Proposed Budget

The FY2018 proposed budget was based on a proposed tax rate of an effective tax rate plus 3%, which was in accordance with City Council direction at the spring retreat and the Financial Management Policy Statements (FMPS).  The objective of the proposed budget and long range financial plan was to improve the resiliency of the City's finances; by reducing dependence on sales tax revenue and replacing it with a more sustainable revenue source- property taxes, this could be achieved within the FMPS target of the effective tax rate plus 3%.  Over the last two years, growth in sales tax revenue has started to slow, meaning that growth in the revenue stream is not sufficient to support the City's needs. 

The FMPS direct that 10% of budgeted General Fund base sales tax revenue shall be set aside to fund pay as you go (PAYG) capital improvement projects, which are primarily infrastructure rehabilitation projects that are not eligible for debt financing.  The FMPS also direct that PAYG capital improvement projects are the first thing to be reduced in the event of a shortfall in revenue.  In FY17 the PAYG funding was reduced by $2 million as a result of declining sales tax revenues, primarily in the Information, Natural Resources and Wholesale sectors.  The forecast for FY18 does not anticipate increases in these sectors, which leaves the PAYG program short of funding.  The FY18 proposed budget shifted these projects to the general fund as part of the operating budget, where they could be supported by other revenue streams.  Over the five year forecast period, the rehabilitation funding could be increased from $1.4 million back up to the $3.1 million that was funded prior to FY17. 

Adopted Budget and Tax Rate

The Fiscal Year 2018 budget was approved as proposed on September 19, 2017, in accordance with state law, which requires that the City Council adopt a budget prior to the adoption of a tax rate.  After the approval of the FY18 budget, the affirmative vote on the tax rate needed to support the budget was not approved by the required 60% of the governing body under the tax code.  Ultimately, the City Council approved a tax rate of $0.31762, which is 1.5% over the effective tax rate. The City Council further compromised on the tax rate split and approved a maintenance and operations rate of $0.17921 and a debt service rate of $0.13841, leaving the General Fund short on budgeted revenue by $601,373.

At that same meeting the City Council approved a resolution requesting the Fort Bend Central Appraisal District to reappraise properties in the city that were damaged as a result of Hurricane Harvey.  The estimated total lost revenue and cost of the reappraisal is $75,000.

In the three months since the budget was filed, the City experienced lower than projected sales tax collections.  The FY18 sales tax estimate was based on zero growth from the FY17 projection; with the actual revenue coming in under projection, staff felt it was important to adjust the FY18 estimates accordingly. The main sectors that are down are Information, Natural Resources and Wholesale, which are all highly influenced by the oil & gas sector of the economy. The trend continued into October, which leads to a recommendation to reduce the FY18 sales tax estimate by $1 million.

As a result of the adopted tax rate, reappraisal request and decline in sales tax revenue, the FY18 Budget requires an amendment to reduce expenditures to balance the budget.

Budget Workshop

On September 26, a workshop was held with City Council, and staff presented options and recommendations for reducing the budget to offset the decreased revenue from sales and property taxes. During this workshop staff further recommended a reduction in funding for certain projects to provide capacity within the Capital Improvements Program to address potential projects that may result from Hurricane Harvey. The proposed reductions were selected based on their potential to support the City's financial resiliency by their recurring nature.  Since the City's financial decisions are not made one year at a time, the entire long range forecast needed to be re-evaluated using updated assumptions for revenue growth based on the council's direction.  Reductions to the budget needed to have a recurring impact and minimize disruption to core services provided by the City.

Council further directed the City Manager to implement any remaining reductions necessary to balance the FY18 budget, and adjust the long range forecast and five year CIP based on assumptions of an effective tax rate plus 1.5%. 

With the change in the assumptions, the City's capacity for tax-backed debt declines and several projects will be pushed out of the five year CIP window.  Staff also recommended, and Council concurred, to suspend the Park Bond program until the revenue is there to support the debt that has already been issued along with the operating impacts, before any further progress is made on the program.  To date, the City has issued $21.2 million out of $31.45 million in authorized debt, but has only raised the tax rate 0.7 cents to support the bond program, which generated $836,000 in property tax revenue for FY18, leaving $1.05 million in park bond program costs (debt and operating) to be paid by other revenue streams that was intended to support other city services.

General Fund 

Total revenues in the General Fund are anticipated to be $89.9M, which is $1.31M less than the adopted budget. Revenues in the General Fund have been reduced to reflect the adopted property tax rate of $0.17291 for maintenance and operations. Property tax revenues have also been reduced by the general fund's share of an estimated $50,000 revenue loss from reappraisal of storm damaged property from Hurricane Harvey. Sales tax revenue has been reduced by $750,000 to reflect the recent trends in collection as described above.

Total expenditures in the General Fund have been revised to  a total of $89.1M, which is $1.32M less than presented in the adopted budget. As mentioned above, the FMPS provide direction on budget management during the year if a decline in revenues occurs mid-year; the City Manager is provided a prioritized list of corrective actions to implement to manage the budget to ensure the City ends the year within available resources.  A reduction such as the one needed to balance this year's budget at the beginning of the year is unprecedented and needs the support of City Council as it will impact the services and service levels provided.  Should additional adjustments be necessary during the year, the City Manager will implement the prioritized corrective actions as outlined in the FMPS.

 Expenditures recommended for reduction are intended to re-establish the structural balance in the budget through recurring expenditure reductions. To preserve core services, the following guidelines were used to determine which reductions to recommend:

• Reduce subsidization of services provided by other entities
• Prioritize needs vs wants
  • Reduce discretionary service levels
  • Focus on services that result in significant overtime impact

The recommended budget cuts will result in a reduction to service levels, such as elimination of special events including New Year's Eve, the Star Spangled Spectacular, and the State of the City event.  The employee merit pool  budget is being reduced from 3% of salaries to 2%, with a January 2018 effective date for increases based on performance evaluations. Reduced service levels include closure of the city pool due to repairs needed beyond available funding, and reduced frequency of services such as street sweeping and mowing of parks and rights of way.  The City will no longer print and mail Sugar Land Today and the City calendar. Employee development will be reduced through a 10% reduction to travel/training funding.  Reduced subsidization of other entities include elimination of funding to the TREK program provided by Fort Bend County, City funding for the Impact Player Partners and reduced MUD tax rebates as a result of the adopted tax rate.  Reducing the contingency funding to 1/4% of the general fund means that the City will have limited flexibility to respond to unforeseen expenses which were not planned for in the budget.

The recommended expenditure reductions totaling $1.58 million are shown below:

In addition to the reduction to recurring expenditures, the General Fund also includes one-time funding of $25,000 for the reappraisal of flood damaged properties along with one- time funding of $210,000 for engineering studies related to potential Hurricane Harvey impacts.

This amendment will also capture budget amendments related to council approval of two STEP Grants on October 3:  

• Resolution No. 17-29 accepted the FY18 STEP Comprehensive grant in the amount of $80,110. This amendment will recognize $59,996 in revenues and expenditures of $20,114 for additional overtime, which is the city's match to the grant.  
• Resolution No. 17-30 accepted the FY18 STEP Commercial Motor Vehicle grant in the amount of $15,464, This amendment will recognize $11,959 in revenues and expenditures of  $3,505  for additional overtime, which is the city's match to the grant.
  

With the revised revenues and expenditures described above, the General Fund will have a budgeted FY18 ending balance of $20,167,978.

Debt Service Fund 

Property tax revenue is a net decrease of $13,389 in the Debt Service Fund, which is a combination of the adopted tax rate and certified tax roll, and anticipated revenue loss due to the reappraisal.  A transfer from the Capital Projects Fund of $143,872 has been added as well. These funds are equal to a prorated share of the annual debt service on park bonds issued for projects that are currently suspended. These proceeds will be used to repay the debt service on these projects, as the allowable use of the funds is for project construction or debt service only. By repaying the debt service on these projects it open additional debt service capacity within the debt service fund to deal with potential Hurricane Harvey related damages. The net increase in revenue for this fund is $130,483 leaving a total revenue budget of $29,118,074 and a fund balance of $5,180,069.

Sugar Land Development Corporation (SLDC) 

Revenues for SLDC are anticipated to be $7.16M which is $125,00 less than presented in the adopted budget due to the decline in projected sales tax revenue. 

Expenditures for the SLDC are anticipated to be $7.39M which is $125,000 less than presented in the adopted budget. The economic development incentives budget was reduced in order to balance the anticipated the budget. The Corporation will have an ending balance of $1,068,831, which is $160,962 over the fund balance policy requirement of 15% of budgeted sales tax.

Sugar Land 4B Corporation (SL4B) 

Revenues for SLDC are anticipated to be $6.36M, which is $125,000 less than presented in the adopted budget due to the decline in projected sales tax revenue. 

Expenditures for the SL4B are anticipated to be $7.67M, which is $125,000 less than presented in the adopted budget. The transfer of funding to the CIP for wayfinding signs and joint participation in CIP were reduced in order to balance the anticipated decline in revenues from sales tax. The corporation will have an ending balance of $980,603, which is $72,734 over the fund balance policy requirement of 15% of budgeted sales tax.

Utility, Airport and Surface Water Funds

The other major operating funds have been adjusted to reflect funding for the recommended 2% merit pool.  There are no other changes at this time to these funds.

Capital Project Funds and Five Year CIP
Capital Project revenues will decrease by $125,000 as a result of the reduction in funding from the Sugar Land 4B Corporation (SL4B), which funding was intended to be used for wayfinding signs and joint participation in CIP.  

Capital Project expenditures will decrease by a net $1,414,128 as a result of the following changes  within the CIP - primarily the reduction of design projects for which there is no longer construction funding capacity in the out-years - along with the addition of a transfer of $143,872 to the Debt Service Fund: 

The five year CIP has been re-prioritized and reduced from $130.28 million to $96.4 million to fiscally constrain projects within the revised capacity from the long range forecast.  The reduction is due to the removal of projects that are not affordable within the capacity identified by the revised long range forecast using the assumption of property tax revenue growth at the effective tax rate plus 1.5%, along with suspension of the park bond program until additional property tax revenues can be generated to support the existing obligations, plus any increase needed to complete the projects that have been suspended.

Below is a chart of the total projects by year as adopted originally and as revised by Ordinance No. 2115.  The complete list of projects in the updated five year capital improvement program can be found in the exhibit to the ordinance.

Recommendation

Staff recommends approval of Ordinance No. 2115 amending the FY18 budget.