| AGENDA ITEM #: 1. DATE: 02/01/2021 CAR #: {ud_fi4} |
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CITY COUNCIL ACTION REPORT
| SUBJECT: | General Fund FY2021 and FY2022 Status, Five-Year Forecast and Citywide Financial Policies |
| STAFF PRESENTER(S): | Lauri Wingenroth, Finance Manager - Budget and Research |
SUMMARY:
Staff will present the General Fund five-year forecast as well as initial estimates for FY2021 and the FY2022 upcoming budget year. Also included will be proposed revisions to financial policies and information on known one-time General Fund upcoming demands. This information and Council discussion about budget priorities will provide the basis for bringing forward the annual adoption of Financial Policies and guide the City Manager in developing a recommended budget for FY2022.
RECOMMENDATION:
This is an informational session that serves as a step in forming the FY2022 Annual Budget and FY2022-FY2026 Capital Improvement Program.
FISCAL IMPACT:
This is a step in the process to develop the budget for FY2022.
BACKGROUND AND PREVIOUS ACTIONS:
The budget process is year-round. Each month staff prepare a financial report, with more detailed analysis on a quarterly basis, to monitor current year expense and revenue trends relative to the adopted budget and to guide development of estimates for the next year budget. Budget adjustments are made throughout the year and brought forward for Council approval as required according to Council Resolution and state law.
For FY2021, due to the unknowns of the pandemic, there have been changes to the adopted budget beyond the norm. Revenue estimates were significantly dropped and extra contingencies included in the FY2021 budget with the expectation that mid-year additions would be made if revenue performed at or better than estimated. The extra contingencies included $17.1 million that was supported by budgeted revenues but not appropriated to specific expenses and the capacity to recoup the $12.3 million in revenue reductions made to pre-pandemic estimates.
Because the economic impacts of the pandemic were not as severe in FY2020 as provided for in the estimates, on July 13, 2020, the Council approved using a portion of the extra contingencies for a number of essential budget additions, primarily related to full-time staffing needs in the development support areas.
A higher than normal ending fund balance in the General Fund for FY2020 resulted from the increased revenues. That increase becomes available as new one-time resources. On September 24, 2020, the first $3.1 million of that increase was approved to fund the streetlight replacement project avoiding the use of debt financing.
For FY2021, due to the unknowns of the pandemic, there have been changes to the adopted budget beyond the norm. Revenue estimates were significantly dropped and extra contingencies included in the FY2021 budget with the expectation that mid-year additions would be made if revenue performed at or better than estimated. The extra contingencies included $17.1 million that was supported by budgeted revenues but not appropriated to specific expenses and the capacity to recoup the $12.3 million in revenue reductions made to pre-pandemic estimates.
Because the economic impacts of the pandemic were not as severe in FY2020 as provided for in the estimates, on July 13, 2020, the Council approved using a portion of the extra contingencies for a number of essential budget additions, primarily related to full-time staffing needs in the development support areas.
A higher than normal ending fund balance in the General Fund for FY2020 resulted from the increased revenues. That increase becomes available as new one-time resources. On September 24, 2020, the first $3.1 million of that increase was approved to fund the streetlight replacement project avoiding the use of debt financing.
In addition, a Council retreat was held on November 13, 2020 where a pre-audit review of FY2020 General Fund results was shared along with early estimates for FY2021 and FY2022. Again, with revenues continuing to perform well above budgeted levels into FY2021, even above levels projected prior to the pandemic, mid-year budget additions were approved on December 5, 2020 to a level similar to a typical budget year.
Beginning in September 2020, capital project and annual operating budget administrative processes for the FY2022 budget began with departments. Department, Finance, Engineering, Information Technology, and City Manager’s Office staff have been updating expected revenues and expenditures for FY2021, preparing FY2022 base budget and revenue estimates, and developing capital project and supplemental budget requests.
STAFF ANALYSIS
This step in the budget process provides an early look at the FY2022 budget and the city’s ability to take on new projects or initiatives and helps guide the Council in understanding how decisions in the FY2022 budget may impact the future. In addition, this provides another opportunity for the Council to provide direction in terms of both revenue and expenditure policies and spending priorities.
Outlook and Assumptions
The coming years present a positive outlook for the city. Recovery from the pandemic for areas such as entertainment that were most impacted is projected to occur over the next 12 to 18 months. Though some slowdown in the rate at which the city’s revenue growth is forecasted, there is no recession predicted. Economic development efforts and population growth continue to be positive factors relative to the broader metro region. Goodyear has space to grow and a good location relative to freeways and an airport.
Goodyear retail sales growth, as in recent years, outpaced the metro area through the pandemic. Sales tax estimates are now prepared by tax category such as retail, construction, and utility. For both FY2021 and FY2022, close attention has been paid to performance before and during the pandemic in preparing these estimates. For the five-year forecast, annual growth of two to five percent is included on non-construction sales taxes which is conservative in that it is very close to or below what would be derived from inflation and population growth.
Residential home permitting in FY2020 exceeded the prior year by 21%. This includes the period of March through May all falling below the same month in the prior year, most likely related to initial pandemic caution. However, the months before and after were significantly higher. Though December 2020 is the first month in FY2021 where residential permits did not exceed the same month in the prior year, the city has already permitted 60% of the FY2020 total and 70% of the FY2019 and FY2018 totals.
The regional forecast for residential permitting is for nearly a 5% drop from CY2020 to CY2021 and then lessening rates of decline through the end of CY2024. At these rates, residential permitting would be expected to remain above the FY2019 level throughout the forecast. The typical Goodyear approach of high conservatism in budgeting development related sales taxes and use fees is below these levels.
All mid-FY2021 additions have been incorporated into the FY2021 and FY2022 estimates and the five-year base budget forecast. The existing asset management plans with an estimate added for a new facilities plan, and the current CIP project and CIP operating costs are the basis for those cost estimates. Base budget growth of 3.5% is consistent with pre-FY2021 experience and used for FY2022 and throughout the five-year forecast.
Under these assumptions, the estimates for FY2022 and five forecast years indicate that ongoing resources will support ongoing costs and provide for capacity to increase expenses to meet service demands of the growing city. One-time resources are also well within the norm in the five-year forecast and manageable with the timing of capital projects. For FY2022, there will be significant one-time resources to meet a number of known and equally significant priorities of the City Council.
Financial Policies
Each year financial policies are reviewed and reconsidered by staff and the Council. This year some proposed revisions are proposed for Council discussion in addition to the required annual review of the allocation of construction sales tax to ongoing revenue.
Attachment A provides the staff proposed changes and the level at which construction sales tax would be designated to ongoing based on the recent practice of using the average of the five lowest years in the last ten years of actual collections. That would increase the ongoing portion from $5.1 million to $5.6 million.
Other proposed revisions address the needs of a growing city including the addition of a policy to direct that the most restricted eligible funding source be used first in making budget allocations, and clarifications to asset management and strategic plan related policies.
Next Steps
With the direction from this Work Session, staff will return later in February requesting approval of any changes to the Financial Polices. Those policies, Council and other input will guide the City Manager in developing a recommended budget to be presented in April.
Outlook and Assumptions
The coming years present a positive outlook for the city. Recovery from the pandemic for areas such as entertainment that were most impacted is projected to occur over the next 12 to 18 months. Though some slowdown in the rate at which the city’s revenue growth is forecasted, there is no recession predicted. Economic development efforts and population growth continue to be positive factors relative to the broader metro region. Goodyear has space to grow and a good location relative to freeways and an airport.
Goodyear retail sales growth, as in recent years, outpaced the metro area through the pandemic. Sales tax estimates are now prepared by tax category such as retail, construction, and utility. For both FY2021 and FY2022, close attention has been paid to performance before and during the pandemic in preparing these estimates. For the five-year forecast, annual growth of two to five percent is included on non-construction sales taxes which is conservative in that it is very close to or below what would be derived from inflation and population growth.
Residential home permitting in FY2020 exceeded the prior year by 21%. This includes the period of March through May all falling below the same month in the prior year, most likely related to initial pandemic caution. However, the months before and after were significantly higher. Though December 2020 is the first month in FY2021 where residential permits did not exceed the same month in the prior year, the city has already permitted 60% of the FY2020 total and 70% of the FY2019 and FY2018 totals.
The regional forecast for residential permitting is for nearly a 5% drop from CY2020 to CY2021 and then lessening rates of decline through the end of CY2024. At these rates, residential permitting would be expected to remain above the FY2019 level throughout the forecast. The typical Goodyear approach of high conservatism in budgeting development related sales taxes and use fees is below these levels.
All mid-FY2021 additions have been incorporated into the FY2021 and FY2022 estimates and the five-year base budget forecast. The existing asset management plans with an estimate added for a new facilities plan, and the current CIP project and CIP operating costs are the basis for those cost estimates. Base budget growth of 3.5% is consistent with pre-FY2021 experience and used for FY2022 and throughout the five-year forecast.
Under these assumptions, the estimates for FY2022 and five forecast years indicate that ongoing resources will support ongoing costs and provide for capacity to increase expenses to meet service demands of the growing city. One-time resources are also well within the norm in the five-year forecast and manageable with the timing of capital projects. For FY2022, there will be significant one-time resources to meet a number of known and equally significant priorities of the City Council.
Financial Policies
Each year financial policies are reviewed and reconsidered by staff and the Council. This year some proposed revisions are proposed for Council discussion in addition to the required annual review of the allocation of construction sales tax to ongoing revenue.
Attachment A provides the staff proposed changes and the level at which construction sales tax would be designated to ongoing based on the recent practice of using the average of the five lowest years in the last ten years of actual collections. That would increase the ongoing portion from $5.1 million to $5.6 million.
Other proposed revisions address the needs of a growing city including the addition of a policy to direct that the most restricted eligible funding source be used first in making budget allocations, and clarifications to asset management and strategic plan related policies.
Next Steps
With the direction from this Work Session, staff will return later in February requesting approval of any changes to the Financial Polices. Those policies, Council and other input will guide the City Manager in developing a recommended budget to be presented in April.