TOWN OF LOS GATOS COUNCIL AGENDA REPORT
MEETING DATE: 06/05/2018
ITEM NO: 5 DESK ITEM
DATE: JUNE 5, 2018
TO: MAYOR AND TOWN COUNCIL
FROM: LAUREL PREVETTI, TOWN MANAGER
SUBJECT: ADOPT A RESOLUTION APPROVING THE TOWN OF LOS GATOS FISCAL YEAR (FY) 2018/19 OPERATING BUDGET AND FY 2018/19 – 2022/23 CAPITAL IMPROVEMENT PROGRAM (CIP), NEW APPROPRIATIONS, OTHER APPROVED ADJUSTMENTS, MINOR CORRECTIONS, AND CARRY-FORWARD APPROPRIATIONS
Below are responses to public inquiries regarding the proposed budget documents.
Issue 1: The budget proposes the largest reduction in fund balances ($9,730,814) in recent history. Do you fully understand what this is and is it your judgment that this is the best use of the Town’s fund balances?
Pages C-25 and C-26 of the Proposed Budget identify and summarize the changes in fund balances. The planned expenditures address needed infrastructure, information technology, pension, and other investments. These investments will be realized through increases in Town asset values and pension trust assets. The planned reduction in fund balances for FY 18/19 for all funds, as detailed in the Proposed Budget, are further explained in the table on the next page.
Please note that some reserves and fund balances are expected to increase, and that the table reflects only scheduled decreases or use of reserves or fund balance as detailed in the Proposed FY 18/19 Budget of approximately $10.4 million. The net effect of combining the proposed
PREPARED BY: STEPHEN CONWAY
Reviewed by: Town Manager, Assistant Town Manager, and Town Attorney
110 E. Main Street Los Gatos, CA 95030 ● 408-354-6832 www.losgatosca.gov
increases would be added to the decreases to arrive at the net use of approximately $9.7 million of fund balances/reserves proposed for the FY 18/19 budget year.
|FUND NAME||ESTIMATED AMOUNT OF FUND BALANCE USE|
|Pension/OPEB Reserve||$3,188,913 budgeted to be paid to PARS Pension Trust. (Fund balance reduction with an identical increase in pension trust assets.)|
|Capital and Special Projects Reserve||$2,785,220 transferred to the Town’s GFAR fund per the Town’s Capital Improvement Program (CIP). (GF Fund Balance Reserve reduction with an identical increase to investment in Town infrastructure assets and $450,000 repaid to Town’s Equipment Replacement fund from Almond Grove Phase 1 project savings.)|
|Capital Projects Funds|
|GFAR||$4K net use of fund balance for capital infrastructure increasing Town asset values.|
|CIP Grant and Storm Drain Funds||$426K net use of fund balance for planned CIP infrastructure improvements increasing Town infrastructure asset values.|
|Construction Tax -Utility Undergrounding Fund||$2,173,690 net use of fund balance to fund planned CIP infrastructure improvements increasing Town infrastructure assets values.|
|Internal Service Funds|
|ABAG/Workers Compensation Funds||$339,816 reduction due to recent adverse claims experience (cyclical in nature).|
|Management Information Systems (Information Technology)||$877,297 use proposed for key technology investments including IT disaster recovery improvements ($200K), system upgrades ($100K), Emergency Operations Center equipment ($51K), replacement servers/other IT equipment, the IT Master Plan ($150K), among others.|
|Equipment Replacement Fund||$502,945 use of fund balance to provide for scheduled replacement of Town fleet equipment for which monies are set aside in the fund. One large new item includes Police Records Management System and Computer Aided Dispatch replacement of $300K. Fund balance use equals increase in Town fleet equipment assets.|
|Special Revenue Funds|
|Blackwell/Kennedy Meadows/Gemini/Santa Rosa Vasona/Hillbrook Special Assess. Districts||Total of $73,150 use of reserves accumulated from annual collection of special assessments to fund planned infrastructure improvements in each specific Assessment District.|
The Town has approximately $74m in unrestricted cash. Making investments in critical infrastructure or paying down unfunded pension liabilities is a prudent move and we strongly encourage. We do however take exception to a number of the statements regarding the use of fund balances noted in the table above.
Capital and Special Projects Reserve
- The correct amount that was transferred to the Town’s GFAR Fund from the General Fund Capital Reserve was $2,635,220 not $2,785,220. The difference between the two numbers of $150,000 was actually transferred to the Internal Services Fund – Equipment Replacement. This can be seen on schedule C-24 of the FY 2019 budget.
- What is more troubling is the statement that $450,000 was transferred to the Internal Service Fund – Equipment Replacement without telling the Town Council that $300,000 was provided by a transfer out from the Management Information Systems Fund. To be clear the $450,000 that was transferred in to the Equipment Replacement Fund was achieved by a $150,000 transfer out from the General Fund Capital Reserve and $300,000 transfer out from the Management Information Systems Fund.
- This reinforces our position that the Town has excess cash reserves “stashed” in various fund balances that are freely moved. Since the Staff has reallocated $300,000 of the Management Information Systems Fund balance to another fund, the Staff must believe that the Management Information Fund balance is excessive. These transfers can be seen on schedule C-24 of the FY 2019 budget.
ABAG/Workers Compensation Funds
- The ABAG Self Insurance fund and the Workers Comp Self Insurance fund are two separate funds. The combined fund balance as of June 30, 2018 was estimated to be $1,655,802. The FY 2019 budget calls for a combined reduction of $604,990 from these funds, not $339,816. The reported reduction is for only the Workers Comp Self Insurance fund.
- What is troubling and does not square with the Staff’s response is that the reduction is “cyclical in nature”. The total reduction in the combined fund balance since June 30, 2015 has been $1,426,217. This represents over the four year period a 46% reduction. This consistent year over year decline cannot be “cyclical”. This trend can be seen on schedule C-27.
Management Information Systems
- The $877,297 reduction in Management Information Systems is correct. What isn’t correct (see the second bullet above) is what drove this reduction. As stated earlier $300,000 of this reduction was due to money being transferred from this fund to the Equipment Replacement fund. The remaining $577,297 is due to expenditures of $911,775 exceeding revenues of $334,478. This can be seen on schedule C-26.
- The Staff has provided a partial list of MIS expenditures which totals only $501,000. What is not explained is how the remaining $410,775 is being spent. Have any of these expenditures been discussed by the Town Council? Are these expenditures in line with the Town Council’s priorities?
- Lastly, the $911,775 expenditures for Management Information systems, is not the total amount. In addition, there are three information technology projects in the GFAR totaling $425,337 which have been approved. This can be seen on the CIP Schedule which was included in the CIP Transmittal Letter. That brings the total MIS expenditures in the FY 2019 budget to a mind blowing $1,327,112.
- When the Staff is telling the Town Council that there isn’t $700,000 to increase the expenditures for street repair and maintenance which is a very high Town Council priority, and allows a budget for MIS total expenditures of $1,327,112 to be approved without raising the possibility that some of these funds could be redirected, we find this to be extremely troubling.
Equipment Replacement Fund
- The $502,945 reduction in Equipment Replacement fund is correct. What isn’t disclosed is that this reduction is due to $1,572,945 in expenditures exceeding the $620,000 in revenues and the $450,000 transfer in of funds as previously discussed.
- The Staff identifies that $300,000 of the $1,572,945 is targeted for a replacement of the Police Records Management System. This raises the question as to why funds that are clearly MIS related being spent out of the Equipment Replacement Fund.
- Setting this aside that leaves $1,272,945 in expenditures which are not adequately explained. In the schedule above the Staff makes reference to “an increase in Town fleet equipment” but doesn’t provide any detail to this. None of this was clearly called out in the Town Manager’s Transmittal letter.
Issue 2: The budget is proposing an increase of $2,646,811 in salaries and benefits over the FY 2018 estimated level while total headcount is flat from prior year. This represents a 11% increase in salaries and benefits to the staff. Do you understand why this is and do you agree with the proposed 11% increase in salaries and benefits?
When comparing budgeted salaries between fiscal years, staff recommends comparing adopted budgeted amounts in the prior year to the proposed adopted budget for the upcoming fiscal year.
Comparing estimated actual salaries and benefits for the current year to the adopted budget can be insightful especially in terms of understanding how actual costs can differ from the year’s adopted budgeted amounts. The estimated amounts for the current fiscal year can often be significantly lower than the adopted budget for a variety of reasons, including staff vacancy savings, the actual benefit costs (such as health premiums) being lower than expected at the time of budget development, or other factors. Focusing on staff vacancies, the Proposed FY 18/19 Budget follows the Town’s longstanding practice of budgeting currently vacant positions at the highest step/benefits level for the position. Historically due to this conservative practice, the Town has experienced salaries and benefits savings when the eventual new hire is appointed at an initial lower salary step or the budgeted position remains vacant for longer than expected periods.
To more accurately compare changes to salary and benefits, it is best to focus on the changes in the Adopted and Proposed Budget amounts as detailed below:
|Salaries and Benefits Proposed FY 18/19||$27,347,094||Source: Town of LG Proposed Budget Page C-15|
|Salaries and Benefits Adopted Budget FY 17/18||$27,005,920||Source: Town of LG Adopted Budget page C-15|
|Increase to Salary & Benefits||$341,174|
As demonstrated above, the increase in the salaries and benefits is $341,174, reflecting moderate increases related to anticipated step increases, and healthcare and pension costs.
We find the Staff’s comments to be off point. Let us explain why.
- Comparing current year budget vs. prior year budget is useful in understanding differences in budget assumptions. However, it is equally, if not more important, to compare actual history to the current year budget to understand fundamental changes in cost structure. The Staff makes a sweeping statement that they recommend comparing adopted budgets without giving an explanation as to the basis for such recommendation.
- The FY 2019 budget for salaries and benefits is $2,646,811 higher than the actual cost in 2018 with headcount being essentially flat (160 FTE in 2018 vs. 159 FTE in 2019). If the Town was able to deliver the required goods and services to the residents in 2018 for $24,700,282 in salary and benefits why is it going to cost $27,347,093 in FY 2019 when there is no increase in headcount nor increase in the delivery of services? The Staff has never provided a detail bridge analysis which would explains the 11% increase over FY 2018 actuals.
- As of July 7, 2018 the Town on its website listed only 2 unfilled full time positions – a communication dispatcher (top salary $98,404) and an executive assistant for the Police Chief (top salary $81,785).
- We believe that the Staff has for years purposely over budgeted the salary and benefits expense as a way to create “budget cushion”. For the period FY 2015 through FY 2018, the excess salary and benefit expense that was budgeted totaled $6.3m. This is a staggering amount.
- What this means is the Staff denied the Town Council the ability to reallocate funds to other pressing areas because they were not aware of the “cushion” that had been built into the salary and benefit expense for the current year budget. This is not a conservative practice at all.
- The Staff needs to provide a detail analysis of the $2,646,811 immediately so the Town Council can decide if these budgeted funds can be reallocated to more pressing needs.
Issue 3: The budget is proposing an increase of $4,170,412 in operating expenditures. Of this increase, $3,100,000 is the payment to the Town’s Pension and OPEB Trust. Netting this payment out, there is still a $1,070,412 increase in operating expenditures which was never discussed in the Town Manager’s transmittal letter. Do you understand why this is and do you agree with the proposed increase?
Staff does not recommend comparing estimated actual FY 17/18 expenditures to the Proposed FY 18/19 Operating Budget. Staff recommends comparing the Adopted FY 17/18 Budget to the Proposed FY 18/19 Budget as presented in the following table:
|FY 18/19 Proposed All Funds Operating Expenditures||$17,719,817||Source: Town of LG Proposed Budget Page C-9|
|FY 17/18 Adopted All Funds Operating Expenditures||$12,770,115||Source: Town of LG Adopted Budget Page C-9|
As the questioner noted, there is an increase recommended for Proposed FY 18/19 Operating Budget related to the major new items identified in the table below. The remaining expenses include increases to contracts due to Consumer Price Index increases and other items.
|Major New Items||FY 18/19 Proposed Budget|
|Payment from GF Pension/OPEB Reserve to PARS Pension Trust||$3,100,000|
|General Plan Update||$1,250,000|
|One-time tree trimming||$100,000|
As we have noted earlier, a budget vs budget comparison is useful in understanding changes in budget assumptions from year to year. However, what is more important is comparing prior year actual results to the current year budget to understand fundamental changes in cost structure. This is not a choice of picking one analysis over another. This is about doing both.
With regard to the Staff’s response we do want the Town Council to take note of the following:
- It is clear that the increase in Operating Expenditures from 2018 projected actuals is largely due to the pension payment of $3,100,000 and the planned expenditure of $1,250,000 for the general plan update. We find it puzzling that such a large expenditure in support of the general plan update is not explicitly called out in the Town Manager’s transmittal letter. On page A-4 the Town Manager discusses the need to do a general plan update, but never mentions that $1,250,000 has been included in the FY 2019 budget for third party consultants.
- The other item that we find puzzling is the large unfavorable variance in the projected actual operating expenditures in 2018 of $13,549,405 vs. the approved 2018 budget of $12,770,115. This represents an unfavorable spending variance of $779,290.There is no explanation as to why this has occurred. One can only assume, given the analysis the Staff has done comparing prior year’s budget to the current year’s budget, that the $779,290 are onetime expenses and therefore are not included in the FY 2019 budget. The Staff needs to explain this significant unfavorable variance so the Town Council can have a complete understanding of the FY 2019 budget.
Issue 4: The budget is proposing an increase of $835,568 in fixed assets which is a 87% increase over the prior year. It also represents approximately 346% increase over FY 2017 levels. The transmittal letter never discussed what fixed assets were being acquired. Do you understand what is being acquired and do you agree that this level of expenditure is necessary in FY 2019?
Fixed asset additions of note that increased from the FY 2017/18 Adopted Budget include the following:
- Police Communications Center upgrades $375,000 (Upgrade to Police Computer Aided Dispatch and Emergency Operations Center communications equipment)
- Parks and Public Works fleet and other equipment replacements, including two dump trucks and backhoe totaling approximately $400,000. These assets have quite long useful lives, hence when they are replaced fifteen or more years later, that particular years equipment purchase amounts are likely to spike because of the infrequent nature of
We find the Staff’s response to be materially incomplete. Let us explain why.
- The total Fixed Asset expenditures in the FY 2019 budget is $1,798,038. The vast majority of these expenditures, $1,722,945, have been programmed in the Internal Services Fund. Please refer to schedule C-7 in the FY 2019 budget.
- In the Staff’s response to question 1 above, they disclosed that $300,000 had been planned for a Police Records Management System. Additionally they disclosed that an unspecified amount of money was being spent for the acquisition of “Town fleet equipment assets”. What exactly is this?
- In the response above, the Staff further discloses that there is $375,000 planned to upgrade the Police Computer Aided Dispatch and Emergency Operations Center and $400,000 for 2 dump trucks and a backhoe. This totals $775,000 in planned fixed asset expenditures.
- Combining the identified expenditures we get a total of $1,075,000 of identified fixed asset expenditures which leaves $647,945 unexplained.
When Staff tells the Town Council that there is not an additional $700,000 available to increase the expenditures for street repair and maintenance while not disclosing how $647,945 is planned to be spent for “fixed assets”, this does not give the Town Council the ability to make their independent judgment as to the appropriateness of these expenditures