PRESENT:

Chuck Kill - Chairman Peter Lamm, Vice-Chair Bob Harris, Member Jared Parks, Member Bill Garner, Councilmember Liaison Stacey Lemos, Finance Director

EXCUSED:

Dan Toth, Member

No one spoke during Call to Audience. 

MOTION:  A motion was made by Member Harris and seconded by Vice-Chair Lamm to approve minutes. 

Ms. Lemos presented the FY 2009/10 Financial Update report with year-to-date numbers through November 2009, listing revenues and expenditures of the General Fund, Highway Fund, Bed Tax Fund, and Public Transportation Fund.      General Fund revenues collected through November were approximately $10.3M, and expenditures totaled approximately $10.8M; this is on par with past years’ trends.  

The estimated deficit at year-end is $1.1M, compared with $1.6M budgeted.   Local sales tax revenues have been adjusted down by about 6.3%, which equals about $875,000.   The continued slowdown in the construction industry, lagging retail sales, and delays in the Ventana expansion project are all affecting our figures. 

Utility tax revenues are trending higher than expected, at about 9%.  Single family residential building permits continue to trend to the budget, with 5 home permits issued during November.   Permit revenues were bumped up slightly because the cost per permit is trending higher than estimated.    Revenues from fines and charges for services are trending below budget. 

Departments are being diligent in keeping expenses down.  Current year-to-date expenses are trending and end-of-year expenses have been adjusted by about 5% off of the budgeted amounts.  This is comparable to prior years’ performance.  This year, departments are being encouraged to try to spend conservatively.  Savings have also resulted from the personnel vacancies.   The hiring freeze is still on, and a $580,000 savings from operations and maintenance is being projected. 

Mr. Harris asked if these projections help in pinpointing what services are being affected.  Ms. Lemos said that personnel expenses are a better indicator than operations and maintenance expenses for pinpointing the affected services.   Mr. Harris said that these trends will be more significant next fiscal year.   

Ms. Lemos offered details on the Highway Fund, and explained that the trend seems to follow prior years’ patterns.  Because construction sales taxes are below what was budgeted, and also due to the delay in the Ventana expansion project, the local sales tax revenue in this fund has been adjusted, by about $800,000 down.   Expenditures are projected to be under budget by about $625,000 as a result of the personnel vacancies and from cost savings on the roadway maintenance budget.    

Chair Kill commented that we want to make sure that saving money in the short run does not end up costing money in the longer term, with regard to the road maintenance issue.   Ms. Lemos said that she discussed this issue with Public Works Director Craig Civalier, who believes that the Town might be able to capture favorable bid conditions this year, do the same number of miles of planned roadway maintenance and continue to save on our budget. 

In the Bed Tax Fund, Ms. Lemos said she projects a 25% reduction in hotel industry revenue, which translates into approximately $900,000 in total revenue from the 6% bed tax.   The Town had budgeted to subsidize the General Fund with $700,000 from the bed tax fund, and the plan is to keep as much bed tax revenue going into the General Fund as possible.  The bed tax pays only for the Hilton rebate, TREO, and the MTCVB, so a $236,000 year-end Bed Tax Fund deficit is being projected. 

Ms. Lemos said that in the Transit fund a small operating year-end surplus is projected.  The program has gone to a volunteer driver program, which has helped offset expenses, creating the small surplus.

Chair Kill asked if Mayor Loomis is on the RTA board; Ms. Lemos said that he is.   Chair Kill asked for clarification on funding sources for our public transit service.   Ms. Lemos replied that most public transportation is subsidized, partly from State lottery funds, as well as our General Fund amount of $302,000.  The subsidy has remained steady, but as with all State shared revenues, those subsidies could be in jeopardy.   

Councilmember Garner said that public transportation also receives federal funding for purchase of transportation units, so the program is regulated both by federal and state requirements.  Oro Valley is most unique in providing door-to-door service.  Councilmember Garner added that the RTA is looking at a regional approach, and right now Marana and Sahuarita do not have door-to-door service; they only have Sun Tran service.  There is some discussion about splitting off the services and using Handi-Car for ADA-eligible riders, although at the moment Handi-Car does not travel north of Tangerine.    This might help Oro Valley by splintering off the ADA-eligible riders to Handi-Car and lightening the burden on Coyote Run, which would serve the elderly.  Councilmember Garner added that there is also some discussion about canceling the 101 service and transferring that funding to Coyote Run.  There is also some discussion about looking at this as an enterprise.

MOTION:  A motion was made by Vice-Chair Lamm, and seconded by Member Harris, to submit the FY 2009/10 Financial Update (through November 2009) to Town Council for approval.    MOTION carried 4-0.

Ms. Lemos provided copies of a Powerpoint presentation that was prepared for the November 9, 2009 Budget Study Session.  The report summarized each of the funds, including the forecast on the tax-based funds of the budget, and made assumptions for the funds.   The General Fund reflects the slow recovery, lagging economy in the retail and commercial construction sectors, and significant declines projected in state shared revenue.  An average of 75 permits is projected for next year and every year thereafter.   Also projected is very limited commercial development over the next 4 - 5 years.  The number of planned hotels has been reduced to two because the Hampton Inn project is on hold due to funding limitations.  We are assuming no new personnel, a continuing hiring freeze, and no salary increases for a four to five-year period.   A 10% annual benefits increase and a .5% per year annual pension increase has been budgeted. 

Vice-Chair Lamm asked if the 10% annual benefits increase was partly due to the assumption that funding will have to increase due to depleted pension funds.   Ms. Lemos replied that the increase was due to projected increases in health insurance premiums, but we could see a savings in that area, as the Town was able to negotiate a decrease in premium costs this past year.  Ms. Lemos said that the .5% annual pension increase comes directly from the State’s retirement system’s projections. 

Ms. Lemos explained we are assuming no new capital projects but have included a $100,000 per year for emergency CIP purchases.  Also factored in is a continued and increasing allocation for the Bed Tax Fund, and the community funding to outside non-profits is being kept flat.  The Town Council took action to suspend the community funding for next year, so if that remains in place we could see some relief there ($120,000 in the General Fund and $120,000 in the Bed Tax Fund). 

Chair Kill asked about the option of modifying the split between Town and employees on medical cost.  Ms. Lemos said that would be an option offered to Town Council.   Chair Kill asked if the HR Department had comparison data for the cost split in other jurisdictions.  Ms. Lemos replied that we have a comparison from the Arizona League of Cities and Towns.  Also taken into account is the probability that no raises will be given for the next 3 - 4 years, and that the cost of medical plans and retirement contributions will increase, all resulting in reductions of net pay.   Chair Kill asked if the no pay increase policy applies to employees receiving promotions.  Ms. Lemos explained that no promotional opportunities have been included in the budget.   If a person is promoted to a higher paying position, that person could receive a pay increase, but the forecast does not include any pay-for-performance increases, merit increases, or cost of living increases. 

In response to Mr. Harris’ question, Ms. Lemos said that Steam Pump Ranch has about $200,000 remaining in Pima County Bond funds that can go towards stabilization efforts.   Also included in this year’s adopted budget is about $400,000 to be put towards that project.  That money hasn’t been tapped into yet as we are hoping to use the County’s money first, but we may need to revisit that allocation. 

Ms. Lemos provided details on the projected deficits through FY 2013/14.  Ms. Lemos detailed options to close the deficit by targeting reductions to recurring expenditures and/or developing new or increased recurring revenue sources. 

Councilmember Garner asked if it would be appropriate for Ms. Lemos to provide information on what would happen if the state started issuing IOUs to pay their bills.   Ms. Lemos said that it is unclear whether the State would be allowed to issue towns IOUs for state shared revenue funds.  The Arizona League of Cities and Town said that this was a murky issue, and that such action would require a 2/3 vote of the State Legislature, but their constitutional ability to do that was limited.    If this occurs, it could change our state shared revenue projections.  

Ms Lemos said that options being considered include looking at service level evaluations, doing an early defeasance of some of our outstanding bonds, and doing a formal cost of service study to evaluate what we bill to our general enterprise funds.  Mr. Harris asked if the Town has a cost allocation system to support that.   Ms. Lemos explained the Town would need to generate a cost allocation study. 

Vice-Chair Lamm asked if we are allowed to tax food.    Ms. Lemos said yes; the State does allow it and there are some jurisdictions that do tax food. 

Vice-Chair Lamm suggested increasing water rates to increase revenue.  Ms. Lemos explained this comes down to a political limitation, and an issue of what the taxpayers are willing to bear.  Ms. Lemos said that in the last rate study, our Water Utility fees came in fairly comparable to other jurisdictions.  Ms. Lemos said that there is more of an opportunity to charge the Water Utility a higher administrative fee, and a cost of service study would provide us with guidance on how to proceed. 

Ms. Lemos distributed additional materials related to the Early Bond Defeasance.  Town Council has been approached with options about using some cash reserves and doing a one-time use of the reserves to pay some outstanding bonds.    This is at least a viable option in terms of reducing interest costs, but our reserves would be reduced.   Ms. Lemos explained that she would have firmer numbers next month.   The estimated use of cash reserves would be about $5.8M to pay off on the three bond issuances.   The interest rates that are being paid on these bonds range from 3.125% to 5.2%.   The interest we are earning on our invested income is about .5%.   Over the four-year term of the projection, the savings would be approximately $650,000 in debt service, but increasing to approximately $800,000 average on the out years.  Next year’s projected deficit is approximately $1.7M.  If we paid down our debt service, it would knock the projected deficit down to $1.1M, but it would also take the cash reserves down.  If bonds are not callable yet, we would have to pay cash into an escrow account with a trustee, and up front that cash so that the trustee could continue to make those debt service payments until they were callable.  

Ms. Lemos provided an analysis of what our five-year ending balance would be with and without the defeasance.  Ms. Lemos plans to finalize the figures for what we would need to use in cash reserves to place into escrow to defease these bonds, to ask the bond agencies their opinions of this use of cash reserve, and to provide some final numbers by mid-January. 

Vice-Chair Lamm expressed his concern that we would be gambling on the effect that inflation may have in the out years.   By reducing debt, we are reducing our exposure to the markets.     Vice-Chair Lamm asked if these bonds are traded anywhere.  Ms. Lemos said they are usually held by the private investment institutions.  Ms. Lemos will discuss other options with our financial advisors.  Vice-Chair Lamm suggested using extreme caution.   Ms. Lemos said that these options would be researched fully and carefully.  Mr. Harris asked if any thought has been given to refunding and extending the maturity dates.  Ms. Lemos said this was done a few years ago. 

Ms. Lemos provided details on the Highway Fund, which has a similar forecast, with a continued decline in sales tax revenues, with possibly some increases in the out years from commercial developments and if the housing market rebounds.    

On the Bed Tax Fund, there is a no-growth assumption.  Ms. Lemos will update to take into account the one hotel project that is on hold.  Chair Kill asked for clarification on the total increase or decrease in bed tax in FY 2012/13.   Ms. Lemos clarified that there is no growth anticipated in the bed tax fund.  Kill suggested stating this more clearly. 

The Transit Fund is projected to remain fairly stable, with flat revenue sources.  This five-year projection does not incorporate any of the RTA consolidation discussions. 

Ms. Lemos explained that staff had asked Town Council for feedback on these deficit closing options and whether to conduct the community funding process.  Council’s direction regarding the CIP process was to pay for projects already in the pipeline and not solicit any new CIP projects for next fiscal year.    Ms. Lemos explained that replacement of computers and police cars come out of the routine asset replacement, not the CIP process.  We have $500,000 in the capital replacement fund for next year that could be tapped to replace aging computers or vehicles.   Another option is extending the useful lives before replacing vehicles and computers.   

Mr. Harris asked for clarification on personnel, and asked if attrition was included in the projections.   Ms. Lemos explained that there is no further attrition included in the projection; the projection is based on the hiring freeze as it is currently.     Ms. Lemos further explained that we might experience additional attrition, depending on what positions are vacated (critical versus non-critical), but it would be difficult to plan and project for that.   There could be other opportunities to offer another severance package, and possibly encourage retirement-eligible employees to retire.
   

Mr. Harris presented his recommendation as a simplified variation of a policy that has been in place at the federal level.  If there is something new in the way of spending, there has to be a funding reduction or revenue increase to accompany that new expenditure, so that the net result is zero. 

Ms. Lemos said that this would be something that we might want to incorporate as a recommendation to include in our Town budgetary policies, as criteria for evaluation of new programs or enhanced service level that would come before Town Council, to make sure that it did not have any budgetary impact or that was paired with a revenue source.  Mr. Harris added that it would be up to Town Council to determine if they would deviate from the policy.   Ms. Lemos explained that because this could create a possible change to our financial policy, it would require a recommendation to Town Council for approval.    The committee can make a motion tonight, or bring it back for discussion at a later meeting.

Vice-Chair Lamm asked if this recommendation wouldn’t serve the same purpose as the existing requirement to balance the budget.   Discussion ensued about how this neutrality-based method would affect budgetary decisions in times of financial prosperity, and whether it might prevent the municipality from initiating new programs. 

Vice-Chair Lamm said he was not clear on who is referred to as "binding," and Mr. Harris explained this would extend to people making proposals.    Vice-Chair Lamm said the committee could recommend to Town Council that they urge citizens and groups advocating for new projects, that those advocates should include in their presentations how these projects are to be funded, whether through increased revenues or reduced spending.

Mr. Parks said that he was confused about how this policy differs from what is done now.  

Chair Kill said he wasn’t sure how any advocate going before Town Council would have the capacity to understand the financing structure to suggest where it would come from.  

Councilmember Garner offered the animal control function as an example.  That study suggested a system very similar to Mr. Harris’ suggestion.   Part of that study would be evaluating how a new service would be paid for.  This also applies to internal suggestions for new projects.  Councilmember Garner added that he is confused on how it differs, since we do balance our budgets.   Perhaps this suggested policy would apply more to a project being proposed mid-stream, and might be helpful to Town Council in determining how a new project will be funded. 

Town Resident Bill Adler commented that some projects have intangible investments and so the costs have to be subsidized.  An example is Steam Pump Ranch, which has been a tremendous investment that may never pay for itself, but it has intangible benefits.  Mr. Harris said that at the inception of a project it would be worthwhile to know what the cost recovery will be.    There are always going to be investments without a monetary return.    Ms. Lemos added that this may come into play at the start of budgeting process when new projects are being proposed.   

MOTION:  Harris moved to make recommendation to Town Council to implement his suggested pay-as-you-go fiscal policy.  Motion failed due to lack of a second.  Vice-Chair Lamm and Mr. Parks said they would like to postpone discussion on this item. 

Councilmember Garner reported that the Town Council Budget Retreat is scheduled for Saturday, January 23rd.    We don’t have the full agenda or location, but it is open to the public, and everyone is welcome.    Each of the department heads will be there, and Ms. Lemos will have a presentation.  Ms. Lemos added that we will bring in an outside facilitator.  Chair Kill asked if the committee members could receive an email of the agenda. 

Ms. Lemos reported that she met with Councilmember Gillaspie and Bill Adler regarding Mr. Adler’s suggestion to review the Town zoning code and creating of a task force.    Part of that discussion was to possibly keep the concept but look at it in a different perspective, and rather than creating a task force and making contact with the developer of each parcel individually to see if they had any options for developing in a prohibited zoning that is not allowed on that site to, instead, look at making a uniform code change to allow for flexibility on all zoned parcels as a whole.   This would allow a developer to present a zoning variance that could be looked at by staff and Town Council on a case-by-case, with staff having more administrative leeway on applications, and also putting together time frames where a developer could expect to hear back on the application, as well as possibly eliminating the need for the DRB step to streamline the process.  

Councilmember Gillaspie has asked to come to our January meeting to offer his ideas on this item, in lieu of the methodology that was discussed at the last meeting.    

Chair Kill asked Councilmember Garner if he was familiar with this new development.   Councilmember Garner said that Ms. Lemos had briefed him earlier that afternoon.  Chair Kill suggested that in future he would prefer that Councilmember Garner be included in meetings, rather than having another Council member meet on an issue that was presented from this committee.    Chair Kill asked if Councilmember Garner was invited to the meeting with Councilmember Gillaspie and Mr. Adler; Councilmember Garner said he was not invited to that meeting but knew it took place.    Councilmember Garner said he stayed neutral on this issue during last month’s discussion and also during a conversation with Councilmember Gillaspie because he knew this motion would be going to Town Council.

Vice-Chair Lamm asked if a motion to put this on the January agenda would postpone making a recommendation for reconsideration to Town Council, and Ms. Lemos verified that he was correct.   Ms. Lemos explained that the concern from council members is with having that proposal come to the Town Council from the Finance and Bond Committee without having any kind of economic impact analysis done.  Councilmember Gillaspie asked to meet with Mr. Adler to get a better understanding of Mr. Adler’s proposal to see if there was a better way that this could be approached, so it wouldn’t go to Town Council and be rejected because the recommendation did not have any economic impact information supporting it.  

Chair Kill said his understanding was that the advisory committee’s purpose was to put that information together, and it seemed to him that Councilmember Gillaspie would prefer to displace the advisory committee with the council.   Chair Kill said to put it on the agenda for January.  Ms. Lemos said that Councilmember Gillaspie offered to talk to the Finance and Bond Committee before it went to Council, to avoid creating a sense of ill will if the recommendation went to Council and was rejected.   Vice-Chair Lamm said he didn’t see any harm in hearing Councilmember Gillaspie’s thoughts on the subject.  Ms. Lemos said that Councilmember Gillaspie recognized that the recommendation had merit. 

MOTION:  A motion was made by Vice-Chair Lamm, and seconded by Member Parks, to put this matter on the Finance and Bond Committee January agenda.   MOTION carried 4-0.

MOTION:   A motion was made by Member Harris, and seconded by Vice-Chair Lamm, to adjourn.   MOTION carried 4-0.    Meeting adjourned at 8:07 p.m.