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HomeMy WebLinkAbout031009PC:\Documents and Settings\BBender\Local Settings\Temporary Internet Files\Content.Outlook\PS2FNR2U\090310WS.doc Page 1 of 1 NOTICE OF THE WORK STUDY SESSION OF THE FOUNTAIN HILLS TOWN COUNCIL TIME: 5:00 P.M. - 7:00 P.M. WHEN: TUESDAY, MARCH 10, 2009 WHERE: FOUNTAIN HILLS COUNCIL CHAMBERS 16705 E. AVENUE OF THE FOUNTAINS, FOUNTAIN HILLS, AZ ALL WORK-STUDY ITEMS LISTED ARE FOR DISCUSSION ONLY. NO ACTION CAN OR WILL BE TAKEN. The primary purpose of work session meetings is to provide the Town Council with the opportunity for in-depth discussion and study of specific subjects. Public comment is not provided for on the Agenda and may be made only as approved by consensus of the Council. In appropriate circumstances, a brief presentation may be permitted by a member of the public or another interested party on an Agenda item if invited by the Mayor or the Town Manager to do so. The Presiding Officer may limit or end the time for such presentations. 1.) CALL TO ORDER AND ROLL CALL – Mayor Schlum 2.) UPDATE AND DISCUSSION on funding for the SPECIAL TRANSPORTATION SERVICES (STS) program. 3.) UPDATE AND DISCUSSION on progress of FY08-09 CAPITAL IMPROVEMENT PROJECTS. 4.) DISCUSSION AND PRESENTATION of FY09-10 REVENUE OPTIONS, including proposed fee schedule. 5.) DISCUSSION of a SERVICES AGREEMENT with 3D/International, Inc. in the amount of $207, 505.69 for the dirt alley project, Phase 1. 6.) ADJOURNMENT. DATED this 9th day of March, 2009. Bevelyn J. Bender, Town Clerk The Town of Fountain Hills endeavors to make all public meetings accessible to persons with disabilities. Please call 480-816-5100 (voice) or 1-800-367-8939 (TDD) 48 hours prior to the meeting to request a reasonable accommodation to attend this meeting or to obtain agenda information in large print format. Supporting documentation and staff reports furnished the council with this agenda are available for review in the Clerk’s office. Mayor Jay T. Schlum Vice Mayor Mike Archambault Councilmember Cassie Hansen Councilmember Dennis Contino Councilmember Henry Leger Councilmember Ginny Dickey Councilmember Keith McMahan C:\Documents and Settings\BBender\Local Settings\Temporary Internet Files\Content.Outlook\PS2FNR2U\090310WS.doc Page 1 of 1 NOTICE OF THE WORK STUDY SESSION OF THE FOUNTAIN HILLS TOWN COUNCIL TIME: 5:00 P.M. - 7:00 P.M. WHEN: TUESDAY, MARCH 10, 2009 WHERE: FOUNTAIN HILLS COUNCIL CHAMBERS 16705 E. AVENUE OF THE FOUNTAINS, FOUNTAIN HILLS, AZ ALL WORK-STUDY ITEMS LISTED ARE FOR DISCUSSION ONLY. NO ACTION CAN OR WILL BE TAKEN. The primary purpose of work session meetings is to provide the Town Council with the opportunity for in-depth discussion and study of specific subjects. Public comment is not provided for on the Agenda and may be made only as approved by consensus of the Council. In appropriate circumstances, a brief presentation may be permitted by a member of the public or another interested party on an Agenda item if invited by the Mayor or the Town Manager to do so. The Presiding Officer may limit or end the time for such presentations. 1.) CALL TO ORDER AND ROLL CALL – Mayor Schlum 2.) UPDATE AND DISCUSSION on funding for the SPECIAL TRANSPORTATION SERVICES (STS) program. 3.) UPDATE AND DISCUSSION on progress of FY08-09 CAPITAL IMPROVEMENT PROJECTS. 4.) DISCUSSION AND PRESENTATION of FY09-10 REVENUE OPTIONS, including proposed fee schedule. 5.) DISCUSSION of a SERVICES AGREEMENT with 3D/International, Inc. in the amount of $207, 505.69 for the dirt alley project, Phase 1. 6.) ADJOURNMENT. DATED this 9th day of March, 2009. Bevelyn J. Bender, Town Clerk The Town of Fountain Hills endeavors to make all public meetings accessible to persons with disabilities. Please call 480-816-5100 (voice) or 1-800-367-8939 (TDD) 48 hours prior to the meeting to request a reasonable accommodation to attend this meeting or to obtain agenda information in large print format. Supporting documentation and staff reports furnished the council with this agenda are available for review in the Clerk’s office. Mayor Jay T. Schlum Vice Mayor Mike Archambault Councilmember Cassie Hansen Councilmember Dennis Contino Councilmember Henry Leger Councilmember Ginny Dickey Councilmember Keith McMahan TOWN OF FOUNTAIN HILLSAchieving Financial StabilityMarch 10, 2009 Background•The Town of Fountain Hills completed a Strategic Plan in 2005 which was adopted by the Town Council in 2006•One of the key strategic initiatives coming out of the Plan was to achieve financial stability for the Town2March 10, 2009 Current Situation•Year 2025 financial forecast was prepared•Best estimate of future events for projecting revenue and expenditures•Assumptions were made based on known information, level of service•Future events are shaped by both internal and external influences3March 10, 2009 •Revenue determines capacity of Town to provide services•FY10 available resources is ~$14M•General Fund is heavily reliant on sales taxes; lack of diversification:–State controlled revenues 44%–Local sales tax43%Total87%Current Situation4March 10, 2009 Construction sales tax revenue is very volatile and dependent upon the economy; the state trust land provides temporary increases but once all land is developed the Town will have to rely on remodels.Construction revenue is based on contract values – remodeling costs are typically less than new home construction.5March 10, 2009 Retail Sales Tax•Commercial property is less than 3% of land in Fountain Hills - 75% is already developed•Sales tax revenues respond to changes in economy and inflation, therefore unreliable as a stable source of operating revenue6March 10, 2009 The above chart shows the projected trend in retail sales tax through FY2025 – based on sustained level of retail businesses in Fountain Hills7March 10, 2009 Revenue Variables•Competition from nearby communities could impact the amount of retail sales tax the Town receives•The loss of a major retailer would be a significant negative financial and visual impact on the local economy8March 10, 2009 Expenditure Variables•Projected costs assume existing service level•Inflationary increases•A major change in service level would add more costs, for example–Loss of contract services for fire and/or police–New or increase in number of programs9March 10, 2009 Timing Issue•A look into the future shows that new home construction revenues will decline as available land is developed•Similar to retirement planning it is critical to the Town’s fiscal future to address the long-term revenue shortfall 10March 10, 2009 Options for funding Future Operations–Expenditure Control–Identify new sources of revenue–Use capital project fund and bond proceeds for capital projects–Create a permanent rainy day fund–Propose a primary property tax–Use reserve funds for operations11March 10, 2009 Expenditure Control•Currently being done through technology, staff reductions, delay of projects•Risks:–Not all costs are controllable–Delaying maintenance is contrary to maintaining a quality community–Delays the inevitable12March 10, 2009 Identify new sources of revenue•Franchise agreement (most surrounding cities currently have a franchise tax on cable, gas, electric, water)•Increase local tax rate from 2.6% to 2.8% (~$600K per year)•Increase local tax rate on some activities•Charge a fee for liquor license applications•Risks:–Loss of major retailer–Unfair burdens on some businesses13March 10, 2009 Use CIP Fund/Bond Proceeds•Propose an initiative to voters to pay for major mill and overlay project on Saguaro Boulevard•HURF bonds will be paid off in FY10•Risks:–Lack of voter approval could mean delay of project14March 10, 2009 Our roads?1March 10, 2009 Create a Rainy Day Fund•The current economy necessitates a change in financial policy•Reclassify the 30 days expenditures to be the permanent RDF•RDF would be used for revenue shortfall not increased expenditures16March 10, 2009 Propose a Primary Property Tax•Voters have rejected this proposal twice•This option will need to be considered at some point in the future17March 10, 2009 Use of Reserve Funds•Draw down of reserve funds for operations•Risks:–Would create serious long term financial instability–Would result in downgrading of Town credit–Reduction of business and residential value of the community18March 10, 2009 SUMMARY•Amend financial policies for RDF•Consider revenue options for FY10–Bond for major road project(s)–Franchise fee proposal–Liquor license fees–Changes to sales tax March 10, 200919 Z:\Council Packets\2009\W3-10-09\Revenue Options.doc Financing the Future (Financial Stability in 2025) Updated: March 10, 2009 Prepared by: Julie Ghetti, Deputy Town Manager Z:\Council Packets\2009\W3-10-09\Revenue Options.doc Future Financial Stability The future strength of the Town of Fountain Hills’ financial condition will hinge on many factors occurring at both a local and macro economic level. As the Town reaches build-out over the next 18 - 20 years, new development and population growth will slow and the Town will face a shifting economic base. One time tax revenues from development that augment current revenues will no longer be available and the proportionate distribution of state-shared revenues will shift to faster growing larger and more densely populated communities. This will result in a heavier reliance on new and existing revenue streams generated within Fountain Hills to support operations and to fund demands for amenities and enhanced services from the community. Fountain Hills will need to focus on finding sustainable funding alternatives to close the projected revenue shortfall to continue to offer a high quality community for its residents and visitors. ASSUMPTIONS – Variability in revenues Revenue: Revenue determines the capacity of the Town to provide services. Under ideal conditions, revenue should grow at a rate equal to or greater than the combined effects of inflation and expenditures. Some local revenue sources will continue to grow with the economic base and inflation, such as sales tax from retail activity, while others decline as building slows and build-out is attained. The following chart represents the projected decline in local sales tax revenues from construction, which is based on the estimated building activity. Z:\Council Packets\2009\W3-10-09\Revenue Options.doc The projected retail sales tax is based on existing businesses with moderate growth for inflation. Elastic revenues, such as sales tax, are highly responsive to changes in the economy and inflation. Commercial property comprises only 3% of available land in Fountain Hills limiting the opportunities for additional retail business and sales tax revenues The limited amount of commercial activity competes with the surrounding cities that offer multiple retail centers for shopping; the following chart represents the projected decline in local sales tax revenues from retail activity (assuming no loss of a major retailer). Z:\Council Packets\2009\W3-10-09\Revenue Options.doc State-Shared Revenues: Fountain Hills is expected to receive an estimated $7.8M of shared revenue from the State in FY09-10. Some revenues, such as State-Shared Sales Tax and State-Shared Income Tax, are unrestricted as to use; other revenues, such as Highway User Fuel Tax and Local Transportation Assistance Funds, are restricted for transportation purposes only. The estimate of future shared revenues is determined by analysis of past collections, with moderate growth, with the assumption of no legislative changes to the distribution formula and a recovered economy. Population level indirectly relates to such issues as employment, income, and property value Looking ahead, the Town’s slowing population growth relative to other municipalities in Arizona will most likely result in a reduction of intergovernmental revenues distributed to Fountain Hills based on population levels. As one-time revenue sources decline the Town will become more dependent upon shared revenues and local sales tax for operations. The Town will need to rely on outside and unstable revenue sources, such as shared State revenue and sales tax, with the decline in one-time revenues related to construction to support ongoing operations. Bonding and Bond Capacity: General Obligation and Revenue bonds are issued for large capital expenditures and must be approved by a vote of the citizens; the chart below shows the historic and future secondary property tax rates for bonds issued by the Town since 1991. The Town’s outstanding bonds are currently scheduled to be retired in FY2020. The chart reflects only the Town levy and does not include special levies such as schools, special districts, etc TOWN OF FOUNTAIN HILLS SECONDARY TAX RATES $0.00 $0.10 $0.20 $0.30 $0.40 $0.50 $0.60 919395979901030507*09*11*13*15*17*19*Fiscal Years *estimated Z:\Council Packets\2009\W3-10-09\Revenue Options.doc Arizona Constitution imposes limits on the principal amount of General Obligation bonds allowed to be outstanding at any point in time depending on the use of the bond proceeds Bonds amounting to 26 percent of the assessed value of taxable property in the Town can be issued for water, wastewater, transportation, public safety, and general governmental facilities, artificial light, open space preserves, parks, playgrounds, and recreational facilities – the Town’s maximum 26% bonding capacity in FY07-08 is $169.4M Revenue bonds (HURF) are also available to the Town and are not included in the 20 percent and 6 percent capacity calculation. These bonds generally carry a higher risk and, therefore, higher interest rates than General Obligation bonds that are supported by the full faith and credit of the Town. Highway User Revenue Fund bonds are payable from Highway User revenues and also require voter approval; the current revenue bonds will be retired in FY09-10 ASSUMPTIONS – Variability in Expenditures Beginning in FY2017 through FY2025, as indicated in the 20 Year Financial Plan, $27 million in additional revenues, expenditure cuts, or a combination of both would be necessary to maintain a balanced budget ($1.5M per year). Every annual budget adopted by Council is statutorily required to be balanced, so any unbalanced projected deficit must be reconciled to bring expenditures in line with revenues. The Town may balance its annual budget yet create a long-run imbalance in which expenditure outlays and commitments grow faster than revenues. The purpose of including a “deficit” or “additional revenues/expenditure reduction” line in this forecast is to reveal a structural imbalance that must be eliminated. Operating expenditures are calculated with an increase of 5% throughout the forecast period; this is an average since some expenditures will increase more than 5% (for example, employee healthcare coverage) and some may be less (wages). Per capita expenditures (total expenditures divided by population) reflect changes in expenditures relative to changes in population. Increasing per capita expenditures may indicate that the cost of providing services is outstripping the Town’s ability to pay, especially if spending is increasing faster than the Town’s relevant tax base. Employee benefits comprise a significant portion of operating costs. Direct benefits requiring immediate cash outlay include retirement contributions, worker’s compensation, life and health insurance, tuition reimbursement. Indirect benefits, which include accumulated holiday, vacation, and sick leave, do not require immediate cash outlay but may require paying the opportunity cost of not having the work done or paying others to do the work Benefits as a percentage of salaries trended upward from fiscal year 2004; the increasing trend is attributable to rising health care costs, which is a nationwide trend and expected to continue through the forecast period. Expenditure Limit – The State of Arizona imposes an expenditure limit on cities and towns. It uses local total revenues as a base and adjusts the revenue by increases in population and the implicit price deflator. Some of the items excluded from the limitation are grants, debt service payments, Highway User Revenues and interest earnings. Penalties for exceeding the expenditure limit include the loss of State-shared revenues in Z:\Council Packets\2009\W3-10-09\Revenue Options.doc the fiscal year following the violation. The Town’s expenditure limit for FY07 is $22.8M for all funds. STRATEGIC OPTIONS TO RESOLVE REVENUE SHORTFALL One of the goals of the 2025 Financial Forecast and Capital Improvement Plan was to identify potential future financial problems and provide decision makers with information to make recommendations to fix or circumvent potential problems. Based on these stated assumptions, the General Fund will need an additional $27M over an eighteen-year period to cover the predicted shortfall due to the decline in building revenues. Alternatives to close the unfunded gap during the forecast period range from the simple to the complex. The following is a list of potential alternatives. The final course of action will likely be a combination of alternatives representing management’s and the Council’s best judgment of what the citizen and community needs are, and what can be supported at that time. Alternative 1 - Expenditure control Expenditure control is a top priority for staff and management of the Town of Fountain Hills. The Town continually looks at the cost/benefit of all expenditures. It evaluates efficiencies, technologies, consolidations, compensation and all programs for costs, who are the beneficiaries, can a task be eliminated, or outsourced for greater efficiency and less cost. There are several ways in which this is currently being done and will be done in the future: 1) Employee productivity is improved through more efficient use of technology, labor saving methods and retention programs. A review of salary and benefit costs and its impact on an impending deficit is performed annually during each budget preparation cycle 2) Strategies to maintain or reduce service delivery costs are implemented, such as shifting of service delivery and operations to others in the private or public sector. 3) Reduce operating expenditures through further staff layoffs, elimination of recreation, senior and sports programs, reduction in landscape/wash maintenance and street cleaning. 4) Eliminate non-essential capital projects to focus budget priorities on infrastructure restoration, capital projects with the least amount of operating costs and basic community needs rather than non-essential services or facilities. 5) The Town continues to research grant opportunities that will provide funding for capital or one-time expenditures but not increase operating costs 6) Eliminate duplication of services through collaboration with other governmental and non- governmental entities; for example, regional taxing districts and joint service agreements with other agencies for programs, maintenance Z:\Council Packets\2009\W3-10-09\Revenue Options.doc Risks: Control of expenditures is not always possible with costs that are driven by external factors. The price of gas, inflation, market pressures on wages and benefits, contract costs, etc. are examples of costs that are not controllable. Eliminating maintenance of landscaping, washes, or recreation programs would be contrary to maintaining a quality community. Considering only one side of the equation (expenditures versus revenues) leaves open the possibility for delaying the inevitable. Alternative 2 - Identify new sources of revenue Raising fees and taxes is an alternative. Some alternatives are: 1) Implementing a franchise agreement to utilities using the Town’s streets in the distribution of utility services would produce approximately $600,000 per year additional revenue at a rate of 4.5%. While there is no specific amount or limitation in State law, the traditional amount for a franchise tax has been two percent of the gross proceeds from the sale of utility services within the city or town. To grant a franchise, the Town must place the question before the voters of the community for approval. State law also limits the term of a franchise agreement to a maximum of twenty-five years. 2) Increase the local tax rate and/or widen the local sales tax base by increasing the tax rate on specific activities. Many cities and towns in Maricopa County assess a higher tax rate for activities such as telecommunications, restaurants and bars, or construction. An increase from the current rate of 2.6% to 4% would provide (approximately): a. Transp/Comm/Utilities $700,000 b. Restaurants/bars $313,000 c. Construction* $530,000 (*designated for capital projects) 3) The Town currently processing liquor license applications at no charge; almost all other municipalities charge a fee for liquor licenses (see attached). The Town processes approximately 20 licenses each year; each application requires review by Town staff departments for public safety, zoning, licensing, etc.. The benefit for this expenditure of resources accrues to the applicant rather than the general public. Risks: Deterioration of revenue base through the loss of a major retail or grocery store. Unfair burdens on specific economic sectors (retail, restaurants and bars, for example) Legislative policies that may adversely affect revenue; for example, proposed federal legislation regarding local control and authority to manage their rights-of-way for telecommunications Overdependence on obsolete or external revenue sources; for example, shifting to a service rather than goods economy Risk of not selling or developing the state trust land due to the high cost of the land and/or construction Z:\Council Packets\2009\W3-10-09\Revenue Options.doc Alternative 3 – Use capital project fund and bond proceeds for capital projects Use bond proceeds to fund capital projects that have an expected useful life of ten (10) years or more. The Town has issued bonds in the past for major road improvements, both General Obligation (property tax) and Revenue bonds (HURF revenues). The General Obligation bonds will be paid off in 2015 and the HURF bonds will be paid off in FY2010. Both bond issues require voter approval. Risks: lack of voter approval would mean that the project(s) would be postponed or eliminated; the result would be deterioration of infrastructure, higher future costs or decreased level of service in the General Fund to complete the project(s). Alternative 4 – Creation of a permanent rainy day fund (RDF) FY08-09 experienced a decline in revenues that resulted in decreased level of service for the community with no indication that an economic recovery was on the horizon. Although the Town anticipated the economic downturn and proposed a budget that was less than the prior year the recession has been deeper and wider than could be projected. Economic fluctuations are not always predictable but are inevitable; long term financial stability requires that the Town have a strategic plan to manage the downturns. The Town’s financial policies include a fund balance policy that is comprised of three components: 1) 20% of the past five years average of General Fund revenues will be reserved and unavailable for appropriation except to address an emergency 2) 10% of the past five years average of General Fund revenues are reserved for capital replacement expenditures 3) 30 days of annual operating expenditures for temporary financing of an unforeseen nature or unanticipated expenditure or loss of revenue Reclassifying the 30 days of annual operating expenditures (#3) as the “rainy day fund” would provide additional financial stability in the event of unanticipated revenue shortfall. The RDF would only be used if current year revenues fell below what was anticipated during the annual budget process; the funds are not intended to increase expenditures over current available resources. Z:\Council Packets\2009\W3-10-09\Revenue Options.doc Alternative 5 - Propose a Primary Property Tax A primary property tax levy, has been put before Fountain Hills voters and turned down twice; however without a large retail base this option must be considered sometime in the future. There is a mandated restriction on how much the Town can increase the primary levy each year. Arizona voters approved two measures designed to contain local government spending; the primary levy is limited to a 2.0 percent increase over the previous year’s “maximum allowable levy” plus the addition of any new property not previously taxed. The secondary property tax, however, is unlimited as to amount but can only be used to repay voter approved debt service, not for operations. Alternative 6 – Use reserve funds and bond proceeds for operations, defer maintenance Use bond proceeds for operations, use reserve funds, and defer maintenance on streets, buildings, or infrastructure. In these cases, the budget remains balanced, but the long-run budget is developing a deficit. Risks: Deferral of maintenance on the assets and their subsequent deterioration can create a significant unfunded liability. Maintenance expenditures should remain relatively constant in relation to the cost and nature of assets maintained. If the ratio is declining, it may be a sign that the Town’s assets are deteriorating. The following are some of the problems associated with continued deferred maintenance: Creation of safety hazards and other liability exposures. Reduction in the residential and business value of the Town. Decreased efficiency of equipment due to obsolescence and deferred maintenance. Increased costs of bringing the facility up to acceptable levels after continued maintenance deferral due to severity of damage and rising construction costs Creation of a large unfunded liability in the form of a backlog in maintenance that can result in accelerated deterioration. If these assets are not maintained in good condition, or if they are allowed to become obsolete, the result is often a decrease in the usefulness of the assets, an increase in the cost of maintaining and replacing them, and a decrease in the attractiveness of the Town as a place to live or do business. Cities or towns often defer maintenance and replacement because it is a relatively painless and short-term method to reduce expenditures and ease current financial strain. Continued maintenance deferral, however, can create serious long-term problems that become exaggerated because of the large sums of money invested in capital facilities. Z:\Council Packets\2009\W3-10-09\Revenue Options.doc The following pictures are examples of what happens to roads and equipment when maintenance is deferred (these are actually Fountain Hills streets). Roads are an on-going maintenance capital item that require annual resources; deferring these projects increases the cost in future years.