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HomeMy WebLinkAboutMinutes - Minutes - City Council - Meeting Date: 9/16/2003 * PLEASE NOTE: Since the Glendale City Council does not take formal action at the Workshops, Workshop minutes are not approved by the City Council. MINUTES CITY OF GLENDALE CITY COUNCIL WORKSHOP September 16, 2003 1:30 p.m. PRESENT: Mayor Elaine M. Scruggs, Vice Mayor Thomas R. Eggleston, and Councilmembers Joyce V. Clark, Steven E. Frate, David M. Goulet, H. Phillip Lieberman, and Manuel D. Martinez ALSO PRESENT: Ed Beasley, City Manager; Pam Kavanaugh, Assistant City Manager; Jon Paladini, Deputy City Attorney; and Pamela Hanna, City Clerk 1. FY02-03 YEAR END REPORT: GENERAL FUND RECAP CITY STAFF PRESENTING THIS ITEM: Ms. Sherry Schurhammer, Budget Director; Art Lynch, Chief Financial Officer; and Tim Ernster, Deputy City Manager. This is a request for the City Council to review the Fiscal Year (FY) 2002-03 year-end report on general fund expenditures and revenues. City Council was informed at the July 15, 2003, workshop that the FY02-03 year-end report would be brought forward in September 2003, with quarterly reports on the current fiscal year, FY03-04, scheduled for mid-November 2003, mid-February 2004, and mid-May 2004. As part of this report on FY02-03, there will be a brief presentation on changes to the capital improvement program (CIP) calendar to accommodate City Council's concerns regarding the CIP process. Following this presentation, Art Lynch, the City's Chief Financial Officer, will present the city's debt management plan. The FY02-03 numbers presented today are not the final, audited numbers, but they do represent the information presented to the auditors for review. The budget process has been revamped to address City Council's concerns about budget information being presented in a piecemeal manner. The purpose of the revamped budget process is to provide City Council with a holistic picture of the City's budget. Today's presentation on the FY02-03 year-end report for the General Fund and the City's debt management plan are part of the revamped budget process. The FY02-03 budget and actuals for the General Fund operating and capital expenditures are as follows: 1 02-03 Budget 02-03 Actuals GF Operating Expenses $113.8M $104.3M GF Capital Expenses $ 11.5M $ 8.4M Total GF Expenses $125.3M $112.7M As the preceding list shows, the FY02-03 actual general fund expenditures were $112.7 million, or$12.6 million less than budget. Specifically, these savings were the result of: • $3.3 million in vacancy savings; • $4.3 million in non-personnel savings; • $3.0 million in CIP pay-as-you-go savings; • $1.7 million in PC and vehicle replacement fund savings that represent the deferral of payments into the replacement funds for 7 months; and • $325,000 in carryover savings. These savings were the result of one-time measures like delayed hiring for vacant positions, uniformed patrol and sworn firefighter vacancies were not subject to this hiring delay, reduced service levels in several areas, reduced spending on capital projects, deferred payments for PC and vehicle replacement funds, and the elimination of carryover savings from FY01-02. The FY02-03 budget and actuals for general fund revenue are as follows: 02-03 Budget 02-03 Actuals Ongoing GF Revenue $123.1M $122.4M One-time GF Revenue $ 13.5M $ 25.1M Total GF Revenue $136.6M $147.5M The distinction between ongoing and one-time revenue sources is important because on-going sources pay for the city's on-going, day-to-day operations. As the preceding list shows, ongoing revenue receipts came in under budget by almost $700,000, whereas one-time revenue receipts came in above budget. Specifically, one-time general fund revenue in FY02-03 equals $25.1 million. This amount includes the $14.5 million in lease proceeds for Northern Crossing, $7.5 million in lease proceeds for the Hickman land purchase, $500,000 in lease proceeds for the purchase of a fire truck and copier, and $2.6 million from the sale of parcels at the Northern Crossing development. The debt service payments for these leases do not appear in FY02-03 because the leases were not finalized until the end of that fiscal year. The debt service payments will show up as expenditures in FY03-04 and beyond. The primary sources of on-going revenue for the city's on-going general fund operations are city sales taxes and state-shared revenue. It is very important to take a closer look at these revenue sources because on-going sources pay for the city's day-to-day operations. State-shared revenue is comprised of state income taxes, state sales taxes, and vehicle in-lieu taxes. These on-going sources of revenue make up 67% of all general fund budgeted revenue ($92.1 million out of $136.6 million), and 63% of all general fund revenue actuals ($92.7 million out of$147.5 million). The FY02-03 budget and actuals for city sales tax receipts are as follows: 2 02-03 Budget 02-03 Actuals City sales tax revenue $ 42.9M $ 43.7M The city sales tax receipts include the additional revenue generated as a result of the telecommunications rate adjustment that became effective March 1, 2003. An additional $852,000 in revenue was generated as a result of this rate adjustment. The FY02-03 budget and actuals for state-shared revenue are as follows: 02-03 Budget 02-03 Actuals State income tax revenue $ 24.4M $ 23.3M State sales tax revenue $ 17.5M $ 17.1M Vehicle in-lieu revenue $ 7.3M $ 8.6M Total state-shared revenue $ 49.2M $ 49.0M As the preceding list shows, the state vehicle in-lieu tax revenue came in $13 million, or almost 18%, higher than anticipated. This revenue comes from the licensing of motor vehicles. The increased receipts reflect the generous incentives — such as 0% financing and $0 down payment — that carmakers have implemented to encourage new-car purchases In a comparison to the city sales tax receipts and total state-shared revenue receipts for the past three fiscal years (from FY00-01 through FY02-03), there has been modest growth in the former and more robust growth in the latter. The following list illustrates this fact: 00-01 01-02 02-03 Percent Change Actuals Actuals Actuals 00-01 to 02-03 City sales tax revenue $ 42.0M $ 41.4M $ 43.7M 4.0% State-shared revenue $ 44.9M $ 46.9M $ 49.0M 9.1% Total $ 86.9M $ 88.3M $ 92.7M 6.7% City sales tax receipts increased from $42 million in FY00-01, to $43.7 million in FY02- 03, a rise of $1.7 million or 4% over a two-year period. This increase reflects modest growth in this important on-going source of revenue. Total state-shared revenue receipts have increased from $44.9 million in FY00-01, to $49 million in FY02-03, a rise of 9.1%, or$4.1 million. The main reason for the increase in state-shared revenue is the jump in vehicle in-lieu receipts, from $6.9 million in 00-01 to $8.6 million in 02-03, a 25% increase. As noted previously, this increase probably is the result of carmakers offering unusually attractive incentives to encourage new car purchases, including 0% financing and $0 down payment, as well as deferred payments for several months. In addition, state-shared income tax receipts have increased $2.1 million, or 10%, since 3 00-01, from $21.2 million to $23.3 million. Despite the downturn in the economy, Arizona was one of the few states that experienced a net increase in jobs, with an additional 9,700 jobs added since March 2001 according to a Wall Street Journal report. Also, the city's and state's population continues to increase. State-shared sales tax receipts have increased only $300,000, or only 1.8%, since 00- 01 (from $16.8 million to $17.1 million). While this component experienced the smallest rate of growth over the three-year period, it is the second largest of the three components comprising state-shared revenue. Councilmember Clark asked if the Primary Property Tax rate increased over the previous year, pointing out individual tax bills continue to increase. Ms. Schurhammer offered to research last year's actuals, noting, however the property tax is an accumulation of levies from a variety of different districts. Councilmember Clark clarified her question by explaining that the assessor is valuing properties higher. Ms. Schurhammer reported the primary property tax rate charged by the city decreased to accommodate the increase in values. Mayor Scruggs explained the city remained in compliance with the Truth in Taxation Law by moving one penny from the primary tax rate to the secondary tax rate, with the total rate remaining unchanged. Councilmember Lieberman noted his property tax also increased, asking why the tax revenue to the city did not increase. He pointed out the city's lease proceeds were projected to be $485,000, but actually totaled $22.5 million. He asked for an explanation of the disparity. Ms. Schurhammer explained that lease proceeds are one-time revenues and the actuals reflect the Northern Crossing financing of $14.5 million, the Hickman financing of $7.5 million and approximately $500,000 in financing for the purchase of a fire truck. She stated those items were not anticipated when the revenue budget was created 18 months ago. Councilman Lieberman asked whether lease proceeds revenue were an on-going revenue stream like sales tax receipts. Ms. Schurhammer stated that lease proceeds were a one-time source of revenue, and that leases are considered debt because of the accompanying debt service payments that must be made to repay the lease. Councilmember Clark questioned why lease proceeds are listed as revenue when they are actually debt. Ms. Schurhammer explained that the debt service payments for these leases do not appear in FY02-03 because the leases were not finalized until the end of that fiscal year. The debt service payments will show up as expenditures in FY03-04 and beyond Mayor Scruggs asked if the lease transaction can be paid out of the Secondary Property Tax. Mr. Lynch responded no, explaining leases are paid from a variety of sources, including the General Fund. The Mayor then restated that the debt service payments for the leases must be paid out of ongoing General Fund revenue. Vice Mayor Eggleston stated that the difference between the budgeted city sales tax 4 number and the actual amount collected almost equals the additional revenue generated by the telecomm rate increase. Ms. Schurhammer agreed but stated that the difference between the budget number and the actual amount collected equaling about $800,000 was a fluke. Mayor Scruggs stated that once the additional revenue attributable to the telecomm rate adjustment, $852,000, deducted from the city sales tax revenue, the resulting number is actually a bit under budget even though several large, new retail centers opened in the city. She stated that this result is a reflection of the economic downturn: growth in retail stores were offset by the slow economy. Councilmember Lieberman asked about the decrease in All Other revenue, from $23.9 million budgeted, to an actual of$11.8 million. Councilmember Clark asked why the actual amount collected from the sale of assets was significantly lower than anticipated. Ms. Schurhammer explained that the All Other category included revenue like construction-related permits and fees, franchise fees from gas, electric, and cable utilities, rental income, business and liquor licenses, and revenue from the sale of assets. Ms. Schurhammer also explained that Asset Sales refers to the sale of parcels at Northern Crossings. She stated that the 2002/03 revenue budget was created over 18 months ago and, at that time, they expected to sell more parcels. She said their expectation did not accurately reflect the development plan which anticipated a four to five year buildout. The actual sales of the Northern Crossings parcels totaled $2.6 million in 2003 with more sales expected this fiscal year. This is why there is such a large variance between the budget and actuals numbers for the All Other category. Ms. Schurhammer pointed out that revenue from Development Permit Fees, another component of the All Other category, exceeded expectations with actual collections totaling $5.3 million, a full $2.1 million, or 66%, more than budgeted. Ms. Schurhammer reviewed General Fund revenue totals for the past three years, explaining the $30 million increase in total General Fund revenue since 2001 is attributable to two main factors, an increase in state shared revenue, an ongoing source of revenue, of $4.1 million, and a one time revenue increase of $25.1 million. She stated the one-time revenue increase is primarily the result of lease proceeds from financings for Northern Crossings and the Hickman property purchase. She said the other component is the sale of assets or parcels at Northern Crossing. She noted there were no General Fund capital lease proceeds or sales of assets in FY00-01 or 01-02. Ms Schurhammer discussed the General Fund ending balance by explaining that there was incoming revenue of $147.5 million, with transfers out of $9.9 million and expenditures of $112.7 million, resulting in an ending fund balance of $31.6 million. 5 She clarified that debt service payments on the Hickman, Northern Crossing and fire truck leases do not appear in the "expenses" line item for FY02-03, explaining the full impact of the debt service payments will appear this fiscal year and next fiscal year. She reiterated that the ending fund balance includes $25.1 million in one-time revenue sources. Councilmember Clark asked what would be the fund balance if the one-time revenue lease proceeds of $22.5 million were excluded; Ms. Schurhammer responded with $9.1 million. Councilmember Lieberman stated the city is actually $2.4 million ahead of last year if you compared the beginning fund balance of $6.7 million with the $9.1 million balance obtained by removing the lease proceeds revenue. Ms. Schurhammer agreed. Mayor Scruggs stated no salary increases were given to city employees and those who are in the State Retirement System realized a three percent reduction in pay. She expressed concern that employees will see the $31.6 million ending fund balance and question why they did not receive pay increases. She explained the $147.5 million in revenue included one-time money that cannot be replicated. In response to Councilmember Lieberman's comments about transfers, Ms. Schurhammer clarified that the transfers reflect a transfer of funds from the General Fund to other funds to support other operations such as the Community Housing and Revitalization Department. Mayor Scruggs pointed out that the original estimated ending fund balance, according the March 2003 memo provided to City Council, totaled $6.2 million. She asked where the remaining $25.4 million went, resulting in an ending balance of $31.6 million shown on the slide. Ms. Schurhammer said there was some uncertainty about lease financing at the time the original estimated ending balance was prepared. Mayor Scruggs expressed frustration that the Council built the budget on erroneous numbers. Mr. Lynch stated the original budget was prepared in November 2002, during the economic downturn. He explained very conservative assumptions were used which reflected considerably less than the city was actually able to do. He said they are now presenting the actual operating results. He clarified the $14.5 million in lease activity is a transaction wherein the city reimbursed itself for having purchased Northern Crossing. Councilmember Clark asked if any proceeds from the sale of parcels to date have been applied to the lease debt. Mr. Lynch stated the proceeds are reserved to pay off the debt. He clarified for Councilmember Clark that the city still has a $14.5 million debt, even though the General Fund was reimbursed the $14.5 million used to purchase Northern Crossing. He said, however, revenue from the sale of parcels is expected to pay off the debt. Councilmember Lieberman asked why the sale of assets at Northern Crossings did not 6 reduce the amount of the debt. Mr. Lynch explained the proceeds are used to pay the lease payments as they come in. He said any money received in excess of the amount of the lease payment will be set aside and used to accelerate repayment of the debt. He explained the $14.5 million reimbursed to the General Fund was shown as revenue because it was shown as an expenditure in the prior year (FY01-02) when Northern Crossing was purchased. Mayor Scruggs expressed her opinion that the final report should include a line showing an undesignated, unreserved balance of $6.5 million. Mr. Lynch explained, however, that the $14.5 million reimbursed to the General Fund is not restricted. Mayor Scruggs asked why the beginning balance was not increased to include the $14.5 million when Council originally considered the FY03/04 budget last spring. Mr. Lynch stated the beginning balance of 31.6 million anticipated the reimbursement. He said the actual ending balance, minus all one-time revenue, totals approximately $122.4 million. He stated actual costs ended up being around $112 million, resulting in a positive General Fund balance. Councilmember Clark asked why the $14.5 million reimbursed to the General Fund is considered revenue when the lease proceeds still need to be repaid. Mr. Lynch explained the city reimbursed itself for a cash payment it made out of the General Fund, and payment of the debt service is expected by applying the revenue received from the sale of parcels at Northern Crossing. Mr. Lynch clarified for Vice Mayor Eggleston the ending fund balance includes total available resources. Mr. Ernster presented additional information. Mr. Ernster discussed the Capital Improvement Plan development process. He explained that, based on Council's suggestions and consultant and staff surveys, the process was improved to focus on the quality and accuracy of information presented to Council. He stated a CIP Finance Group was created and charged with ensuring all financial information is accurate and determining whether funding is available for projects that will be presented to Council, as well as reviewing unfunded projects and identifying potential sources of funding. He said they also formed an Operations and Maintenance Group whose purpose is to more accurately estimate the operating impacts of capital projects on the Operating budget. He explained the Capital Improvement Process is a year-round process, beginning in August with information meetings with city staff. Councilmember Clark asked if the Project Request Submission Deadline of September 12 refers to new projects to be added to the CIP or changes to projects already included in the CIP. Mr. Ernster explained submissions include both potential changes to existing projects and new projects. Mr. Ernster explained that during October to December, the Financing and O&M Groups review project requests and ensure all information is accurate. He said the information compiled during that review process is then taken to the Leadership Team 7 for review. He noted, during this year's process, they will come to Council in December or January for a preliminary review of the CIP, allowing Council an opportunity to review the preliminary information and provide direction to staff with regard to certain projects or issues. Mr. Ernster stated departments are asked to submit their carryover estimates in January and again in April. He stated a draft CIP is forwarded to the Planning and Zoning Commission for review in March and the recommended CIP is brought to Council in April. He said a tentative CIP Report is completed in May and the final budget is adopted in June. Councilmember Lieberman suggested future presentations include not only projected numbers, but what the numbers will be if anticipated revenues are not received. Mr. Ernster reiterated the Finance and O&M Groups were created for the purpose of improving the quality of information provided to Council. Councilmember Clark thanked staff for listening to the comments Council made during last year's budget process. She said, while conservative numbers are necessary, Council also needs to know the real numbers. 2. DEBT MANAGEMENT UPDATE CITY STAFF PRESENTING THIS ITEM: Mr. Art Lynch, Chief Financial Officer and Mr. Ray Shuey, Finance Controller. This is a request for City Council to review the city's comprehensive Debt Management Plan. The Debt Management Plan provides information needed for credit assessments. The plan helps guide the City of Glendale in its debt administration practices, and provides support in obtaining real dollar resources to accomplish the goals identified in the city's Capital Improvement Program (CIP). The city's long-term financial planning process identifies projects that can be completed once the bond and other funding sources are obtained. The plan emphasizes utilizing bond capacity only in situations beneficial to Glendale citizens and the city. The plan includes an analysis of opportunities for various types of financing to be used. Debt instruments used thus far by the City of Glendale have been limited to fixed rate, serial bonds with conservative financial structures. Staff is continually looking at areas of opportunity for the city to potentially lower its net borrowing costs as a part of this plan. The plan is a tool that enables the city to keep stronger bond ratings by providing pertinent financial information that keeps rating agencies current. It provides valuable information on topics like debt capacity analysis, debt management policies, and 10- year trend information. The plan details overall debt schedules and provides complete public information on overall debt operations. Preparation of the Debt Management Plan reflects well on Glendale's financial management. The updated plan demonstrates the positive outcomes from past sound, conservative financial policies set forth by officials and carried out in day-to-day management of the city. 8 Parts of the debt plan are utilized in the CIP process, rating agency update process, and for day-to-day debt management issues faced by the city. It is customary for staff to distribute the debt plan to interested parties after bringing it to City Council for review. Finance Department staff sends copies to banks, rating services and other levels of government. The cost of preparing the debt plan is included in the total costs of selling the bonds. Mr. Lynch assured the Council the city can safely manage the city's current debt obligations and that the city follows best practice standards for debt management. In response to Councilmember Clark's question, Mr. Lynch explained the plan includes schedules for individual debts as well as consolidated schedules that show an overall picture for an entire fund. Mr. Lynch reviewed a chart depicting annual debt since 1991, noting the city has consistently maintained its annual debt between $200 and $250 million. He said, however, in 2003 the city's debt increased to approximately $431 million as a result of the arena financing. He said the city's outstanding debt, minus the arena financing, again falls within the $200 to $250 million range. He explained the city's outstanding debt consists of ongoing financing of basic needs and one-time financing. Mr. Lynch reviewed a chart depicting debt service requirements to maturity, excluding lease financings. Councilmember Clark asked why lease financings are excluded. Mr. Lynch explained they have a consolidated picture of all lease financings and a consolidated picture of all debt categories. He assured Councilmember Clark that the Comprehensive Debt Management Plan will include all obligations. Councilmember Clark asked how the chart would change if lease financings were included. Mr. Lynch stated the totals would be slightly higher in earlier years. Mr. Lynch confirmed for Vice Mayor Eggleston that the plan will show which debts have associated revenue streams. Councilmember Clark pointed out the city's outstanding debt has almost doubled over the past two years, with the largest increases being in General Obligation, Water Revenue and MPC. Mr. Lynch agreed. He explained, in 2003, ongoing basic need financings accounted for $244 million, while the remaining debt relates to the arena financing. Mr. Lynch stated the city has used lease financing in excess of 18 years, noting all leases have been paid off as scheduled. He explained leases allow the city to own up- to-date equipment and smooth out its capital acquisition costs over time. 9 Vice Mayor Eggleston asked how lease debt differs from bonding and why it does not impact the city's 6 percent capacity. Mr. Lynch explained leases are primarily designed for shorter term uses, while bonds, once sold, guarantee repayment to bond holders. Councilmember Clark asked if there is any downside to leasing. Mr. Lynch explained leasing, as a tool, does not present a lot of downsides. He said, depending on the market and the length of the lease, leasing could result in a slightly higher interest rate. Mr. Lynch displayed a list of outstanding notes and leases, noting the majority of the leases disappear within the next five years. Councilmember Clark pointed out the notes with longer life spans are considerably larger than the leases that will end within the next five years. Mr. Lynch reviewed the payment schedule, stating all lease obligations disappear by 2015. He said the city intends to sell the Hickman property once development occurs in the area and, by structuring the lease with a large payment in the future, the city was able to cut the cost of holding the property. He pointed out the majority of the outstanding obligations are lease payments funded by rentals and the sale of parcels. Vice Mayor Eggleston expressed concern that the city will be responsible for a very large payment in 2012 if the Hickman property is not sold. Mr. Lynch acknowledged there is some risk, stating, however, that type of financing is commonly used when the intent is to resell the property. Mayor Scruggs asked if revenue that comes in from the rental or sale of parcels on which the city has a lease is considered revenue since the funds are already designated. With regard to the Northern Crossing development, Mr. Lynch noted the city has already secured adequate revenue to cover the first two years of lease payments. He said any excess monies collected once a lease is paid off goes directly into the General Fund. Mr. Lynch confirmed for Vice Mayor Eggleston that revenue generated by the lease properties is designated to repayment of the lease. Councilmember Clark expressed concern that the revenue is being placed in the General Fund and considered new money rather than specifically earmarked for lease repayment. Mr. Lynch explained the revenue meets the accounting definition of revenue and the lease payments meet the accounting criteria for an expenditure. He said, therefore, the expense and revenue items offset each other. Councilmember Martinez asked why the revenue collected on a particular property is not placed into a separate account designated for repayment of the lease. Mr. Lynch stated the expenditure is in the General Fund, therefore, the revenue also goes into the General Fund. He confirmed for Councilmember Martinez that they are able to track the status of each lease account separately. 10 Mr. Lynch reviewed the revenue and debt service structure for the Coyotes Arena. He pointed out the majority of revenues will be generated by parking and sales taxes. Mr. Lynch explained that, because of the significance of water and sewer projects, the bonds are structured to be repaid at an accelerated rate, allowing the city to add new projects. He also reviewed debt service requirements for Street and Highway User Bonds and Assessment District bonds. In response to Councilmember Clark's question, Mr. Lynch explained the bonds are structured in a manner that allows the city to repay the bonds early without upsetting the bond holders. Mr. Lynch stated future bond sales for all projects incorporated in the city's Capital Improvement Plan are estimated to total $100,910,580 in 2003/04, $78,940,000 in 2004/05, and $70,400,000 in 2005/06. Vice Mayor Eggleston asked about the Municipal Property Corporation Bonds. Mr. Lynch stated they do not have any planned MPC bond sales in the current Capital Improvement Plan. Mr. Lynch confirmed for Councilmember Lieberman that the 1988 General Obligation bonds have been fully repaid. He stated the 1988 street light bond sale under the Municipal Property Corporation has also been repaid in full. Councilmember Lieberman asked if they have authorization to sell the $226 million in bonds needed over the next three fiscal years. Mr. Lynch said they have authorization for a significant portion, noting they have also been working on a financing technique that will allow the city to obtain the immediate funds needed in basic service areas. He stated, while Glendale has not used the technique before, it has been used by other cities in Arizona. Councilmember Martinez asked about the Cardinal Stadium. Mr. Lynch stated the city is not selling bonds to finance the Cardinal Stadium. He explained a Community Facilities District was established and will utilize the revenues generated by the Cardinal facility to repay the outstanding obligations. Councilmember Clark clarified the Tourism and Sports Authority is paying for the stadium and the revenues earned will repay the obligation for infrastructure improvements. Mr. Lynch agreed. Councilmember Frate asked about the city's bond ratings. Mr. Lynch explained rating agencies look at a number of criteria when establishing a city's rating, including the city's tax base, its financial operations, its leadership, and its overall financial policies. He said Glendale's rating is currently AA2, noting there are only two higher ratings. ADJOURNMENT The meeting was adjourned at 3:40 p.m. 11