Introduction

INTRODUCTION

2023-2024 Proposed Biennial Operating and Capital Budget

Arvada is continuing to make decisions under the FOCUS performance-management system . This integrated performance-management system is not a project with a defined end date. Rather, this is a process that defines how staff looks at what they do each day and how this supports the City Council Strategic Results . It provides data for decision making and helps drive funding decisions for the many programs Arvada citizens want and need . Citizens will be able to see the value they receive for their investment through the performance measures and strategic results .

All the revenue and expenditure assumptions for the 2023-2024 Biennial Operating Budget were made in the context of the FOCUS Arvada framework . Each department’s budget was based upon six key elements: a mission statement, a vision statement, Council strategic plan, department strategic results, lines of business and programs . Using this framework and keeping the customer experience in mind, key results are identified that are to be accomplished during the two-year budget.

On September 16, 2019, City Council adopted a new six-year City Strategic Plan 2020 to 2025 . Their plan outlined five priority areas and 29 strategic goals to be accomplished over the next six years. City staff uses the Council’s identified strategic measures to develop milestones and measures to identify what results are being achieved and what needs refined. With these measures in place, discussions follow pertaining to process and budget, with the resulting goal of a true performance-based system . City Council adopts annual revisions to the strategic plan to recognize updates to current goals and remove goals that have already been achieved . The revisions approved on June 1, 2020 changed the timelines on a few of the approved measures due to the COVID pandemic . The revisions approved on July 19, 2021 added four measures to the plan . The most recent revision approved on May 16, 2022 added seven measures to the plan and removed two measures .

National Economy

US Gross Domestic Product (GDP) grew at an annualized rate of 5 .7% for year ending 2021, the largest number since 1984 . This was driven by a 6 .9% increase in the fourth quarter alone . The concept of “transitory inflation” went out the window with the Fed now trying to slow down the rapidly increasing inflationary rate. After receiving this data, the Fed telegraphed the start of rate hikes in March 2022. The Fed followed through by raising rates four times so far this year with three more expected this fall . The current short term interest rate target, as of August 2022, sits at 2 .25% – 2 .5% with the year-end number expected to be between 3 .25% and 4 .0% .

Unfortunately, inflation has continued to rise up to 9.1% for the 12 months ending June 2022, the highest in 40 years, consumer credit card debt has risen significantly in the past year just short of record all-time highs, vehicle debt is at a record high, consumer sentiment has fallen leading to a reduction in personal consumption, industry production has started to slow with many larger companies freezing hiring or even laying off team members and the 2-year and 10-year yield curves continue to be inverted.

Finally, the Gross Domestic Product (GDP) decreased at 0 .9% for the second quarter of 2022 . This marks the second consecutive quarter of negative growth, with the first quarter being down 1.6%. The technical definition of a recession is two consecutive quarters of negative economic growth, leaving the United States in a “technical recession” right now. What a lot people do not know is that the official pronouncement of a recession, for the United States, comes from a team of eight economists chosen by the National Bureau of Economic Research, called the Business Cycle Dating Committee . This group has been responsible for identifying recessions and has set the dates for the start and end of recession since 1978. Unfortunately, this group usually waits a while after a recession has begun to officially pronounce it, sometimes until the recession is actually over .

2023-2024 Proposed Biennial Operating and Capital Budget

Federal unemployment has dropped to 3 .6%, the lowest since March of 2020, and has stayed steady . Job openings still outpace the number of workers available, reducing the production of goods and increasing inflation as demand for goods has remained high.

Local Economy The City’s general revenue collection is influenced by many different factors. Two of the major contributors are sales tax and building activity . As illustrated in the discussion below, the City has experienced very positive results in nearly every major sales tax revenue category for the past ten years . In 2021, the City experienced consistent revenue growth with every month but August showing double digit year over year increases. The majority of this growth was driven by the increase in on-line sales and inflation. The City finished the year with a 15.4% increase in sales tax revenue, the largest since 2005. The City’s retail offerings include many essential businesses such as grocery, warehouse, online retail and home improvement stores . This has allowed sales tax, the City’s largest revenues source, to be more stable than many other government entities . 2022 appears to be following the positive results of 2021 with some areas starting to slow down . All major City revenues are up compared to 2021 except for court revenues and building use tax .

Sales Tax A 3% sales tax rate on all goods sold within the city limits pays for more than 53% of the General Fund services . In addition, it pays for 82 police positions through an additional dedicated 0 .46% tax on the same goods .

In six of the past eight years, there has been significant sales tax growth. The following graph illustrates the percentage increase each year since 2015. Since 2015, sales tax grew an average of 6%, significantly higher than the expected growth rate of 2 .5% . In the last two years, sales tax growth has exploded to an average of 12% per year . Initial estimates for sales tax growth in 2020 were conservative given all the COVID-19 restrictions . The City saw an incredible increase of 9% in 2020 and this was followed up by a 15% increase in 2021 . The increase in sales tax can be attributed to the City’s main sales tax generators which are grocery stores and general department stores that had double digit increases and on-line retailers . The City also saw a 48% increase in its on-line retailer’s category as a result of the Marketplace Facilitators Act that was passed in October 2019. Sales tax in the first half of 2022 is continuing at very high pace up 9 .6% through the second quarter, with the budget at 9% for 2022 . There are signs that sales tax may level off in the second half of 2022 with consumer spending stating to slowdown. For the 2023-2024 budget, the City has projected growth in sales tax to be 3 .5% and 1 .5% respectively .

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2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 % change 6.2% 4.8% 6.0% 1.3% 2.5% 9.1% 15.4% 9.0% 3.5% 1.5%

2023-2024 Proposed Biennial Operating and Capital Budget

Building Activity The following graph demonstrates the trend in single-family housing permits . The majority of this growth from 2012- 2016 is due to two new housing developments in northwest Arvada . However, the City also saw an increase in the smaller in-fill developments around the G Line transit stations. In 2017, the City saw the first decrease in single-family detached home permits since 2011. This trend continued from 2018 through 2021 . In 2022 and beyond, the City expects a base level of building activity .

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Single-Family Detached Home Permits

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While the decrease in building activity directly affects building revenues, the City conservatively budgets for building activity and bases building revenue on an average year . Revenues from building activity generated almost $6 .6 million of the City’s 2021 revenues for general operating purposes, including building use tax and building permits for the General Fund . This amount is reduced to $6 .1 million in 2022 to account for the base level of building activity . A small growth factor of 2 .5% - 3 .0% has been assumed for 2023 and beyond .

Economic Environment

Unemployment Unemployment hit a peak of almost 14 .7% in April 2020, the highest observed rate since data collection began in 1948 . At the state level and local level, this number reached 12 .2% . A large percentage of the jobs that were lost were in the service industry . By December of 2020 the unemployment rate dropped to 6 .7% with the number falling all the way to 3 .9% at the end of 2021 . Unemployment has remained steady since that time period, currently sitting at 3 .6% . Many industries are experiencing labor shortages, much like 2019, and have needed to cut back their service levels .

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Unemployment Rates 2019-2022

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2023-2024 Proposed Biennial Operating and Capital Budget

Ten-Year Planning

All of these indicators and more went into development of the assumptions for the “Ten-Year Models .” The 2023-2024 Proposed Biennial Operating Budget document has a separate section for each Fund and the assumptions included in the ten-year plan .

The ten-year model is not a budget, but a planning tool . It is important to understand the long-term implications of all current decisions and their impact on the City’s long-term financial plan. Each recommendation that is included in the ten-year plan includes all operating costs for any new capital or ongoing operation recommendation .

Ten-year plans typically anticipate both upticks and downward trends. The prior ten years have reflected the benefits of economic growth, and the resulting increased revenues. With that said, projections in this ten-year plan include impacts of a slowing economy . Revenue growth is expected to continue through 2022 and stabilize in 2023 with a proposed slowdown in 2024 .

Following is a summary of significant revenue and expenditure assumptions in this updated ten-year plan .

Revenues

• Sales Tax revenue assumes a growth rate of 9% for 2022, 3 .5 % for 2023 and a 1 .5% for 2024 . • Building use tax revenue assumes a reset of the base in 2022 to $3,292,000 with a 3% in 2023 and 2024 Increases of 1% - 4% are estimated for 2025 and beyond with a 0% in 2029 to reset the base again . • Open Space revenues are derived from sales tax throughout the region . Open Space revenues are budgeted to increase at 3 .0% - 4 .5% for all years of the model . • Water rates are budgeted to increase 12 .3% in 2023 with an additional $2 per month increase in the service fee . Increases are estimated at 7% in the years thereafter . The large increase is to help offset inflationary increases and help fund a much needed bond issue to complete some large capital projects . • Wastewater rates are budgeted to increase 9 .8% in 2023 with an additional $1 per month increase in the service fee . Increases are estimated at 6% in the years thereafter . The large increase is to help offset inflationary increases; fund pass through charges from the Metro Reclamation District and help fund a much needed bond issue to complete some large capital projects . • Stormwater rates will increase at 2% for 2023 . A 2% rate increase is projected to increase for the years thereafter until the master plan work can be completed .

Expenditures

• Personnel-related costs were calculated based upon each employee’s current grade and step and include an assumption for future market-range adjustments (MRA’s) . The MRA methodology is not based on cost of living adjustments, but rather an analysis of each job class in an identified market.

The MRA for 2022 was budgeted at 3% and came in at 3 .47% . This increase was covered by the increases in sales tax revenue . A mid-year 3% market rate adjustment was approved by City Council on August 1, 2022 to try and offset inflationary pressures. An additional 3% MRA is budgeted for

January 1, 2023 . • Medical cost increases are the most unknown due to external national forces and the full implementation of the Affordable Care Act. At this time, the increases are budgeted to be 0% in 2023 and 5% through the rest of the model . • Internal Service costs – insurance, building maintenance, vehicle maintenance and replacement 66

2023-2024 Proposed Biennial Operating and Capital Budget

and computer maintenance and replacement all have increase of 1% - 3% throughout the model . • Staff vacancy savings have been assumed in many of the funds. These are not the same across each fund due to the analysis of change in personnel by fund . Vacancy savings range from 1% to as high as 3% . • Ongoing street maintenance is now budgeted at $12 million with an additional $1 .5 million dollar transfer added starting in 2023 . Variable growth rates from 2 .0%-3 .0% are assumed for the rest of the model .

Fund Balances

Over time, each fund needs a well-considered fund balance goal . In 2015, City Council adopted a budget and fiscal policy, included in this document under the Additional Information tab, setting minimum required reserve levels . All expenditures and revenues have to be considered within the context of ten-year implications . The goal is to ensure all funds have a positive balance, meeting or exceeding the established goal, within the end of the ten-year planning horizon .

• General Fund: 17% of fund expenditures . • Parks, Golf and Hospitality: 11% of fund expenditures . • Utility Enterprise Funds: 25% of fund expenditures . These funds include: Water, Wastewater and Stormwater . • Enterprise Funds: 11% of fund expenditures . This includes the Golf fund . • Internal Service Funds: These funds have no adopted levels, except for the Print Shop which is 11% .

All funds except the Enterprise funds are balanced throughout the model . The Enterprise funds fall under the required fund balance goal in the ten year model, but recover and meet the fund balance goal by the end of the model .

SUMMARY

The factors noted above were all evaluated in developing the 2023-2024 Proposed Biennial Operating Budget . As presented in the following sections, changes to the budget continue to focus on City Council’s Strategic Plan and each individual department’s strategic results and performance measures . In addition, there are changes to ensure that the City continues to offer a competitive compensation package to attract top personnel .

Overall, the City has benefitted from a healthy economy for the past ten plus years and the funds had healthy reserves going into the pandemic induced recession . Although the recession was short lived, the City fared much better than many of the comparable Cities and the State of Colorado . Half way through 2022, the City is continuing to see revenue growth in many areas that will help to fund the increasing cost of City operations and offset some of the inflationary growth. The next few years are still unpredictable with a growing concern of a recession. As such, the 2023 - 2024 Proposed Biennial Operating Budget offers an appropriately conservative direction for 2023 .

Bryan Archer Director of Finance