Memorandum

City of Lawrence

Finance Department

TO:	Dave Corliss, City Manager
FROM:	Ed Mullins, Finance Director
CC:	Cynthia Boecker, Assistant City Manager Diane Stoddard, Assistant City Manager Casey Toomay, Budget Manager
Date:	April 24, 2008
RE:	Governmental Fund Projection

Background

Staff has analyzed the city’s budgeted governmental fund types for the 2008-2011 periods. Budgeted governmental funds include the general, debt, transportation, library, recreation, guest tax, alcohol, gas tax, and special recreation funds. With the exception of the general and recreation funds, the funds are dependant upon one revenue source, either property taxes or a special tax.

Methodology

Property tax revenues were projected by increasing the 2008 budgeted amounts by anticipated increases in assessed valuation. Based on current information from Douglas County, no increase in 2008 assessed valuation is projected. In addition, no increase in the mill levy was included. Sales tax revenue was increased by two percent (2.0%) annually after 2008. The amount of sales tax projected for 2008 was the original budgeted amount which is slightly higher than the amount predicted by the model.

The attached spreadsheets reflect two sets of assumptions relating to budgeted funds. A four percent (4.0%) increase in expenditures was projected to allow for the continuation of current service levels. A two percent (2.0%) scenario was also reviewed. This is slower growth than we have typically experienced and may require a reduction in current service levels.

A three percent (3.0%) annual increase in guest tax revenue and a five percent (5%) annual increase in alcohol tax revenue were used for funds with those revenue sources. Gasoline tax revenue is projected to be lower in future years as higher prices lead to reduced consumption, primarily because of the purchase of more fuel efficient vehicles.

General Fund expenditures in 2008 were projected to equal ninety-nine percent (99%) of the budgeted amount less identified salary and operating savings. The 2008 expenditures of most other funds were projected at either ninety-seven percent (97%) or ninety-eight percent (98%) of budget. However, some funds such as the Library, Guest Tax, and Alcohol were projected to spend one hundred percent (100%) of budget.

Analysis

Most of the governmental fund types have experienced reductions in fund balances in recent years. As a result, future expenditure growth will need to be less than revenue growth to avoid significant reductions in fund balances. Douglas County has informed us to plan on no increase in assessed valuation when planning the 2009 budget.

· General Fund

Using either the two percent (2%) or four percent (4%) expenditure assumptions, the General Fund balance falls below the adopted policy preference of a 15-30% range in 2009. The 2011 ending General Fund balance is eight and a half percent (8.5%) using the two percent (2%) growth scenario and negative using the four percent (4%) scenario. General Fund revenues are expected to grow around one and a half percent (1.5%) in 2009 and less than two and a half percent (2.5%) in 2010 and 2011. It is unlikely that current service levels can be maintained with only a two percent (2%) increase in expenditures.

· Bond and Interest Fund

The Bond and Interest Fund had a substantial fund balance of $7.7 million as of the end of 2007. It has been assumed that the city will issue no more than $5 million per year in debt payable from property taxes. This does not include debt paid by special assessment or other sources such as sales tax or storm water fees. Because of slower assessed valuation growth it may be necessary to decrease future debt issuance or increase the debt levy as early as 2012.

· Library Fund

Expenditures in the Library Fund have been outpacing revenues, with 2008 expenditures anticipated to be almost $60,000 more than revenue, resulting in a fund balance of less than $80,000. Because of slower revenue growth, the Library Fund cannot support even a two percent (2%) increase in expenditures in 2009.

· Recreation Fund

The Recreation Fund receives approximately twelve percent (12%) of its revenue from property taxes. Program fees produce about forty-five percent (45%) of the fund’s revenues. Most of the remaining revenue is from a transfer of $1.4 million in sales tax revenue from the General Fund. The Recreation Fund cannot support its activities using the two percent (2%) expenditure growth scenario past 2009.

· Special Alcohol Fund

Alcohol distributions were flat in 2005 and grew by less than one percent (1%) in 2007. Revenues are expected to rebound and grow by five percent (5%) per year from 2009-2011. However, expenditures have been more than revenues in the fund since 2005. As a result, expenditures in 2009 will need to be at least $40,000 less than 2008 to avoid a negative fund balance.

· Special Gas Tax Fund

First quarter 2008 gasoline tax revenues were substantially lower than 2007. That trend is expected to continue as consumers respond to higher gasoline prices by either driving less or buying more fuel efficient vehicles. Approximately sixty percent (60%) of Gas Tax expenditures are for salaries with the remaining paying for curb repair and overlay. These expenditures have been reduced in order to match the anticipated revenue decline.

· Special Recreation Fund

The Special Recreation Fund is financed by alcohol distributions. If alcohol distributions grow by the expected five percent (5%), expenditures in the fund can increase by at least four percent (4%). Expenditures are for part-time salaries, small park maintenance projects, and utilities.

The Transit and Guest Tax Funds will be discussed separately.