HomeMy WebLinkAbout09/20/2018 02 Council Orientation on the 2019 Budget Adoption ProcessITEM TITLE:
SUBMITTED BY:
1
BUSINESS OF THE CITY COUNCIL
YAKIMA, WASHINGTON
AGENDASTATEMENT
Item No. 2.
For Meeting of: September 20, 2018
Council orientation on the 2019 budget adoption process
Ana Cortez, Interim Finance Director and Assistant City Manager
SUMMARY EXPLANATION:
The City's budget process needs to result in the adoption of the 2019 Budget in December
2018. Staff has finalized the 5 year forecast for 2019-2023. This document will be the founding
component of the 2019 Budget document. Today's discussion will cover the following items:
1. Five Year Forecast
2. Detail of Budget Process
ITEM BUDGETED:
STRATEGIC PRIORITY:
APPROVED FOR
SUBMITTAL:
City Manager
STAFF RECOMMENDATION:
Staff recommends review of the attached documents.
BOARD/COMMITTEE RECOMMENDATION:
ATTACHMENTS:
Description Upload Date
d 5 year 9/17/2018
Type
Coyer Memo
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('111 OF
Yakima
2
5 -Year
7 Financial Plan
CITY OF Yakima
2019 5 -YEAR FINANCIAL PLAN
TABLE OF CONTENTS
INTRODUCTION AND EXECUTIVE SUMMARY 2
FINANCIAL HEALTH/FUND BALANCE 4
GENERAL FUND REVENUES 9
GENERAL FUND EXPENDITURES 15
RECOMMENDATIONS 19
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INTRODUCTION AND EXECUTIVE SUMMARY
The purpose of the 5 -Year Financial Plan is to help the City of Yakima make informed financial and
operational decisions by carefully anticipating estimated future revenues and expenditures. This
document reflects analysis and forecasts future revenue and expenditure trends and their impact on the
City's financial reserves. A primary purpose of the document is to provide context for present and future
budget decisions and to understand the long-term financial impacts. Only by assessing the longer-term
financial impacts of current revenue and expenditure decisions can the Council determine the feasibility
of such actions.
This projection addresses the fiscal position of the General Fund including revenue and expenditure
trends and the status of reserves. Other funds are discussed insofar as they receive necessary support
from the General Fund or may influence General Fund operations. Events and circumstances will be
discussed that allowed reserves to fall below the policy level target of 16.7%, a nationally recognized
standard. The document will explore potential strategies to continue rebuilding General Fund reserves
as quickly as practicable.
Conservative Revenue and Expenditure Projections
Although the future is unpredictable, the City can plan for its financial future through reasonable
assumptions about future events and careful decision making. Much like the weather, the farther out in
time predicting goes, the less precise predictions become. For financial projections, the prudent course
is to be conservative, meaning revenues should be projected at the lower end of the likely range of
outcomes and expenditures should be projected at the upper end of the likely range of outcomes. This
conservative approach can result in projected deficits in future years. Deficit means that expenditures
exceed revenues (that year), thus requiring the use of reserves to balance the budget. Whether the deficit
is manageable depends on the City's financial flexibility and how rapidly the City begins to address the
possible deficit. If revenues increase and expenditures can be managed through conservative
approaches, then financial stability is a realistic outcome.
Conditions Affecting Financial Flexibility
Financial planning for the City is impacted by several structural conditions that limit financial flexibility.
The purchasing power of city residents, median income and general demographics affect the residents'
ability to absorb the impact of inflation and rising cost of municipal services'. Property tax, a major
component of General Fund revenues, has been limited in growth to the lessor of two indicators: 1% or
the Implicit Price Deflator, which has been, as a general rule, less than the rate of inflation. Additionally,
two recent Charter amendments, while reflective of community priorities, mandate specific spending
targets without the creation of new revenue sources to offset that spending. These Charter amendments
significantly limit Council's ability to respond to spending priorities. The Charter amendments are
discussed in detail later in this document.
1 Yakima s median household income in 2016 was $45,700. Per capita income the past 12 months is $20,653 and
18.2% of the population live in poverty. Census.gov
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Executive Summary
For a variety of reasons discussed throughout this document, the City has needed to use reserves to
maintain service levels. Reserves are now below the City's policy level requirement of 16.7% (2 months
of expenditures) and this 5 -year forecast shows that, absent some intervention, reserves will remain
below the policy level requirement for the forecasted 5 -year period. This exposes the City to risks that it
will not have sufficient resources to maintain City services should an emergency or other unforeseen
circumstances put additional strains on City resources.
Current expenditure levels, with conservative revenue predictions, indicate a steady decline of reserves.
This is a direct outcome of structural problems that have resulted in expenses exceeding revenues. Yet
it is important to point out the levels of services (expenses) are negatively impacted by historical funding
reductions. The City is currently challenged to provide service levels expected by the community.
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FINANCIAL HEALTH/FUND BALANCE
Reserve Policy and Assumptions
The Governmental Financial Officer Association (GFOA) recommends best practices for municipal
finance. GFOA recommends that general-purpose governments like the City of Yakima, regardless of
size, maintain an unrestricted budgetary fund balance in their general fund of no less than two months
of regular General Fund operating expenditures (or 16.7% of expenditures). The City has adopted this
recommendation into policy. Up to 2013, the City's fund balance/reserve had been consistently above
the reserve policy level, and although it had declined modestly throughout the Recession, it continued
to be above 16.7% of expenditures until 2014. A series of decisions created a post -Recession dependence
on the use of reserves to meet ordinary operating obligations causing a decline in total reserves to a point
below the required policy level. The issues that affected reserves have been analyzed and steps have
been taken to mitigate and reverse this dependence.
Current and Projected Reserves
Over the next five years, the City's revenues and expenditures are forecasted to be structurally out of
balance. Given the pressure created by the Charter amendments of 2013 and 2014, and the inflationary
impact of collective bargaining agreements with the City's ten (nine beginning 2019) bargaining units,
absent strategic redirection, the City's revenues are not expected to keep up with the maintenance cost
of current service levels, resulting in a fiscal imbalance. The table below depicts the projected ending
fund balance for years 2018 through 2023.
GENERAL FUND PROJECTED RESERVES
Adopted Policy Level Reserves is 16.7%
2017 2018 2019 2020 2021 2022 2023
Revised
Actual Estimate Forecast Forecast Forecast Forecast Forecast
Beginning Fund Balance $ 8,266,909 $ 8,464,925 $ 8,750,829 $ 7,755,817 $ 7,578,175 $ 7,219,713 $ 6,693,727
Revenues 66,210,691 69,426,438 69,789,987 71,766,858 73,567,238 75,419,614 77,325,604
Expenditures 66,012,675 69,140,533 70,785,000 71,944,500 73,925,700 75,945,600 78,094,800
Ending Fund Balance $ 8,464,925 $ 8,750,829 $ 7,755,817 $ 7,578,175 $ 7,219,713 $ 6,693,727 $ 5,924,531
Fund Balance as % of Expenditures 12.8% 12.7% 11.0% 10.5% 9.8% 8.8% 7.6%
GENERAL FUND RESERVE FORECAST VS POLICY LEVEL REQUIREMENTS
2017 2018 2019 2020 2021 2022 2023
Revised
Actual Estimate Forecast Forecast Forecast Forecast Forecast
General Fund Reserve Forecast $ 8,464,925 $ 8,750,829 $ 7,755,817 $ 7,578,175 $ 7,219,713 $ 6,693,727 $ 5,924,531
Policy Level Requirements @ 16.7% 11,024,117 11,546,469 11,821,095 12,014,732 12,345,592 12,682,915 13,041,832
Net Increase or Deficit $ (2,559,192) $ (2,795,640) $ (4,065,278) $ (4,436,557) $ (5,125,879) $ (5,989,188) $ (7,117,300)
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The difference between the annual forecasted reserve and the policy level requirement increases over
time because revenues are not expected to grow at the rate needed to fund operating expenditures as
well as the required reserves.
Operating Revenues
Operating Expenditures
Net Operating (Loss)
GENERAL FUND OPERATING INCOME/LOSS ANALYSIS
2017 2018 2019 2020 2021 2022 2023
Revised
Actual Estimate Forecast Forecast Forecast Forecast Forecast
$ 66,210,691 $ 69,426,438 $ 69,789,987 $ 71,766,858 $ 73,567,238 $ 75,419,614 $ 77,325,604
66,012,675 69,140,533 70,785,000 71,944,500 73,925,700 75,945,600 78,094,800
$ 198,016 $ 285,905 $ (995,013) $ (177,642) $ (358,462) $ (525,986) $ (769,196)
The 2019 Forecast assumes that all vacant positions would be filled. The forecast does not assume any
growth in staffing as a result of increases in population or levels of service. So, the current authorized
level of staffing would need to be filled in order to provide ongoing services. In 2020, annual debt service
of nearly $1 million is eliminated as a result of the debt being paid off. The forecast does not assume any
new issuance of debt. Instead, this analysis uses the reduction of debt to offset the increase in the cost of
operations.
Historical Trends
The following table illustrates the historical data and background of the City's ending General Fund
balance from 2013 through 2017. The table demonstrates that the fund balance fell below the 16.7% target
during 2014 and has continued to be below that target since then.
GENERAL FUND RESERVE HISTORY
2013 2014 2015 2016 2017
Actual Actual Actual Actual Actual
Beginning Fund Balance $10,138,453 $10,071,272 $ 8,848,302 $ 6,887,225 $ 8,266,909
Revenues 55,285,271 59,520,257 60,680,228 64,791,138 66,210,691
Expenditures 55,352,452 60,743,227 62,641,305 63,411,453 66,012,675
Ending Fund Balance $10,071,272 $ 8,848,302 $ 6,887,225 $ 8,266,909 $ 8,464,925
Fund Balance as % of Expenditures 18.2% 14.6% 11.0% 13.0% 12.8%
Conditions Causing the Use of Reserves
The City's adopted financial policies state that reserves will not be used for ongoing operations. Rather,
they are intended to enable the City to react to emergencies, to respond to unpredictable economic events
and/or to provide for special needs or programs that may or may not have been planned in advance.
Reserves may also be used for one-time investments that are forecasted to produce near-term returns to
replenish the initial cost of the investment. When conditions require the use of reserves, plans should be
implemented to replenish reserves as quickly as practicable to ensure the long-term fiscal health of the
City. On the other hand, when the total fund balance exceeds the policy reserve level, the amount in
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excess of the policy level reserve may be included in the budget to meet other strategic priorities with or
without a plan for replenishment. It is common to purposely build the reserve balance in anticipation of
a special project and leverage that cash position with debt to achieve optimal efficiency in balancing
growth and fiscal position.
Like many other local governments, the City chose to use some portion of its reserves to maintain service
levels during the Recession. However, there was an expectation that economic recovery alone would
rebuild reserves so that the City could continue to commit large-scale future resources to pursue new
projects. This expectation has proven to be overly optimistic. These commitments are now part of the
challenging budget reality with a reserve that continues to be inadequately funded. A summary of the
use of reserves in previous years is at the top of the next page.
GENERAL FUND RESERVE HISTORY ANALYSIS
Year and Annual Change Factors Impacting Reduction in Fund Balance Reserves
Increased Expenditures
(1) (2) (3) (4) (5)
Fire Bond
Sales Tax Levy Expired
Over Charter Property Revenue No
Policy Level Actual (Under) Amendment Investment Settlements Estimate Replacement Total Impact
Reserve Reserve Funded Funding Acquisition and Claims Shortfall Funding on Reserve
2013 $ 9,243,859 $ 10,071,272 $ 827,413 $ - $ - $ - $ - $ - $ -
2014 10,144,119 8,848,302 (1,295,817) 2,000,000 1,100,857 250,000 3,350,857
2015 10,461,098 6,887,225 (3,573,873) 2,782,586 1,000,000 250,000 4,032,586
2016 10,589,713 8,266,909 (2,322,804) 2,823,023 (684,079) 1,846,014 250,000 4,234,958
2017 11,024,117 8,464,924 (2,559,193) 2,867,892 1,250,000 250,000 4,367,892
Revenue Reductions
In 2014 and 2015, General Fund expenditures exceeded revenues, requiring the use of a portion of
reserves to balance the budget. The following conditions in 2013, 2014 and 2015 further contributed to
the use of reserves. The narrative below further describes the Factors Impacting Reduction in Fund
Balance Reserves in the table above.
#1- Charter Amendment Funding
The voter approved Charter amendments in 2013 and 2014 requiring general tax revenues beginning at
$2,000,000 be dedicated to fund capital improvements for street reconstruction and renovation and
$750,000 to fund capital improvements for City parks and parks facilities, respectively. These
amendments included an aggressive annual growth factor (described below). By the end of 2018, over
$13.3 million will have been appropriated and spent from general revenues since 2014, most of that going
to fund the debt service payments related to several large capital projects undertaken to improve City
streets and parks facilities.
Each of these amendments has a built-in inflation factor based on the West Region Consumer Price Index
(CPI), which is typically higher than the regional rate of inflation. Property tax revenues are limited to
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grow each year by the lower of 1% or the Implicit Price Deflator (IPD)2. Thus the City's property tax
revenue, which is used to fund the financial obligation, is restricted to a rate that is currently lower than
the rate by which the Charter amendment funds are growing. It is important to remember Property taxes
are approximately 19% of General Fund revenues and that other general revenues will grow only at the
regional rate of inflation, at best.
The Charter funding for streets is being used to pay debt service on large projects completed in 2014
while the funding for parks covers debt incurred to develop SOZO and the YMCA Aquatic Center.
Although part of that debt will be retired in 2024 and the remainder in 2028, from 2018 to 2023 all of the
Charter funding is obligated to the long-term debt service for these projects.
As a result, the City's current and future ability to fund parks and streets maintenance has been curtailed.
It is important to recognize that by using the charter contributions to pay debt (for streets, SOZO and the
YMCA), the charter negatively impacts all general fund departments including parks and streets by
placing revenue intended for operations and maintenance, into debt payments. The intended goal
behind these amendments was to ensure funding for parks and streets; however, by using the yearly
funds for debt, the result is the opposite: a dearth of resources for parks and streets and a decrease of
general operation revenues for all. As indicated above, the General Fund's limited growth precludes it
from replenishing the funds taken out by the Charter Amendment.
#2 - Property Investment Acquisition
The City Council authorized the use of about $1.1 million of reserves in 2014 to purchase four Tiger Oil
properties. In making this investment, the City expected that revenues from the sale of these properties
would replenish the reserves. These sites were an eyesore to the community and the State Department
of Ecology encouraged the City to make the investment by agreeing to assist with the cleanup of the
polluted sites. As of 2018, two of the sites have been sold and $684,000 has been recovered. Two
additional sites are still in inventory. The City has prioritized the sale of the Tiger Mart site on Nob Hill
and 24th Avenue in 2019. If that sale occurs, $300,000-$400,000 will be added to the General Fund. The
site on North First Street is currently going through environmental monitoring. This is a good example
of how the use of reserves can support the well-being of the community and leverage the City's position
to achieve economic growth. While two of the sites have been problematic, the others have generated
tax revenues that would not have been realized if left in their former state.
#3 - Unforeseen Financial Obligations: Settlements and Claims
There have been a number of unanticipated events that have required the use of reserves in recent years:
2 The IPD, as compared to the CPI, does not include technology or health care inflation which tend to arbitrarily
inflate the CPI.
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• City was impacted by settlements and claims in 2016-2017. In 2017, the City encountered an
unprecedented number of outlier medical claims requiring additional contributions from all
operating funds. These costs added to $500K.
• The City's health plan was restored to a recognized PPO as part of a settlement with a local
provider. A backlog of claims was paid out, partially by the General Fund at a cost of $750,000.
Another $300,000 is committed to the settlement for 2018 and 2019. The funding for the City's
health plan is generated from operating funds with payroll activities through monthly
assessments made for each covered employee. Employer/employee contributions are collectively
bargained. Employees contribute monthly from payroll and retirees pay the full cost of coverage
monthly from their pension checks.
• The ACLU lawsuit was an uninsured loss and required the use of reserves to pay the judgment
of $1,846,014 in 2016. This further exacerbated the difficulty in restoring the reserve balance to
policy level.
#4 - Revenue Shortfalls
• The City of Yakima is located in an agricultural area. The City has seen a correlation between
annual production by farms and sales tax revenues. For this reason, drought conditions affected
sales tax revenues in 2015 by approximately $1 million.
• Revenue projections for 2015 were overly optimistic. While the economy as a whole was
recovering from the Recession, City revenues actually declined due to the drought that negatively
affected local sales tax revenues. Also negatively affecting revenues was the drop in energy prices
that caused a decline in gas tax revenues that support street maintenance. The decline in gas tax
revenues required a larger contribution from General Fund property tax revenues to fully fund
street maintenance costs. The City did not amend its budgeted expenditures in 2015 to fully
accommodate lagging revenues.
• Negotiated salary increases for 2012, 2013 and 2014 were based on post -recession optimism even
though fund balances were barely above the minimum policy level. When anticipated revenues
did not materialize to support contracted amounts, expenditures were paid from reserves.
• Relying on an optimistic outlook, the City pursued unbudgeted initiatives in 2015 that further
raised expenditures above normal levels with no offsetting revenues. Among these were the
repaving of Tahoma Cemetery roads, financial support of celebrations sponsored by other
agencies, and extended hours at Franklin Pool.
#5 - Other Decisions Contributing to the Use of Reserves: Fire Bond Levy
• The voter approved bond to support Fire Department capital needs expired in 2014 and it was
decided not to place a renewal option before the voters. Previously, an excess property tax levy
was approved by voters to finance needed equipment and building improvements for the Fire
Department. These ongoing capital needs are now entirely funded within the City's base tax
revenues. The levy supplied over $250,000 in additional annual property tax revenues until mid -
2014.
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GENERAL FUND REVENUES
Revenues are supported by four main revenue streams each represent roughly a quarter of the total
General Fund revenues: Property Taxes, Retail Sales & Use Taxes, Utility Taxes, and Other Revenue
(business licenses, gambling taxes, and fines and forfeitures).
Gov't Payments
$3,900,808
5.9%
Other Tax, Lic,
Permits
$2,397,706
3.6%
2017 GENERAL FUND REVENUES
Generalized Categories
Chgs f/Svcs -
Interfund
$7,969,803
12.0%
Fines, Forfeits & Misc
$2,664,893
4.0%
Property Tax
$12,592,341
19.0%
Utility Tax
$16,625,263
25.1%
Retail Sales & Use Tax
$20,059,876
30.3%
Current Economic Outlook
The City's core General Fund revenues are directly affected by the local economy. The global and
national economies have been recording synchronous gains in the past few years. The State of
Washington has recorded similar growth. Although the local economy lags behind the state and national
economies, the valley economy has shown growth activity. Regional employment rates are at all-time
highs. However, the stability of international trade is uncertain and this uncertainty directly influences
the region's agriculturally based economy. Revenue assumptions are based on the following:
• The average annual unemployment rate for Yakima County has fallen dramatically. The rate in
July 2018 was 4.9%. The rate has continued to decline month over month since the beginning of
2018 as reported by the Washington State Employment Security Department.
• The federal government has placed tariffs on a number of imported products. Other governments
have responded in-kind. A trade war could affect the State of Washington, which is highly
dependent on foreign trade, and especially on the Yakima Valley with its dependence on
agriculture- 28.1% of employments are in this sector. Although a conservative approach has been
used in developing revenue projections, this plan does not include the potential impact of a trade
war.
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• Annual property tax increase is limited to the greater of 1% or the Implicit Price Deflator (IPD).
The forecast assumes that property taxes are increased by the maximum authorized level for each
year. Increases resulting from new construction are assumed to be moderate in 2018 at 1.2% and
growing in the latter part of the forecast due to several major developments being completed.
• This year's mild winter dampened the financial growth that was forecasted due to the elimination
of the utility tax cap. On the other hand, retail sales are robust and tax revenues are on track with
budget.
GENERAL FUND REVENUE FORECAST
2017 2018 2019 2020 2021 2022 2023
Revised
Actual Estimate Forecast Forecast Forecast Forecast Forecast
Property Tax $ 12,592,341 $ 12,873,497 $ 13,182,461 $ 13,485,657 $ 13,782,342 $ 14,085,553 $ 14,395,435
% Change 3.9% 2.2% 2.4% 2.3% 2.2% 2.2% 2.2%
Retail Sales & Use Tax $ 20,059,876 $ 21,776,746 $ 22,865,583 $ 23,780,207 $ 24,493,613 $ 25,228,421 $ 25,985,274
% Change 0.9% 8.6% 5.0% 4.0% 3.0% 3.0% 3.0%
Utility Tax $ 16,625,263 $ 17,456,527 $ 17,858,027 $ 18,286,619 $ 18,725,498 $ 19,174,910 $ 19,635,108
% Change 3.5% 5.0% 2.3% 2.4% 2.4% 2.4% 2.4%
Other Tax, Lic, Permits $ 2,397,706 $ 2,445,660 $ 2,494,573 $ 2,544,465 $ 2,595,354 $ 2,647,261 $ 2,700,207
% Change 4.9% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Gov't Payments $ 3,900,808 $ 3,978,825 $ 4,038,507 $ 4,099,085 $ 4,168,769 $ 4,239,638 $ 4,311,712
% Change 6.3% 2.0% 1.5% 1.5% 1.7% 1.7% 1.7%
Chgs f/Svcs - Interfund $ 7,969,803 $ 8,184,988 $ 6,594,567 $ 6,759,431 $ 6,928,417 $ 7,101,627 $ 7,279,168
% Change 5.8% 2.7% (19.4%) 2.5% 2.5% 2.5% 2.5%
Fines, Forfeits & Misc $ 2,664,893 $ 2,710,196 $ 2,756,269 $ 2,811,395 $ 2,873,245 $ 2,942,203 $ 3,018,700
% Change 32.3% 1.7% 1.7% 2.0% 2.2% 2.4% 2.6%
$ 66,210,691 $ 69,426,438 $ 69,789,987 $ 71,766,858 $ 73,567,238 $ 75,419,614 $ 77,325,604
2.2% 4.9% 0.5% 2.8% 2.5% 2.5% 2.5%
Property taxes
This source represents nearly 19% of the City's general revenues. Property taxes are considered a stable
source of revenue, although the growth rate varies from year to year due to the impact of new
construction. New construction varies with the economy but tends to lag behind it somewhat due to the
timing of project implementation versus completion. The City has seen a significant number of building
permits issued during 2018. The forecast assumes that the projects will be completed over an 18 -month
period and that construction will begin to slow in future periods. The forecast also assumes that the City
will continue to increase property taxes each year by the 1% allowed by state law to pay for services that
are also increasing.
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PROPERTY TAX LEVY PROJECTION
Projected Property Tax Levy Collections
% change from prior year
Projected Distribution of Property Taxes
General Fund
Streets Capital Charter Amendment
Total received by General Fund
Property Tax Directly Allocated to Other Funds:
Parks & Recreation
Streets Operations & Maintenance
Parks Capital - Charter Amendment
Total Projected Distribution
Annual Property Tax Levy Collections
% change from prior year
13
2018 2019 2020 2021 2022 2023
$ 18,812,140 $ 19,263,632 $ 19,687,431 $ 20,081,180 $ 20,482,804 $ 20,892,460
2.8% 2.4% 2.3% 2.2% 2.2% 2.2%
$ 10,743,628 $ 11,001,475 $ 11,254,509 $ 11,502,108 $ 11,755,154 $ 12,013,768
2,129,869 2,180,986 2,231,149 2,280,234 2,330,399 2,381,668
12,873,497 13,182,461 13,485,657 13, 782,342 14,085,553 14,395,435
1,952,227 1,999,080 2,025,796 2,030,988 2,035,508 2,039,323
3,202,315 3,279,171 3,354,592 3,428,393 3,503,818 3,580,902
784,101 802,919 821,387 839,457 857,925 876,799
$ 18,812,140 $ 19,263,632 $ 19,687,431 $ 20,081,180 $ 20,482,804 $ 20,892,460
PROPERTY TAX LEVY HISTORY
2012 2013 2014 2015 2016 2017
$ 16,649,646 $ 16,892,067 $ 17,209,981 $ 17,627,347 $ 18,013,573 $ 18,292,210
2.5% 1.5% 1.9% 2.4% 2.2% 1.5%
Historical Distribution of Property Taxes
General Fund:
Operations $ 11,250,939 $ 11,392,671 $ 10,230,373 $ 9,078,414 $ 10,074,276 $ 10,512,356
Streets Capital Charter Amendment - 2,000,000 2,018,116 2,047,443 2,079,985
Total received by General Fund 11,250,939 11,392,671 12,230,373 11,096,530 12,121,719 12,592,341
Property Tax Directly Allocated to Other Funds:
Parks & Recreation 1,683,000 1,920,107 1,875,098 2,206,085 1,861,153 1,817,524
Parks Capital Charter Amendment 750,000 753,756 765,736
Streets Operations & Maintenance 3,716,000 3,580,360 3,103,441 3,574,732 3,276,945 3,116,609
Total Property Tax Distributed $ 16,649,939 $ 16,893,138 $ 17,208,912 $ 17,627,347 $ 18,013,573 $ 18,292,210
Retail Sales and Use Tax
This is the largest and most volatile of the four revenue categories, comprising about 30% of General
Fund revenues in 2017. Sales taxes are heavily dependent on the performance of the local economy and
can be driven by environmental forces such as the drought of 2015. Revenue collections in this category
have recorded fluctuating gains year after year since 2012. This trend is expected to continue.
Additionally, City initiatives will drive construction costs in several projects including the aquatic center,
the pending mill site and possible plaza development and other initiatives such as Safe Routes to Schools.
All these will add sales tax during the construction, which is one time money received by the City as each
project is being constructed. This forecast projects a moderate growth of 3.6%, reducing in the latter years
of the forecast.
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Utility and Franchise Taxes
This category represents one quarter of General Fund revenues. In 2017, the cap limiting utility taxes for
larger consumers was raised and in 2018 was eliminated altogether. The full 6.0% tax is now being
charged on gross revenues of companies providing electrical service, natural gas, telephone and cellular
telephone services. The removal of the cap is estimated to bring in an additional $550,000 annually.
However, utility revenues are greatly impacted by the weather. A mild winter and/or a cool summer
can significantly reduce consumer usage and the City's resulting tax revenues in any given year. The
mild winter experienced in the Valley in 2018 is likely to dampen the effect of this change unless it is
followed by a hot summer. 2018 utility tax revenue is projected to increase 3.5% for outside utilities and
2.5% for City -owned utilities over 2017 due to the removal of the cap. After 2018, utility taxes are
expected to keep pace with inflationary utility price trends at 3% and 2.5% from outside and internal
sources respectively. A portion of these revenues has been earmarked by adopted Council action to
support parks operations and police capital. Transfers to those funds are recorded as Transfer to Other
Funds (expenditures) of the General Fund.
Other Revenue
This category includes sources such as business licenses, gambling taxes, and fines and forfeitures. This
revenue source has experienced little growth in previous years and is expected to increase very slowly
in future years. Expected increases are projected based on prior year trends at an annual rate between
1.0% and 3.0%.
Excise taxes and other state shared revenue is subject to legislative priorities and has been volatile. This
category includes liquor profits and marijuana excise taxes. It also includes violent crime revenues,
which can quickly disappear, or increase based on the City's crime rate relative to other municipalities
in the state. History of this category has been volatile with year -over -year changes of no growth to over
7%. It is conservatively projected to increase at a rate of 1.5% to 3%.
ADDITIONAL CHALLENGE - REVENUES
Not unique to Yakima, there is a challenge that the City may have to address in the short and long term:
economic diversification. Economic diversity is important to build resilience against external economic
shocks such as recession. A better understanding of the region's sectors and their concentration levels
and corresponding vulnerabilities to shocks, may lead policymakers to adopt buffering policies. It is
unlikely that the Yakima Valley region would quickly alter its sector diversity in the short term, and it
may also be difficult to attract and retain firms in more peripheral industries. Best practices indicate that
consideration of larger rainy day funds (reserves) for less diverse counties may be warranted. Leaders
in less diverse economies may seek a more stable tax base that varies less with the overall economy than
those in counties with a more diverse industrial mix.
A desired larger reserve is ideal; yet the very nature of our limited economy poses obstacles towards this
goal. The Employment Security Department of the State of Washington reports that in the Yakima Valley,
agriculture is king providing 31,361 or 28% of total covered employment as of 2016 statistics. In
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comparison, the second and third sectors: health and government, provide 15,252 and 13,350 jobs
respectively. These three sectors account for 53.8% of the total covered employment.
The Employment Security Department report that the top five Yakima County sectors in 2016 in terms
of employment were:
Sector
Number
of Jobs
Share of
Employment
1. Agriculture, forestry and fishing
31,361
28.1%
2. Health services
15,252
13.7%
3. Local government
13,350
12.0%
4. Retail trade
10,732
9.6%
5. Manufacturing
8,369
7.5%
All other industries
32,474
29.1%
Total covered payrolls
111,538
100%
Although the region has seen an upper trend in the creation of non -Ag jobs, such trend has not affected
the overall sector ranking.
Per the Employment Security Department, the total covered payroll in 2016 in Yakima County was
approximately $4.09 billion. The average annual wage was $36,648 or 62.0 percent of the state average
of $59,073.
The top five Yakima County industries in 2016 in terms of payrolls were:
Sector
Payroll
Share of
Payrolls
1. Agriculture, forestry and fishing
$ 892,087,169
21.8%
2. Health services
661,025,674
16.2%
3. Local government
583,924,263
14.3%
4. Manufacturing
374,505,886
9.2%
5. Retail trade
310,729,591
7.6%
All other industries
1,265,400,263
31.0%
Total covered payrolls
4,087,672,846
100%
To offer a point of comparison, this report also shows the economic diversity of Benton County. The
following table - also from the Employment Security Department - shows a more diversified economy
with 10 defined sectors and greater balance of size per sector.
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TOP 10 INDUSTRIES IN BENTON COUNTY
(Source: Employment Security Department, QCEW)
Rank
Industry
To of
Total
1
Government
15.2%
2
Health care and social assistance
13.0%
3
Professional and technical services
11.3%
4
Administrative and waste services
11.5%
5
Retail trade
11.4%
6
Accommodation and food services
8.4%
7
Agriculture
6.9%
8
Construction
6.0%
9
Manufacturing
4.7%
10
Finance and insurance
2.1%
Note that five sectors are balanced in their importance and contribution to the County. There is no one
dominant sector in comparison to Yakima.
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GENERAL FUND EXPENDITURES
2017 GENERAL FUND EXPENDITURES
Generalized Categories
Capital Outlays
$90,262 Transfers to other
0.1% Debt Service Funds
$3,085,814 $2,108,125
hltergov't Services \ 4.7% 3 2
$2,086,424
3.2
Services & Charges
$9,423,586
14.3%
Supplies, Equip,
Misc
$1,380,232
2.1%
Personnel Benefits
$12,195,693
18.5%
City C0unr
$253,907
9.4%
EXPENDITURES BY OPERATIONS
Police
$29,473,402
44.6
T iticrllaitrouti
$440,994
Information Technology
$3,521,e02
City
1\,1 nr1gerrent
$395,581
Civ- Hal Fac
$550,676
0.8 0
Planting .
$577,096 ' Economic
tt 9% ' Development
9.59.5.405
1peratiny. 0.9'Y6
Transfers Human
$4,187,350 Resources
$613,633
9.9
Salaries & Wages
$35,642,539
54.0%
$14,562,453
22.1%
Code Adr,irnisi i
11,71 3, .'1
Legal
$1,616,593
Indigent Defense $1,439,477
$1,021,792
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Cay
Clerk/Records
$636,541
1.11" 1
Engineering
$660,751
1.0%
Utility Servio
51,570,'58
2.4'7
18
Expenditure by Operating Department
Public Safety (fire and police) represents nearly 76% of total expenditures for the General Fund. The
second highest category is operating transfers. This includes transfers for debt service and transfers to
Parks and Recreation and Street Maintenance as required by the Charter amendments. For purposes of
discussing forecasted expenditures, this document separates discussions for debt service and Charter
amendment transfers.
Expenditure Outlook
The overall economic outlook for the City is discussed in the revenues section of this document. As it
pertains to the City's expenditures, cost categories other than salaries and benefits are expected to keep
pace with inflation. The Federal Reserve aims to keep the inflation rate at approximately 2% by balancing
economic growth with the cost of borrowing funds. While inflationary growth dampens purchasing
power, a small growth factor helps cushion against damaging deflation when the economy weakens.
GENERAL FUND EXPENDITURE FORECAST
2017 2018 2019 2020 2021 2022 2023
Revised
Actual Estimate Forecast Forecast Forecast Forecast Forecast
Salaries & Wages $ 35,642,539 $ 37,156,201 $ 37,824,800 $ 38,769,500 $ 39,737,900 $ 40,731,300 $ 41,738,700
% Change 3.3% 4.2% 1.8% 2.5% 2.5% 2.5% 2.5%
Personnel Benefits $ 12,195,693 $ 12,684,310 $ 13,695,400 $ 14,447,300 $ 15,171,000 $ 15,931,000 $ 16,728,800
% Change 7.1% 4.0% 8.0% 5.5% 5.0% 5.0% 5.0%
Supplies, Equip, Misc $ 1,380,232 $ 1,368,551 $ 1,384,000 $ 1,411,700 $ 1,439,900 $ 1,468,700 $ 1,498,100
% Change 7.9% (0.8%) 1.1% 2.0% 2.0% 2.0% 2.0%
Services & Charges $ 9,423,586 $ 10,228,319 $ 9,819,000 $ 10,015,300 $ 10,215,700 $ 10,420,000 $ 10,628,400
% Change 14.1% 8.5% (4.0%) 2.0% 2.0% 2.0% 2.0%
Intergov't Services $ 2,086,424 $ 2,008,965 $ 2,311,600 $ 2,357,900 $ 2,405,000 $ 2,453,100 $ 2,502,200
% Change 6.7% (3.7%) 15.1% 2.5% 2.0% 2.0% 2.0%
Capital Outlays $ 90,262 $ 308,500 $ 165,000 $ 175,000 $ 200,000 $ 200,000 $ 200,000
% Change (44.0%) 241.8% (46.5%) 6.1% 14.3% 0.0% 0.0%
Debt Service $ 3,085,814 $ 3,211,147 $ 3,356,300 $ 2,483,200 $ 2,414,500 $ 2,341,200 $ 2,338,300
% Change (4.4%) 4.1% 4.5% (26.0%) (2.8%) (3.0%) (0.1%)
Transfers to other Funds $ 2,108,125 $ 2,174,540 $ 2,228,900 $ 2,284,600 $ 2,341,700 $ 2,400,300 $ 2,460,300
% Change (20.5%) 3.2% 2.5% 2.5% 2.5% 2.5% 2.5%
Total General Fund $ 66,012,675 $ 69,140,533 $ 70,785,000 $ 71,944,500 $ 73,925,700 $ 75,945,600 $ 78,094,800
% Change 4.1% 4.7% 2.4% 1.6% 2.8% 2.7% 2.8%
General Note:
Beginning in 2019, following best practice accounting guidelines, costs associated with Utility Customer
Services and billing will be directly charged to the utility funds. Other associated costs will be accounted
for in the Water Fund and reimbursed by other utility funds. This provides management with more
timely information to manage operations of the utilities. As a result of this accounting change in 2019,
percentages shown are decreased since the costs for this division change has been removed.
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Salaries and related personnel benefits
This category represents the largest expenditure category for the General Fund. General Fund operations
are primarily service -based and 75% of the total expenditures are personnel related.
The City currently has ten negotiated bargaining unit contracts. Six contracts are settled through 2019 or
beyond. Future salaries and wages have been calculated to reflect estimates for recently negotiated
increases. Four contracts expire at the end of 2019, including the Yakima Police and Patrolman's
Association (YPPA) contract. Economic drivers such as low rates of unemployment and increasing
inflationary trends will put pressure on the City's salaries and benefits (the annual estimated increases
for salaries includes funding for contractually required annual salary increases, merit increases,
overtime, longevity and retirement payouts). Due to the relative size of this category, a small increase
can have a large impact on the overall budget.
This projection assumes no new positions are added to the budgeted General Fund FTEs (Full Time
Equivalents) for the five year period. Currently, there are a number of vacant positions citywide,
particularly in police. Police staffing is expected to increase within current authorized FTE levels without
the addition of new positions over the next several years. The forecast includes all authorized positions
at fully -funded levels.
Benefits are projected at a much higher rate due to health care inflation and are projected to increase
approximately 6% per year over the next five years.
Supplies and Minor Equipment
This includes various types of supplies, furniture and equipment that have a unit cost of less than $5,000
and/or have a useful life of a year or less.
Services and Charges
This include all professional and contracted services, including indigent defense fees of over $1 million,
which is partially offset by a modest State of Washington contribution of $82,000. Utility and insurance
costs of over $800,000 are included in this category. In addition, training and transportation costs and
ordinary repairs and maintenance are included in this category. Public safety dispatch service costs of
about $1 million are also included here. Software license fee and software support are over $800,000.
Intergovernmental Services
This category includes contracts with other governments for governmental types of services. The City
maintains a contract with Yakima County to house inmates in the County jail. The jail service contract
comprises the majority of costs for this category and is expected to keep pace with inflation. City inmate
medical services costs can affect this category and vary from year to year.
Capital Outlay
This includes the cost of equipment, furniture and improvements for items with a unit cost of $5,000 or
more and that is expected to have a useful life of more than a year. Miscellaneous items such as office
furniture or minor improvements are purchased directly out of the General Fund. However, in the past,
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the majority of expenditures have been related to purchases of hardware and/or software exceeding the
capitalization cost threshold. For future years, these types of purchases are funded from the Technology
Capital Fund.
Debt Service
Debt service is paid directly from the General Fund (lease/purchase agreements) or funds are transferred
to a Debt Service fund for the payment of principal and interest payment (bonds and other long-term
debt). For this projection, all debt service that is paid using the general revenues of the City are included
in this category. For budget and accounting purposes, funds transferred to debt service funds to make
debt payments are categorized as transfers. There will be a significant reduction in annual debt service
payments starting in 2020 when police vehicles are paid off. This will result in revenue being freed up
to pay for the annual increase in operating costs.
GENERAL FUND DEBT SERVICE
2018 2019 2020 2021 2022 2023
Projected Projected Projected Projected Projected Projected Matures
2013 - 74 Police Vehicles $ 789,037 $ 789,037 $ - $ - $ $ - 2019
2011- Fire Apparatus 69,959 69,959 69,959 - - - 2020
2013 - Fire Apparatus 39,216 39,216 39,216 39,216 39,216 39,216 2023
2013 - Fire Air Packs 86,898 86,898 - - - - 2019
2017 - Fire Aerial and Pumper 20,472 132,489 132,371 132,248 132,119 131,983 2027
2008 - Ladder Truck 75,800 73,200 75,600 72,800 - - 2021
2014 Streets Improvements 1,647,450 1,646,650 1,648,750 1,650,750 1,648,375 1,648,750 2024
2013 Streets Improvements 360,366 399,664 399,664 399,664 399,664 399,664 2028
2014 SunComm Relocation 121,950 119,150 117,663 119,863 121,863 118,663 2034
Total General Fund Debt Service $ 3,211,147 $ 3,356,262 $ 2,483,222 $ 2,414,541 $ 2,341,236 $ 2,338,275
Transfers to Other Funds
This category represents transfers of General Fund revenues to other funds for capital
accumulation/purchase, for debt service, and to subsidize the operations of non -self-supporting funds.
For this projection, all debt service transfers are included in the debt service line. Remaining transfers
are expected to increase at 2% each year as follows:
• Support to the Parks and Recreation fund - $1.5 million per year from utility tax revenues.
• Capital accumulation to the Law & Justice Capital fund - $220,000 per year, from utility tax
revenues. A 2012 budget initiative paired an internal utility tax increase to the City's own utilities,
earmarked for police capital needs.
• Capital accumulation to the Technology Capital fund - $275,000 per year, from sales tax revenues
for ongoing hardware and software upgrades needed to maintain and/or replace the General
Fund's share of systems, networks and connected equipment.
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RECOMMENDATIONS
There are significant challenges before the City; the regional economy and demographics provide limited
growth. Expenses are conservative and levels of services are already impacted. In summary:
• The City needs to develop an approach to meet policy reserve requirements for the General Fund.
• Zero to little growth in maintenance and operation annual allocations can be done in the short
term, but it is not a long-term solution unless levels of services are changed. There are some cases
in which the level of service may not be able to be reduced. An example would be contracts for
maintenance of computer software.
• The City should have sufficient reserves to meet emergencies.
• There is a long term structural deficit in the General Fund. The effect of which is estimated
revenues do not cover estimated expenditures.
Similarly, the City has implemented revenue expansion and expenditure containment strategies in the
past. Some of the strategies are not sustainable long term unless there is a corresponding decrease in
levels of service. The items include:
• Elimination of the utility tax cap, resulting in increased revenue to the General Fund.
• Implementation of fees for Transportation Benefit District (TBD) projects.
• Identification of $900,000 of cost reductions in 2016 and 2017. (The actual savings accepted by
Council was $600,000 with $300,000 in new appropriations.)
• No increase in authorized staffing levels. Zero growth in FTE's, except if positions are grant -
funded.
• No growth in maintenance and operations budgets.
Recommendations to be evaluated for the next three to five years include:
Expenses
• Use of a Cost Allocation Plan to appropriately reimburse the General Fund.
• Salary and or benefit reductions.
• Elimination of vacant position.
• Examination of pension plans and contracts.
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Revenues
• Adoption of cost recovery fees each year.
• Reinstatement of Fire Bond Levy.
• Institute a franchise fee for commercial refuse collection.
• Promote high -tax -revenue producing ventures and housing development.
• Adopt a fee/levy/tax to fund public safety emergency communication technical infrastructure.
• Develop a strategy to finance public facilities repairs and upgrades.
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