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HomeMy WebLinkAboutMinutes - Finance and Bond Committee - 3/26/2007E MINUTES TOWN OF ORO VALLEY FINANCE AND BOND COMMITTEE SPECIAL MEETING HOPI CONFERENCE ROOM DEVELOPMENT SERVICES BUILDING 11,000 N. LA CANADA DRIVE ORO VALLEY, ARIZONA MONDAY, MARCH 26, 2007 AT OR AFTER 6:00 P.M. PRESENT: Tony Eichorn, Chair Chuck Kill, Vice -Chair Peter Lamm, Member Bob Harris, Member EXCUSED: Aaron Fisher, Member STAFF PRESENT: Stacey Lemos, Finance Director Wendy Gilden, Management & Budget Analyst Danielle Tanner, Senior Office Specialist ALSO PRESENT: Helen Dankwerth, Vice -Mayor �N� 111111[�7-\I17 M�►C� Mr. John Musolf, 13716 N. Carlynn Cliff Drive, prepared informational packets for the members for review. He stated that he believes that the best method of budgeting is zero based budgeting. Phoenix uses a modified zero based budget with the following three elements: 1) They estimate the costs associated with maintaining current service levels. 2) All the managers identify 5%-10% budget reductions for potential elimination. 3) They submit supplemental requests showing all costs associated with a service/program. Mr. Musolf stated that the Naranja Town Site (NTS) is an excellent quality of life item and the Town may want to be involved but the price is high. The Municipal Operations Center (MOC) presentations showed a space issue but lacked justification that it would increase productivity. 1. APPROVAL OF MINUTES FROM THE FEBRUARY 26, 2007 AND MARCH 12, 2007 SPECIAL MEETINGS MOTION: Member Harris MOVED to approve the minutes from the February 26, 2007 and March 12, 2007 meetings. Member Lamm SECONDED the motion. Motion carried, 4-0. 2. DISCUSSION OF DEPARTMENT SERVICE LEVELS & REVENUE PROJECTIONS FOR THE FINANCIAL SUSTAINABILITY PLAN F:WIINUTESTFNANCE AND BOND\2007\03 26 07.doc 03/26/07 MINUTES, FINANCE AND BOND REGULAR MEETING 2 Ms. Lemos presented the suggested format for the Financial Sustainability Plan (FSP). She requested that the Committee review the materials presented between now and the next meeting. Staff will bring back a more complete version of the model at the next meeting. She stated that tonight we are reviewing the General Fund portion of the plan. Ms. Lemos discussed the 10-Year FSP spreadsheet. Key points included: • It shows projections from fiscal year 2007 with the base year going out to 2017. • It includes revenue and expenditure forecasts. • Staff segregated the existing revenue base from the new commercial growth figures. Those estimates include new commercial development sales tax, retail sales tax, construction sales tax, and permit fees that would be generated by the new growth. • Expenditure estimates are driven by population growth. • Staff segregated increases in employee costs that relate to merit increases, COLAs and benefits increases in one line item. • The plan captures the sales tax rebate calculations for the existing shopping centers. • The fund transfers are the Town's transfers out to debt service that pay for existing bonds that are paid for by the General Fund. Member Lamm asked if these projections include an inflation factor. Ms. Lemos stated that the increase in employee costs do include inflation. The COLA, merit and cost of benefits have been historical real costs. They can be tied together with the revenue estimates because we will be looking at including an inflationary factor. These costs are measureable because we have given COLA increases in the past that have been tied to inflation and CPI indexes. She explained that merit increases range between 2.5%-5% and there is detail behind these numbers. Vice -Chair Kill asked for the detailed information. Ms. Lemos stated that it can be sent to the Committee. Ms. Lemos discussed the following key points about the FSP: • The plan contains the unfunded needs such as the Capital Asset Replacement Fund, costs associated with the MOC and Police service levels. • Housing Economist, John Strobeck, projected housing units over the next 10 years. • Population growth ties to the number of projected building permits. • The plan has the revenues listed and the forecast method used with projections going forward based on populations. • A new commercial development section relating to revenues feeds into the FSP. Ms. Lemos discussed the Police department tab which shows the existing status of 2.2 officers per 1,000 population and it drives the ratio of civilian employees per sworn officers. It shows the alternative analysis of 2.5 officers per 1,000 and shows the increase in funding associated with that in the Police department. Staff rolled in the related impact to the Legal department and Court for expenditure projections. Ms. Lemos stated that the EV Model was tested to see how it works compared to an actual budget. This year when the Chief turned in his budget document he was requesting 2.5 officers per 1,000 population service levels. The Police bottom line budget came within 1% of the $13.9M figure for 2008. The assumption used for the model reflected how the cost allocation would be used in the real budget. FA\MINUTES\FINANCE AND BOND\2007\03 26 07.doc 2 03/26/07 MINUTES, FINANCE AND BOND REGULAR MEETING Member Harris stated that the employment in daytime population figures is relatively constant except for Town population growth. He asked where the employees are related to all of the open retail space. Ms. Lemos stated that those will be programmed in and that will also bring in additional traffic and additional employees. Member Lamm stated that the spread between daytime and nighttime population will be increasing over a 10 year span but it may be overstated because it does not include the population that leaves Oro Valley to work elsewhere. Ms. Lemos stated that the consultant for the EV Model indicated that those effects are fairly immaterial but the driving factor is real Town incorporated boundaries population and an estimate of daytime population as far as businesses. Ms. Lemos discussed the MOC analysis. It looks at building 51,000 square feet of buildings to house Police, Public Works and Water Utility operations. A midpoint was taken of the debt service over 25 years to fund that and it was a $30M cost which comes out to about $1.8M annually with principal and interest to finance the cost of that building and issue bonds. The annual O&M costs are based on the existing O&M budget with existing square footage of buildings and we extrapolated that out to 51,000 square feet. Mern0er—Lamimnascl—ed o11 winuch- the $7 I is smKing uric reiiremen s. S. emoss�t iezl that none of it is but a portion is principal and interest is factored in at 5%. Member Lamm stated that the principal portion unless it matches depreciation of a property is a cash flow item because it is retiring debt. He stated that a 5% interest rate is prevailing in the current market and inflation is running around 2% — 3%. If we are hypothesizing a 0% inflation then the real interest costs with any capital outlays is about 2.5%. He recommended a 2.5% interest cost for that portion of the analysis that includes zero inflation and when you add an inflation component back into the expenditures it can be added into the interest component. Ms. Lemos stated that this does include an inflation factor but we will make a footnote of that because that is how the debt service schedule was run and that is the standard for how it is done for all of our debt: Member Lamm explained the value of keeping the inflation out of the numbers until the end. He stated that when you look at 10 year trends and use numbers with an inflation component in them if the numbers increase you can not tell what is standing still in terms of service levels and what is increasing or decreasing. It should be left out when you are looking at real service levels and put in at the point where you wish to look at nominal levels and the actual dollars that have generated in a future year. The other reason for backing it out is because you can not predict inflation accurately. Ms. Lemos stated that staff has done research on historical inflation factors and historical CPIs and has come to an average over the last 10 years that they felt would be reasonable to apply for the next 10 years and it can be brought back as an additional assumption. Ms. Lemos stated that the debt service split for the MOC was based on the square footage for those occupying the building and it is between the General Fund, Highway Fund, and Water Fund. Ms. Lemos stated that it is a significant cost to the General Fund to pay that debt service. Some kind of revenue source or reduction in service levels is needed to accommodate it. Ms. Lemos stated that we have new commercial development coming in over the next three years that is known and in later stages of development and review. Member Harris asked at what point you assume that a project is solid enough to include a projection of tax revenue. Ms. Lemos explained that we have done a detailed analysis of our existing retail base and the square footage that is out there and calculated the amount of sales tax that is generated per square foot or calculated the amount of sales that a retail establishment experiences per square foot. Staff FAMINUTES\FINANCE AND BOND\2007\03 26 07.doc 3 03/26/07 MINUTES, FINANCE AND BOND REGULAR MEETING 4 has come up with estimated average dollar amounts per square foot based on those categories that we have applied to the EV Model to project out sales taxes for construction and retail. Ms. Lemos stated that Oro Valley Marketplace is expected to open in September 2008. Staff did a separate projection on the hotels because the bed tax revenues were going to be allocated to the Naranja Town Site O&M. On the assumptions behind the employee cost increases, we have looked at average projections based on historical data, benefits increases, COLAs and merit increases and some of those include inflationary data. Vice Mayor Dankwerth asked why the COLA in the assumption is 2.5% when in the MOU for Council it was 3.9%. Ms. Lemos stated that this is based on the historical trends on prior years. We also looked at the CPI indexes going back 10 years and the average was around 2.5%. The 3.9% this year is the peak in the fluctuations on inflation because there have been peaks in housing costs, fuel and energy prices. She stated that staff did not think that 3.9% would be sustainable in the future so they used a middle ground number. Ms Lemos explained the report from John Strobeck, the Housing Economist. He put together a forecast loo mg ache mar et specific m ro -ales what 1 hassbeenhisto�r'c�ll� xnd projected it out 10 years. For 2007 we are looking at issuing 310 permits and going up in 2008 to 335, peaking at 376 in 2011 and then starting to decline. This is based on historic trends in the housing industry. About every 7 years there is a peak and then a valley and it also reflects build out. There is also an estimated increase in sales per square foot on our sales tax revenue projected in at 1 % per year. Ms. Lemos discussed the need to focus on the Highway Fund and the following issues: • Road maintenance needs • Funding of the MOC construction • Subsidies that the Highway Fund may need to make • Impact Fee Fund to help offset the loss in development impact fees over the next 10 years from reduced residential growth. • The Stormwater Fund is an additional subsidy that the General Fund aids. • Staff will bring back more detail on what each of the proposed fees are in the Stormwater Fund and what level of service each level of fee will fund. Vice -Chair Kill asked why expenditures are surpassing revenues. Member Harris suggested that a significant portion may be personnel costs. Ms. Lemos stated that there are increasing employee costs each year. There is also a large decrease in commercial building permits as we reach build out. Based on Mr. Strobeck's research, once the current projects are built that will be the end of large scale commercial development. As time goes on residential building permits will go to a slight peak and then decline. Member Harris asked if there is a process for fund balance. Ms. Lemos explained that there is a Council adopted policy stating that the Town must maintain a contingency fund that is 20% of the Town's adopted expenditures. That limit is around $5.5M currently and the contingency fund is around $13M. Ms. Lemos stated that staff will be working on this model for the next couple of weeks steadily as new information arrives. As the Town Manager's Recommended Budget is being put together, we will be updating the fiscal year 2008 numbers with those revenue estimates that are FAMMUTES\FINANCE AND BOND\2007\03 26 07.doe 4 03/26/07 MINUTES, FINANCE AND BOND REGULAR MEETING 5 closer to where they will be in the Manager's Recommended Budget as well as the departmental expenditures. Ms. Lemos requested feedback on the format and assumptions. The Committee indicated that they were satisfied with the format. Vice -Mayor Dankwerth suggested that this be graphed so that it is easier to understand. Ms. Lemos stated that we will check some numbers and continue to add to the analysis. Some costs were received from Public Works on utility undergrounding last week and staff will do analysis to see if a franchise fee could be dedicated for electrical undergrounding in certain percentage amounts. Member Harris asked how the Committee goes about ranking these projects. Ms. Lemos stated that it could be in the Committee's purview to make a recommendational priority list including justification. Vice -Mayor Dankwerth stated that she would like such a list from the group and she would also like to see funding prioritization concurrently. Member Lamm stated that the MOC is predicated on a future increase in personnel which is predicated on the high likelihood of further annexation. If those annexations do not occur, this 0 a year fry e GeneralFundieither nssary rmallynecessary. I S. Lemos stated that it is for 51,000 square feet and currently the Town has around 70,000 square feet of existing buildings so scaling back the MOC facilities is a possibility if we do not annex. Vice -Mayor Dankwerth suggested the possibility of modular structures. Member Harris expressed concern that sending this information to the Council may connote that this group endorses certain levels of spending. Vice -Mayor Dankwerth recommended coming up with scenarios, prioritization of expenditures and how those could be funded. As a group the Committee can say if it feels that one is more necessary than another. Member Harris asked if all appropriate costs are included on the expense side for the analysis of annexation. Ms. Lemos explained that the departments have been asked to estimate what their additional needs would be if we took in the Southwest Annexation area. Staff will review them for reasonability and make any adjustments as they are included into the plan. Member Lamm discussed modifying the spreadsheet for the MOC to include a square footage cost based on municipal headcount over a decade in a zero annexation context instead of putting in projected costs for the center itself. Mr. Doug McKee from the audience discussed the following: • Assumptions could be included for the transfer of the Library to the County and for reimbursement from the County as equity. Ms. Lemos stated that a status quo was factored in which will be shown later in the process. • He recommended factoring in a recession assumption. • He would like to see more detail in the assumptions on the amount of retail square footage spread out by year to track the sales tax against square footages. Vice -Mayor Dankwerth asked if we have data from businesses in Oro Valley so that we could track what their revenues were per square foot. Ms. Lemos explained that the State Department of Revenue sends the Town monthly sales taxes rates for each business in Town. FAMINUTES\FINANCE AND BOND\2007\03 26 07.doe iii I 5ERNFINIFTI-N! !1! 111111 ''1 1 1 � 11111 1 Ms. Lemos stated that she will email the Committee about the Study Session regarding this topic when the dates are finalized. At that point, the group can look at the timeframe between the next meeting and the date of that Study Session to see if there is a need to have another meeting, Ms. Lemos stated that staff will try to finalize this plan for the Committee to review by the next meeting. Vice -Mayor Dankwerth encouraged the Committee to attend the Study Session. LWI-1911IN0011 MOTION: Member Harris MOVED to ADJOURN the meeting at 7:50 p.m. Vice -Chair Kill SECONDED the motion, Motion carried, 4-0. NFVZ� Danielle Tanner Senior Office Specialist HMINUTESTINANCE AND BOND\2007\03 26 OTdoc 6