Recommendation
Staff recommends that the Mayor and Council review and file the FY 2011 Budget Preview and Worksession - PART II, and offer additional guidance as necessary for preparing the FY 2011 Proposed Operating and Capital Improvement Program budgets.

Discussion
Tonight the remaining City departments will present an overview of their department, which includes their department's strategic issues with a focus on challenges and significant changes for FY 2011. After the department reports, Budget staff will summarize the overall budget principles proposed for the FY 2011 budget development process. At this time it is expected that the Mayor and Council will provide policy direction and guidance with respect to the revenue and expenditure principles.

Mayor and Council Budget Preview - PART II
December 14, 2009
1) Public Works
2) City Clerk
3) City Attorney
4) Finance
5) City Manager
6) FY 2011 Budget Principles - Budget Office

FY 2011 Budget Calendar
During this preview the Mayor and Council should notify staff of any suggestions or changes they would like to see to the budget process or the proposed budget calendar. Other opportunities for the Mayor and Council to provide additional guidance and direction include the Mayor and Council goal setting worksession in mid-January, the budget preview scheduled for late-February, and any of the other Mayor and Council worksessions and public hearings that are listed in the following proposed FY 2011 budget calendar:

December 7, 2009	Mayor and Council Budget Preview - PART I
December 14, 2009	Mayor and Council Budget Preview - PART II
January 15-17, 2010	Mayor and Council Priorities and Goals
February 22, 2010	Mayor and Council Budget Preview - FINAL
March 22, 2010	Presentation of Proposed Budget Introduction of Ordinances and Resolutions
April 12, 2010	Public Hearing - Constant Yield Tax Rate Public Hearing - General #1
April 19, 2010	Public Hearing - General #2
April 26, 2010	Mayor and Council Worksession #1
May 3, 2010	Mayor and Council Worksession #2
May 10, 2010	Public Hearing - General #3 (if needed) Mayor and Council Worksession #3 (if needed)
May 24, 2010	Budget Adoption

Below is a summary of the FY 2011 General Fund revenue and expenditure budget principles. These principles embody the assumptions and premises that will guide the General Fund revenues and expenditures of the FY 2011 Operating and CIP budgets. These principles are the foundation on which staff will build the recommended budget. Staff will incorporate the policy direction and guidance of the Mayor and Council and determine the fiscal impacts of each decision during the budget development process.

General Fund Revenue Principles

REVENUE PRINCIPLE #1 - Maintain current property tax rates and continue to offer the Homeowners' Tax Credit Program
The FY 2011 budget will include property tax revenues based on the current tax rates of $0.292 per $100 of assessed value for real property and $0.805 per $100 of assessed value for personal property. Property tax revenue is the largest General Fund revenue source constituting approximately 55 percent of all General Fund revenues. For FY 2011 staff estimates that total taxable real property assessments will likely remain flat or even decline, restricting the growth of total property tax revenue at the current rate. Given that the taxable assessments will likely remain flat, staff recommends not including a one-time credit ($100 in FY 2010) under the State Income Tax Offset Program. Including this one-time credit would require an additional $1.54 million reduction in programs and/or projects.

For FY 2011 staff recommends continuing with the Homeowners' Tax Credit Program, which is property tax relief targeting low- to moderate-income homeowners. This program, estimated to cost $300,000 to $400,000 in FY 2011, is a State administered program that provides real property tax credits to residents for property taxes due on their principal residence. Under the City's current program as presented in Chapter 22 "Taxation" of the Rockville City Code, households with gross incomes up to $85,000 per year and a household net worth of less than $200,000 (not including the value of the home or qualified retirement savings) could qualify for tax relief on the first $400,000 of their home's assessed value. In FY 2009, the Mayor and Council expanded this program to include an additional 25 percent credit for seniors 70 years or older who are primary homeowners. The City's program parameters are more generous than the State's program parameters, where households with gross incomes up to $60,000 per year and a household net worth of less than $200,000 could qualify for tax relief on the first $300,000 of their home's assessed value.

REVENUE PRINCIPLE #2 - Budget major revenues conservatively to ensure sufficient funds are available throughout FY 2011
During FY 2010, the State reduced funding for counties and municipalities. The City's revenue sources that were directly impacted during FY 2010 were highway user (decrease of 90 percent or $2.16 million) and police protection (decrease of 35 percent or $217,000). There exists a possibility that these revenues or additional revenues (such as income tax) will be further reduced in FY 2010. Staff anticipates these reductions will continue into FY 2011. Although it is too early to know the exact impact on these revenue sources, the City should be prepared for additional declines in State and County revenues when developing the FY 2011 budget.

Major Revenue Source		FY 2007 Act	FY 2008 Act	FY 2009 Act	FY 2010 Bud	FY 2011 Est
Highway User		$3.26 mm	$3.05 mm	$2.67 mm	$0.24 mm	$0
Police Protection Grant		$0.65 mm	$0.63 mm	$0.62 mm	$0.40 mm	$0.40 mm
Income Tax		$9.82 mm	$10.62 mm	$10.44 mm	$9.30 mm	$9.30 mm
Tax Duplication		$2.23 mm	$2.23 mm	$2.23 mm	$2.23 mm	$1.1 mm

REVENUE PRINCIPLE #3 - Budget fees and charges to achieve maximum cost recovery
Other revenue sources are currently being analyzed through a formal cost allocation and user fee study, which was commissioned in the FY 2009 budget. This study evaluates all user fees, customer charges, and internal administration charges to determine if fees are charged appropriately and if overhead is fairly allocated. This study includes all charges for services, licenses and permits, and administrative charges included in the operating budget. Depending on the results of the study, General Fund revenues may increase in FY 2011. Staff will present this report to the Mayor and Council in early calendar year 2010, and will have more information on which revenue sources will be impacted for the February budget preview.


General Fund Expenditure Principles

EXPENDITURE PRINCIPLE #1 - Limit increases in the FY 2011 operating budget to essential City programs and services, and decrease or eliminate nonessential operating expenditures such as employee travel, training, and professional development
Since revenues will likely decrease from FY 2010 to FY 2011, the City will need to make strategic reductions in expenditures while maintaining essential City services and programs. Some operating areas that staff recommends to continue decreasing or eliminating include employee travel and training, professional development, and dues, fees, and publications. Only essential certifications and training courses will be funded in FY 2011, resulting in a reduction of an estimated $200,000. Other areas staff will target include temporary employee wages, overtime, consultants and outside trainers. Each department will focus on achieving their core mission by utilizing current regular employees and fewer temporary employees, consultants, and outside trainers.

EXPENDITURE PRINCIPLE #2 - Maintain current salary levels and fund increases in employee benefits
Due to the major revenue constraints and additional required expenditures in FY 2011, staff recommends not funding across the board adjustments or merit increases for regular employees in FY 2011. Although salaries will not increase, total personnel expenditures will increase due to increases in health care and workers' compensation insurance.

Health care is estimated to increase by 16 percent or $311,000, while workers' compensation insurance is estimated to increase by approximately 35 percent or $313,700 under the Montgomery County Insurance Pool. Because of the impact of these large increases on the City's FY 2011 budget, the City is currently in the process of evaluating other insurance carriers and health care providers. For workers' compensation, this may entail leaving the Montgomery County Insurance Pool, which the City has been a member of since the 1970s (see additional information on general liability and property insurance under Expenditure Principle #5). For health care, the City is in the process of working with a broker to negotiate the City's future health care contracts. In addition, the City is monitoring the debate in Congress closely as any legislation can have a significant impact on employers who provide health care benefits.

EXPENDITURE PRINCIPLE #3 - Fund the increase in the City's Annual Required Contribution to the Pension Fund
As a result of the turmoil in the financial markets during the latter part of 2008 and early 2009, over the next three years the City's annual required contribution to the pension fund will increase by 179.8 percent from the current $1.58 million to $4.42 million projected in FY 2013. This represents an average increase of approximately $950,000 a year for the next three years or an average increase of 41.5 percent per year. These projected increases in the City's contributions are significant and will impact the FY 2011 budget and future years. For FY 2011, the City will contribute an additional of $663,000 across all funds, with approximately 80 percent or $530,000 coming from the General Fund. The budgeted increase is less than the increase in the required annual contribution because the City has over-funded the pension payment in the past, with the goal of reducing future liabilities. Since General Fund revenues will likely decrease or remain flat from FY 2010 to FY 2011, staff recommends funding the pension payment at the required annual contribution level for FY 2011.

EXPENDITURE PRINCIPLE #4 - Contribute to retiree health care costs (GASB 45)
In FY 2009 the City set up an irrevocable trust fund to begin prefunding retiree health care benefits as required under GASB 45. The City contributed $1.3 million to the trust in FY 2009, which was the full liability provided in the FY 2009 actuarial valuation report. The City is currently waiting for the results of a new actuarial valuation report which will provide the City's FY 2010 and estimated FY 2011 and FY 2012 liabilities associated with the current benefits package. Staff also requested that the actuary provide various options for reducing the City's retiree health care costs going forward, from eliminating the benefit, to changing the benefit amounts provided to retirees. For FY 2010 and FY 2011, staff estimates that the City will need to contribute approximately $300,000 for all funds, which is one-fifth of the estimated total liability in accordance with Mayor and Council policy. Approximately 80 percent or $240,000 of the one-fifth annual contribution is General Fund.

EXPENDITURE PRINCIPLE #5 - Fund increases in liability and property insurance
Liability and property insurance is estimated to increase by approximately 35 percent under the City's current contract with the Montgomery County Insurance Pool. Under this contract for FY 2011, the City will contribute an additional $90,000 across all funds, with approximately 81 percent or $73,000 coming from the General Fund. Because of the impact of this increase on the City's FY 2011 budget, the City is looking into alternative insurance carriers. As stated under Expenditure Principle #2, one option is to leave the Montgomery County Insurance Pool and join another insurance carrier with the goal of maintaining or reducing the City's total workers' compensation, general liability and property insurance expenditures in FY 2011 and in future years.

EXPENDITURE PRINCIPLE #6 - Maintain caregiver agency funding and continue with competitive grant funding process
Each year the Division of Community Services coordinates committees (employee panel and community panel) that review and evaluate all caregiver and outside agency funding requests received by the City. After the committees review and evaluate each application, they develop funding recommendations for each program. These recommendations take into account the number of City residents served, the demonstrated need for the service, and the quality of the application. Since there are no cost of living increases being recommended for FY 2011, staff recommends continuing with the competitive grant process and allocating $513,875, the same amount that was allocated to caregiver agencies in FY 2010. The FY 2010 allocation was an 8.7 percent increase over FY 2009.

EXPENDITURE PRINCIPLE #7 - Transfer $2.4 million to the City's Capital Projects Fund
The Capital Improvements Program (CIP) budget is mainly funded from four components over a five-year period: debt, cash (paygo transfer from the General Fund), government grants, and developer contributions. Staff recommends that the planned General Fund contribution for FY 2011 total $2.4 million, which is a decrease of $1.7 million from adopted FY 2010 (adopted at $4.1 million, but then adjusted down to $2.4 million as a result of the State of Maryland's Board of Public Works' municipal revenue reductions). Staff will evaluate the current five-year CIP plan, and through the City's formal CIP prioritization process, make recommendations on which projects should be funded in FY 2011 and which projects can be eliminated or deferred to future years. The amount of the annual paygo contribution impacts both the current fiscal year and future years since the Capital Projects Fund is balanced over a rolling five-year period.

EXPENDITURE PRINCIPLE #8 - Fund $110,000 in operating cost impacts from completed Capital Improvements Program projects
The FY 2011 proposed budget will contain an additional $110,000 in operating costs associated with partially completed or fully completed Capital Improvements Program (CIP) projects. The $110,000 is budgeted across several departments in electricity, program supplies, contract services, and temporary employees. These operating cost impacts are related to the following CIP projects: Pedestrian Safety, Sidewalks, Street Lighting Improvements, College Gardens Park SWM Pond, Fallsgrove Park, Gude Drive Facility Improvements and Pumphouse Improvements.

EXPENDITURE PRINCIPLE #9 - Assist with the annual operating deficit in the Parking Fund
Staff recommends the FY 2011 budget include a $1.0 million transfer from the General Fund to the Parking Fund to assist with the annual operating Parking Fund deficit. It is prudent to continue with a General Fund transfer until it is demonstrated that the parking garages will generate sufficient revenues to support more of the Fund's annual expenses. The Fund's annual expenses include debt service, regular FTEs, and the operating and contract service costs associated with the maintenance of the garages.

EXPENDITURE PRINCIPLE #10 - Transfer $5.0 million to the City's Debt Service Fund
Staff recommends the FY 2011 budget include a $5.0 million transfer from the General Fund to the Debt Service Fund to support the City's annual debt payments. This is an increase of $1.0 million from the FY 2010 adopted transfer of $4.0 million. The increase is a result of a $12 million bond issue that will take place in FY 2010 to support the Gude Drive Maintenance Facility project and the Police Station project.

EXPENDITURE PRINCIPLE #11 - Fund Mayor and Council priorities
The Mayor and Council and the City Manager will participate in a mid-January 2010 worksession to establish goals and priorities. Any significant changes to the City's priorities could impact resource needs in the FY 2011 budget. Although the new Mayor and Council's goals and priorities are unknown at this time, the timing of the mid-January worksession will allow the City Manager to incorporate the financial and budgetary impacts of the goals and priorities established into the proposed budget.

In addition to the eleven expenditure principles listed in this report, and depending on the Mayor and Council's direction regarding RedGate Golf Course, there may be a significant impact on the City's General Fund in FY 2011 and future years.

Mayor and Council History
FY 2011 Budget Preview - PART I, Mayor and Council Meeting on December 7, 2009.

Fiscal Impact
This presentation contains information that will impact the revenues and expenditures of the FY 2011 Operating and CIP budgets. Staff will incorporate the policy direction and guidance of the Mayor and Council and determine the fiscal impacts of each decision during the budget development process.

Next Steps
The City Manager and the Budget Office will return in late-February to update the Mayor and Council with new information about revenues and/or expenditures that will impact the overall FY 2011 General Fund and enterprise fund budgets. The City Manager and the Budget Office will then incorporate any new policy direction and guidance of the Mayor and Council into the Proposed Operating and Capital Improvements Program budgets.

The FY 2011 Proposed Operating and Capital Improvements Program budgets will be presented to the Mayor and Council in late March 2010. Once the Proposed Budget is presented in March, several public hearings and worksessions will take place with budget adoption scheduled for May 24, 2010.

Department Head:



Gavin Cohen, Director of Finance
Approved on: 11/30/2009

City Manager:

Scott Ullery, City Manager
Approved on: 12/04/2009