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February 24, 2010 > Budget amendments for 2009-10

Budget amendments for 2009-10

By Shavon Walker

Council amended Union City's General Fund operating budget for fiscal year (FY) 2009-10. According to Director of Administrative Services Richard Digre, revenue is less than expected but expenditures are within target.

Quarterly reporting informs Council of recent developments affecting the city's General Fund finances so that appropriate actions can be taken, if required, to ensure the city meets its budgetary commitments and obligations.

General Fund revenues for the first half of the fiscal year are 15.17 percent ($2,056,171) lower than the previous fiscal year. Budgeted revenues for FY 2009-10 were estimated at $2.6M, or 6.2 percent, less than FY 2008-09 year-end revenues. However, a 15.7 percent decrease is greater than anticipated; most of the city's revenues have been adversely impacted by the continued state of the economy. The city's main revenue sources, property taxes and sales tax, lead this downward trend.

Property tax collections for the first half of the FY 2009-10 fell by 6.6 percent compared with the same period in FY 2008-09 (down from $9,615,732 to $8,984,712). Secured property taxes are up slightly over last fiscal year. According to the Alameda County Assessor's office, foreclosed homes sold below their assessed value are impacting supplemental property taxes. Cities receive the latter when homes are sold and the new owners pay the difference in taxes from the assessed value to the sales price in that property tax year. For the first time since enactment of Proposition 13, Union City is seeing negative supplemental property tax payments owed on many sold homes. Supplemental property taxes are projected to drop $450,000 from what was previously anticipated.

The city is also concerned about the mount of property taxes it will receive from the state as part of its sales tax in-lieu payment ("the Triple Flip"). Sales tax revenues are also down city-wide and the state is now forecast to send Union City $696,000 less than what was expected for "the Triple Flip." Triple Flip revenue accounts for part of the city's receivable property tax payments. These developments are worrying since property taxes are the city's main revenue source and represent 46.11 percent of the total General Fund budgeted revenue for FY 2009-10. Next fiscal year's projected property tax revenues are forecast to be even lower.

Year-on-year sales tax collections for the quarter through December 2009 fell by 20.1 percent to $1,686,622 from $2,111,670 in FY 2008-09. Receipts from holiday sales are awaited and will be included in the third quarter report. Staff does not expect sales tax revenue to improve before the end of the fiscal year. This pessimism is based upon the city's most recent review of its sales tax revenues with its sales tax consultant Muni Services. Sales tax is the city's second largest revenue source and makes up 15.68 percent of the total General Fund budgeted revenue for FY 2009-10. Sales tax revenue is expected to be $791,900 lower than the original budget estimate. Staff projects FY 2010-11 sales tax revenues could be $1,087,700 less than original budget estimates.

Franchise taxes increased by almost 48 percent during the first six months of FY 2009-10 to $1,051,376 from $710,583 compared to the same period in FY 2008-09. This revenue source is quite stable or increases as rates rise. However, the upward trend might not be sustained as consumers switch to more affordable utility plans.

A 47.61 percent, year-on-year, decline in Charges for Service collections is not out of line with the original 43.02 percent budgeted reduction for FY 2009-10. Charges for Service are actually forecast to be $43,060 greater than original budget estimates due to planned projects for this year (e.g., Mid-Peninsula Housing, Southern Wine and Spirits, etc.) which will help Building Plan Check Fees and other revenues.

Licenses and Permits revenue have decreased by 38.4 percent ($253,249) from a year ago because of less new construction. Although projects such as Mid-Peninsula Housing and Southern Wine and Spirits will help offset some of the decline, their fees will not be large enough to prevent an anticipated fall of $277,000 compared with original budget estimates.

There are many factors beyond the city's control, e.g. further state takeaways, improving or deteriorating economy, etc. Projections are based on the most recent data available. Revenue adjustments were suggested so that expenditure plans can be developed to avoid budget gaps.

As a whole, staff projects year-end revenues to be below original budgetary estimates by $2.6M. However, this is offset by expenditure projections that have been adjusted downwards. Expenditures are now expected to exceed revenues by $1.88M and the original budgeted draw on Reserve Funds by $1.58M. This funding gap will be closed primarily with spending cuts.

Staff requested a 20 percent reduction but 16 percent has been approved for the time being. Given poor revenue streams, this will prove inadequate; staff will request a cut of 4-5 percent in the future.

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Triple Flip
In March 2004, voters approved Proposition 57, the California Economic Recovery Bond Act, which authorized a $15 billion state bond issue to reduce the California budget deficit. $10.9 billion of these bonds were issued in 2004 and the remainder in 2008.

The state legislature enacted provisions affecting how sales and use taxes and other revenues are distributed to schools and local governments, effective July 1, 2004. These revenue "swapping" procedures, known as the "Triple Flip," will continue until the bonds are retired. As of June 2009, the Department of Finance estimates that to be Spring 2016.

How the Triple Flip Works
Flip 1: Local sales and use tax revenues decreased, beginning July 1, 2004
A quarter percent of local government sales and use taxes shifted to the state to guarantee the bonds.

Flip 2: Local sales and use tax losses are offset by property tax revenues
Each County Auditor uses property tax revenues to reimburse revenues lost through Flip 1. Some of the local property tax revenues, shifted from local government (cities, counties and special districts) to the County Educational Revenue Augmentation Fund (ERAF) to fund schools, are set aside in a Sales and Use Tax Compensation Fund. In January and May of each year, the State Director of Finance instructs County Auditors to allocate revenues from the Compensation Fund to the county and cities within the county.

Flip 3: State General Fund revenues help schools
Since part of the County ERAF is used to offset local sales and use tax losses (Flip 2), schools receive less revenue from county property taxes. Any shortfall in minimum-funding requirements, as per Proposition 98, is covered by California General Fund revenues.

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