QR6 of the 2YB
Second Quarter of FY 2003
DFM

QR6 Financial Analysis

 QR6 � January through March 2003.  In most past years, the second quarter is typically one of preparation as departments complete plans for spring and summer capital projects and for program implementation.  However, QR6 in the 2002 and 2003 2YB (two year budget) was hardly typical.  During QR6, the forensic audit of City spending, especially in the Mayor�s Office, created significant demands on financial staff and the organization. 

At the same time as the forensic audit created a whirlwind of distraction, budget development for the two year budget was underway.  Department budget preparation was largely completed during the quarter.  The long term financial planning process, resulting in the Six Year Financial Plan update, was completed during this period of turmoil.  The projection model in the plan provided a broad mapping capability for the Mayor and City Council in directing the objectives and themes of the 2YB.

The City will hardly be the same in the aftermath of the foundation shaking events of the first two quarters of FY 2003.  Changes in financial and human resources policies were directed to create clearer and more open oversight process for the staff, Mayor and City Council.  Community feelings about municipal government were significantly changed.

QR6 Accomplishments.   As difficult as were the events of QR6, the City continued to implement the financial plans adopted for the year. 

• Departments continued to provide programs and found ways to make them more efficient.
• Departments responded to the need for cost containment to balance the FY 2003 budget and earmarked or sequestered $850,000 in cost savings to help balance the budget. 
• The ValleyRide management of the City bus operations reorganized federal funding and found ways to obtain additional federal grant funds from other parts of the State � resulting in over $800,000 in additional savings to the City.  
• Capital projects continued, including culmination of the largest single municipal capital project in the history of the State of Idaho, the new airport terminal construction project. 
• The City staff showed the ability to carry on in the face of distraction and discouraging media focus.

Quarterly Reporting Policy.    As a result of the discussion related to the forensic audit, the City Council adopted a new policy related to quarterly reporting.  The policy was adopted by the City Council as a component of Resolution 17564.  It provides clear expectations for departments and for the Division of Financial Management related to quarterly report preparation and review. 

The new policy requirements will be first implemented with the QR7 reports in July and August 2003.  Other financial policies related to the chart of accounts, budget transfers, revenue offset programs, fiduciary responsibility including a special DFM fiduciary responsibility policy, and �re-budgeting� of prior year allocations were also adopted with Resolution 17564 and will affect the format and accountabilities related to the QR7 and subsequent quarterly reports.

The forensic audit identified the lack of transaction analysis as an important control issue.  The Division of Financial Management matrix team met and discussed ways to implement the new policy and concluded that budget to �actual� transaction analysis is not currently assigned any significant staff time.  Time is not available in the Accounting or Treasury Offices in which transactions for expenditures and revenues are processed.  Budget has analysis time, which is primarily focused on budget development and implementation.  DFM will provide recommendations to address this transaction analysis gap

QR formats.    The QR6 reports provide budget change information and budget to �actual� revenue and expenditures.  Because the change in quarterly reporting policy, these reports have been revised to highlight and focus on �budget to budget� changes and comparisons of �budget to actual� expenditures and revenues.  The new format reports provide standard reporting, in which department totals may be tied to fund totals and to the City total.  The reports include columns to show: 

• Prior year (FY 2002) adopted budget.  These amounts were adopted in the original appropriation ordinance for FY 2002.  These amounts do not change and are the baseline budget for the fiscal year.
• Prior year (FY 2002) revised budget.  These amounts show the final budget with all changes that were made either through City Council agenda action or department head discretion.
• Prior year (FY 2002) actuals.  These are the actual revenues and expenditures.
• Current year (FY 2003) adopted budget.  These amounts were adopted in the original appropriation ordinance for FY 2003.  These amounts do not change and are the baseline budget for the fiscal year.
• Current year (FY 2003) revised.  This column shows the current budget with all revisions that have been made through March 31, 2003.
• Variance FY 2003 adopted to revised budget.  This column shows the dollar amounts for all changes that have been made in the FY 2003 budget through March 31, 2003.  Each change can be tied to an approved City Council action or to a department head approved transfer.
• Prior year (FY 2002) QR6 revised budget � 6 months budget amount.  This column shows (using a straight line allocation) half of the fiscal 2002 budget for comparison purposes with the 6 month 2003 budget.
• Prior year (FY 2002) �actuals� � expenditures and revenues for the first six months of FY 2002.  This is also for comparison purposes to FY 2003 QR6 actuals.
• Current year (FY 2003) QR6 revised budget.  This column shows the budget (also using a straight line allocation) for the first six months of fiscal 2003.  The budget for fiscal 2003 QR6 can be compared to that for FY 2002 QR2.  The QR6 budget has some inflationary items that were added in the second year of the two year budget.
• Current year (FY 2003) �actuals� - expenditures and revenues for the first six months of FY 2003.  These numbers can be compared to expenditures in QR2 of 2002.  While the fiscal year was 50 percent complete at the end of QR6, expenditure are typically less than that because a comparatively larger percentage is usually spent in the last two quarters.
• Explanations of budget to budget variance and of QR6 budget to �actuals� are provided in the Budget to Budget and Budget to Actual analysis after this overview.

 

FY 2003 Tax Supported Fund Savings through March 31, 2003 - $1,460,818.   During the fiscal year, savings or revenue gains that are unallocated may be swept into a savings account for control or planning purposes.  Savings in the City�s tax subsidy to the bus system ($806,287) comprise the largest amount of savings during the first six months of FY 2003. 

The next largest savings amount resulted from the Park and Recreation Department recommendation to delay or eliminate the Morris Hill Cemetery construction project as a means to reduce costs in FY 2003 and to avoid operating costs.  That money ($445,000) is in the tax supported Capital Fund.

These savings are in addition to the department management target budget reductions that departments sequestered or otherwise earmarked to help balance the FY 2003 budget.

Revenue changes during QR6.  

BUS grants restructuring � gold star work by ValleyRide.   By negotiating agreements with other grantees and with the State�s public transportation leadership, ValleyRide was able to obtain an additional $800,000 in federal grant, using existing available City matching funds allocated within the 2YB.  Those additional grants translate to $800,000 in savings by reducing the amount of subsidy for the transit program required of the City.  The savings were a direct result of the far sight and skill of Kelli Fairless, Kevin Bittner and others at ValleyRide.  Their efforts merit recognition and appreciation from the City and are worthy of the financial Gold Star award for QR6.

Property tax changes.   During the quarter, final numbers for FY 2003 property valuations were received.  The changes were minor and did not result in changes to tax projections.  The valuations provide information useful for budget projections for the next 2YB and do not change current year levy amounts.  At year end, the delinquencies and subsequent roll amounts will be booked.  Those do potentially affect FY 2003 proceeds but will not be known until October or November 2003.

The Micron property tax valuation law suit was settled after the end of QR6 and resulted in a loss of property tax proceeds of $2.2 million to Boise City.  The State Tax Commission also disclosed that Qwest has contested valuation for FY 2002 and FY 2003.  The amount for the Qwest law suit is projected to be, in the worst case, about $750,000 per year.

Sales tax projections.   Revised sales tax figures indicate that the City�s proceeds will be almost $300 thousand higher than projected in the budget.  That amount was communicated to City Council in the Six Year Financial Plan update in February 2003.  Sales tax has been stronger during FY 2003 than economists projected.  The State of Idaho experienced tax proceeds of close to 5 percent higher than budgeted during the six month period.  The City had budgeted higher projections than the State in the municipal budget and the projected increase over budget is about 2.7 percent. 

Liquor tax proceeds.   Liquor tax proceeds are apparently counter cyclical and have exceeded projections during the downturn in the economy.    The amount of gain is about $61 thousand.  That amount was communicated to City Council in the Six Year Financial Plan update in February 2003.

Franchise fees.   Franchise fee projections continue to be as budgeted.  The �excess base� amounts, set aside to cover increased City power costs, are projected to be lower than budgeted because of rate reductions by the IPUC.  Those funds are set aside and do not affect available money.

User fees.  User fees show a reduction of $320 thousand for court fines.  Those monies were formerly received as an allocation of court costs to pay for the municipal court facility debt.  The County Courthouse replaced the municipal facility and with it, the City lost the right to capture the court cost.  The County has continued to share those revenues as a discount to the City�s payments for court staffing.

Development fees.  The slow economy has dampened development within the City.  As communicated during the Six Year Financial Plan update in February, the projected year end total for development fees is over $800,000 less than budgeted.  While the number of permits has remained quite high, the number of high cost projects has radically declined.

Cost changes during QR6.

Impact of the calendar 2003 medical insurance contract.   During the quarter, the new contract for medical insurance was implemented.  Police and fire unions continued to receive coverages prescribed in their labor contracts.  Other employees received a new Preferred Provider Option coverage, which cost 13 percent more than coverage in the previous insurance contract.  With the cost increase for the police and fire union coverage, the overall cost to provide medical insurance in the tax funded programs increased by 20 percent. 

The assignment to the Human Resources bureau to study cost saving options was underway during the quarter.  Self funding, Internal Revenue Service approved savings arrangements, and other ways to maintain coverage and reduce costs are being studied.

Public Employees Retirement System changes.  PERSI changes in employer costs were formally communicated during the quarter.  Those increases were effective beginning in FY 2004 and will be included in the 2YB development.

Life and disability insurance premium changes.  Human Resources was able to secure significant savings in life and disability insurance costs.  Those costs will be passed on to all departments as personnel cost savings.

Fuel costs.  Fuel costs remain higher than budgeted.  Departments are working to cover the increases within their budgets.

Utility costs.  Power and water costs are �watch items� for departments.  The excess franchise fee proceeds are available to offset power costs.  Those will be transferred to departments as far as the excess proceeds may be spread.

 City Shop costs and revenues.   During the quarter, the City Shop found reduced usage and consequently revenues declined.  The Shop managers committed to finding ways to balance costs with revenues. 

Technology efforts.   The Mayor assigned an Information Technology Advisory Team to develop an organizational plan for IT services and infrastructure in the next few years.  The team met extensively and will provide recommendations for budget consideration by the Executive Management Team and the City Council.

Debt funded programs.  Sewer and Airport.     During the quarter, Public Works successfully developed a debt issue and achieved the necessary judicial approvals.  Airport worked to develop a debt issuance to acquire additional funding needed to complete the master plan for parking and other facilities associated with the airport improvements. 

The issue of financing for the police headquarters/precinct, branch libraries, fire stations and ladder truck continued on hold as alternatives were studied.

 Reserves.    All fund managers presented reports to the City Council, concluding in February 2003 with the Risk Management and Workers Compensation Fund reports.  Reported exceptions to the reserve objectives approved by the City Council include the �Rainy day fund� in the General Fund, with an objective of a fund balance designation of 5 percent of the annual budget, was only at 3.9 percent or $4.24 million.  The Risk Management Fund self funding reserve, targeted at 90 percent of actuarially identified reserve, was approximately 82 percent.  The Workers Compensation Fund self funding balance was at 78 percent, which was consistent with the multi-year strategy of building the reserve balance in the new self funding program.

Rating of City financial resources and management.   During the quarter, events and situations that are disclosable include but are not limited to the Micron law suit related to property tax valuations (and consequently to tax proceeds), the Qwest law suit related to operating property valuations, and the forensic audit.

 Security assessment.  The Risk Management program continued through the quarter to work on the security assessment using a contract firm.  The report will be completed near the end of the quarter and communicated to the City Council.

Department budget and �actual� reports.

All departments and major divisions have submitted QR6 reports.  Each department has prepared budget to �actual� reports in their department section in the QR6 report.  Under the Quarterly Report Policy, departments are responsible for analyzing and disclosing all material events and changes in their budget and financial picture. 

DFM is accountable for reviewing their reports and for budget to actual for City wide costs and revenues.  This section addresses DFM�s responsibility for the City wide accounts.  The departments� reports are attached. 

Since the second quarter of FY 2003 (QR6) was such a difficult and busy time for DFM, no specific analysis of the departments� reports are provided.  The new Quarterly Report Policy that clarifies the DFM responsibility was adopted after the quarter was over.  In future reports, DFM will assign time to provide review and comment about departmental variance and issue reports.

Recommendation for further analysis - Airport.   The DFM staff have discussed the advisability of special audit of the Airport terminal construction project because it is the largest single construction project in the City�s history.   The Airport staff have managed the project consistent with City policies and processes related to accounting transactions and debt.  The Airport Financial Manager has completed special financial analysis and audits and has indicated that external requirements and time constraints on the project have resulted in change orders. 

Because of the unique complexity relating to the size of the budget and to the numerous changes that have been required because of external events, especially related to security requirements imposed by the Federal government, DFM communicated to Airport staff the recommendation that special audit  work should be completed.  The JeffersonWells forensic audit also indicated the general guideline that a construction project of such complexity and size is a good candidate for special audit.  For those reasons, DFM staff believe that a special audit should be done of the airport terminal project.