CITY COUNCIL AGENDA ITEM
ACTION REQUESTED:
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Receive the report on the CY2018 Budget and review options for the Property Tax Levy reduction (Item 1 of 4)
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DEPARTMENT: Finance Department
SUBMITTED BY: Rachel Mayer, Finance Director
BOARD/COMMISSION REVIEW:
N/A
BACKGROUND:
Budget Overview
The City of Naperville’s 2018 budget was approved at $443.6 million, an overall increase of 0.5% from the $441.5 million 2017 budget. The City’s three major funds, which equate to 78% of the overall budget, saw limited change from 2017 to 2018.
• The General Fund decreased 0.7% with a total budget of $121.1 million;
• The Electric Utility Fund increased 2.5% with a total budget of $161.3 million; and
• The Water Utility Fund decreased 0.3% with a total budget of $62.1 million.
This limited growth is evidence of the City’s proactive annual commitment to reviewing expenditures, generating appropriate revenues and evaluating service delivery methods that provide high quality services to our community. Each year, City staff and City Council spend a significant amount of time exploring and planning how they envision the municipality operating both now and into the future. The City’s mission statement, ends policies and financial principles are all guiding influences in the budget development process.
Budget Process
The City’s budgetary process occurs year-round; primary activity for the coming year’s budget begins in August. Departments develop and submit their operating budget and capital improvement program (CIP) recommendations using historical spending information and projections for the upcoming year.
Two rounds of review followed initial 2018 budget submissions. Finance staff first analyzed trends, spending patterns and prices to reduce submissions. Next, multi-department team meetings that included CMO and Finance provided the environment for collaboration, discussing cost-saving opportunities across departments, and delineating service enhancement requests from ongoing service requests. The City’s financial principles, Citizen Survey data, and ends policies were used as decision-making guidelines throughout the process. Reductions included personnel requests, building improvements, equipment purchases and deferred or delayed capital projects. A total of $12.6 million in initial operating and capital budget reductions were included in the proposed budget presented to the City Council. See Attachment #1 for a list of operating and capital budget reductions.
Review of the tentative annual budget for 2018 took place at three City Council workshops. At the conclusion of the second workshop, City Council instructed staff to identify additional budget reductions equal to 1%, or approximately $1.2 million, within the 2018 budget. Staff reviewed the budget and created an itemized list of potential reductions from the City, Naperville Public Library, and Naper Settlement. This list included an explanation of the impact on service levels. During the third workshop, City Council voted to eliminate and reduce service levels by $1.4 million. See Attachment #2 for a list of reductions.
Financial Principles and Prior Actions
In 2015, the City implemented three financial principles intended to guide future financial decisions and promote the long-term financial success of the community. The City continually tests its finances against these principles.
• Principle #1 - The City will pass a structurally balanced operating budget annually;
• Principle #2 - The City commits to continuous improvement in the delivery of necessary and cost-effective services; and
• Principle #3 - The City will actively seek to increase its reserves to 25% and reduce its debt by 25% in the next eight years.
Principle 1 ‐ The City will pass a structurally balanced operating budget annually.
The City’s ongoing efforts to provide high-quality services at a low cost for residents is evidenced through on-going expenditure review and limited annual growth. The 2018 General Fund operating budget is a 0.7% decrease from 2017. The general fund budget was reduced despite outside pressures, including a $1 million reduction in state revenues and a 16% increase in actuarial-required public safety pension costs, that did not align with prior assumptions of no change in state funding and moderate pension growth.
The City’s proactive approach to cost containment is evident. The City has maintained a 0.9% average annual increase in operating expenditures over the past decade compared to the Chicago-area consumer price index (CPI) growth rate of 1.6% over the same timeframe. The City’s cost containment efforts exceed the 3% annual growth assumption for expenditures. During the 2018 budget process, $3.9 million in reductions was identified, $2.5 million from staff review and $1.4 from service level reductions.
Personnel comprises 61% of the City’s maintenance and operating budget (excluding purchased power and water). During the 2018 budget process, all personnel requests were reviewed by the Personnel Review Committee to responsibly control these costs moving into the future. Due to this and Council actions, total City staff was reduced by 7.3 FTEs during the 2018 budget cycle. Currently, total City staff is at 949 FTEs, the lowest level since the City has been substantially built out. Overall, the City’s salaries and wages decreased 0.7% in 2018.
Principle 2 ‐ The City commits to continuous improvement in the delivery of necessary and cost‐effective services.
During development of Naperville’s three financial principles, the City solidified its organizational philosophy on service delivery. In Naperville, service is not simply delivered; it is continually analyzed for improvements by all employees at all levels, which equates to better service at a lower cost. The City’s philosophy isn’t just to serve the community; it’s to serve the community well.
As part of the City’s commitment to using data to drive results and innovation, gathering and understanding statistics that address the community’s satisfaction with City services is critical. The 2016 Citizen Survey is the City’s most recent statistically valid benchmark to measure efforts; in that year, 94% of residents surveyed were satisfied with the overall quality of life in Naperville, a 3% increase from 2012. This indicates the City is performing extremely well; however, the City is now at a point where future service decisions could result in what are considered unacceptable service levels.
Satisfaction levels in Naperville have increased since 2008, remaining well above the national average. However, the survey also indicated a decrease in satisfaction in 23 of the 94 areas assessed, with several seeing a statistically significant decrease. These included street sign, pavement and marking maintenance; traffic conditions in neighborhoods; maintenance of major City streets; curbside bulk leaf removal service; and household hazardous waste disposal. In addition, residents indicated they’d like to see increased efforts to address traffic and congestion, street maintenance and police services.
Principle #2 supports the City’s overall service philosophy and attempts to align with the Citizen Survey data. As part of the 2018 budget process, $2.26 million in service enhancement proposals were submitted. During budget review, these enhancements were reduced to $633,000. See Attachment #3 for a list of service enhancements and multi-year initiatives.
Principle 3 ‐ The City will actively seek to increase its reserves to twenty-five percent (25%) and reduce its debt by twenty-five percent (25%) in the next (8) years.
In 2018, the original unfunded capital project listing for the City totaled $26.23 million. Through program review and project coordination, staff reduced the total recommendation by $10.07 million for a total unfunded capital amount of $16.16 million. The project amendments attached, combined with changes to 25 other projects, allowed staff to reduce the overall capital request for 2018. See Attachment #1 for a list of capital budget reductions.
To reduce reliance on borrowing for capital re‐investment and to allow the City to reduce debt and increase reserves, the City implemented a 0.50% home rule sales tax in 2015. At the time of the financial principles’ implementation, the City had $121 million in general corporate debt. The City ended 2017 with $102 million in debt, a 16% reduction. This is a reduction from $823 of debt per capita to $694 of debt per capita in four years.
To align with the City’s objective of reducing debt and minimizing the risk to our bond rating, the 2018 budget includes approximately $7.35 million in borrowing. This, combined with the City’s projected debt service payments of $12.70 million, will reduce the City’s overall governmental debt position an additional $2.37 million, or 2.1%, by the end of 2018, leaving $99.80 million in outstanding governmental debt.
The aim of the cash reserves component of principle 3 was to reverse the historical usage of reserves to maintain a balanced budget. From 2002 through 2015, the City drew its total cash reserves down from $180 million to $71 million, a 60% reduction. Since the implementation of the principles, cash reserves have begun to be replenished, with both utility funds working towards 30-day reserve targets and the General Fund working towards its 25% cash reserves target, with a current reserve level of 21%.
DISCUSSION:
City Council Prior Action
The City continues to have the lowest property tax rate of our comparable communities. While the City component only makes up 10% of a resident’s total tax bill, the City minimizes its impact on taxpayers by balancing service levels and diversifying its revenue sources to decrease reliance on property taxes as a funding mechanism.
During the 2018 budget process, Council’s decisions indicated that maintaining or lowering the total amount of property tax dollars collected was a significant priority. It’s important to note that maintaining or reducing the total amount of property tax collected results in the City forgoing the continued growth of its equalized assessed valuation (EAV). This EAV increase includes both existing property appreciation as well as new construction, the latter of which requires increased City services to support the new infrastructure. On December 19, 2017, Council directed staff to provide $2.1 million in changes to further reduce the property tax levy to an amount less than last year’s.
Below are several options available to reduce the property tax levy. As currently approved, the average homeowner’s projected tax bill is $848 for city services. If all options below are selected, the average City portion of property tax bills in 2018 would be $810, which is flat compared to 2017.
Municipal Telecommunications Tax
The City applies a 5% telecommunications tax to landline and cell phones that the State of Illinois collects and distributes. The maximum rate allowed by the state is 6%. Increasing this tax rate from 5% to 6% effective July 1, 2018, would yield an increase of $880,000 for a full year of payments. This action would require the City to file an ordinance with the state by April 1, 2018. Similar to the implementation of the home rule sales tax, there is a three-month delay in receiving funds once a tax is enacted. This means that for a July 1 implementation date, the City would receive monthly disbursements starting in October 2018 and yield an incremental $220,000 for 2018. Included in the agenda is the ordinance increasing this tax rate.
Hotel/Motel Tax
The City applies a 4.4% hotel/motel tax that is administered and collected locally, meaning there are no state deadlines associated with implementation. The average hotel/motel tax rate in the region is 5.5%. Increasing Naperville’s tax from 4.4% to 5.5% would yield a gross increase in tax collected over a full year of $600,000. As some of this increase would be rebated back to several hotels, the net increase for a full year of collection is $350,000. Assuming the tax was implemented to start in the second quarter, the 2018 impact would be an additional $280,000. Included in the agenda is the ordinance increasing this tax rate.
Home Rule Sales Tax
The City’s current home rule sales tax rate is 0.5%. Each quarter point increment is valued at $4.5 million for a full year of receipts. As the earliest date that this tax could be changed is July 1, the three-month delay in disbursements for a 0.25% increase would result in a $1.1 million impact for 2018. Included in the agenda is a first reading of an ordinance increasing this tax rate by 0.25%.
Food and Beverage Tax (SECA)
Although it would not impact 2018, an idea has been suggested to provide a 0.25% reduction to the citywide Food and Beverage Tax effective January 1, 2019. This action would have a negative impact in 2019 with a $1 million reduction in revenue collected. Based upon the current allocations of food and beverage receipts there would be a $300,000 decrease in funding for public safety pensions, a $200,000 decrease to social service grants, and a $700,000 decrease to debt service allocations. Should Council come to consensus on this reduction, an ordinance amendment will be brought back at a future date.
Maintenance/Capital Items Decrease
One annual maintenance item was identified by directors that would have the least impact on residents: either a one-year (or multi-year) moratorium on storm sewer lining. The 2018 budget currently has $600,000 earmarked for this work. Staff advises the retainage of a minimum $100,000 for annual lining repairs due to the cost-effective nature of the program. Should Council come to consensus on this decrease, a budget amendment will be brought back at a future date.
Summary
The below chart visualizes each component, the specific action, the effective tax, the projected impact, and how each component builds to reach the $2.1 million target as directed by City Council.
|
Component |
Action |
Effective Date |
Impact |
Impact on 2018 Target |
|
Bond Sale |
Lower interest rate than anticipated |
Immediate |
Reduces gap starting point by $200,000 |
Reduces $2.10M to $1.90M |
|
Municipal Telecommunications Tax |
Increase from 5.0% to 6.0% |
July 1, 2018 collection October 1, 2018 disbursement |
$220,000 increase for 2018; $880,000 increase in 2019 |
Reduces $1.90M to $1.68M |
|
Hotel/Motel Tax |
Increase from 4.4% to 5.5% |
April 1, 2018 collection and disbursement |
$280,000 increase for 2018; $350,000 increase in 2019 |
Reduces $1.68M to $1.40M |
|
Home Rule Sales Tax |
Increase from 0.50% to 0.75% |
July 1, 2018 collection October 1, 2018 disbursement |
$1.1 million increase for 2018; $4.4 million increase in 2019 |
Reduces $1.40M to $300,000 |
|
Maintenance/Capital Items Decrease |
Place one- or multi-year moratorium on storm sewer lining program |
Immediate |
$500,000 decrease for 2018 $500,000 decrease in 2019 and beyond |
Reduces $300,000 target to a $200,000 decrease in the property tax levy |
|
Food and Beverage Tax (SECA) |
Decrease from 1.00% to 0.75% |
January 1, 2019 collection and disbursement |
No impact in 2018 $1 million decrease in 2019 |
No 2018 impact |
2019 Budget Projections
Looking forward to the 2019 budget, if the telecommunications tax, hotel/motel tax, and home rule sales tax are all enacted, they are projected to generate an additional $4.0 million next year. In 2019, if operating expenses increase by 2.5%, this would translate to a $3.0 million increase in the General Fund. Staff also anticipates a $0.5 million increase in the maintenance improvement program (MIP) in 2019. These preliminary figures do not account for any external pressures, including actions at the national and state level.
One of the additional options submitted by Council for review and mentioned above was the reduction of the Food and Beverage tax from 1.00% to 0.75%. This action would decrease revenues by an estimated $1.0 million starting in 2019. This decrease, in conjunction with potential operational increases and the anticipated increase in MIP investment, would put the City in a projected $0.5 million deficit to start 2019. As part of this discussion, staff advises Council not reduce the Food and Beverage tax.
FISCAL IMPACT:
If all the above actions are approved, the City’s property tax levy would be reduced from $48.7 million to $46.6 million. This would result in a flat property tax amount for the average homeowner.