11 minute read
Introduction
INTRODUCTION
Advertisement
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 2021-2022 Proposed Revised Biennial Operating Budget were made in the context of the FOCUS Arvada framework . Each department’s budget was based upon five key elements: a mission statement, a vision statement, 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.
In addition, 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 (the most recent revision on July 19, 2021) to recognize updates to current goals and remove goals that have already been achieved .
National Economy
In 2020, the swift and massive shock of the COVID-19 pandemic and shutdown measures to contain it, caused the worst recession since World War II . Although this recession was particularly deep with major indices dropping 20 – 30% and the loss of approximately 22 million jobs, the recession was short lived at only two months . The quick actions of the Federal Government, Congress and the Federal Reserve through the Paycheck Protection Program (PPP), the Coronavirus Aid, Relief and Economic Security (CARES) Act, lowering short term interest rates and initiating two stimulus programs provided much needed relief . Funding through the Paycheck Protection Program (PPP) allowed small businesses to apply for a forgiveness loan that would help offset salary and wages. Funding was also allocated to States, Counties and large Cities to help offset the challenges of the COVID-19 virus. The City received $9.4 million in CARES funding. 78% of the funding was used for business and non-profit assistance while the remaining 22% was used for housing and human service and internal city use . While the stimulus packages helped to reduce the depth of the recession, US Gross Domestic Product (GDP) still declined 3 .5% in 2020, the worst in the US since the end of World War II .
In March of 2021, the $1.9 trillion American Rescue Plan Act (ARPA) was signed into law. The first tranche of the funds were received in the second quarter . The City received half of its $11 million allotment in May and is working through completing the planning phase with recommendations for funding scheduled to go to City Council this fall . Second quarter GDP grew just above 6% . Total GDP growth is projected at 6% for 2021, falling to 5% by 2022 .
Local Economy The City’s general revenue base has several different influences. 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 revenue category for the past ten years . In 2020, the City started the year in a positive manner, with the first quarter exceeding budget expectations. The second quarter was somewhat of a roller coaster, with April sharply down but May and June showing high levels of growth . The City finished the year with a 9% increase. The City’s retail offerings include many essential businesses 55
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 . 2021 appears to be following the positive results of 2020 . All major City revenues are up compared to 2020 except for court revenues .
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 80 police positions through a dedicated 0 .46% tax on the same goods . The overall City rate is 3 .46% .
In seven of the past ten years, there has been significant sales tax growth. The following graph illustrates the percentage increase each year since 2012 . Since 2012, sales tax grew an average of 6%, significantly higher than the expected growth rate of 2%. In the last two years, sales tax growth has slowed to an average of 2% 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 . The increase in sales tax can be attributed to the City’s main sales tax generators which are grocery stores and general department stores each experiencing double digit increases in the first several months of the pandemic. 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 2020. Sales tax in the first half of 2021 is continuing at an unprecedented growth rate of 20% through the second quarter, although the City is conservatively budgeting sales tax at an increase of 11% for 2021 as there are signs that sales tax may level off in the second half of the year. For the 2022 budget, the City has projected sales tax to be flat.
Sales Tax Growth (%)
8%
6%
4%
2%
0%
-2%
-4%
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 % change 6% 6% 7% 6% 5% 6% 1% 3% 9% 11% 0%
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 in 2018 and 2019 . In 2020 and beyond, the City expects a base level of building activity .
1000
900
800
700
600
500
400
300
200
100
0
Single-Family Detached Home Permits
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
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 2020 revenues for general operating purposes, including building use tax and building permits for both the General Fund and the Police Tax Increment Funds . This amount is reduced to $5 .8 million in 2022 to account for the base level of building activity .
Economic Environment
Unemployment Unemployment hit a peak of almost 15% in April 2020, the highest observed rate since data collection began in 1948 . At the state level and local level, this number reached 12% . A large percentage of the jobs that were lost were in the service industry . By October of 2020 the unemployment rate dropped to 7% . Unemployment still remains high, but has declined to just over 5% at the end of July . The extended Federal unemployment benefits programs are scheduled to end on September 4, 2021. Around 7.5 million US workers will lose benefits at that time, almost equaling the estimated job vacancies of 7.6 million . Unemployment forecasts call for unemployment to average over 4% by the end of 2021 and to drop below 4% by 2023 .
Ten-Year Planning
All of these indicators and more went into development of the assumptions for the “Ten-Year Models .” The 2021-2022 Proposed Revised 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 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 2021 and stabilize in 2022 .
Following is a summary of significant revenue and expenditure assumptions in this updated ten-year plan .
Revenues
• Sales Tax revenue assumes an average growth rate of 2% . • Building use tax revenue assumes an increase of 3% in 2022 to reset building use tax to a base of $3,306,000 . Increases of 1% - 4% are estimated for 2023 and beyond with a 0% in 2028 to reset the base . • Open Space revenues are derived from sales tax throughout the region . Open Space revenues are budgeted to increase at 2% - 3% for all years of the model . • Water rates are budgeted to increase 3% in 2022 with a $2 per month increase in the service fee .
Increases are estimated at 7% in the years thereafter . • Wastewater rates increase 3% in 2022 with a $1 per month increase in the service fee . Increases are estimated at 6% in the years thereafter . Over 67% of the change in rates is due to the regional costs of cleaning wastewater . • Stormwater rates will remain unchanged for 2022 . A 2% rate increase is projected for the years thereafter .
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.
There was no MRA adjustment in 2021 based on the uncertainty in the economy when the budget was prepared in 2020. There will be a retroactive 1.5% MRA adjustment in 2021 as the financial outlook for the City is much better than anticipated . The MRA for 2022 is budgeted at 3% . • 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 3% in 2022, 6% in 2023 and 5% through the rest of the model . • Internal Service costs – insurance, building maintenance, vehicle maintenance and replacement 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 budgeted at $10 million, with variable growth rates from 2%-3%, for the entire model .
Fund Balances
Over time, each fund needs a well-considered fund balance goal . In 2015, City Council adopted a budget and fiscal policy setting out 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 and Golf: 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 2021-2022 Proposed Revised 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 years and the funds had healthy reserves going into the 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 2021, the City is continuing to see revenue growth in many areas that will help to fund the increasing cost of City operations . The next few years are still unpredictable and as such, the 2021 - 2022 Proposed Biennial Revised Operating Budget offers an appropriately conservative direction for 2022.
Bryan Archer Director of Finance
