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

Discussion
Tonight's presentation, FY 2011 Budget Preview - FINAL, seeks the Mayor and Council's guidance with regard to the development of the FY 2011 Proposed Operating and Capital Improvements Program budgets. This is the third of three budget previews for FY 2011 (the first two previews took place in December 2009). It is expected that the Mayor and Council will provide additional guidance with respect to program and project priorities during the Mayor and Council worksessions and public hearings that are scheduled in the next few months:

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 - 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. Some principles have been updated since the December previews due to new revenue and expenditure information. Based on these principles the General Fund currently has a $2.2 million budget gap. Options for closing this gap, along with a staff recommendation, are described after the budget principles. Tonight staff seeks the Mayor and Council’s guidance with regards to closing this budget gap.

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 60 percent of all General Fund revenues. For FY 2011, staff estimates that total taxable real property assessments will increase by approximately 1.4 percent. Given that the taxable assessments are only projected to increase by 1.4 percent, staff will recommend 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 or services.

For FY 2011 staff will recommend 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 qualify for tax relief on the first $300,000 of their home's assessed value.

Overall staff estimates that real property tax revenue will increase by 5.9 percent or $1.9 million from FY 2010 to FY 2011 as shown in the table below. The change in revenue is greater than the change in the taxable assessed value because staff recommends not including the one-time credit, valued at $1.54 million.

		FY 2007 Actual	FY 2008 Actual	FY 2009 Actual	FY 2010 Budget	FY 2011 Estimate
Real Property Tax Rate		$0.312	$0.302	$0.292	$0.292	$0.292
Real Property Tax Rev		$27.6 mm	$29.1 mm*	$31.3 mm*	$31.4 mm*	$33.3 mm

* Includes a one-time tax credit of $100 for every owner-occupied household through the State’s Income Tax Offset Program. Each year from FY 2008 to FY 2010, Rockville used this program to target tax relief for owner-occupied residential properties (approximately 15,400 in the City).

REVENUE PRINCIPLE #2 - Budget major revenues conservatively to ensure sufficient funds are available throughout FY 2011

Income Tax
Income tax revenue consists of the City’s share of income taxes received by the State of Maryland for returns filed from Rockville residents. Maryland counties are able to impose an income tax that is separate from the State income tax. In accordance with Maryland law, municipalities receive 17 percent of collected county income taxes within the municipalities' jurisdiction. Montgomery County’s income tax rate is currently 3.2 percent.

There has been significant growth in income tax revenue over the past few years due to the City's population growth. When preparing the FY 2010 budget, however, staff estimated income tax would likely go down as a result of the increase in regional unemployment and reductions in capital gains. FY 2010 income tax was budgeted at $9.3 million, which is 11 percent less than the FY 2009 actual revenues. As of February 2010, FY 2010 income tax revenues were approximately 8 percent less than the same period last year (or 3 percent better than budgeted). Because this trend is likely to continue, staff will recommend budgeting $9.3 million for the FY 2011 budget. Unfortunately this revenue source is volatile and there is very little data available from the State or County to estimate total revenues for the remainder of FY 2010 or for FY 2011 and FY 2012.

		FY 2007 Actual	FY 2008 Actual	FY 2009 Actual	FY 2010 Budget	FY 2011 Estimate
Income Tax Revenue		$9.8 mm	$10.6 mm	$10.4 mm	$9.3 mm	$9.3 mm

Highway User Revenue
Highway User Revenue (HUR) represents the City's share of gasoline tax and vehicle registrations collected by the State of Maryland. During FY 2010, the State of Maryland's Board of Public Works voted to decrease the municipal share of HUR by 90 percent, or $2.16 million for the City of Rockville (HUR was adopted at $2.4 million for FY 2010). This reduction was part of a larger package aimed at addressing the State's projected budget shortfall of more than $700 million for FY 2010. Recently City staff learned that the 90 percent reduction in HUR will continue into FY 2011 and FY 2012, resulting in a revenue budget of $240,000.

		FY 2007 Actual	FY 2008 Actual	FY 2009 Actual	FY 2010 Budget	FY 2011 Estimate
Highway User Revenue		$3.26 mm	$3.05 mm	$2.67 mm	$240,000	$240,000

Tax Duplication
This revenue is received from Montgomery County as a partial reimbursement for tax duplication. Several factors, such as number of streetlights, the number of street miles maintained by the City, and what the County spends each year, determine what the City receives each year. The County is currently working on a new formula to determine the amount of tax duplication that municipalities will receive. The formula is not yet finalized, but City staff believe that the City's portion of tax duplication will be reduced starting in FY 2011. In addition to a less favorable formula, the County may elect to reduce the City's share even further due to their anticipated FY 2011 budget deficit. Until more information becomes available, the City will assume a 50 percent decrease or $1.1 million in tax duplication revenue for FY 2011.

		FY 2007 Actual	FY 2008 Actual	FY 2009 Actual	FY 2010 Budget	FY 2011 Estimate
Tax Duplication Revenue		$2.23 mm	$2.23 mm	$2.23 mm	$2.23 mm	$1.1 mm

Hotel Tax
This revenue consists of the City's share of tax levied on customers who pay for a room or space at a hotel. FY 2009 was the first year for the 2 percent hotel tax, which began October 1, 2008. For FY 2011, the City anticipates approximately $850,000 in hotel tax revenue, an increase of $50,000, due mainly to a new hotel, the Hilton Garden Inn on Shady Grove Road, scheduled to open in May 2010.

		FY 2007 Actual	FY 2008 Actual	FY 2009 Actual	FY 2010 Budget	FY 2011 Estimate
Hotel Tax Revenue		N/A	N/A	$624,486*	$800,000	$850,000

* Represents a partial year, or nine months, of Hotel Tax Revenue.

Police Protection Grant
This revenue consists of an annual operating grant from the State of Maryland to assist with funding police protection services. During FY 2010, the State of Maryland's Board of Public Works voted to decrease the municipal share of police protection aid by 35 percent, or $217,000 for the City of Rockville (police protection was adopted at $620,000 for FY 2010). This reduction was part of a larger package aimed at addressing the State's projected budget shortfall of more than $700 million for FY 2010. Recently City staff learned that the 35 percent reduction in the Police Protection Grant will continue into FY 2011 and FY 2012, resulting in a revenue budget of $403,000.

		FY 2007 Actual	FY 2008 Actual	FY 2009 Actual	FY 2010 Budget	FY 2011 Estimate
Police Protection Grant		$651,181	$627,894	$615,763	$403,000	$403,000

REVENUE PRINCIPLE #3 - Budget fees and charges to achieve maximum cost recovery
Other revenue sources are currently being analyzed through a formal Cost Allocation Plan and User Fee Study, which was commissioned in the FY 2009 budget. This study evaluates all user fees, customer charges, and internal administrative 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.

As of February, the Cost Allocation Plan was nearly complete, and as a result of the plan, staff will recommend increasing the administrative charges to the City's Enterprise and Special Revenue Funds (see STAFF'S RECOMMENDATION TO CLOSE BUDGET GAP FOR FY 2011 below). The User Fee Study will be finalized and presented to the Mayor and Council in April, and staff will incorporate any changes to the City’s fees and customer charges approved by the Mayor and Council into the FY 2011 adopted budget.

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
During the budget process staff evaluated each department operating budget and decreased or eliminated expenditures. Below are some areas that staff targeted during the FY 2011 budget review (changes are from FY 2010 adopted).

Decrease of 9.5 Vacant Regular FTEs	$536,000
Consultants and Outside Trainers	238,000
Employee Travel	101,000
Employee Training / Professional Development	151,000
Dues, Fees, Publications	38,000
Contract Services - Building, Grounds, Street	69,000
Program Supplies	86,000
Furniture and Equipment Replacement	136,000
TOTAL	$1,355,000

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 will recommend not funding across the board adjustments or merit increases for regular employees in FY 2011. One exception to maintaining current salary levels is for the employees eligible for longevity pay. For FY 2011 33 employees are eligible to receive longevity pay estimated at $100,000 ($160,000 all funds). In addition to the increases for longevity pay, overall health care is estimated to increase by $585,000 as a result of health care cost increases and changes in health care elections.

During the December preview, staff reported that workers' compensation insurance would increase by approximately 35 percent under the Montgomery County Insurance Pool. Because of the impact of the large increases on the City's FY 2011 budget, staff has recommended leaving the Pool and joining the Injured Workers' Insurance Fund (IWIF) and Local Government Insurance Trust (LGIT) for general liability, property, auto, workers' compensation, excess liability and associated insurance. The confirmed premium contribution of $1.1 million provided by LGIT and IWIF for all lines of insurance coverage will realize savings of approximately of $600,000 in FY 2011 (all funds). This savings does not represent a decrease from the FY 2010 adopted budget, but a savings from what the Montgomery County Insurance Pool would have charged in FY 2011. For budgeting purposes, the total workers' compensation insurance budget will remain relatively flat from FY 2010 adopted to FY 2011 proposed (note: this item was presented to the Mayor and Council at the meeting of February 1, 2010).

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, from FY 2009 to FY 2012 the City's annual required contribution to the pension fund will increase by 179.8 percent from the FY 2009 contribution of $1.58 million to $4.42 million projected in FY 2012. This represents an average increase of approximately $950,000 a year, 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 and future years budgets. For FY 2011, the City will need to contribute a total of $3.48 million across all funds, with approximately 80 percent, or $2.75 million, coming from the General Fund. The amount the City is required to contribute is calculated by the City's actuary.

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 FY 2010 adopted General Fund budget did not include a contribution to the retiree benefit trust because staff anticipated that because the trust was fully funded in FY 2009 the City would not be required to make an additional contribution in FY 2010. The City received the FY 2010 actuarial report in December 2009, and the report stated that the City should contribute a minimum of $130,078 from the General Fund ($166,000 all funds) to the trust for FY 2010, and an additional $300,000 from the General Fund ($367,000 all funds) for FY 2011, which is one-fifth of the estimated total liability in accordance with Mayor and Council policy.

Staff is currently working with the actuary on 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.

EXPENDITURE PRINCIPLE #5 - Fund increases in liability and property insurance
As mentioned under Expenditure Principle #2, during the December preview, staff reported that liability and property insurance would increase by approximately 35 percent under the Montgomery County Insurance Pool. Because of the impact to the FY 2011 budget, staff has recommended leaving the Pool and joining the Injured Workers' Insurance Fund (IWIF) and Local Government Insurance Trust (LGIT). The confirmed premium contribution of $1.1 million provided by LGIT and IWIF for all lines of insurance coverage will realize savings of approximately of $600,000 in FY 2011 (all funds). This savings does not represent a decrease from the FY 2010 adopted budget, but a savings from what the Montgomery County Insurance Pool would have charged in FY 2011. For budgeting purposes, the total liability and property insurance budgets will remain relatively flat from FY 2010 adopted to FY 2011 proposed.

EXPENDITURE PRINCIPLE #6 - Increase caregiver agency funding by 5 to 8 percent 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. Based on the requests received, staff will recommend increasing the total amount of grants by 5 to 8 percent, or $26,000 to $41,000, over the FY 2010 adopted amount of $513,875. Staff's review of the caregiver agency requests, as well as the recommendations from both the employee panel and community panel is currently underway.

EXPENDITURE PRINCIPLE #7 - Transfer $3.0 million to the City's Capital Projects Fund
The Capital Improvements Program (CIP) budget is funded mainly from the following four components over a five-year period: debt, cash (paygo transfer from the General Fund), government grants, and developer contributions. Staff will recommend that the planned General Fund contribution for FY 2011 total $3.0 million, which is a decrease of $1.1 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).

Through the budget development process, staff evaluated the current five-year CIP plan, and by utilizing the City's formal CIP prioritization process, made recommendations on which projects should be funded in FY 2011 and which projects should be unfunded or deferred to future years. Even with these adjustments, $6.0 to $7.0 million in bond proceeds will be added to the FY 2013 budget to fund asphalt and concrete repair and replacement. In order to eliminate future borrowing for routine maintenance, or to fund additional projects that are currently unfunded or under-funded as shown below, the Mayor and Council may need to reduce the current level of programs and services the City offers, or re-prioritize currently funded CIP projects.

Unfunded or Reduced Capital Projects Fund CIP Projects

Project Name	FY 2011	FY 2012	FY 2013	FY 2014	FY 2015
Asphalt Repair and Replacement	$1,549,500	$317,420	$336,450	$356,702	$-
Avery Road Reconstruction*	-	300,000	2,100,000	-	-
Ballfield Equipment Replacement	-	-	442,000	-	-
Bridge Rehabilitation	-	171,000	10,000	34,500	55,000
City Hall Improvements	-	1,274,000	-	-	-
Civic Center Improvements*	-	931,450	782,150	560,850	629,550
Community/Park Enhancements*	160,000	-	-	-	-
Concrete Repair and Replace.	1,000,000	-	-	-	-
Enterprise Software*	-	120,000	700,000	-	-
F. Scott Fitzgerald Theatre*	232,000	743,000	155,000	-	-
Gateway Welcome Signs*	-	-	-	475,000	-
Glenview Mansion/Cottage Improv.	-	-	103,000	-	-
Greenway Streetscape Corridor	-	32,000	-	-	-
Gude Drive Facility Improv.	-	-	-	9,723,600	-
King Farm Farmstead Park	-	-	-	-	1,500,000
Maryvale Park Improvements	-	56,100	-	-	-
Mattie J.T. Stepanek Park	-	65,000	-	-	-
Outdoor Security Lighting	-	-	-	250,000	-
Park Ped. Bridge Improvements	116,300	114,000	36,500	-	-
Park System Sign Replace.*	-	-	-	191,000	-
Rockcrest Recreation Center*	-	72,000	864,900	-	-
Roofing Replacement	-	-	250,000	250,000	-
Senior Center Improvements	-	500,000	-	-	-
Southlawn Lane*	-	100,000	400,000	2,200,000	-
Swim and Fitness Center	713,233	-	507,700	-	310,600
TOTAL	$3,771,033	$4,795,970	$6,687,700	$14,041,652	$2,495,150

* These projects will appear fully unfunded in the FY 2011 - FY 2015 CIP budget.

EXPENDITURE PRINCIPLE #8 - Fund $102,000 in operating cost impacts from completed Capital Improvements Program projects
The FY 2011 proposed budget will contain an additional $102,000 in operating costs associated with partially completed or fully completed Capital Improvements Program (CIP) projects. The $102,000 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 will recommend the FY 2011 budget include a $750,000 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 $5.1 million to the City's Debt Service Fund
Staff will recommend the FY 2011 budget include a $5.1 million transfer from the General Fund to the Debt Service Fund to support the City's annual debt payments. This is an increase of $1.1 million from the FY 2010 adopted transfer of $4.0 million. The increase is a result of a $13.5 million bond issue proposed to take place in FY 2011 to support the Gude Drive Maintenance Facility, the Police Station, and the Senior Center projects. Staff anticipates that this bond issue will take place in September or October 2010.

EXPENDITURE PRINCIPLE #11 - Fund Mayor and Council priorities
The Mayor and Council and the City Manager participated in a mid-January 2010 worksession and began a discussion of new priorities. Staff expects the Mayor and Council will discuss these priorities as they relate to the FY 2011 budget, and will give staff direction during the Mayor and Council's budget worksessions scheduled for April and May.

General Fund Budget Gap

In December, staff estimated the City would have a General Fund budget gap of $2.4 million for FY 2011. As of February, this gap is estimated at $2.2 million. Below is a recommendation from staff to close this budget gap, along with a list of options available for the Mayor and Council with corresponding budget estimates.

STAFF'S RECOMMENDATION TO CLOSE BUDGET GAP FOR FY 2011
Staff’s recommendation contains two parts:

1) Utilize $1.2 million in General Fund reserve above the 15 percent reserve requirement. The current General Fund reserve balance is $11.9 million and the reserve requirement is $9.3 million. If $1.2 million is utilized to help balance the General Fund budget, staff estimates approximately $1.4 million will remain above the 15 percent reserve requirement. It is prudent not to use the entire excess balance due to the uncertain revenues for the remainder of FY 2010 and into FY 2011 and future years.

2) Increase the administrative charges by $1.0 million consistent with the results of the Cost Allocation Plan. These administrative charges represent centrally budgeted administrative or "overhead" costs. Each fund pays for its share of the costs through a transfer to the General Fund. Staff recommends phasing in the increased administrative charges over a three year period. With the three year phase-in, General Fund revenues will increase by over $1.0 million each year for FY 2011, FY 2012, and FY 2013.

This strategy depends on the Mayor and Council adopting the Cost Allocation Plan and approving the three year phase-in approach.

City Fund *	FY 2010 Adopted	FY 2011 Proposed	Annual Change
Water	$444,000	$639,760	$195,760
Sewer	248,200	353,590	105,390
Refuse	469,700	694,850	225,150
Parking	87,600	275,430	187,830
Stormwater Management	158,600	309,130	150,530
RedGate Golf Course **	97,900	89,415	(8,485)
Town Center Management District	-	75,730	75,730
Speed Camera	-	74,990	74,990
Total	$1,506,000	$2,512,895	$1,006,895

* This strategy implies that rates and charges that impact customers will increase over time, although the exact impact has yet to be determined.
** $89,415 is the FY 2011 administrative charge if the Mayor and Council would like to continue with the 5-year business plan (50% of the recommended $178,830).

ALTERNATIVE OPTIONS TO CLOSE BUDGET GAP FOR FY 2011
Below are several alternative options to the City Manager's recommendation that the Mayor and Council may wish to consider in order to close the projected $2.2 million budget gap. Each option has a corresponding revenue or expenditure estimate. It is important to remember that some options represent short-term solutions, while others represent longer-term solutions. Based on current data, it is estimated that revenues will remain flat into FY 2012, so it is prudent that the Mayor and Council select options that consider the future outlook and health of the General Fund.

1) Reduce the Transfer to the Capital Projects Fund - $0 to $2.2 million
The current transfer is budgeted at $3.0 million for FY 2011. If the Mayor and Council choose to reduce the transfer, current projects will need to be reduced, deferred or eliminated since the amount of the annual paygo transfer impacts both the current fiscal year and the future years. This option also impacts the amount of debt that the City must incur and the burden that places on the City's taxpayers.

2) Utilize General Fund Reserves in Excess of the 15 Percent Reserve Requirement - $0 to $2.2 million
The current General Fund reserve balance is $11.9 million and the reserve requirement is $9.3 million, for a difference of $2.6 million. The Mayor and Council may choose to fund the entire budget gap by utilizing $2.2 million, leaving approximately $400,000 in the reserve above the 15 percent reserve requirement. If the Mayor and Council were to choose this option, it is important to note, depending on the amount of reserves utilized, this is a short-term solution that may not be sustainable for future years.

3) Increase the Administrative Charges to Other City Funds Consistent with the Results of the Cost Allocation Plan - $0 to $2.2 million
These administrative charges represent centrally budgeted administrative or "overhead" costs. Each fund pays for its share of the costs through a transfer to the General Fund. A total increase of approximately $3.3 million in administrative charges will be recommended through the Cost Allocation Plan. The Mayor and Council will receive the full results of the Cost Allocation Plan as a separate presentation and report in April.

4) Eliminate or Reduce Current Services or Program - $0 to $2.2 million
The Mayor and Council may choose to reduce or eliminate current programs or services. If the Mayor and Council require additional information on the cost of a program or service, staff will provide current expenditure estimates, as well as revenue estimates when applicable. The Mayor and Council can also refer to the report distributed at the December 7, 2010 budget preview (Cost Center Summary) for program and service expenditure and revenue budgets, as well as associated FTEs.

5) Increase User Fees and/or Charges to Maximize Cost Recovery – Amount To Be Determined
Other revenue sources are currently being analyzed through a formal User Fee Study, which was commissioned in the FY 2009 budget. This study evaluates all user fees and customer charges to determine if fees and charges are set appropriately – consistent with cost recovery goals, comparative pricing, and user demand. This study includes all charges for services and licenses and permits included in the operating budget. Depending on the results of the study, General Fund revenues may increase in FY 2011. The Mayor and Council may also use the results of the study to evaluate the financial status of the City's current programs and services.

The User Fee Study will be finalized and presented to the Mayor and Council in April, and staff will incorporate any changes to the City's fees and customer charges, programs and/or services approved by the Mayor and Council into the FY 2011 adopted budget.

6) Increase the Real Property Tax Rate - $0 to $2.2 million
The real property tax rate is currently recommended at $0.292 per $100 of assessed valuation. Each $0.001 equals approximately $115,000 in new revenue. In order to close the entire gap, the Mayor and Council would need to increase the real property tax by $0.019, to $0.311 per $100 of assessed value.

7) Eliminate the City’s Supplement to the State’s Homeowners’ Tax Credit Program - $400,000
The City’s supplement to the Homeowners' Tax Credit Program is property tax relief that targets low- to moderate-income homeowners. This program, estimated to cost up 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, 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.

If the Mayor and Council choose this option, the tax credit program would be completely eliminated for FY 2011. In the future, if the Mayor and Council would like to modify the program by adjusting the program parameters, the new parameters would need to be submitted to the Maryland State Department of Assessments and Taxation approximately eight months prior to the fiscal year with the change.

8) Decrease All Regular Employee Base Salaries - $0 to $2.2 million
Each 0.5 percent equals approximately $137,500 in decreased General Fund expenditures. In order to close the entire gap, the Mayor and Council would need to decrease all regular employee salaries by 8.0 percent. In addition to regular salaries, the Mayor and Council may opt to eliminate longevity pay. Currently there are 33 employees eligible to receive approximately $100,000 ($160,000 all funds) in longevity pay in FY 2011. This budget option may require the City to amend the personnel policy for administrative employees, and may require negotiations and discussions with AFSCME Local 1453 and FOP Lodge 117 for union and police employees.

9) Increase the Employee Contribution to the Pension Plan - $554,000
The Mayor and Council may choose to require an additional contribution from administrative, union, and police employees, to the City’s pension plan. This additional contribution would, in theory, decrease the City’s expenditure by $554,000. However, the City’s actuary recommends not decreasing the City’s contribution, even with an additional employee contribution, due to the current health of the Plan.

Enterprise Funds

Enterprise funds are used to account for operations financed and operated in a manner similar to private business enterprises where the cost of expenses, including both operations and capital, are financed or recovered from the users of the services rather than general taxpayers. The City of Rockville through the Financial Management Policies has designated the following operations as enterprise funds: Water, Sewer, Refuse, Stormwater Management, Parking and RedGate Golf Course.

The goals in setting the City's utility rates (Water, Sewer, Refuse, Stormwater Management) are low rates over time, while covering all operating and capital expenses and maintaining required reserve levels (30 to 90 days). The City establishes rates on a multi-year basis as opposed to setting them annually in order to maintain consistency and reduce volatility. In order to set the rates the City uses cash flow models that take into account factors such as future changes in operating expenses, debt obligations, and changes in revenues. For setting rates and fees for Parking and RedGate Golf Course (which unlike Water, Sewer, Refuse, and Stormwater are competitive services), the City uses additional factors such as comparative pricing and user demand.

At the time of writing this report, staff has not yet fully analyzed the cash flows, though staff is aware of the financial difficulties being experienced by many City residents, and will attempt to keep all utility rates as low as possible for FY 2011. In addition, based on the results of the Cost Allocation Plan, the current administrative overhead charges to the City's Enterprise and Special Revenue funds are significantly lower than the study suggests, and staff recommends that increases be phased in over a three year period to avoid the rate shock to the City's utility customers (see STAFF'S RECOMMENDATION TO CLOSE BUDGET GAP FOR FY 2011 under "General Fund Budget Gap").

Water Fund - 70% of the City (the remaining 30% is serviced by WSSC)
The Water Fund is used to account for the financial activity associated with the treatment and distribution of potable water. In FY 2008, the Department of Public Works presented two comprehensive studies that evaluated the City's overall water program related to the Water Treatment Plant and the Water Distribution System. As a result of these two studies, starting in FY 2009 the City increased both the Water Fund operating and CIP budgets to address the concerns that were identified.

To fund the increases in the system requirements, and in accordance with the Mayor and Council's adopted plan, the water usage rates increased by 25 percent from FY 2008 to FY 2009, 25 percent from FY 2009 to FY 2010, and will increase again by 25 percent from FY 2010 to FY 2011. Despite these increases, as reflected in the FY 2009 financial report, annual Water Fund revenues are not covering Water Fund expenses. Based on this trend, Finance and Public Works are evaluating all operating and capital costs to determine if the rate increases are sufficient to support future years. Water and sewer customers also pay a ready-to-serve charge that will increase by 3 percent from FY 2010 to FY 2011 and is equally distributed to both Water and Sewer funds.

Usage Tier (per quarter)		FY 2007 Actual	FY 2008 Actual	FY 2009 Actual	FY 2010 Budget	FY 2011 Estimate
Per 1,000 gal. - first 12,000		$1.62	$1.78	$2.23	$2.78	$3.48
Per 1,000 gal. - next 12,000		$2.33	$2.56	$3.20	$4.00	$5.01
Per 1,000 gal. - over 24,000		$2.50	$2.75	$3.44	$4.30	$5.37

Sewer Fund - 70% of the City (the remaining 30% is serviced by WSSC)
The Sewer Fund accounts for the financial activity associated with the collection of sewage. Charges are based on water consumption. Nearly all of the capital costs in the Sewer Fund, and a substantial portion of the operating costs, are payments for the operation of and capital improvements to the District of Columbia Water and Sewer Authority’s (DCWASA) Blue Plains Advanced Wastewater Treatment Plant. The City’s share of Blue Plains’ capital improvements is proportionate to the City’s allocation of treatment capacity.

In accordance with the Mayor and Council's adopted plan, and as presented in the December budget previews, the Sewer Fund rate for FY 2011 was scheduled to increase to $4.28 per 1,000 gallons, or 3.9 percent over the FY 2010 adopted rate of $4.12 per 1,000 gallons. However, since that time staff has learned that the City's contribution to the Blue Plains Advanced Wastewater Treatment Plant has increased significantly in FY 2010, and will continue to increase in FY 2011 and future years. This new information has forced staff to re-evaluate the planned rate increases to determine if sufficient funds are available in FY 2011 and future years. Based on our initial cash flows, the 3.9 percent increase will not cover the Fund's operating and capital expenditures in FY 2011. Staff will complete the cash flow for the Sewer Fund and present the Mayor and Council with the recommended rate plan on March 22, 2010.

Usage		FY 2007 Actual	FY 2008 Actual	FY 2009 Actual	FY 2010 Budget	FY 2011 Estimate
Sewer Rate per 1,000 gal.		$3.63	$3.82	$3.97	$4.12	TBD

Refuse Fund - Residential Properties Only
The Refuse Fund is used to account for the financial activity associated with the collection and disposal of recycling, refuse, and yardwaste. The FY 2011 Refuse budget will be based on a semi-automated once per week recycling and refuse program. Based on the current Refuse Fund reserve balance and the projected revenues and expenses for FY 2011 and future years, staff will recommend keeping the rate flat at $392.40 per year for FY 2011. Keeping the rate flat in FY 2011 will help minimize rate increases in FY 2012 and future years. The semi-automated once per week system has provided reduced operating expenses because fewer personnel, contractual services, commodities, and vehicles and equipment are needed.

Usage		FY 2007 Actual	FY 2008 Actual	FY 2009 Actual	FY 2010 Budget	FY 2011 Estimate
Refuse Rate (per year)		$372.00	$392.40	$392.40	$392.40	$392.40

Stormwater Management Fund - All Properties in the City
The Stormwater Management (SWM) Fund accounts for the financial activity associated with maintaining existing SWM facilities and constructing new facilities. In FY 2008, Public Works staff recommended that a stormwater utility fee would be needed to fund Rockville's existing and expanded stormwater, storm drainage and water quality programs. Historically, new development has funded much of Rockville's stormwater management with fees imposed on developers. With few opportunities for new development, new funding sources were needed to cover new programs and the maintenance of the public stormwater infrastructure.

In FY 2008 the Mayor and Council approved an ordinance to amend the City Code to include a new Stormwater Management Utility Fee. This ordinance enables the City to charge an annual fee per Equivalent Residential Unit ("ERU"). Although the Mayor and Council adopted the ordinance that enabled the fee, no fee was adopted in FY 2009. Under the Mayor and Council's direction, the expenses for the new program in FY 2009 were funded from the Stormwater Management Fund's reserve.

For the FY 2010 budget, a fixed fee of $40.00 per ERU was implemented, which is estimated to generate $1.6 million in fee revenue. In December 2009, staff reported that the proposed utility fee would equal $49.20 for FY 2011, as approved by the Mayor and Council in April 2009.

		FY 2007 Actual	FY 2008 Actual	FY 2009 Actual	FY 2010 Budget	FY 2011 Estimate
SWM Utility Fee per ERU		N/A	N/A	N/A	$40.00	$49.20

Parking Fund - Users
The Parking Fund was created to account for the revenue and expenses from parking related activities, including the issuance of parking tickets, the parking meter program, and the costs associated with the construction and operation of the three public parking garages in the City's Town Square. In order to manage the three parking garages and on-street meters within Town Square, the Town Center Parking District was formed. The Parking District tax rate for FY 2008 through FY 2010 was $0.300 per $100 dollars of assessed value. The commercial property owners (FRIT and MEDCO) that are located within the Town Square boundaries pay this tax in addition to the general City property tax. Staff received the assessment report from the State Department of Assessments and Taxation in February, and will propose to increase the Parking District tax rate by 10 percent to $0.330, which will generate an additional $23,000 for the Parking Fund in FY 2011.

Special Tax District		FY 2007 Actual	FY 2008 Actual	FY 2009 Actual	FY 2010 Budget	FY 2011 Estimate
Parking District		N/A	$0.300	$0.300	$0.300	$0.330

In addition to the revenues raised by the Parking Fund, the FY 2011 proposed budget will include a $750,000 transfer from the General Fund to support the parking enterprise. Staff will recommend continuing with a General Fund transfer until more of the annual revenues offset annual expenses, which include the debt service payments on approximately $36 million of bonds issued to support the construction of the Town Square Garages. The amount of the General Fund transfer depends on the total amount of other revenues raised by the Parking Fund. If the Mayor and Council would like to decrease the General Fund transfer even further for FY 2011, other adjustments would need to be made to increase the Parking District's tax rate, increase the dollar amount of parking violations, and/or increase the amount or days the City charges for parking.

RedGate Golf Fund - Users
The RedGate Golf Fund is used to account for the financial activity associated with the City's public golf course. After covering all of its operating, overhead and capital costs for nearly thirty years, RedGate began operating in the red in FY 2000. In response to financial losses over several years, in March 2006 staff presented a business plan to the Mayor and Council that analyzed the financial situation of the golf course. The business plan focused on achieving the objective of generating sufficient revenues through fees and charges in order to pay for the costs of operations, capital outlay, and infrastructure improvements. FY 2011 will be the fifth year of the five-year business plan.

Although there has been several changes made since the business plan was adopted, the Fund continues to have a growing deficit estimated at $1.6 million by the end of FY 2010. Some of the changes recommended by the business plan that the City made over the last three years include: transferring $372,500 from the General Fund to the RedGate Golf Fund to support capital improvements to the course, reducing the administrative charge to the General Fund by half, and intensifying overall marketing efforts. In addition to the changes recommended by the business plan, and in an attempt to increase revenues, the Mayor and Council increased green fees in 2009.

Recognizing that the financial situation of the Fund is not improving, the Mayor and Council directed staff to research alternative management options available to RedGate. Pending completion of that research and further direction by the Mayor and Council, FY 2011 will continue with the business plan, which allows for the administrative charge to RedGate be reduced by half.

Special Revenue Funds

Special revenue funds are used to account for the proceeds of specific revenue sources that are restricted by legal, regulatory, and policy provisions to finance specific activities. Included in the special revenue funds are the Special Activities, Community Development Block Grant, Town Center Management District, and Speed Camera funds.

Special Activities Fund
The Special Activities Fund receives revenues from fundraising and community activities, payment-in-lieu programs, as well as from a variety of corporations and community service organizations. These revenues are deposited into separate accounts and then used for specific purposes related to those accounts. The amount that is appropriated each year is directly related to the overall revenues received in the past years, and projected revenues for the next year (these accounts are not funded by general revenues). There are currently 14 active accounts in the FY 2010 budget that will continue in FY 2011.

For FY 2011, staff is assessing the feasibility of transferring approximately $23,600 in arts-related expenditures, such as expenditures for the Youth Orchestra and the F. Scott Fitzgerald Literary Conference, from the Arts Cost Center in the General Fund to the Friends of the Arts Cost Center in the Special Activities Fund. The Friends of the Arts Cost Center is used to support new art programs and/or enhancements to existing arts programs.

Community Development Block Grant Fund (CDBG)
CDBG is a special revenue fund supported by a sub-grant of federal funds via Montgomery County. The annual budget for this fund consists of unexpended prior years' grants as well as the next year's anticipated grant. Staff anticipates next year's grant will remain at $304,000.

		FY 2007 Actual	FY 2008 Actual	FY 2009 Actual	FY 2010 Budget	FY 2011 Estimate
CDBG Grant		$380,000	$304,000	$304,000	$304,000	$304,000

Town Center Management District Fund
The Town Square Street and Area Lighting District (residential and commercial properties) and the Town Square Commercial District (only commercial properties) were created in FY 2008 to support the maintenance and operational costs of the Town Center Management District. The two districts levy special property taxes on the properties within the Town Square boundaries to support the total annual expenditure budget for the Town Center Management District Fund. Staff received the assessment report from the State Department of Assessments and Taxation in February, and will propose to increase the Town Square Street and Area Lighting District and the Town Square Commercial District tax rates by 10 percent, which will generate a total of $933,000 in Town Center Management District Fund revenues. The 10 percent increase is necessary in order to raise enough revenue to cover the annual operating expenditures, and to close the accumulated deficit in the Fund.

Tax District		FY 2007 Actual	FY 2008 Actual	FY 2009 Actual	FY 2010 Budget	FY 2011 Estimate
Street and Area Lighting		N/A	$0.048	$0.105	$0.105	$0.116
Commercial		N/A	$0.530	$1.200	$1.200	$1.320

Speed Camera Fund
The Speed Camera Fund, created in FY 2007, is a special revenue fund used to track the financial transactions associated with the City's speed camera program. In October 2009, a new State of Maryland law took effect that changed the threshold speed limit from 11 miles per hour to 12 miles per hour, limits the use of speed cameras in school zones to Monday through Friday from 6:00 am to 8:00 pm, and restricts the annual amount of program revenue the City can retain to ten percent of the City's total revenues. Based on current estimates, this new law decreased the total number of citations the City issues each month from approximately 6,500 to 1,400, or approximately 78 percent. This decrease will impact program revenues for FY 2011, and will dramatically impact the future of the City's program and Speed Camera funded CIP projects.

Under the current assumptions, the FY 2011 Speed Camera Fund will support 5.5 positions (a decrease of 1.5 FTEs), the operating costs of the program, as well as several CIP projects which focus on pedestrian and traffic safety in FY 2011. Although several CIP projects are funded with Speed Camera in FY 2011, a majority of the Speed Camera funding was removed from future years. The table below shows the funding from Speed Camera revenue that will no longer appear in the capital budget. Some of these projects will still contain some funding from the Speed Camera Fund in FY 2011 and/or the Capital Projects Fund in FY 2011 through future years.

Unfunded or Reduced Speed Camera Fund CIP Projects

Project Name	FY 2011	FY 2012	FY 2013	FY 2014	FY 2015
Accessible Pedestrian Signals	$-	$450,000	$450,000	$450,000	$450,000
Illuminated Street Signs	110,000	110,000	110,000	110,000	-
Pedestrian Safety	-	200,000	200,000	200,000	200,000
Sidewalks	-	460,000	650,000	750,000	750,000
Street Lighting Improvements	-	200,000	200,000	200,000	200,000
Traffic Controls: Citywide	-	100,000	100,000	100,000	100,000
TOTAL	$110,000	$1,520,000	$1,710,000	$1,810,000	$1,700,000

Mayor and Council History
FY 2011 Budget Preview - PART I, Mayor and Council Meeting on December 7, 2009.
FY 2011 Budget Preview - PART II, Mayor and Council Meeting on December 14, 2009.
Mayor and Council Priority and Goal Setting Session, January 15-17, 2010.

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 for inclusion in the FY 2011 Proposed Operating and CIP budgets.

Next Steps
The City Manager and the Budget Office will incorporate any new policy direction and guidance of the Mayor and Council into the Proposed Operating and Capital Improvements Program budgets. Other opportunities for the Mayor and Council to provide additional guidance and direction include the Mayor and Council worksessions and public hearings that are listed in the following FY 2011 budget calendar:

March 22, 2010	Presentation of Proposed Budget Introduction of Ordinances and Resolutions
April 12, 2010	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	Adoption of FY 2011 Resolutions and Ordinances

Department Head:



Gavin Cohen, Director of Finance
Approved on: 02/17/2010

City Manager:

Scott Ullery, City Manager
Approved on: 02/17/2010