Mayor and Council



   For the meeting on:

  December 10, 2012
   Department:   Finance
   Responsible staff:  Stacey Webster, Budget and Finance Manager
  phone: (240) 314 - 8407
  SWebster@rockvillemd.gov


Subject
FY 2014 Budget Preview

Recommendation
Staff recommends that the Mayor and Council review the FY 2014 Budget Preview and Budget Survey results and offer preliminary guidance for preparing the FY 2014 Proposed Operating and Capital Improvement Program (CIP) budgets.

Discussion
It is the City’s practice to provide the Mayor and Council with a preview of the upcoming year’s budget in late November/early December. According to the adopted Financial Management Policies,

"At least one month before the preparation of the proposed annual budget, the City Manager will meet with the Mayor and Council members to review and deliberate all policy guidelines that may affect the proposed budget." (source: FY 2013 Adopted Operating Budget, page 2-3)

This agenda item provides a review of each operating fund and discusses the major factors that may influence revenue and expenditure estimates. The Mayor and Council can provide guidance and direction with respect to program and project priorities at this meeting and at the second budget preview that is scheduled for February 11, 2013. After the proposed budget is introduced in March, there will be many opportunities for the Mayor and Council to discuss and deliberate the budget during the worksessions that are scheduled for April and May. The proposed budget calendar is below:

Meeting Date
Agenda Item
December 10, 2012 Mayor and Council Budget Preview (includes budget survey results)
February 11, 2013 Mayor and Council Budget Preview (includes assessment info.)
March 18, 2013 Presentation of Proposed Budget and Introduction of Ordinances
and Resolutions
April 1, 8, 15, 29, 2013
May 6, 2013
3 Budget Public Hearings and 4 Mayor and Council Budget
Worksessions
May 20, 2013 Budget Adoption

Overview
FY 2014 is projected to be another challenging year for the City. Financial pressures such as employee benefit costs and aging infrastructure, combined with decreases in property tax revenue and limited revenues from other governments, weigh heavily on the projected FY 2014 bottom line. Staff's current estimates of major revenues and expenditures are described throughout this report. Staff will continue to update the Mayor and Council throughout the FY 2014 budget preparation process if/when new revenue and expenditure estimates are available. The Mayor and Council should be aware that City government finances tend to lag behind the general economy so, even when the general economic situation improves, the impact on the City in terms of revenue growth will take some time. Accordingly, strategic reductions should have a long-term focus. This is the best approach to ensure stability in the City's tax rates and in the fees charged to residents.

General Fund

General Fund - Revenues
The General Fund is the primary operating fund of the City and is used to account for the majority of the City's daily operations. Many of the City's core services and administrative functions are supported through the General Fund. The major revenue sources for the General Fund include: property taxes, income tax, tax duplication, hotel tax, highway user, and user fees for services. FY 2014 revenue estimates are conservative and reflect the current economic conditions.

Real Property Tax - This revenue source makes up more than one-half of the FY 2013 General Fund budget. The total real taxable assessed value (AV) from FY 2012 to FY 2013 is estimated to decrease by four percent. This decrease is due to the most recent assessment of Group 3 City properties and assessment appeals made by residents. Group 1 properties will be reassessed in January 2013, and staff currently anticipates another decrease. In order to be conservative, staff's current FY 2014 projection reflects another decrease of four percent; staff is hopeful it will be less since the prior four percent reduction included some previous appeals. 

The full property assessment report, which will include the Group 1 reassessments, will be available from the County in late January. This report will provide the information necessary to calculate the FY 2014 property tax revenues. This information will be the basis for the Mayor and Council's February budget preview.

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.

Income tax revenue in the City of Rockville has remained relatively strong despite the recent recession. Income tax revenue for FY 2012 totaled $10.8 million; in FY 2013, income tax revenue is budgeted at a conservative $11.0 million. For FY 2014, staff estimates that income tax will increase by a modest 2.5 percent or $275,000; this is consistent with the average annual increase for income tax revenue over the last several years, modified to reflect current economic conditions.

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, impact what the City receives. Tax duplication payments are subject to annual appropriation by the County Council.

Currently, the Government Operations Committee of the County Council is considering changes to the County's tax duplication law that could result in a loss of revenue to municipalities. Given the uncertainty of this revenue source, the FY 2014 revenue estimate will represent a decrease by 15 percent from the FY 2013 revenue. This reduced level of $1.8 million is more consistent with the recommendations of the County staff set forth in the Revenue Sharing Task Force Report. It is important to note that this revenue source is difficult to predict because of the County Council review currently underway and the fact that, historically, tax duplication payments are based on Montgomery County's actual annual spending.

Hotel Tax - This revenue consists of the City's share of tax levied on a person who pays for a room or space at a hotel. For the past two fiscal years, the City has received over $900,000 from this tax. For FY 2014, staff will assume $950,000 in revenue, which is consistent with the FY 2013 adopted budget amount.

Highway User Revenue - This revenue source, which represents a portion of the City's share of gasoline tax and vehicle registrations collected by the State of Maryland, peaked in FY 2007 at $3.3 million. Rockville's share for FY 2013 equals $480,530, which is lower than FY 2012. Based on a September 2012 letter from the Maryland State Highway Administration, the City will receive $509,700 in FY 2014. This is approximately $30,000 higher than the estimate included in the General Fund five-year forecast. As the FY 2014 budget process continues, staff will inform the Mayor and Council about any revisions to the City's HUR estimates.

Other Revenues - Other revenue sources, such as charges for services and licenses and permits, will be analyzed throughout the next several months to determine if the City's fees and charges are meeting or exceeding their cost recovery goals; staff will also analyze if they are fairly set based on surrounding jurisdictions or competing programs. Depending on the results of staff's review, General Fund revenues will likely increase in FY 2014. Staff will have more information on which revenue sources will be impacted later on in the budget process.

General Fund - Expenditures
The General Fund constitutes over 60 percent of the City's total budget. The known major cost drivers for the General Fund in FY 2014 include: salaries and benefits, the City's contribution to the pension fund and to retiree health revenues, and transfers to the Capital Projects, Parking, and Debt Service funds.

Salaries - Salaries are estimated to increase by 1.25 percent from FY 2013 to FY 2014, while overtime and staffing levels are projected to remain flat. The salary increase of 1.25 percent is the amount that is stated in the current AFSCME union contract. Past practice dictates that this increase will be assumed for all employee classes, unless adjusted by the Mayor and Council. The Mayor and Council can dramatically impact the budget by changing staffing levels since this expenditure category makes up 64 percent of all projected General Fund expenditures in FY 2013. For more information on compensation, please refer to the "City Employee Compensation" agenda item from October 15, 2012.

Healthcare - Staff currently estimates that the City's healthcare costs will increase by at least ten percent from FY 2013 to FY 2014. This increase is difficult to predict because the fiscal year covers two health plan years. For the first plan year, July through December 31, 2013, the City costs will increase by seven percent. A ten percent increase equates to approximately $300,000 for the General Fund.

Pension and Retiree Health Contribution - The City's contribution to the pension fund, which covers the City's defined benefit program, is estimated to equal $4.2 million in FY 2014; this figure has been updated since the October report on City Employee Compensation. This contribution is slightly less than the contribution budgeted for FY 2013. If the City contributes the required amount, not including any supplemental employee contributions, the funded ratio will equal approximately 76 percent in FY 2014. The funded ratio is estimated to gradually increase over the next several years while the City's contributions decrease slightly to just under $4 million.

In addition to contributing to the pension, the City provides retirees with healthcare coverage upon retirement, covering 80 percent of the total cost of the City's lowest cost healthcare plan. For FY 2014, the City will contribute $762,000 to the retiree benefit trust, which represents a $140,000 increase over FY 2013. If the City contributes the required amount, the funded ratio will equal approximately 43 percent in FY 2014.

For more information on the City's annual required contribution and the funded ratio of the pension fund, please refer to the Actuarial Valuation Report as of November 9, 2012. For more information on the City's annual required contribution and the funded ratio of the retiree benefit trust, please refer to the Actuarial Valuation of the Post Retirement Medical Plan report as of July 1, 2011. For more information on the City's retirement system in general, please refer to the "City Employee Compensation" agenda item from October 15, 2012.

Transfer to the Capital Projects Fund - Each year the City makes a transfer from the General Fund to the Capital Projects Fund to support the City's capital program. The transfer for FY 2014 is currently estimated at $4.5 million. This is an increase of $600,000 from FY 2013. Staff will evaluate the current five-year CIP plan and, through the City's formal CIP prioritization process, make recommendations on what projects should be funded in FY 2014 and what 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 five-year period. For more information on the CIP, please refer to the "Capital Improvements Program" agenda item from November 5, 2012.

Transfer to the Parking Fund - The planned FY 2014 budget includes a $750,000 transfer from the General Fund to the Parking Fund to support the parking enterprise. This is an increase of $250,000 from the FY 2013 adopted transfer. Staff recommends continuing with a General Fund transfer until more of the annual revenues offset annual expenses, which include 4.25 regular FTEs, the street meter program, and the debt service payments on $36 million of bonds issued to support the construction of the garages.

Transfer to the Debt Service Fund - The planned transfer from the General Fund to the Debt Service Fund for FY 2014 totals $4.7 million. This supports the City's annual debt service payments and is the same amount as the FY 2013 adopted transfer. Currently, there are no new tax-supported bond issues scheduled in the next five years.

Other Operating - The remaining expenditure budget is attributed to the operating budgets that fund the City's services and programs. These services and programs range from internal administration to caregiver agency grants. The easiest way to view the City's programs and services is by using the Cost Center Summary tables located in the Appendix of the Operating Budget. Staff is currently assuming that operating costs for current programs will increase anywhere between zero and three percent for FY 2014. For more information on understanding the City's programs and services, please refer to the "Reducing the City Budget, What it Means to Cut Costs" agenda item from December 3, 2012.

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 primarily through user charges. The City of Rockville has designated the following operations as enterprise funds: Water, Sewer, Refuse, Stormwater Management, Parking and RedGate Golf Course.

The City's utility rates (Water, Sewer, Refuse, Stormwater Management) are set with the goal of 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 for its customers. In order to set the rates, the City uses rate models that take into account factors such as future changes in operating expenses, debt obligations, capital needs, and changes in revenues.

Water Fund
The Water Fund is used to account for all financial activity associated with the treatment and distribution of potable water. The City provides water service to 70 percent of the City, or approximately 13,000 accounts.

To fund the increases in both the operating and CIP budgets and in accordance with the Mayor and Council's adopted plan, water usage rates are estimated to increase by eight percent in FY 2014. The rates for FY 2014 will continue with a three-tier structure and will include a ready-to-serve charge that is split equally between the Water and Sewer funds. The amount of the charge is based on the size of the water meter and is estimated to increase by 20 percent from adopted FY 2013 (see page 3-15 of the FY 2013 adopted budget book for meter sizes).

Continuing to provide high quality water service and maintaining the infrastructure associated with the City's water system requires significant capital spending. Improving the fiscal health of the Water Fund requires a revised strategy, increased efficiency, and future rate increases. Staff is exploring all current and potential future issues in the Water Fund and developing strategies to ensure the fund is sustainable.

Sewer Fund
The Sewer Fund accounts for the financial activity associated with the collection and disposal 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. The Blue Plains Wastewater Treatment CIP project (FY 2013 adopted CIP page 88) contains additional information regarding the City’s capital costs for sewer treatment.

The Sewer Fund budget for FY 2014 will be based on an estimated rate increase of nine percent. In addition to the sewer charge, as mentioned under the Water Fund, users pay a ready-to-serve charge that is split equally between the Water and Sewer funds. The amount of the charge is based on the size of the water meter, and is estimated to increase by 20 percent from adopted FY 2013.

Refuse Fund
The Refuse Fund is used to account for the financial activity associated with the collection and disposal of recycling, refuse, and yard waste for residential properties within the City. After successfully holding the refuse rate steady for five years, the City reduced the rate for FY 2013. Staff is continuing to explore all options for keeping this rate flat for FY 2014. More information on the recommended refuse rate will be presented at the February 11, 2013 budget preview.

Stormwater Management Fund
The Stormwater Management (SWM) Fund accounts for the financial activity associated with maintaining existing SWM facilities and constructing new facilities. As part of the FY 2013 budget process, the fee schedule was re-evaluated to ensure sufficient revenue will be generated in order to cover the operating and capital expenses of the Stormwater Management Fund. As a result the fee increased by approximately 26 percent in FY 2013 and is projected to increase again by this same amount in FY 2014.

The FY 2013 and FY 2014 fee levels assume that all properties (including County properties) will pay the annual fee. If all properties do not pay the planned fees, staff estimates the fee will need to increase by at least 33 percent in FY 2014 in order to avoid a deficit situation and maintain the Fund's required level of reserves. Staff is currently considering whether the City of Rockville facilities will continue to pay the fee if other governmental agencies are not paying.

Parking Fund
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 costs associated with the three public parking garages in the City’s Town Center. The FY 2014 budget continues with the leasing of the Town Square garage operations to Federal Realty Investment Trust (FRIT), the commercial developer of Town Square. The City entered into an agreement with FRIT on September 1, 2011 to manage, operate and re-equip the garages under a long-term lease agreement. Under the lease arrangement, FRIT is responsible for setting the rates both for hourly and monthly parking in the garages; it is also responsible for all capital improvements and renovations during the term of the lease.

As mentioned under the General Fund expenditures, the FY 2014 budget will include a transfer from the General Fund to the Parking Fund of $750,000. It is anticipated that a General Fund transfer will be needed for future years, until such time as the new operations and management of the garages has stabilized and the debt is repaid.

Staff anticipates keeping the Parking District tax rate at 0.33 per $100 of assessed valuation for FY 2014. The District, which is comprised of the commercial properties within the Town Square boundaries, generates approximately $166,000 towards servicing the garage debt.

RedGate Golf Course Fund
On October 17, 2011, the Mayor and Council approved an operating lease with Billy Casper Golf (BCG) to invest in, manage and operate RedGate Golf Course. The lease commenced January 1, 2012, for an initial period of ten years. Under the lease agreement, the City will receive $12,000 in course rental revenue, approximately $34,000 for payment of debt service, and performance revenue if performance targets are met over the calendar year golf season. The FY 2014 expense budget will include debt service payments and depreciation for those assets not disposed of during the transition to BCG.

The City's first year of the lease will end on December 31, 2012; thereafter, staff will prepare a full report on the results of the operations. As with any new venture, issues surfaced during the transition, and staff has worked with BCG to resolve these issues to ensure that customers have a positive playing experience at the course. One item that is currently being discussed relates to the expense of watering of the course and the amount of water used by BCG. The cost of the water needed to properly maintain the course exceeds BCG's spending plan. More information on the impact of the cost of the water will be forthcoming.

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, and Speed Camera funds.

Special Activities Fund
The Special Activities Fund receives revenues from fundraising and community activities, payment-in-lieu programs, and 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 15 active accounts including the Housing Opportunities account in the FY 2013 budget.

Staff is in the process of reviewing all of the Special Activities Fund accounts to make sure that they have legal revenue restrictions consistent with GASB 54. Staff will have more information on any major changes to existing accounts, or new Special Activities accounts, later in the FY 2014 budget process.

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. The City’s overall CDBG grant amount has been reduced by 35 percent over the last five grant years, from $325,348 in Year 34 to $211,312 in Year 38, due to federal budget cuts and changes in how the Department of Housing and Urban Development (HUD) allocates funds. Staff anticipates next year's grant (Year 39) will equal approximately $211,000. This level is consistent with what the City received in FY 2013.

In response to federal cuts to the CDBG program over the past two years, on August 6, 2012, the Mayor and Council decided to target CDBG funds to housing activities for FY 2014 in order to address basic needs more directly. Mayor and Council also established a minimum grant amount of $15,000 for outside agencies to eliminate administrative inefficiencies of awarding small grants and suspended funding for public service grants. Finally, the Mayor and Council decided to consider, as part of the FY 2014 budget process, shifting the remaining CDBG staffing costs (0.4 FTE) to the General Fund in order to increase funds for home improvements.

Speed Camera Fund
The Speed Camera Fund is a special revenue fund used to track the financial transactions associated with the City's speed camera program. Total revenue for FY 2014 and future years is currently estimated to remain steady at just over $2 million each year (assumes approximately 4,875 citations). Under the current assumptions, the FY 2014 Speed Camera Fund will support 5.5 positions, the operating costs of the program, as well as several CIP projects which focus on pedestrian and traffic safety. By law, all Speed Camera Fund revenues must be used for public safety expenditures.

Mayor and Council Goals and Priorities

For the past two years, staff has used a budget survey tool to help the Mayor and Council identify priorities and preferences for the upcoming year. This survey tool listed all City cost centers along with all funded and unfunded CIP projects. For the FY 2014 budget process, the Mayor and Council decided to use the survey tool again, although in a slightly different format. The FY 2014 survey focused on the major policy issue and foundation items. The surveys were distributed in late October; the results are summarized below. Staff expects the results from the Mayor and Council survey will provide a structure or foundation for generating healthy debate and discussion about City priorities. The timing of the budget surveys allows the City Manager to incorporate the majority's preferences and priorities into the proposed budget.

(note: there were only 4 responses for items 1b, 1c, and 10l)

Strongly Disagree
Disagree
No
Opinion
Agree
Strongly Agree
1a
Maintain the Real Property Tax Rate at $0.292 and decrease operating and/or capital budgets
X
X
X
X X
1b
Increase the Real Property Tax Rate by less than 2 cents AND decrease operating and/or capital budgets
X X
X
X
1c
Increase the Real Property Tax Rate by 2 cents to $0.312
X X X
X
2
Maintain the Personal Property Tax Rate of $0.805 and maintain exemptions of 82% for commercial and manufacturing inventory and 100% for manufacturing machinery
X X
X X
X
3
Offer the current Homeowners' Tax Credit Program, which benefits low- to moderate-income homeowners
X X X X X
4
Assume Fees and Charges on discretionary programs will be adjusted in accordance with achieving cost recovery goals as listed in the adopted Financial Management Policies
X X X X X
5
Increase annual Employee Compensation by a 1.25% cost of living adjustment consistent with the current union contract
X X X X
X
6
Budget Mayor and Council Compensation equal to Compensation Commission recommendation
X
X
X
X X
7
Maintain current Employee Benefits (includes allowances, healthcare, pension, retiree health)
X X
X X X
8
Transfer sufficient funding to the City's Capital Projects Fund to support the current 5-year CIP
X X X
X X
9
Issue new general debt to support unfunded/underfunded CIP projects
X
X
X X X
10
Maintain the following program
and service areas:
Strongly Disagree
Disagree
No
Opinion
Agree
Strongly Agree
a
Arts and Special Events
X X X
X
X
b
City Communication and Outreach
X
X
X
X X
c
City Forest and Tree Services
X
X X X
X
d
Mayor and Council Support Services
X
X X
X
X
e
City Parks and Open Space
X X
X
X
X
f
Employee Relations, Benefit Admin. & Development
X X X X
X
g
Engineering, Design and Construction Services
X X
X X
X
h
Financial Management and Budgeting Services
X X
X X
X
i
Info. Technology Systems and Telephone Services
X X
X
X
X
j
Inspection Services
X X X
X X
k
Public and Community Rec. Facilities
X
X
X X X
l
Outside Agency Grants
X
X
X X
m
Planning and Zoning Services
X
X
X
X X
n
Police Services
X X
X
X X
o
Recreation Programs
X X
X
X X
p
Roads, Sidewalks and Traffic Services
X X
X X
X
q
Senior Citizen Services
X
X X X
X
r
Social Services
X
X
X X X
s
Neighborhood Services
X X
X
X X
t
Environmental Management
X X
X X X
In addition to these survey items, there were several comments and additional areas added by the Mayor and Councilmembers. For complete individual survey results, please see Attachment A.

Follow-up from Previous Mayor and Council Meetings

Included as Attachment B are follow-up items to requests that were made at the Mayor and Council meeting on October 15, 2012. Below is a list of the items along with the attachment page numbers.

Follow-up Item
Page
1
Add 2011 and 2012 to TABLE 9 of the City Employee Compensation item (note: 2012 will not be available until after the calendar year is complete)
B-1
2
Graph history of effective versus actual rate of return for the Defined Benefit Plan
B-2
3
Information on the Definition of "Fund Balance" - Including the Changes According to GASB 54
B-3
4
Provide a history of all funds personnel costs as a percent of total expenditures
B-4
5
Provide a history of all funds benefit costs as a percent of total personnel expenditures
B-4
6
Provide an example of total employee compensation for a hypothetical employee by employee class for each year from FY 2006 through FY 2013
B-5
7
Provide examples of actual retirees by employee class and their defined retirement benefit
B-13

In addition to this list, the Mayor and Council also requested that staff show the impact of supplemental employee contributions on the future of the Defined Benefit funded ratio. This information is not currently available but, if the Mayor and Council are still interested in receiving it, the City will speak to the actuary about the timing and cost of this analysis. Staff recommends that the Mayor and Council provide direction on this item.

Mayor and Council History
This is the first official FY 2014 budget preview. In preparation for the FY 2014 budget season, the Mayor and Council directed staff to prepare several finance worksessions to begin in October 2012. These worksessions are intended to provide information for the development of the FY 2014 budget.

Meeting Date
Agenda Item
October 15, 2012 State of the FY 2014 General Fund Budget
City Employee Compensation
November 5, 2012 Capital Improvements Program (CIP)
November 19, 2012 Biennial Budgeting
December 3, 2012 Reducing the City Budget, What it Means to Cut Costs
December 17, 2012 City Contracting
January 7, 2013 Costs and Revenues Associated with New Development

Fiscal Impact
This presentation contains information that will impact the revenues and expenditures of the FY 2014 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

Meeting Date
Agenda Item
February 11, 2013 Mayor and Council Budget Preview (includes assessment information)
March 18, 2013 Presentation of Proposed Budget and Introduction of Ordinances
and Resolutions
April 1, 8, 15, 29, 2013
May 6, 2013
3 Budget Public Hearings and 4 Mayor and Council Budget
Worksessions
May 20, 2013 Budget Adoption

Attachments
Attachment A - Individual Budget Surveys
AttachA_BudgetSurveys.pdfAttachA_BudgetSurveys.pdf

Attachment B - Follow-up Items
AttachB_Followup.pdfAttachB_Followup.pdf

Department Head:



Gavin Cohen, Chief Financial Officer
Approved on: 12/04/2012

City Manager:

Barbara B. Matthews, City Manager
Approved on: 12/05/2012