Quarter 7 - April 1, 2003 Through June 30, 2003

QR7 - FY 2003
Second Year of the Two Year Budget

Executive Summary

QR7 � April through June in the second year of the 2YB period - was a time of intense financial action in City operations as departments developed their next Two Year Budget requests, completed projections, administered spring and summer programs, and initiated capital projects. The 2YB process focused interest and attention by the Mayor, city staff, City Council and interested citizens on plans for the future and projections for the current year.

On May 6, 2003, the City Council adopted several new and revised financial policies. A revised quarterly reporting policy outlines additional requirements for departments and for the central financial staff for the quarterly analysis of financial transactions and results. The policy requires greater detail in spending reports. Click Here to view the new policy.

• The level of materiality for review and reporting by departments and the DFM that emerged as an issue, as this report was prepared. A materiality level for reporting on budget or spending changes of a 20 % and $1,000 change in a cost or revenue line item has resulted in a significant amount of work. Some departments have questioned the value of that level of detail. During a discussion in an EMT meeting, the consensus seemed to be that there are other and better approaches to materiality that could be used to achieve the City Council�s oversight objectives.

• Recommendation related to QR materiality level. The Budget Office suggests that the Mayor and Council direct the Executive Management Team to prepare suggestions about the level of materiality for future reports. It seems reasonable to rely on departments� to identify significant variances and to complete and report their due diligence review of the significance of variances.

QR7 Accomplishments. The City continued to implement the FY 2003 budget plan while at the same time dealing with the outcomes of the Mayor�s Office spending debacle.

• The Boise Airport Terminal project, perhaps the most significant capital improvement project in terms of cost in the City�s history, was brought to fruition during the quarter.
• The Preliminary Approved 2 Year Budget for 2004 and 2005 was adopted by the City Council on June 24, 2003 and set for public hearing on August 12th, culminating many months of work by departments and agencies and other interested participants.
• City operations and capital project development. In spite of the distractions related to the Mayor�s Office spending debacle, City departments and agencies continued to offer excellent customer services and to make progress on approved capital projects.

FY 2003 General Fund Savings. During FY 2003, Budget has transferred savings into a sequestered savings account. The account was initiated to accumulate funding for the Shaver�s property purchase (for future Main Library expansion or construction). At the end of QR7, $1,077,150 was set aside in the General Fund (primarily from bus grant actions by ValleyRide) and $445,000 in the tax supported Capital Fund (from the Morris Hill Park Development project that Jim Hall proposed for deferral in order to help meet the budget shortfall).

On June 24th at the City Council budget workshop, the Council approved a motion to use the savings to cover the loss of property tax revenue related to the Micron tax valuation settlement. Because the ($1,522,000) savings was less than the Micron loss, the Council directed that the �rainy day� fund be used to cover the remaining loss ($643 thousand). The effect of the decision on FY 2003 will be a use of fund balance at year end that will result in a reduction in the �rainy day� balance sheet designation.

he sequestered savings account was established and considerable progress was made toward the $1.5 million for the Shaver�s property. The funding for the Southeast library branch site was also approved and the �earnest money� payment ($145,153) was made. That payment was also without budgeted funds because the Cole and Ustick branch site had cost the entire amount budgeted for both branch sites. Again, direction was given that savings would be accumulated for that purchase as well. The closing of the Southeast library branch site will occur after October 1, 2003 and will be an FY 2004 issue.

Library, Budget and the Executive Management Team have worked to identify funding within the budget that can be converted to fund the library sites. A funding plan is being prepared and will be taken to the City Council through the MBT in August. The staff has identified alternatives that the City Council could approve to fund the two library purchases in FY 2003.

Some departments approached their assigned management target by moving budgeted money from spending accounts into a sequester account (amounts in the sequester account total $465 thousand in the General Fund in QR7.) Other departments have chosen to earmark money within their budgets for their assigned savings target.

Several departments set aside the full amount of their share of the original target ($1.515 million) to provide a cushion if other budgetary problems were to arise during the year.

At QR7, the departments and DFM continue to monitor �watch item� factors that could significantly affect the EOY bottom line. Those factors were communicated to City Council during the February and March Six Year Financial Plan workshops and during the 2YB process in June. FY 2003 is marked by considerable uncertainty and the end of year could include savings or losses beyond the planned use of fund balance (the �rainy day� fund) approved by City Council on June 24th to cover the Micron property tax loss. Therefore, at this point it is important to continue to monitor with caution and concern as departments and DFM manage the budget to try to achieve a positive year end balance.

• Property tax revenues. During the quarter, the City Council directed that the Micron tax loss will be absorbed and that a levy to recover the lost amount will not be pursued in the September 2003 property tax certification. DFM will book that loss of $2.3 million.
• Animal Control revenues. City Council approved new fees for animal licenses effective August 1, 2003. The animal control revenues have been weak during the last year, probably as a result of the economic climate. The affect of the new fees will be reported in QR8 but will likely not be fully apparent until a full year cycle of licensing and license renewals is completed.
• Franchise fees. The Public Utilities Commission�s actions on rate requests by Intermountain Gas will increase City franchise fees beginning in QR8. Whether they are base increases or anomalies (as were the electric and water rate increases in 2000 through 2002) will not be apparent until FY 2004. Some increases beyond budget are expected for gas franchise fees. Cable fees continue to be soft. Some electric franchise fees are projected during FY 2003 beyond budget. By Council policy, those excess fees will be applied to excess costs for power in the departments� facilities and programs.
• Development fees. Development fees are a key General Fund revenue source and continue to be a watch item through QR7. Tim Hogland and his staff have communicated projections during the budget development process and in previous quarterly reports.

QR7 Cost Analysis and Projections.

• Utility costs for departments. Public Works has projected that the municipal street lighting program may experience costs over budget for electric power because of the excess rate increases. Other departments have also estimated that power costs may exceed budget. A marker for those departments that do experience such increases over budget related to rates is provided using the excess electric franchise fees. The transfer from the Capital Fund will be completed in the year end process if required. However, the electric power rate decrease that was approved by the IPUC effective in May is expected to mitigate this issue.

Departments will be expected to manage and balance their budgets as in past years. However, if they are unable to do so because of the power rate increases, the marker will be applied proportionately related to the amount in the excess electric franchise fee pool.

• Public safety overtime. Always a key spending issue, police and fire indicated concern about potential budget pressures, which would be heightened during QR8.
• Risk Management reserve funding. Funding for reserves for claims is provided through assessments to operating departments. During FY 2002 fund manager�s reports and during budget development, concern was indicated about reserve levels. The subsequent analysis by Risk Management and Budget indicate that, if no significant anomalous losses occur during QR8, the reserve levels will be within Council policy.

QR7 Cash Flow Analysis for the General Fund This is the first report of analysis of cash flow in the quarterly reports and it is focused on the tax funds. Cash flow in the General Fund is cyclical, primarily because of the impact of property taxes. During part of the fiscal year (particularly the second and the fourth quarters), cash flow is sufficient because of the property tax receipts to cover costs. However, the General Fund typically experiences a cyclical cash flow problem resulting from the gap caused by timing of property tax receipts and expenditures in the first and third quarters which is greater than the current level of the �cash flow designation.� Treasury manages cash to meet commitments and transfers/burrows cash within funds to do so.

Analysis of FY 2002 and current year cash flow shows the impact of unfunded expenditure commitments upon the cash flow gap. Purchases in FY 2002 (the industrial park site and the 25th and Fairview) and in FY 2003 (the library sites) required internal borrowing. While the FY 2002 purchases will return cash to the General Fund when sold, that will be sometime in the future.

• Property tax impact. The City receives the majority of the cash from property taxes late in January and July. Because the first significant payment for the current fiscal year is in January, the cash flow for the first quarter expenditures must come from the prior fiscal year. The problem also occurs prior to the July property tax receipts.
• Cash flow level. While the first quarter typically is at the bottom of the cash cycle, it exhibits comparatively high expenditures. The General Fund has historically required short term internal borrowing from other funds (primarily Capital Projects and Debt Service) to cover cash needs of $3 million to $4 million beyond the cash flow designation during the December/January and June/July periods. The �loans� are then reimbursed to the other funds when the taxes are received from the County.
• Other cash drains. Over the past few years, the problem has been exacerbated though additional cash drains: 1) Land purchases (e.g., industrial park and 25th and Fairview) with the commitment to eventually sell and reimburse the cash to the General Fund added another $5 million to the cash flow mismatch; 2) cash flow support to other funds such as BUS, City Shop and Municipal Irrigation (e.g., in FY 2003, the General Fund has advanced in excess of $1,000,000 to the bus fund that will be outstanding until ValleyRide receives the federal grants); 3) the $2.3 million cash shortfall which resulted from the Micron property taxes valuation settlement.

The amount needed to cover the cash flow needs has grown to between $8 million and $9 million in FY 2003. As General Fund budgets, and the related cash demands increase in the future, the cyclical cash flow gap could also increase. The current cash flow policy provides five percent (5% or about $5.6 million) of the General Fund as a source to cover the cash flow issue. At October 1, 2002, the cash flow designation was funded only at the 3.9% level ($4.2 million). The difference between the cash flow reserve and net cash flow needs must be covered by internal borrowing.

• FY 2003 cash flow level. After receipt of the July, 2003 property taxes, the General Fund will repay the Capital Projects Fund about $8 million for FY 2002 (the source to cover the gap was the capital transfers from the General Fund, which were not made due to the cash flow problem.) Projections indicate that during December 2003 and January 2004, the General Fund will again experience a cash flow shortfall of approximately $8 million, which will again necessitate borrowing from other funds.

Alternatives and recommendation. The General Fund cash flow issue will remain the pattern for the foreseeable future. However, unbudgeted purchase of land that exacerbated the issue during 2002 and 2003 is not expected to occur during the next 2YB. DFM proposes that recommendations be developed for Mayor and City Council consideration during the FY 2003 end of year discussions related to QR8. Alternatives for longer term solutions, which will be studied, include:

• Increase the cash flow designation beyond 5 %. This is the preferred solution but may prove difficult given the pessimistic projections for the 6 year planning window. When properties designated for sale are sold and cash is returned to the General Fund, it could be designated to replenish cash flow reserves.
• Institute a judgment levy to recoup the funds lost in the Micron settlement. This would not resolve the whole problem, but would address that portion of the cash flow drain. It would be most significant if the amount of the judgment levy were to be added to the cash flow designation.
• Continue internal interim borrowings. There are limits to how much can be drawn from other funds because of cash flow needs related to future capital projects and to operations in other funds. However, this continues to be a viable option.
• Issue external interim borrowings, such as registered warrants. The City used registered warrants (essentially sight drafts against a bank) to cover certain short term General Fund cash flow needs and emergencies until the late 1980�s. The City also issued Revenue Anticipation notes to cover cash flow deficits dating from the late 1970�s until 1996 when debt was issued to eliminate that need.

The City made some promises to the community that the City would avoid the activities that had required the City to issue �revenue anticipation notes.� This cash flow issue is structurally different that the pre-1996 situation (i.e. those gaps were caused because revenue was not received until after the fiscal year was over � these borrowings would not extend beyond the end of the fiscal year and would be for two or three months.)

Although use of registered warrants to bridge a short-term cyclical cash flow gap is a legitimate use of short-term debt and is based upon a different foundation than that which was cured in 1996, the perception that the City is headed back into that pre-1996 hole may be hard to overcome.

DFM would recommend warrants only as a last resort. DFM will provide the Mayor and City Council with further analysis and recommendations to address the cash flow issue in connection with the QR8 end of year report.

Financial Analysis Assignments and Studies.

During FY 2003, a number of important studies have been assigned to staff teams to improve City operations or to address priority issues.

• Funding for the purchase of Library properties. A proposal for funding the Shaver�s property purchase and the Southeast branch library site purchase will be transmitted to the City Council in August 2003. The Executive Management Team has worked to develop solutions to these funding commitments.
• Debt funded projects. The City Council directed that staff initiate steps to prepare a debt package to take back to the Courts for judicial validation to test the viability of debt funding for fire facilities. That is a significant assignment that will involve many in the City organization and in the Association of Idaho Cities, Idaho Association of Counties and other groups with an interest in the judicial validation process. DFM, Legal and the interested departments are preparing recommendations for the package for consideration by the City Council to submit for judicial validation.
• Grant funded projects, including security enhancements. The limited funding for new and enhanced City operations has caused the staff to seek grant funding for such important activities as security improvements, police staffing, park development, and the Institutional Network. Decisions on the grant applications could occur during the quarter.
• City Financial Controls. During the quarter, Mayor Terteling-Payne directed staff to present recommendations and proposed policy and procedures changes to the City Council. The staff teams were directed to prepare proposed corrections or solutions to address all of the findings of the Jefferson Wells audit. Most were completed during the quarter. A few continue into QR8.
• City Shop Financing Plan. Because of the continuing shortfall between revenues and costs at the City Shop, a team led by Mike O�Dell was assigned to analyze the City Shops processes, charges and to prepare recommendations to balance the Shop budget and balance sheet going forward. The study was initiated during QR7 and will continue on into QR8.
• City Hall Building and Custodial Maintenance. Public Works was directed to prepare a long term major maintenance and repair plan for City Hall facilities. They were also directed to prepare a plan for custodial maintenance including the question of contracting for services or of using staff. The reports were initiated during QR6 and QR7 and are ongoing.
• Downtown Shuttle Alternatives. With the decision to discontinue the downtown shuttle because of the cost implications, a committee was assigned to examine alternatives � short and long term � to provide transportation and parking for City Hall and other downtown employees. The committee was established at the end of QR7 and is ongoing.
• Institutional Network. The INet team continued to work on the goal of developing high speed and high bandwidth telecommunications networks for the City. The consultant report on the feasibility and cost of a City INet was presented to City Council on June 23rd, 2003 during the budget workshops. The INet team will bring recommendations for implementation to the Council in QR8 and beyond.
• Information Technology Advisory Team. The ITAT was established to provide strategic direction and focused analysis of opportunities to enhance the City�s IT facilities and resources. The ITAT is developing standards for IT equipment purchases, organizational structure and assignments for the IT operation, and direction for new or updated software applications. Reports were presented during QR7 and the ITAT has identified a series of products that will be produced and reported during QR8 and beyond.

QR7 report.

The QR7 report was prepared both in paper and in electronic formats at the City Council�s direction. The electronic presentation can be accessed athttp://www.cityofboise.org/financial_management/BudgetOffice/QuarterlyReports/02-03QR7/ The DFM staff will be pleased to respond to questions and comments about the reports.