FINANCE & ECONOMIC DEVELOPMENT COMMITTEECOUNCIL PRESENT:
FEBRUARY 28, 2011
12:00 – 1:20 PM
Chair, Andy Ryder, Jason Hearn, Jeff Gadman
Greg Cuoio, Troy Woo, Scott Spence, Lori Flemm, Peri EdmondsCOUNCILMEMBER HEARN MOVED TO APPROVE THE AGENDA. COUNCILMEMBER GADMAN SECONDED. MOTION CARRIED.ENCUMBRANCE CARRYOVER PROPOSAL
Troy Woo, Finance Director, presented the Committee with a proposal for an additional budget amendment process for carryover encumbrances and projects.
Historically, the City of Lacey amends its budget once per year. Council adopts the amendment ordinance during the fall prior to the development of the proposed budget document to ensure the most accurate comparisons. Each year the amendment ordinance includes projects and purchases that received appropriations during the previous year, but were completed or incurred costs during the current year. Despite the extensive budget planning and efforts to complete projects and purchases prior to year-end closing, staff is not able to complete all of the projects and purchases. As part of the budget development process, staff does include budget requests for projects that are not expected to be completed as planned. However, it is challenging to accurately predict project completion or the project completion percent for multi-year projects.
To simplify the budget development and amendment process, staff proposes that an additional amendment process be approved each year. This amendment would take place early in the year and would be limited to carryover encumbrances and projects.
This carryover process will relieve concerns that authorized budgets will be exceeded when large carryover projects do not have the proper appropriations until late into the year. The City Council is aware of the projects and approves contracts, but do not officially appropriate funding until the amendments are approved later in the year. If the City Council approves these appropriations earlier in the year, the risk of exceeding authorized expenditure levels is minimized.
The encumbrance and capital carryover requests are limited to purchase orders that were initiated in the previous year and capital projects that were authorized in the previous year’s budget. The outstanding purchase order carryover requests are limited to significant (over $2,500) unfilled material, equipment, and supply orders. Capital project carryover requests do not have a dollar threshold. The funds requesting the carryovers must have adequate fund balance before the requests can be granted.
Committee members discussed the process for adopting the budget, what occurs when a line item is over or under budget, and how they can inform the citizens on budget items.
COUNCILMEMBER JEFF GADMAN MOVED TO RECOMMEND TO FULL COUNCIL THE APPROVAL OF THE ENCUMBRANCE CARRYOVER PROPOSAL. COUNCILMEMBER GADMAN SECONDED. MOTION CARRIED. 2010 PROPERTY TAX LEVIES FOR 2011 COLLECTION
Troy Woo, Finance Director, provided the Committee with recent data received from the Thurston County Assessor’s Office advising us of Lacey’s 2010 for 2011 assessed valuation, property tax totals, and the levy rates.
The total of the City of Lacey’s property tax levies has decreased $0.80/$1,000 of assessed valuation over the previous year. Four main factors have caused the General Levy rate to change:
- The voluntary $4,729,260 reduction to the General Levy as a result of the Lacey annexation to Lacey Fire District 3.
- The addition of $73,961,647 million of new construction valuation to the assessment rolls.
- The City Council exercising its revenue limit authority due to increasing expenditure levels.
- Overall assessed valuation within Lacey’s city limits decreased 7.03 percent.
Troy reported that the Fire Safety GO Bond levy receipts will decrease in 2011, while the Parks Improvement GO Bond levy receipts will increase slightly. The GO Bond levies are impacted by the addition of new construction, overall assessed valuation changes, and the predetermined debt repayment schedules. In addition, the Fire Safety GO Bond levy decreased as a result of the bond refunding that was approved by the City Council on November 18, 2010, which saved $204,036 of principal and interest over the next 10 years.
The total Lacey resident property tax levy rate has increased $1.1252/$1,000 of assessed valuation from 2010 to 2011. The total property tax levy rate includes the following jurisdictions: Medic One, North Thurston School District #3, Port of Olympia, PUD #1, State of Washington, Thurston County, Timberland Library District, City of Lacey, and Lacey Fire District 3. The 2010 Levy for collection in 2011 is $11.0324/$1,000 of assessed valuation. The 2009 Levy for collection in 2010 was $9.9072/$1,000 of assessed valuation.
The typical Lacey homeowner whose home was valued in $225,000 in 2010 and now is valued $205,801 (8.53 percent average decrease) will be paying $41.37 more property tax in 2011. The following table includes a comparison of 2011 and 2010 property taxes paid if the typical 2010 Lacey homeowner’s $225,000 valued home is now valued at $205,801.
Property Tax Levy
N.Thurston SD #3
Port of Olympia
State of WA
Lacey Fire District 3
Troy noted the property tax growth has been limited by I-747 and subsequent legislation, which incorporated the provisions of I-747 into law when I-747 was ruled unconstitutional. The statutory limitations on property tax growth results in slow growing property tax collections for jurisdictions except the State of Washington’s levy for public schools. Property tax growth is limited to 1.0 percent or the implicit price deflator, whichever is less. Taxpayers can vote to approve increases exceeding the limitations.
The impact of the 1.0 percent revenue limit to property taxes is significant. Property taxes are one of the City of Lacey’s single largest sources of revenue within the General Fund. The General Fund provides basic services such as police protection, streets, parks, recreation programs, planning, engineering, finance and administration to its citizens. It is difficult to balance the budget when expenditures grow at a faster pace than the 1.0 percent revenue limit. For example, the cost of medical insurance and pension contributions has been growing many times faster than inflation.
Troy noted that Lacey, like many cities, enjoyed strong construction levels prior to the recent recession. Strong construction allowed property taxes to grow faster than 1.0 percent. The property taxes generated from new construction is exempt from the property revenue limit. Now that construction is no longer booming, property tax growth will be challenged. It will be difficult for the City of Lacey to address its expenditure growth challenges in the near future.ACCEPT 2011 INDIRECT COST PLAN
Troy Woo, Finance Director, briefed the Committee on the 2009 annual audit, which marked the 32nd consecutive finding free audit opinion received by the City of Lacey. However, the City did receive a management letter noting an area in the City’s payroll supporting documentation that could be improved. The State Auditor’s Office recommended the City establish procedures to ensure administrative and other costs that are charged to restricted funds are supported and justified. The management letter refers to over $1 million worth of transfers to the Water, Wastewater, and Stormwater Funds that were unsubstantiated. The letter suggests the administrative and other costs charged to restricted funds be charged based on actual expenditures. Staff has developed an indirect cost plan to substantiate the allocated charges.
Troy noted that many cities and entities develop indirect cost plans to allocate overhead (facility maintenance, administrative salaries and benefits, administrative supplies) costs to internal departments, allocate indirect costs to Federal grants (OMB Circular A-87), and calculate indirect cost rates to apply to fees for service. This indirect cost plan is not intended to accomplish any of these objectives. The provisions of the Office of Management and Budget (OMB) Circular A-87 were not considered or complied with during the development of the indirect cost plan. Nor does the plan calculate indirect cost rates to apply to fees for services. The sole objective of the plan is to substantiate the costs allocated to the Street, Water, Wastewater, and Stormwater Funds. The cost allocations developed by this plan are for information purposes only. Staff suggests the city continue to use the historical methodology of allocating administrative and other costs as long as the allocation costs are substantiated by the indirect cost plan.
The 2011 Indirect Cost Plan identifies 10 central service departments from which costs will be allocated to the direct service departments, which include:
- City Council
- Contract Services (Election/Voter Registration, Inter-Governmental, Thurston Community TV)
- City Manager
- City Clerk
- Human Resources
- Community Services/Public Affairs
- City Attorney
- Common Facilities
- Public Works (Administration, Engineering, Facilities Maintenance, Water Resources)
2009 actual costs are allocated by the plan using the multiple rate method. Under this method, the total indirect costs of each central service department are distributed to the direct service and central service departments using the most equitable basis available. Following the primary allocation/distribution, the allocated indirect costs of the central service departments are distributed to the direct service departments.
Troy described how the primary allocation gathers costs through the City’s financial services software, SunGard Public Sector NaviLine. The costs that are allocated include salaries, benefits, supplies, services, maintenance, communications, intergovernmental, interfund, insurance, and utilities. Each central service uses a unique method to allocate its costs to the departments receiving the benefits of the service. This is not to say that central service departments don’t use the same basis. Some central service departments will use different methods for different segments within the department. For example, the Finance Department uses number of full-time employees to allocate the payroll segment and number of purchase orders issued to allocate the accounts payable segment. Others will use more than one method at the same time to allocate a single segment. For example, the City Manager uses expenditure levels to allocate 50 percent of its segment and number of full-time employees to allocate the remaining 50 percent. The bases used and the relative weight for each basis used may be based on cost data or professional judgment. Detailed descriptions of the costs that are allocated and the basis used for the allocation are included in the plan.
The indirect cost that was allocated to the central service departments during the primary allocation are re-allocated to the direct service departments. The costs from the primary allocation are allocated to the direct service departments are prorated according to the direct service department’s share of the primary allocation.
The plan continues to allocate direct charges based on actual time accrued that is documented through the payroll system. This plan does include a direct cost allocation section. Expenses incurred by certain central service departments which are accounted for separately through the City’s payroll system or other financial systems are charged directly to the direct service departments. For example, if the Public Works Engineering staff performs tasks related to the Water Department, the staff will track that time through the City’s payroll system to be directly charged to the Water Department.
The 2011 Indirect Cost Plan allocates direct and indirect costs totaling $8,865,982 to the direct service departments. Troy provided a comparison of the 2009 actual central service department allocation and the 2011 Indirect Cost Plan allocation to the City’s utilities and street funds. The actual allocation for each of the direct service departments is less than the allocation determined by the plan. This is allowable. These direct service departments are considered restricted funds and the central service departments are included in the General Fund. Expenditures in the Street, Water, Sewer, and Stormwater Funds are restricted to specific functions and purposes. The General Fund has far fewer expenditure restrictions, so the City can chose to allocate only a portion of the indirect cost allocation determined by an indirect cost plan. On the other hand, the City cannot justify allocating more costs than determined by an indirect cost plan.
The 2011 Indirect Cost Plan justifies the actual allocations charged to the direct service departments. Full implementation of the plan is not anticipated, and no official action is needed. Troy noted that the auditor will be coming in to their annual audit, and they should be satisfied with the plan.COUNCILMEMBER HEARN MOVED TO ADJOURN THE MEETING. COUNCILMEMBER GADMAN SECONDED. MOTION CARRIED.