Office of the City Manager

DATE: July 16, 2008

TO: Deb Hermann, Chair Finance and Audit Committee

Jan Marcason, Vice- Chair Finance and Audit Committee

Russ Johnson, Finance and Audit Committee

Beth Gottstein, Finance and Audit Committee

Sharon Sanders-Brooks, Finance and Audit Committee

FROM: Wayne A. Cauthen, City Manager

SUBJECT: FY 2008-09 Fiscal Issues Update

As requested, the staff and I have identified the following potential fiscal issues – most of which have arisen since the Mayor and Council adopted the FY 2008-09 Budget on March 27, 2008. At this time of the year, it is more the rule than the exception to have matters like these arise, and, based on experience, I would anticipate that some will not come to fruition and the impact of some others will not be as great as shown while others, such as fuel costs, or unforeseen events could become bigger issues. For example, at the close of first quarter last year, we were projecting a deficit in Earnings and Profits Tax collections of $1.85 million but ended the year with actual collections exceeding budgeted estimates by $2.0 million. Conversely, we did not foresee the $4.2 million TIF reimbursement need until Third Quarterly Analysis and had to quickly address that need. In short, we need to exercise vigilance throughout the fiscal year.

A much more thorough analysis of the budget will take place at the end of the first quarter, and these and other issues should be more clearly defined at that time. The results of that analysis should also better indicate if this preliminary assessment overstates or understates our likely fiscal condition. Furthermore, while historically, the first quarterly analysis and other fiscal reviews this early in the year tend to be very conservative and tend to take a worst case outlook, I do not expect all these potential issues to necessarily work themselves out. In addition, while I do not believe dramatic measures are needed at this time, some action has already been taken to begin addressing some of these issues, and other actions will be taken as needed. Although there is clearly reason to be vigilant regarding the current year’s budget, I also believe there are some clear positives that should favorably impact and assist in moderating our fiscal condition.

Expenditure Issues	Amount
Consolidation of North Patrol and Aviation Facilities	$1,000,000
Leaf and Brush Drop-Off	$450,000
EDC Funding (Restore Contingency)	$450,000
Unleaded and Diesel Fuel Costs	$1,800,000
Solid Waste and Recycling Contracts	$500,000
Police/City Consolidation	$1,000,000
Apartment Rebate	$1,400,000
Total	$6,600,000
Revenue Issues
Development fee increase/underlying activity	$2,100,000
Convention & Tourism Taxes	$1,000,000
Bartle Hall Rentals	$600,000
Gaming Revenues	$1,000,000
Local Use Tax	$1,000,000
Red Light Cameras	$1,000,000
Natural Gas rate increase	($3,000,000)
Total	$3,700,000
Combined Total	$10,300,000

In addition to the items listed above, we should also be attentive to the following:

• It appears that a noteworthy number of employees opted to upgrade their health insurance coverage during open enrollment. While, the budget sought to fully fund health insurance costs, this change in coverage may result in costs exceeding budgeted amounts.

• Police overtime requires attention, because this is a Presidential Election year. Candidate visits to Kansas City will require additional time and effort by our Police Department.

• Thus far, our summer has been somewhat milder than usual. This may be effecting utility tax revenues as air-conditioner use may be less than in recent summers. However, with the remainder of July and August ahead of us, any impacts of the milder weather we have experienced thus far may be offset or exceeded. In addition, increases in natural gas rates should increase our revenues received. Utility Tax collections will be closely monitored as will all other sources of revenue and expenditures.

• Court fine collections for the last few years have fallen below budgeted estimates. Given that history, this is another area that could require further attention.

On a positive note, one of the results of the methods used in structuring and balancing the current budget is that the budget is more resilient and responsive to potential revenue shortfalls and expenditure overruns. Fiscal 08 began with the City in a budgetary “hole” because of a large salary savings allocation and knowingly underfunding workers compensation and health insurance premiums. In fiscal 09, the salary savings allocation is dramatically less than last year. Likewise, the budget sought to fully fund health insurance premiums and workers compensation. These actions alone enabled the city to begin fiscal 09 $11.0 million healthier.

In addition, the Mayor and Council increased funding for snow removal by $1.3 million. They also reduced the revenue estimate for the Earnings and Profits tax by $2.0 million from the amount originally proposed, and the revenue estimate for Licenses and Permits was also lowered by approximately $2.3 million below the adopted FY 08 level to an amount approximately equal to FY 08 actual collections. These measures have further reduced the strain on the FY 09 Budget by another $5.6 million. These actions taken by the Mayor and City Council in adopting the 2008-09 Budget, better positioned the City to deal with fiscal difficulties that may arise and to do so with less trauma to the organization as increases in revenue and reductions in cost incurred during the year will more directly and immediately improve the city’s fiscal condition.

While the impact of the wireless settlement was unquestionably very beneficial to our FY 2008 year end financial condition, I am also pleased that Earnings and Profits Tax income exceeded the budgeted estimate for the year. This gives us a better base on which to build for the current year. Another positive point from the year-end closing of the books that bodes well for the current year is that convention center income from rentals and other facility use charges exceeded the FY 08 budgeted estimated by nearly $1.6 million. These actual collections also exceed the budgeted estimate for FY 09 by approximately $1.0 million. Likewise, Convention and Tourism Tax revenues exceeded the budgeted estimate for FY 08 by $2.4 million and exceeded the revised estimate by $1.6 million. I hope this trend continues as this could significantly moderate the loss of revenue associated with the Wal-Mart Corporate Meeting moving to Orlando. All the same, the intent of the Convention and Entertainment Facilities Department is to cover the $600,000 in lost facilities income from the Wal-Mart decision with $300,000 of cost reductions and $300,000 of additional revenues generated through continued aggressive marketing efforts.

In addition to aggressive marketing and cost cutting at the Convention Center, other actions are being taken to maintain a balanced budget. I will continue to require that departments seek means of reducing fuel consumption while not negatively impacting service delivery. Among others, these measures include minimizing idling and ensuring proper air pressure in tires. Furthermore, we will carefully monitor development activity in the City and associated revenues. If it lags, we will keep existing vacant positions funded by these revenues vacant, and as new vacancies occur within this activity they too will be kept vacant. Likewise, I am instructing all department directors to be conservative in implementing their budgets and to seek means of economizing in their operations. However, we will also ensure that functions needed to sustain existing developments and provide basic public services are continued.

Another fiscal positive is the fact that 36 additional General Fund supported vacancies have accrued since the hiring freeze was put in place in mid-March. Because of the $7.5 million reduction in salary savings in General Fund supported public service functions, these vacancies are rapidly generating budgetary savings, and more vacancies will occur throughout the year. The annualized savings from these 36 vacancies alone will be more than enough to cover budgeted salary savings, in General Fund public service departments, and the $300,000 shortfall in position reductions previously reported to the Committee. I must also note that these 36 vacancies to date are in addition to 190 vacant positions that will remain frozen for the remainder of the year and 157 positions that were eliminated in the 2008-09 budget as a result of the RIF and programmatic reductions.

A total of 347 positions have effectively been removed from the City’s authorized FTE count in the process of implementing the FY 2008-09 Budget. This total is comprised of the following:

• 190 Vacant Positions Frozen and Removed from the Position Register for at least the Remainder of the Fiscal Year
• 78 Vacant Positions Permanently Eliminated from the Position Register
• 15 Employees Released from City Employment and Incumbent Positions Eliminated
• 40 Employees Transferred to Other Existing Vacant Enterprise Fund or Fee or Grant Supported Positions within the City And Incumbent Positions Eliminated
• 8 Employee Retirements or Resignations and Incumbent Positions Eliminated
• 16 Employees with Action Pending (Release, Transfer, etc.) And Incumbent Position to be Eliminated

This approach to achieving the reduction in force plan and position eliminations caused by programmatic reductions is consistent with the plan outlined in the March 27 memo to the Mayor and City Council that emphasized minimizing the number of actual lay-offs that would take place.

As previously noted, in addition to the freeze on then vacant positions, the city implemented a hard hiring freeze in mid-March and that freeze has generated several new vacancies. One of the strongest tools the city has to manage its budget is the management of vacant positions and the authorization to fill those positions. While it is tempting to keep this hiring freeze in effect, a serious concern with hiring freezes is the unintended consequences they can produce. Since vacancies occur randomly, and hiring freezes are implemented without warning, these freezes can disproportionately impact some departments more than others.

The freezes and overall reduction in positions are producing some service delivery issues. Animal control efforts could clearly benefit from the four Animal Control Officer positions currently frozen. It has not been possible to implement the graffiti control program the City Council authorized in the adopted budget, and the Parks and Recreation Department has had to curtail the hours of some community centers and has not been able to maintain its schedule of mowing vacant lots – both privately and city owned. These are but a few examples.

I am also concerned that after two years of improvement in our Citizen Satisfaction Survey Scores for the city’s customer service, we may see some reversal in that trend. We have also seen positive movement in other survey categories as well. While the improvement in the scores were not as great as any of us would have preferred, it was movement in the right direction.

In an effort to address some of these matters, it is my intent to lift the hiring freeze. However, the staff and I will continue managing vacancies and hiring activities so that vacancies can be filled in basic service and other critical positions in a fiscally prudent manner. In regard to the freeze on vacant positions, my proposal is to enable selective positions to be removed from the freeze so long as their place in the freeze is replaced by one or more vacant positions of equal monetary value or the amount of savings from the freeze is not otherwise reduced. In any event, the vacancy freeze established in the adopted budget, will produce no less than $9.6 million in savings this fiscal year.

Let me assure you that the staff and I will also be vigilant in monitoring the local economy, our revenue collections, and expenditures. If items impacting the budget, positively or negatively, arise, we will inform you.

I am anxious to review the quarterly analysis to gain more insight into our fiscal condition. In the event that analysis or a subsequent analysis indicates that we need to take more aggressive action in managing the budget during the course of this fiscal year, I want to be prepared to do so. Therefore, it is my request that within the next few weeks I have the opportunity to meet with the Finance and Audit Committee in a work session to discuss in some detail City service and operational priorities, and that discussion should probably then be extended to the full council. The purpose of this discussion would be two-fold:

1. In the event a more aggressive budget management plan is needed for the remainder of this fiscal year, I can structure that plan consistent with the service and operating goals and objectives of the Mayor and City Council.

2. As we approach September and departments begin preparing their budget requests for 2009-10, a deeper understanding of the Mayor and City Council’s operating and service goals will assist the departments in preparing their requests, and assist the Management and Budget Staff and me in preparing a budget recommendation for your consideration.

Finally, I wish to remind you again that the data in this memo reflects 60 days of revenue collections and service delivery and is not an exhaustive analysis. The staff and I will continue our efforts to identify and resolve all fiscal issues surrounding the FY 2008-09 budget so that the fund balance and expenditure targets identified in the current budget are achieved. I plan to bring you the results of the FY 2008-09 First Quarterly Analysis of Revenues and Expenditures in mid-August. This Analysis will include the above issues in the context of a comprehensive review of General Fund resources.

If you have any questions, please do not hesitate to contact me at your convenience.

CC: Rich Noll, Assistant City Manager

Troy Schulte, Budget Officer