information on other Funds that are maintained by the City and Redevelopment Agency can be found in the City Manager’s FY22 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 FY22 Final Budget Recommendations book.

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 Nevada 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 may approve the FY22 budget recommendations and five-year Capital Improvements Plan as presented today.
2. City Council may reject the FY22 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 2021-2022 through fiscal year 2025-2026”.

Recommended Motion #2: “I move to approve the City Manager’s final budget recommendations for fiscal year 2021-2022”.