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02. City Manager Budget MessageCITYOFispe CI*ty of Kal* 11 - .. +r ., OFFICE OF THE CITY MANAGER . 201 First Avenue East .411O 11 TAN A Kalispell, MT 59903 May 15, 2013 Honorable Mayor Tammi Fisher Members of the Kalispell city council Po Box 1997 Kalispell, MT 59903 Ladies and Gentlemen, It is my pleasure to submit for your consideration the Fiscal Year 2014 proposed budget for all municipal operations. This letter is intended to serve as the budget message for that proposal and outlines the nature of the $46,822,930 budget plan for the coming year. This message is not intended to identify all the specifics of the budget document, but rather provide an overview of the revenues and expenditures, fund levels, unique attributes impacting the budget, and significant budget related activities of the organization. The budget document is a substantial policy and managerial tool that highlights the interaction between the staff and the governing body. Through the budget document, service levels are established, policy directions are initiated, and fiscal positioning is achieved. The budget is an effort in cooperation between the entities of the city and the public as a whole. The FY2014 budget development process continues to respond to the economic correction from past years on the local and national levels, impacting all levels of government. The economic landscape has impacted government to such an extent that it has redefined the framework of operations as municipal governments struggle to adjust to the dramatic changes in their economic environment. As with any change this significant, commentaries on this phase of history are labeling this period as the "New Normal," referencing the belief that government revenues will not rebound and the shifts and re-prioritizations that governmental bodies have undertaken will be a permanent state, rather than a temporary adjustment. Though it could be argued that we as a local government have never faced a situation where all desires of the community could be financially met, we are entering a period where justification of the needs of different cost sectors and projects will likely be required at higher levels than in previous times. Significant time has been spent on the budget preparation this year as the budget format has been changed to present a fund -based, rather than a department -based, budget. Though each format has its respective benefits, it is my belief that a fund -based budget presents a document that is easier to read and easier to follow revenues and expenditures in each fund. Additional time has been spent to identify and display the appropriate cost centers for the expenditures for our activities. This is most evident in expenditures related to some of the special revenue funds, and the allocation of costs to Central Garage, which has been shifted from a general fund department to an internal service fund. I am pleased to present the FY2014 proposed budget and am comfortable in the allocation of funds, the expected service levels resulting from this funding distribution, and the continuing preparation of community infrastructure into the future. ACCOMPLISHMENTS IN 2012 AND 2013 As the FY2014 budget is proposed, it is appropriate to return to recent municipal accomplishments. While the listed items are only a sample of the improvements and respective municipal accomplishments, they do represent a concerted effort across departments for the improvement of services being offered by the city of Kalispell. ➢ Implementation of a training simulator for law enforcement ➢ Adoption of the Core Area Plan and development of policies toward financing programs ➢ Acquisition of the permanent lease from DNRC for the Kidsports land ➢ Implementation of asset management software ➢ continued renovation of the downtown decorative lights ➢ Improved efficiencies of the solid waste operation through expansion into adjacent areas ➢ Preparation for the construction of the pedestrian/bike trail along Highway 03 (expected to be complete by the adoption of this budget) ➢ Utility coordination projects with the State of Montana for future phases of the Bypass construction ➢ various infrastructure improvements in the Water, Sewer, and Storm -water departments ➢ Implementation of general fund reserve policy ➢ Partnering with local agencies on the efforts for implementation of the core Area Plan in conjunction with the development of the rail park PROPOSED FY2014 BUDGET AT A GLANCE The proposed FY2014 city of Kalispell operating budget reflects a total General Fund expenditure decrease of 0.1 % from the FY2013 adopted budget. We forecasted the same increase in growth of new taxable property, though we anticipate that growth will actually be higher when numbers are released in August. We also did not adopt the inflationary component allowed to municipalities, leaving us below our statutorily available taxation cap. Furthermore, by allocating costs to the central Garage from the actual cost centers provides additional general fund and taxpayer relief. The net effect in the proposed budget for FY2014 is a balance Of $1003034. 1 would recommend splitting this balance with 50% going into the reserves and 50% being used to provide property tax relief. If this recommendation is adopted; the reserve cap would be estimated to be at 17.4% of revenues, up from the adopted budget of FY2013, where it was budgeted at 15.5%. Provided the assumptions remain constant when final property tax valuations are provided in August, the presentation of this budget provides the opportunity to add 2% to the reserves to come closer to the 20% reserve policy and still offer property tax relief. Major highlights and conditions of the proposed FY2014 budget include the following: �1 The proposed 2014 budget is based on service levels needed to accomplish the goals outlined in the budget for each department, balanced with available resources. The General Fund budget is developed with an eye toward meeting the established reserve amount of 20%. Though there is available space within the taxation formula to accelerate the amount dedicated to reserves for this upcoming year, the budget is proposed with a balance of meeting that policy and the provision of property tax relief. Property tax is the primary source of revenue for the general fund and is anticipated to increase by $130,000 through new growth in the city. This is always a difficult assumption to make as final valuations are not released until August. Using the previous year as a basis for assumption, however, we feel comfortable with this amount being applied to the revenue projections. There are two Fire Department positions and one Police Department position that were supported by approximately $150,000 in grant funds that are now becoming the responsibility of the city of Kalispell. outside of this financial component for existing positions, there are not any additional increases for personnel within this year's budget, though there have been some reallocations of existing staff time within departments. With the Ambulance fund, you will notice a general fund transfer incorporated into this year's budget and an increase in personnel in the fund itself. These positions have been allocated to this fund in the budget as that is the cost incurred for operating the EMS function. As we have Fire and EMS personnel trained to conduct both duties, we receive the benefit of cross -trained employees. However, we also incur the costs of performing these duties, which is reflected in the general fund transfer. With the expectation of increased costs for capital replacement and rising personnel costs, and the reality that we don't anticipate additional revenue, this is an area that will likely increase in respect to the general fund transfer. Discussions with the Fire and EMS department are currently ongoing as we review options related to the long-term stability of the respective operations. The budget is being presented with no new increases in assessments for various funds. However, during budget sessions, I do anticipate the need to discuss the future of several funds, including 1) Forestry, 2) Light Maintenance, 3) street Assessment, and 4) Solid waste. During these discussions, we can review the health of the respective fund, the fund balance trend, and recommendations for f utu re stability. Central Garage has been moved to an internal service fund within this year's budget. This is a pretty standard framework for this type of activity as it is supported by charges for service. Making that change, however, includes adding new line items within a lot of existing departments. For most of these departments, there will be a central Garage Service and a Fuel line item. This change has multiple advantages; 1) it directly appropriates expenses to the appropriate department, 2) it allows for an easier tracking of these expenses over time, and 3) it removes it from the general fund and the associated burden to the taxpayer of unallocated costs. These costs now get allocated to the respective department through direct billing and apportionment of the overhead cost of the garage. In addition to shifting from a fund -based budget presentation, we have also added in some components of an outcome -based presentation. This simply includes a narrative component on the introduction page for departments that attempts to outline what the purpose of the department is and what the community can expect to receive from this year's proposed budget. This narrative will likely continue to evolve as specific objectives get developed and incorporated into the departmental efforts, ➢ operational activities for the Kalispell Airport are being investigated in an effort to identify revenue sources for maintenance and operation into the future. Independent of the outcome of the election in November, there will be maintenance and operation costs associated with the airport. currently, there is very little available for a sustainable maintenance operation, one of the options is to look for a contract management scenario for the airport, as has been done in other municipalities. We anticipate this leading to significant savings within this fund and providing revenue for ongoing maintenance and operational expenses. As such, the personal expense totals are reduced and the contract services have been increased in anticipation of this potential change. ➢ community Development has been moved into the general fund with the development of this year's budget. Previously, funding for this department has been from grant and specific program related funding which has been slowly declining over time. With the nature of work being done in the office of Community Development, there is general benefit to the community as a whole, and is justified in having this become a general fund operation. The remaining funds within the previous Community Development fund will remain and are recommended to be used for matching funds, or respective studies that emerge in the realm of community Development. The State of Montana passed legislation that will increase the contribution of employers in the PERS program to contribute an additional 1 % toward the retirement contribution. Additionally, employees enrolled in the PERS retirement program are also going to be increasing their contribution by 1%. We have added the employer contribution into the retirement line items. �- Following the same action in last year's budget, I have added 2.5% increase in employee salaries for non -union employees. With the 1 % increase in retirement contribution, the net effect of the take-home pay will be 1.5%, pending passage of the proposed budget. Negotiations with two labor unions are currently underway at the time of this budget submission. Liability insurance rates from MMIA have been projected to stay the same. Moreover, we are receiving a credit from MMIA this year. The credit across all funds is approximately $85,000. This credit has been applied in the funds as a decreased expense. Health care costs from MMIA are projected to increase by 2.5%, which is good news as the initial projections were 5% or higher. Even better news is that the experience factor being applied to the city of Kalispell decreases the premium by about 2.5%. The net effect is that we are looking at health care premiums being the same cost as FY2013. iv GENERAL FUND REVENUE PROPERTY TAX Property tax is the primary revenue source within the general fund. As we do not receive final property valuations for the current year until the first week in August, we are required to forecast revenues with incomplete information. Last year's valuation saw an unexpected decrease based on the central assessment of respective utilities. We anticipate the valuation to increase in conjunction with last year's growth of taxable property. Additionally, we kept the value of the growth of new taxable property at the same level as last year, though we anticipate that we had a higher volume of growth. The total value of new construction has increased in each of the last two years and we are currently trending for increased residential and commercial building in 2013. However, the timing of the construction and the timing of the property assessment creates difficulty in forecasting when the increase in taxable property will result in increased valuations. Maintaining the same growth increase from last year provides a conservative forecast for this revenue source for FY2014. General Fund Revenues by Percentage General Fund Revenue By Type FY14 Fines and Forfeitures 6% Charges for Servic-- 7% l ntercgovernm Revenues 25% Miscellaneous 7% ent Pert -nits Revenue 1% 0% r PropertyTaxes 54 GENERAL FUND EXPENDITURES Expenditures in the General Fund are budgeted at $9,692,916. This is a 9.1 % decrease from the total expenditures adopted in the FY2913 budget. Expenditure categories are broken down in the chart below. Breakdo►nrn of General Fund Expenditures by Percentage General Fund Expenditures by Type FY1 4 Services and Supplies 21% i i rf • „ �i_ ' �i r'_il�il: Capital 1% Debt Service 1% Personal Services 77% Vi SPENDING LEVELS BY DEPARTMENT The following table provides a comparison of general fund departmental expenditures from FY2013 to FY2014. The table is included to demonstrate the funding levels for respective activity in this year's recommended budget as compared to the previous year. Changes may be indicative of large capital items, significant additions to department responsibilities, or other changes of operation and maintenance costs. This year's comparison for some of the departments is measuring different cost components as we have added positions that were previously funded by grants and have shifted central garage costs into each department. Table 1. Comparison Increase from Prior Year- General Fund Departments FY2013 FY2014 Adopted Proposed General Fund Departments Budget Budget % change City Manager $172,700 $177,397 2.72% Human Resources $148,078 $151,429 2.26% Mayor/Council $110,378 $112,648 2.06% City Clerk $103,677 $105,701 1.95% Finance $251,309 $255,683 1.58% Attorney $418,.237 $425,354 1.70% Municipal Court $344,661 $333,361 -3.28% Public Works $29,058 $36,819 26.71% City Hall $259,408 $259,645 0.09% Police $3,842,845 $41062,628 5.72 ro Fire $2,304,295 $2,511,348 8.99/a Planning Department $332,227 $34116-53 2.84% Community Development n/a $84,578 1 n/a V11 SPECIAL REVENUE AND ENTERPRISE FUND REVENUES, EXPENDITURES, AND BALANCES Below is a table of the Special Revenue and Enterprise Funds, with their related revenues, expenditures, and fund balances. Those funds that are bolded are addressed in the narrative following the table. Table 2. Revenues, Expenditures, and Fund Balances in Special Revenue and Enterprise Funds Fund Revenues Expenditures Balance SPECIAL REVENUE FUNDS Parks $1,A281400 $1,559,254 $223,467 Forestry $211,200 $239?421 $4,354 Ambulance $93 7,522 $956f 117 $0 Building Department $288,700 $379,019 $218,92_5 Light Maintenance $336,400 $485,; 191 $63,452 Gas Tax $362,000 $745,500 $44,000 Street Maintenance $1,954,700 $2,495,053 $626,145 ENTERPRISE FUNDS Airport operations $79,222 $80,172 $99 839 Water (operating) $31165,000 $3,876,251 $1,F5701243 Sewer (operating) $4,200,000 $4,0061053 $585,t679 Storm Sewer (operating) $842,000 $lj565,390 $445,297 Solid Waste $1,094,500 $1419,,199 $705,090 FORESTRY The Forestry Special Revenue Fund was established in 2001 with the following objectives: 1) hazard reduction program, 2) replacement for removals or vacant sites, 3) pruning cycles for inventoried trees, 4) public education and site assistance, and 5) maintain a departmental tree viii maintenance unit. The last four years of the program have focused on addressing Dutch Elm Disease within the urban forest. of the 389 inventoried trees, 187 have been removed, leaving 202. with this effort, the remaining objectives have been considered less of a priority, though the department is trying to focus year-round efforts on the urban forest. Personnel costs are proposed slightly lower than FY2013's budget, though expenses in the appropriate allotment in fuel and central garage costs do impact this fund. The fund balance in FY2014 is projected at $4,354.00, which will impact the development of the FY2015 budget. The last increase in the assessment was in 2010, when the assessment was increased from 0.00135 per square footage per lot, to 0.00171. While there is not an increase in the proposed budget for this Fund, it will be one of the areas we would like to address with council during budget discussions. AMBULANCE The ambulance is considered a special revenue fund as it generates a significant portion of its revenue from sources that are committed to the fund's operation. This revenue comes from the billing for services, similar to an enterprise fund. However, as collection of full amount of billing is impacted by Medicare, etc., this fund is essentially supported by a general fund subsidy. This budget presents that subsidy in correlation to the personnel required to run the ambulance operation. The subsidy for FY2014 is a little over $250,000. It is expected that this transfer will increase in the future as capital replacement is needed and personnel costs increase. The unique nature of the operation presents the challenge of how to philosophically approach the funding of this department. LIGHT MAINTENANCE The light maintenance fund is one of the funds we are asking council to review, though we are not recommending an increase with the proposed budget as we want to keep the two items separated. The last increase in this fund was in 2003. This fund is impacted by the increased cost of electricity that has occurred over time through rate increases and the increased amount of lights added to the system. Additionally, more lights have increased the amount of labor required. We currently have 585 street lights that we own and maintain. To more accurately reflect the time on the system, an additional .5 FTE was allocated to this fund from Traffic, Signs, and Signals. We anticipate the fund balance being negative at the end of FY2015. STREET MAINTENANCE The Street Maintenance fund is established for the construction and maintenance of surface transportation. Primary activities are focused on maintaining the current transportation system through overlays and chip sealing operations. The placement of signs, signals, and pavement markings is also conducted through the revenues received in this fund. Projections of the fund at current service levels will likely lead to an imbalance in FY2017. The last increase in the street assessment occurred in 2008. As with Forestry and Light Maintenance, there is not a proposed increase in the budget for this fund, though it is an area we would like to discuss during the budget review process. 1x AIRPORT OPERATIONS As identified in the "highlights" portion of this document, the airport operation is currently being considered as a possible area where savings can be achieved. These savings, should they be realized, would remain in the fund for ongoing maintenance and operations of the facility. As the current budget demonstrates, right now there is very little funding for these functions. To engage the possibility of this change in operations, we would likely be issuing a request for qualifications/proposals for airport management services. Should a proposal be deemed beneficial, we would look to engage this type of contract service. The current budget has reduced salary expense and increased contract expense, though they are essentially placeholders as we may not receive a beneficial proposal, or if we do, the timing of the change is difficult to accurately forecast. SOLID WASTE The Solid Waste Business Plan was presented to Council at a work session in April. during that presentation, the subject of discounted rates for multiple disposals on commercial accounts was discussed. Direction was provided to review this discount structure as we are unsure why multiple disposals received this discount. This subject is anticipated to come to Council at some point during the budget review process. PERSONNEL COMPENSATION AND BENEFITS As was stated earlier, no new full-time positions are being recommended in this proposed budget. As the City continues to grow and amenities are being added, manpower is an area that will need to be examined on an annual basis to ensure we are adequately staffed and are maximizing the resources that we have. Fluctuations in the CPI and economy make it difficult to define the intersection for a recommended base salary adjustment for employees not covered by a collective bargaining agreement, which typically have matrixes and negotiated compensation for the respective positions adopted at a previous time by Council. In general, looking at the Consumer Price Index, we see an increase of 2.1 % from December of 2011, to December of 2012. Last year we implemented a 2.5% increase when the CPI was 3.2% from December of 2010, to December of 2011. Factors in the local economy impact the ability to maintain a constant parallel with the CPI, though it does serve as a baseline for review. The 2.5% increase in FY2013 followed several years of wage freezes for this group of employees, a condition which created compression issues in comparison to bargaining unit employees. This year I am recommending we follow a similar path and make a base salary adjustment of 2.5% for employees not covered by bargaining unit agreements. Though this proposal provides for a 2.5% increase, the State of Montana has passed legislation that will impact employee retirement costs by increasing their contribution by 1 %. Thus a 2.5% increase will have a net effect of 1.5% take home for the employees. As can be seen in the table below, the salary increases vary across respective labor groups. This is attributed to different components with the labor contracts and timing of agreements, etc. For example, the AFSCME contract has a matrix related to increases for enhanced value. I feel this has been a positive addition to the contract and have been investigating the use of a similar matrix for non -bargaining unit employees. This type of system provides some similarity across 04 labor units and adds a mechanism for employees to advance through their respective range based upon value they add to the organization. Salary Increase for Respective Labor Groups Police Contract Fire Contract AFSCME contract Nonunion FY2013 FY2014 FY2013 FY2014 FY2013 FY2014 FY2013 FY2014 Overall % 3.05% 1.30% 3.50% n/a 2.55% 2.65% 2.50% 2.50% Increase (Base (projected- (proposed) Adjustment, includes Longevity, Merit, increase in etc.) cert pay) In addition to the recommendation to review a personnel matrix based on increased value, I am also recommending a review of the classification matrix that will classify employees based on their duties and responsibilities. The current matrix provides for a simplified structure of 6 classifications, often forcing the combining of potentially different positions into the same classification. It is my intent to provide a new classification matrix during FY2014 along with a merit -based program that increases the value of employees to the organization. Health care increases are projected to remain flat for FY2014. This is positive news as increases nearing double digits are not uncommon. The actual increase from MMIA is 2.5% across their system. However, our claims results have provided for a deduction from that increase which creates the flat premiums. Health care is one of the areas we will monitor as there is some uncertainty in how we will be impacted by the national legislation. CONCLUSION The proposed budget was developed and is recommended as an appropriate use of the resources available to the city. The FY2014 budget has been prepared with the goal of simplifying the document itself in order to best represent the revenue and expenditure items to their respective funds and present those in an outcome based operation. The focus of the budget during this year's preparation and implementation has been on maximizing the resources we currently have. Building a culture and environment with our current human resources is a cost --effective way to approach the future, as building from within can often have large benefits over simply adding additional resources. With the rise and fail of the economic indicators over the past years, the FY2014 budget has been developed in a fashion that will prepare the city for potential revenue uncertainties. That being said, it is anticipated that the economy will trend upward with slow but steady growth. However, monitoring of the economic trends will continue throughout the year as the adopted budget is implemented. Xi In conclusion, I would like to personally thank Rick wills, Finance Director for the work he has completed in the development of this year's budget. Not only has the format changed, but modification of funds to allocate according to cost centers has required a substantial amount of time, all of which should result in a better document and a better financial allocation of our resources. Additionally, I would like to acknowledge the efforts of the respective departments and the staff throughout the City. Programs are being monitored and adjusted in an effort: to reach the objectives of the organization while operating in a revenue restricted environment. The employees of the City of Kalispell have done an exceptional job in striving for an improved community through their collective efforts. With these acknowledgements, I present the proposed FY2014 budget. Respectfully, Douglas R. Russell City Manager ■ . X11