Finance Advisory Committee

AGENDA Joint City Council & Finance Advisory Committee Meeting Thursday October 27, 2016 5:30 p.m. City Hall Council Chambers (Second Floor) A. Call to Order B. Roll Call for Attendance C. Public Participation D. Approval of Minutes E. Overview F. Financial Policies G. Tax Levy 2016 1. Actuarial Presentation 2. History and recommendation H. FY 2017 General Fund Budget 1. Process 2. Departmental 3. Summary I. Revenues J. Approval of Recommendations Regarding F,G, H and I K. Other Items L. Adjournment The Finance Advisory Committee’s role (as listed in Chapter 54-11) is to provide well- reasoned, financially sound recommendations to the Council. Meetings and reporting shall be on a project-by-project basis or as otherwise assigned by the City Council. The Finance Advisory Committee shall work in cooperation with the City Council and the City Manager to analyze the City’s financial policies, long term financial stability, options for greater efficiencies and possible revenue and expenditure modifications.  DATE: October 17, 2016 TO: Honorable Mayor John Rey City Council Finance Advisory Committee FROM: Anne Marie Gaura, City Manager Cathy Haley, Finance Director SUBJECT: General Fund Overview The City has made substantial advances in its financial state over the past two years, but still faces many challenges. In 2010, just 6 years ago, the City’s funds were so depleted that it lacked the ability to cover its operational expenses for a single day. At that time, the City was forced to borrow money just to keep itself operational. In the present day, the City has established reasonable fund balances that ensure continuing operation, but has still failed to meet predictable intermediate and long-term needs. In 2016, the City has had aged police cars fail to start at the scene of shootings, and has had ambulances fail while transporting patients to the hospital during medical emergencies. These episodes are illustrative of the problems that occur due to the failure to plan for equipment replacement while meeting basic operational needs. The City is currently working to recover from previous financial decisions while meeting current operational needs and planning for the readily predictable costs of future years. While great strides have been made in the City’s financial health, it is not possible to maintain operations, cover equipment replacement costs, pay long term obligations and fund the cost of unique debts created by past City practices without generating revenues in a responsible fashion. As the proverb goes, an ounce of prevention is worth a pound of cure. The Pavement Management Index presentations reviewed by the City Council in the past two years show the truth of that expression: the failure to maintain streets at an early stage of deterioration results in accelerated pavement failure and transforms simple pavement rehabilitation into complete street reconstruction. The failure to fund equipment replacement generates repair costs far in excess of the value of the equipment being repaired, out of the necessity to keep an operational fleet. The City must make informed decisions now to break from past practices, and set a course for financial stability. In fiscal year 2015, the City Council approved financial policies based upon the unanimous recommendation of the Finance Advisory Committee. Those policies included a recommendation that the City establish and maintain a 25% fund balance within its primary funds. In other words, the policy recommends that the City’s minimum budgeted fund balances should never be below 25% of the anticipated (budgeted) expense for the fiscal year. The rationale behind this policy is to ensure that the City has adequate funds to maintain operations, even during times of uncertainty. In the absence of this fund balance, in previous years the City has run out of operational funds and has had to engage in short-term borrowing to cover basic expenses such as payroll. That borrowing occurred during a period when the State of Illinois had not delayed (or threatened to delay) payment of state funding such as the local share of income tax revenue, motor-fuel taxes or other similar state-derived funding. The present day situation for units of local government such as the City is far less certain than it was several years ago, as the State experiences budget contraction and responds with persistent suggestions to cut, eliminate or condition funding to local units of government. The City has worked for the past several years to generate and preserve a fund balance, and that process has generated extensive discussion. There have been suggestions that the City should reduce its fund balances, and also suggestions that the City should increase its fund balance or reduce expenditures despite the presence of the fund balance. As the City works to develop its full-year budget for FY2017, the fund balance is at the heart of the City’s considerations. Staff has worked diligently to generate a budget that, in municipal finance terms, is a “surplus” budget. In technical terms, a surplus budget is one with anticipated revenues in excess of budgeted expenditures. The City’s proposed FY2017 budget is a surplus budget under that definition, as it complies with the fund balance policy and contemplates revenues just slightly in excess of budgeted expenditures. That surplus status is only achieved through an increase in the property tax levies in an amount necessary to cover the City’s increasing pension costs based upon current actuarial data. The increase in pension costs to the City in FY2017, and the predictable increase in years thereafter, is based upon the persistent failure of the City to properly fund its long-term pension obligations over a protracted period of time in the past. The term “surplus budget” implies that there are funds being raised that are unnecessary or unneeded. While that is the technical term that applies to a budget with revenues in excess of expenditures, it is nonetheless a misleading term. The City’s budget can be compared to the household budget of the members of City Council, the Finance Advisory Committee, or residents of the City. If a household budget has anticipated revenues in excess of expenditures (i.e. if the members of the household are making more in wages than they are spending within a given year), that would be a “surplus budget.” If the household is spending more money than it is making, it would be a “deficit budget.” Just as with the households in the community, the City cannot survive with a deficit budget. A surplus budget is not a luxury—it is a necessity to keep the City functional and operational. The City’s financial status has a very significant impact on the community. At a basic level, if the City budgets as it did in the past with deficit budgets and inadequate fund balances, the City could simply run out of money to keep operating—it could run out of money to pay its bills, to keep police officers in the streets, and to keep firefighters responding to calls. On a grander scale, poor financial planning leads to the City’s bond rating being Page |2 jeopardized and its ability to borrow threatened. As the City has seen in this past year, even with the establishment of reasonable fund balances, if the City does not fund its long- term pension obligations, the City’s credit rating will suffer. The present leadership of the City is called upon to make a number of difficult choices, and those choices are based upon the City’s past financial conduct. Because the City did not previously establish and maintain adequate fund balances, it is necessary to now undertake the steps necessary to preserve that funding for operational emergencies. Because the City did not previously fund its long-term pension obligations at reasonable levels, it is necessary to now increase its revenue generation in order to maintain basic operations while meeting the City’s legal obligations. The General Fund for the FY2017 budget is proposed to hold fund balance reserves at 25.71% or $9,421,384. However, this has not been an easy task for the City to attain and maintain. Candidly, the proposed budget that is brought forward to the joint City Council / Finance Advisory Committee meetings is not a budget that is based upon meeting the recommendations of City staff to operate each department in accordance with best management practices. When the City’s draft budget was initially put together to meet basic principles of best management practices, the budget contemplated a deficit of $1,744,922. Accordingly, the budget brought forward already includes budget cuts developed by staff out of their operational budgets of $737,907. The elimination of the original deficit was a combination of reviewing revenues more closely and looking at departmental operational budgets along with the funding of the Workers Comp Fund and Health Insurance Fund. The draft budget is not intended to be a document with room for significant reductions in funding. The City recognizes that the proposal brought forward contemplates increases in the property tax levy in order to ensure sustainable operations. Accordingly, the first several rounds of budget cuts have already occurred. The concept that the City’s financial operations are not sustainable without increases in the City’s property tax levies is not a new one. The Executive Partners, Inc. (“EPI”) report commissioned by the City in 2013 indicates that the City has to increase its operational revenues in order to meet the goal of financial sustainability. It is the recommendation of City staff and the EPI report that the City cannot achieve sustainability through budget cuts alone. The level of expenditure contemplated by the current draft budget is the minimum amount that can be funded while meeting current operational goals. In other words, any further budget cuts will be to operations, and will directly and adversely impact the provision of services to the community. With that in mind this memo goes back several years to chronicle where the City has been, where it is, how it got here, and where it should be headed. Q: What brought us here? A: The City has been over reliant on TIF funds. The City has relied on the transferring in of TIF Funds to help sustain the General Fund over the life of the TIF’s. This transfer has been above and beyond the dollars disbursed as a surplus of revenue according to state legislature and the Intergovernmental Agreements (IGA) the City has with the school district. The City has used the TIF Funds Page |3 as a crutch to meet its basic operational needs, rather than funding those operational needs through sustainable funding sources. The chart below shows the potential loss of revenue the General Fund could see once the two TIF’s expire. TIF impact on the General Fund FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 Transfer to GF TIF #1 $678,576 $678,576 $678,576 $678,576 $678,576 $678,576 $0 Transfer to GF TIF #2 $113,198 $113,198 $113,198 $0 $0 $0 $0 TIF Property Tax Surplus $180,000 $180,000 $180,000 $180,000 $180,000 $180,000 $0 TIF Sales Tax Surplus $320,000 $305,000 $290,000 $275,000 $260,000 $255,000 $0 Pick-up in Property Tax $95,754 $95,754 $95,754 $656,274 Revenue to the GF $1,291,774 $1,276,774 $1,261,774 $1,229,330 $1,214,330 $1,209,330 $656,274 Loss in revenue GF ($40,221) ($15,000) ($15,000) ($32,444) ($15,000) ($5,000) ($553,056) A: The City’s failure to engage in long term capital planning. The City has not been engaging in long term Capital Planning for Fleet, Equipment, Streets or Facilities. The City again has used TIF funds to keep up with streets located within the two TIF Districts, but has failed to plan for either the end of the TIF Districts, or for the maintenance of streets outside the boundaries of the TIF Districts. Fleet and Equipment, especially within the field of public safety can age quickly. The City has an aged and aging inventory with no means of funding replacements in the future years, because of this failure to engage in long term planning. Attachment A, B & C shows the cost of 5-years in to the future of the City Fleet, Equipment and Capital. Based on those calculations the City needs to spend $17,288,555 to fund the presently foreseeable expenses in Fleet, Equipment, Facilities and Streets. Of that sum, only $817,744 is funded in the draft FY2017 budget or 4.73%. The discussion above indicates that the City failed to engage in long term capital planning, which is an accurate statement. Previous City budgets did identify certain long term capital obligations via a spreadsheet included as a budget appendix. Those appendices failed to include any actual or even proposed funding sources. In other words, the City acknowledged that it had long term needs, but failed to take any steps to plan for paying those known costs. A: City-Funded benefits for retirees. The City funds health insurance benefits to retiree employees based upon decisions and commitments made by past City leadership. While there has been a phasing out time period, this savings impact to the General Fund will not be seen until years down the road. As a matter of point this dollar amount that is funded out of the General Fund to cover costs for retiree health insurance went up by an additional $191,540 for a total contribution Page |4 from the General Fund in FY2017 equal to $961,359. In other words, the City is paying nearly one million dollars to fund the health insurance benefits of people who no longer work for the City. The City has this obligation, despite the absence of any sustainable funding being implemented to cover the long term costs that were created. Fiscal Employer Year Number Retirees Contribution 2010 121 $1,021,359 2011 123 $915,668 2012 121 $965,968 2013 122 $906,056 2014 126 $893,475 2015 125 $863,563 2016 120 $769,819 2016.5 124 $538,781 ** Six-month budget 2017 127 $961,359 A: Prior to FY2015 the City had no “Best Practice” policies in place. For decades, the City failed to implement “Best Practices” such as a Purchasing Manual, Personnel Handbook, Benefits Handbook, Financial Policies on Budgeting, Capital Equipment Replacement Funding. Those documents are basic building blocks of a successful business or unit of government and the City simply failed to implement them. Within the past two years, the City has undergone incredible transformation in the development and implementation of policies that regulate expenditures, curb liabilities, and acknowledge (and work to fund) predictable intermediate and long term expenses. Despite developing “City Strategies” in years past as a part of the budget process, the City failed to take reasonable steps to implement them. For example, the City developed strategies and objectives but failed to incorporate them into a Capital Plan that would have funded the objectives. The City failed to align its goals within the budget process for the future creation of a multi-year financial plan for the City of DeKalb. Within the past two years, the City has adopted both a ten year Strategic Plan, and also has developed intermediate and long term capital plans that contemplate funding the objectives of the Strategic Plan. A: The City had insufficient fund balance reserves leading to the City’s inability to respond to the economic downturn. While the General Fund has made amazing strides in building back reserves to meet the City’s financial policy “Best Practice” goal of 25% of expenditures, it is important to note that these reserves are there for a reason. The economic downturn in 2008 was something the City was not prepared for nor able to respond to in any fiscally responsible manner. As can be seen from the fund balance chart below reserves were at $22,169 in 2010. That figure has to be analyzed to be understood. Currently the $9,401,684 would be Page |5 enough to sustain the City for approximately 3-months. That means that on an annual basis, the City requires roughly $38,000,000 to sustain basic operations—roughly $104,000 per day, 365 days per year. In other words, a $22,169 fund balance is enough to sustain City operations for less than 6 hours. Just 6 years ago, the City lacked enough funding in its bank accounts to sustain operations for a single day, without a constant inflow of revenues. Any disruption of revenues would have halted City operations, which was the reason that the City had to engage in short- term borrowing in order to meet basic operational needs and payroll. The past financial practices of the City are simply not sustainable. A review of the General Fund Reserve Balance History chart attached below shows the historical approach of the City. In 2008-2009, the City drew down its fund balance to a nearly non-existent level. It is only when the fund balance was completely depleted that the City then took emergency actions, such as layoffs and short term borrowing, to start to address this situation. A: The City has been underfunding Police and Fire pension obligations since 2011. The City implemented a number of steps to address its funding deficits in light of the 2010 fund balance crisis described above. Beginning in 2011 the City switched to a lower “allowable” funding method for the funding of the Police and Fire pension funds. The City had used the Entry Age Normal method until 2011 tax year. The City only used the Percent Unit of Credit method for four years (2011-2014). However, using the lower funding method even for that short period resulted in the City incurring substantial deficits in its funding and contributed to a long term unfunded obligation—the very pension obligations that the City faces this year. If the City fails to properly fund the pension costs now, it will simply perpetuate a situation where the City’s pension obligations are further compounded and inescapable. During the 2015 tax levy the City Council and the Finance Advisory Committee recommended increasing employer portion of the tax levy going to the Police and Fire Page |6 pension funds be increased back to the higher finding method of the Entry Age Normal Cost Method and the City Council ultimately approved this change. The policies also recommended funding the obligation through the property tax levies. The purpose of the change was to increase the funding percentage of both funds and decrease the City’s long term pension liability. While this was a beneficial change, the impact of the four years of underfunding the pension obligations have been felt. The City’s bond rating was recently downgraded, based in large part on the City’s pension liabilities and use of the lower funding level for the four-year period. The change in bond rating is important to consider. The City’s downgrading means that an independent agency whose sole function is to grade the creditworthiness and financial stability of entities has looked at the past pension funding decisions of the City and determined that they are not sustainable and do not promote creditworthiness. The credit downgrading also discussed the City’s fund balances (which have been protected in the proposed FY2017 budget) and the need to adopt sustainable sources of funding beyond sales taxes (which is addressed below). A. The City’s past practice is to abate all General Obligation Debt during the tax levy process. Historically, the City fully abates its debt expenditures and covers those costs through transfers from the General Fund. As the City’s debt is established, it is backed by a tax levy that would impose property taxes to cover the full amount of the annual debt payments. “Abating” the debt means that the City determines annually to not impose that tax levy, and instead pays its annual debt obligations from other sources of funds— typically the General Fund. The General Fund transfer to cover debt payments for FY2017 is $1,493,998. In other words, nearly $1.5 million dollars that could be used to meet City operational needs is being diverted to cover debt payments that were intended to be paid through the tax levy, further contributing to unsustainable operational conditions. In practical terms, if the City was not abating these taxes and thus had an additional $1.5 million dollars in the general fund, it could purchase for Public Works a P-6 Pickup Truck with snow plow, a P-37 Aerial traffic signal truck, P-21 One ton dump with plow/salt spreader, a line Lazer road marking paint machine, a P-31 Bobcat with hydraulic concrete breaker, a P-24 Tandem Axel Dump with plow/salt spreader, a Dump truck with snow plow/salt spreader, a P-13 Pickup Truck with snow plow, a P-33 Toro Z-Master riding mower, for the Police Department 3 new squad cars, for Community Development a new pool car and for the Fire Department a Dodge Ram Squad 1, a Chevy one-ton Truck Squad, a Ford ambulance, a Dodge Durango, a Chevy Suburban, a Pierce Saber Fire Engine and pay off the loan taken out for a Fire Engine with no cuts to levels of service or need for borrowing. This unsustainable practice is identified in the 2013 EPI report, which recommends that the City stop the practice of making debt payments from the General Fund. Specifically, the EPI report recommends use of property taxes to cover debt obligations over the life of capital purchases. This EPI report goes on to further indicate that some increase in property tax may be necessary. Because the City has not implemented this EPI recommendation, the City continues this unsustainable practice. Page |7 Q: Where is the City today? A: The City has reached and maintained a 25% reserve fund balance. The practical impact of this change is simple: in the event of a short-term interruption of City revenues, the City can continue basic operations for a long-enough period to either arrange for other funding sources, establish short-term borrowing, or implement emergency spending restrictions. On a more direct level, in the event of a natural disaster, the City would be able to continue meeting emergency public safety obligations and continue operations while responding to the disaster. Some communities rely on the perceived availability of federal or state aide to tide them through disasters. In reality, in the weeks and months immediately following the disaster, it falls upon the City to meet the emergency needs, pay emergency expenses, protect public safety, and then apply for and seek any available emergency funding. In the absence of fund balances, the City can neither responsibly operate, nor meet emergency public need. The City has essentially gone from being able to cover operational expenses for less than 6 hours, to being able to continue operations for over 90 days. A: The City is fully funding the pension funds through the use of property tax revenue as stated in our financial policies. The employer portion of the tax levy going to the Police and Fire pension funds were increased back to the higher finding method of the Entry Age Normal Cost Method. The purpose was to increase the funding percentage of both funds and to decrease the City’s overall pension liability. This policy direction was provided as part of last year’s discussion on the Police and Fire pension funds and the subsequent property tax levy, and was implemented for the first time last year. FY2017 marks the second half of a two year process to transition back to the Entry Age Normal Cost Method. This funding method is recommended by Moody’s Investors Service and has a direct impact on the City’s bond rating and its sustainability. The offset to this expenditure is an increase in Page |8 General Fund revenues under Property Taxes as recommended by the EPI study as well as the City’s financial policies. In other words, the increased costs are sustainable because they are offset by matching revenues. The City’s current financial policies also states “Levy for Police, Fire and IMRF per actuary calculations.” If the actuarial reports indicate a higher employer contribution is needed, said increase will need to be added to the City’s overall previous year levy request to avoid underfunding problems.” If the City fails to levy in accordance with the proposed budget, it will not only be returning to unsustainable practices, but will also be deviating from its own financial policies adopted by the City Council in FY2015 with the unanimous recommendation of the Finance Advisory Committee. A: The City is matching funding to its long-term capital needs. The City has a draft Five-Year Capital Improvement Plan (CIP) along with a new financial policy for the recommendation of funding long term capital such as fleet, equipment, facilities and streets. The significance of this cannot be understated: 2016 marks the first year that the City is actually planning over a five year period to meet its capital improvement needs. The City’s capital improvement needs for a five year period are inarguable. Capital expenses such as trucks and equipment may have a 5-10 year lifespan. Capital expenses such as streets and well pumps may have a 20 year lifespan between major maintenance. Capital expenses such as water mains may have a 60-100 year lifespan. Planning for a short 5 year window represents both a significant step forward for the City, and also a minimum standard for establishing sustainable funding models. The implementation of the 2025 Strategic Plan by the City Council in FY2016, along with incorporating a CIP and funding policy in FY2017 and looking for funding sources to implement both of these in FY2018 will assist in creating a sustainable General Fund and create a long-term sustainable financial plan. As noted above, the 2025 Strategic Plan is being implemented by the City as the very first Strategic Plan that incorporates not only aspirational goals, but also proposed funding to meet and accomplish those goals. A: The City has implemented better budgeting practices. The City has worked to ensure that expenses are properly reflected within the fund that they accrue. For example, the City is directly charging the Utility Fund with those expenses that this fund is actually expending. The City incurs expense in staffing the water billing process, both in terms of collecting water billing data and also in terms of actual billing and processing payments. In years past, the City paid those expenses out of the general fund, and then made a lump-sum transfer from the water fund to the general fund without any underlying substantiation. For the first time starting in FY2015, the City has accurately calculated the true impact and expense that the City incurs as a result of the City’s utility oriented enterprise operations, and is imposing a fair charge for them. Expenses accruing to the utility funds are billed to the utility funds, and no lump-sum transfer occurs. This provides transparency and the ability to calculate and understand the true cost of the City’s operations. Page |9 Adopting an actual Budget policy within the City’s Financial Policies. These policies, which were written based on “Best Practices” will assist the City in attaining a sustainable General Fund operational budget. However, policies are only effective if followed. If the City fails to adhere to its Financial Policies, by engaging in activities such as reducing its fund balances or failing to impose property tax levies to cover pension funding obligations, the Financial Policies are meaningless. Q: What are the challenges and opportunities that the City presently faces? A: The City has insufficient revenues to maintain existing levels of services. The City has been heavily reliant on sales tax revenues, accounting for 42% of total General Fund revenues in FY2017. The charts below show how flat this sales tax revenue has been over the last ten years. Note that the FY16.5 budget has been projected out for twelve months for uniformity. P a g e | 10 Sales taxes are more volatile than other forms of municipal revenue. While revenue streams such as property taxes are predictable (as they are set by the unit of government), sales taxes are based on market forces, the strength of the economy as a whole, the performance of local businesses over which the City has no control, and a myriad of other difficult to predict factors. It is not possible to plan to meet long term, predictable obligations of the City with short term, unpredictable revenue streams. A: The draft FY2017 budget includes numerous cuts to departmental budgets in order to maintain the 25% fund balance reserves. As noted above, the draft FY2017 does not represent the staff recommendation of funding that is needed for proper City operations. Rather than coming to the City Council with a deficit budget and working through extensive budget cuts to achieve balance, staff has already engaged in the challenging work of making major cuts to the budget. Those cuts in total comprise nearly three quarters of a million dollars of expenditure that has been removed from the budget before even being presented to the Council. The City’s budget has been lean in previous years. This year, it has been cut as thinly as possible—there is no further room to make reductions without hitting operational expenses. As a practical example, the next level of budget cuts to the Police Department will be reducing the amount of ammunition that the Department purchases to levels that may not meet minimum training requirements for officers that are expected to maintain public safety on the streets. Beyond that, cuts will result in direct reductions of staffing and fewer “boots on the ground.” The level of cuts already built into this budget is sustainable for one year. Candidly, it is not realistic to expect that it can be maintained thereafter. The City will be using a “Priority Based Budgeting” process starting in FY2018. This method will align actual costs to services being provided and determine which services are core services to the City and which services should be considered non-core services. In other words, the City is already anticipating cuts in levels of service and is working to prioritize services based on need. Further cuts in FY2017 will result in reductions in levels of service without that important prioritization being completed. P a g e | 11  $ Cut From Original Proposed Department Budget Police Department $136,007 Fire Department $108,918 Public Works $105,520 Community Development $289,005 CMO, Finance, HR, IT $98,457 $737,907 A: What do departmental level budget cuts mean to each department? Training: Extensive cuts to training budgets mean that departments are not learning new operating models and do not have the ability to implement more efficient operational practices, thereby increasing long-term costs. Scanning and Document Imaging: The City has cut plans to engage in large scale scanning of City records and documents, which hinders the City’s ability to access records of past operations and current projects, and reduces the City’s transparency. Advertising and Marketing: The City has eliminated or reduced the scope of proposed advertising and marketing projects that could attract new commercial, industrial or residential development and provide much-needed expansion of the property tax base. Wellness Initiatives: The City has cut funding for wellness initiatives that produce a healthier, more productive workforce and reduce long term health care costs. Nuisance Abatement: The City has reduced funding for nuisance abatement programs that maintain the condition and appearance of properties and neighborhoods throughout the community that require attention. Small Tools & Equipment: The City has eliminated funding for camera replacement, computer replacement and similar expenses for items needed to properly document City operations, track and record evidence, and otherwise efficiently operate. Fire Prevention Handouts: The City has cut funding for fire prevention handouts including brochures, pencils, erasers, plastic fire helmets, stickers, coloring books and juvenile firesetter forms that help ensure that children in the City are properly educated in fire avoidance and abatement, and that help address and prevent juvenile arson incidents. These are but a few examples of the numerous cuts made to date. A: How will the City maintain 25% fund balance reserves? General Fund revenues should be used only to carry on the operational services for the City. Without eliminating the non-operational expenses currently being supported by General Fund revenues such as shown in the chart below, the City will need to look at P a g e | 12 cutting service levels in order to maintain this level of reserve. FY2017 Cost General Obligation Debt Payments $1,493,998 The City Abates all Debt Retiree Health Insurance Payments $ 961,359 Unique to DeKalb IMRF $ 537,687 Cost not covered by Property Tax FICA $ 389,495 Cost not covered by Property Tax County Sales Tax Rebated Dollars $1,729,000 Unique to DeKalb $5,111,539 In other words, the City has over Five Million Dollars of expenditures being charged to the General Fund that do not have a sustainable funding source. By implementing “Priority Based Budgeting” in FY2018 the City will be able to align costs with services currently being provided across all departments to determine which services are core services and which services could be considered non-core services. Even with reductions in non-core services and cuts to levels of service for core services, the City cannot attain financial sustainability through budget cuts alone. A: Pension costs will continue to rise. Pension costs will continue to rise. This is a cost for Police and Fire pension funds as well as for IMRF and FICA. Failing to fully fund these mandated costs threatens operational services that the City must provide. A: How does the City continue to fund its obligations? Retiree Health Insurance ($961,359). While this cost will eventually begin to see a decrease, it will very likely increase in the next few years because of several long-term employees retiring within the next 5 years still eligible for this benefit. Debt Obligations ($1,493,998). This required expense will not begin to decrease until the year 2027. FICA/IMRF not covered by the levy ($927,182). This is an expense that the City will be required to cover year after year. The City’s financial polices recommend covering the full cost of IMRF with property tax revenue. County Tax rebate dollars ($1,729,000). These agreements will continue on for decades. A: The City is using traditional operating revenues to cover capital debt. P a g e | 13 No property taxes are levied to cover any of the City’s debt payments. This hinders the City’s ability to meet basic operational expenses. The Executive Partners Inc. (EPI), Strategic Planning Review from June of 2013, recommends not making debt payments from the General Fund. Making debt payments from the General Fund is not a sustainable practice, particularly in light of escalating costs being covered. A: Revenue is being diverted to pay for lengthy Agreements with other entities. These agreements seem to provide funding to other agencies well beyond the benefits received by the City. They are 40 year agreements in some cases and have approximately 20 years remaining. In some instances, agreements were entered into in order to cover the costs of specific improvements that the City has paid for, with interest, and that the City will continue to pay for in coming years without any further benefit. This is based upon the agreements that the City approved in the past, which do not account for the long term cost of the obligations that the City entered into. As noted above this dollar amount comes annually from the General Fund and for FY2017 was $1,729,000— equal to roughly 5% of the City’s General Fund budget. But for the unsustainable provisions of these agreements, the City would have 5% more funding in the General Fund to cover operational expenses or to reduce funding needs. A: The City cannot continue to divert investments in capital equipment replacement funds. The City does not have a funding methodology in place to establish and fund the true costs of capital equipment replacement. At present, the City is not planning beyond a one-year window—this is not sustainable. As discussed above, the City should be spending $17,288,555 to fund its five year CIP, but is only presently budgeting $817,744. It is not possible to make enough cuts to the general fund to support this predictable, known short-term expense. City staff is presenting a Five-Year Capital Improvement Plan (CIP) along with a new financial policy for the recommendation of funding long term capital such as fleet, equipment, facilities and streets. This marks the first time that the City would be planning to meet known or reasonably predictable expenses within a five year horizon. The implementation of the 2025 Strategic Plan by the City Council in FY2016, along with incorporating a CIP and funding policy in FY2017 and looking for funding sources to implement both of these in FY2018 and years subsequent will assist in creating a sustainable General Fund and create a long-term sustainable financial plan. This will also assist in creating a true long-term Capital Replacement Funding process. In other words, difficult decisions to increase revenues over the next few years will result in the City having a plan in place to meet known expenses for the first time in its documented history. P a g e | 14 The City has desperate capital funding problems that illustrate an indisputable need to collaborate on true, sustainable funding sources. The City has outdated facilities that needs renovating/updating. No reinvestment made to facilities over the years has created a need for costly upgrades. City Hall is 49 years old, however it was operated as a 24/7 facility making it closer to over a century of wear and tear. The boiler and most of the other major mechanical systems are original to the building. The expected life on these systems is generally 30 years. These systems need to be replaced to reduce the risk of catastrophic loses. Moisture damage, mold, and asbestos in the building will likely make replacement of these systems considerably more costly than normal. Facilities not being maintained will create a large liability in the future to keep the facilities safe and habitable. The City’s history over the past decade teaches an important lesson: where the City fails to meet current financial obligations, it only increases the burden in future years. Underfunding on street maintenance programs outside of the TIF Districts has caused streets to reach levels of significant deterioration or failure, and to be in need of total reconstruction. As the City has seen from pavement management index presentations over the past two years, the failure to provide needed maintenance in the early stages of pavement deterioration results in significant escalation of later costs, along with early pavement failure and the need for complete street reconstruction. Not maintaining the Fleet/Equipment vehicles creates a large liability for the City specifically in the cases where vehicles broken down on Public Safety calls. The City has had squad cars fail to start at the scene of shootings and ambulances fail while transporting patients to the hospital during medical emergencies. This is the future of the City’s fleet if immediate steps are not taken to intervene and properly fund capital needs. Not maintaining Fleet/Equipment has spiked annual maintenance costs over the value of the some of the older Fleet. Maintenance parts and labor for FY2017 is over $445,000 in the General Fund. If appropriate replacement policies were implemented, this maintenance funding could be used for equipment replacement instead. In conclusion, the proposed FY2017 budget maintains the current level of service that residents and businesses expect, and that visitors enjoy, in a fiscally sound manner. This budget is focused on planning for the future. City staff is working to implement a true 5- year plan in FY2018 by implementing the 2025 Strategic Plan Goals, continuing to update the 5-year financial forecast, incorporating a 5-year Capital Improvement Plan in FY2017 and looking for true funding sources to implement this plan in FY2018. This budget is keeping the General Fund reserves at 25%, implementing phase two of funding the pension funds back to the higher funding method as suggested by GASB and Moody’s, aligning these contributions with the tax levy as is stated in the City’s financial policies, the EPI 2013 report and shows a one for one dollar to the revenue and expenditure side of these mandatory expenses. In FY2017 the increase in Part-time staffing level was in the Transportation Fund within the Public Works Department. The City is strictly a fiscal and staffing agent for the management of the DeKalb-Sycamore Area Transportation Study (DSATS) and the Metropolitan Planning Organization (MPO). P a g e | 15 This Fund is completely separate from the General Fund operations. No staffing levels were increased in any of the City operational funds in FY2017. The City has attempted a number of different ways of addressing its financial situation in years past. It has attempted to underfund long term obligations such as pension and capital improvements. It has attempted reductions in staffing. It has reduced on-hand fund balances to precarious levels. It has worked to cut budgeted expenses. Those approaches have failed, and have contributed to the City’s current need to pay for a significant list of long-term expenses. In response to those challenges, the City Council solicited the EPI Report in 2013 which indicated that the City had to establish proper fund balance reserves, had to levy property taxes to cover debt obligations and pension obligations, and had to implement long term capital planning. The City Council and Finance Advisory Committee worked jointly in FY2015 to adopt a set of Financial Policies that in many instances echo those recommendations. The Financial Policies indicate that the City must make hard decisions. It must levy property tax dollars to cover pension obligations. It must maintain minimum fund balances of 25%. The proposed budget for FY2017 represents the lessons learned from the City’s past financial decisions and incorporates the recommendations of the EPI Report and the requirements of the City’s Financial Policies. It follows the City’s 2025 Strategic Plan and, for the first time ever, includes an actual 5 year Capital Improvement Plan aimed at identifying and funding known City obligations over the next five years. It provides funding that is sustainable—for one fiscal year—with significant reductions from all departments, and maintains current levels of service so that the Council can complete a process of prioritization in preparation for the FY2018 budget. This draft budget represents the fruits of collaboration across all City departments, working together to provide a plan for a sustainable financial future for the City of DeKalb. P a g e | 16 CAPITAL IMPROVEMENT FUND (50) - FUNDING SHEET ATTACHMENT A Include those items in excess of $10,000 with an expected useful life of more than one year. Vision, Goal Dept. Priority Department Useful Life (Yrs) Age (Yrs) Stage Project Name 2017 2018 2019 2020 2021 BEGINNING FUND BALANCE $14,445 $4,445 ($2,111,555) ($4,981,555) ($8,605,332) REVENUES Local Gas Tax 1.5 cents $360,000 $360,000 $360,000 $360,000 $360,000 EXPENDITURES E 1 0 5 H Fire Station Repairs FD $30,000 $30,000 $30,000 $30,000 $30,000 D1a 0 0 1 H Street Maintenance 2017 Street PW $165,000 $0 $0 $0 $0 D1a 0 0 1 H Street Maintenance 2017 Alley PW $0 $0 $0 $0 $0 D1a 0 0 1 H Street Maintenance 2017 Sidewalk PW $20,000 $0 $0 $0 $0 D1a 0 0 1 H Street Maintenance 2017 Engineering PW $15,000 $0 $0 $0 $0 E1 60 61 1 H Water Main Replacement - South Sixth Street Water Main Replacement - Gas Tax PW $140,000 $0 $0 $0 $0 E 10 0 3 L Key fob door lock system for all Fire Stations FD $0 $19,800 $0 $0 $0 E 10 0 3 L Classroom furniture (12 tables & 24 chairs) FD $0 $10,100 $0 $0 $0 E 20 0 3 L Electronic Gate/Fence for Station 1 FD $0 $16,100 $0 $0 $0 0 0 0 1 Storm Water Infrastructure Study PW $0 $50,000 $50,000 $25,000 $25,000 D1 0 0 1 Coordinated Traffic Signal Upgrage Construction (Stage 2) PW $0 $0 $600,000 $600,000 $0 D1a 0 0 4 Street Maintenance 2016 Street PW $0 $0 $0 $0 $0 D1a 0 0 4 Street Maintenance 2016 Alley PW $0 $0 $0 $0 $0 D1a 0 0 4 Street Maintenance 2016 Sidewalk PW $0 $0 $0 $0 $0 D1a 0 0 4 Street Maintenance 2016.5 50-50 Sidewalks PW $0 $0 $0 $0 $0 D1a 0 0 4 Street Maintenance 2016.5 50-50 Sidewalks NIU PW $0 $0 $0 $0 $0 D1a 0 0 4 Street Maintenance 2016.5 Non-TIF Sidewalks PW $0 $0 $0 $0 $0 D1a 0 0 1 Street Maintenance 2018 Street PW $0 $300,000 $0 $0 $0 D1a 0 0 1 Street Maintenance 2018 Alley PW $0 $60,000 $0 $0 $0 D1a 0 0 1 Street Maintenance 2018 Sidewalk PW $0 $50,000 $0 $0 $0 D1a 0 0 1 Street Maintenance 2018 Engineering PW $0 $40,000 $0 $0 $0 D1a 0 0 1 Street Maintenance 2019 Street PW $0 $0 $300,000 $0 $0 D1a 0 0 1 Street Maintenance 2019 Alley PW $0 $0 $60,000 $0 $0 D1a 0 0 1 Street Maintenance 2019 Sidewalk PW $0 $0 $50,000 $0 $0 D1a 0 0 1 Street Maintenance 2019 Engineering PW $0 $0 $40,000 $0 $0 D1a 0 0 1 Street Maintenance 2020 Steet PW $0 $0 $0 $1,050,000 $0 D1a 0 0 2 Street Maintenance 2020 Alley PW $0 $0 $0 $60,000 $0 D1a 0 0 1 Street Maintenance 2020 Sidewalk PW $0 $0 $0 $50,000 $0 D1a 0 0 1 Street Maintenance 2020 Engineering PW $0 $0 $0 $115,000 $0 D1a 0 0 1 Street Maintenance 2021 Street Alley Sidewalk PW $0 $0 $0 $0 $800,000 D1a 0 0 1 Street Maintenance 2021 Street Alley Sidewalk PW $0 $0 $0 $0 $50,000 D1a 0 0 1 Street Maintenance 2021 Street Alley Sidewalk PW $0 $0 $0 $0 $50,000 D1a 0 0 1 Street Maintenance 2021 Engineering PW $0 $0 $0 $0 $190,000 Stormwater System Improvements 2016 PW $0 $0 $0 $0 $0 0 0 0 1 Harvestore Drive Box Culvert Repair PW $0 $100,000 $0 $0 $0 0 0 0 1 Bethany Road Culvert Repair PW $0 $0 $0 $0 $160,000 D1c 0 0 2 N. 1st Street Bridge Replacement Engineering PW $0 $150,000 $50,000 $0 $0 D1c 0 0 2 N. 1st Street Bridge Replacement Construction PW $0 $0 $0 $328,777 $0 D1c 0 0 2 N. 1st Street Pavement Maintenance PW $0 $0 $0 $500,000 $0 D1 0 0 1 Coordinated Traffic Signal Upgrage Construction (Stage 2) PW $0 $0 $200,000 $200,000 $0 D1a 0 0 1 Street Maintenance 2018 PW $0 $750,000 $0 $0 $0 D1a 0 0 1 Street Maintenance 2018 Engineering PW $0 $75,000 $0 $0 $0 D1a 0 0 1 Street Maintenance 2019 PW $0 $0 $750,000 $0 $0 D1a 0 0 1 Street Maintenance 2019 Engineering PW $0 $0 $75,000 $0 $0 D1a 0 0 1 Street Maintenance 2020 PW $0 $0 $0 $750,000 $0 D1a 0 0 1 Street Maintenance 2020 Engineering PW $0 $0 $0 $75,000 $0 D1 0 0 1 Coordinated Traffic Signal Upgrage Construction (Stage 2) PW $0 $0 $200,000 $200,000 $0 D1a 0 0 4 Street Maintenance 2016 PW $0 $0 $0 $0 $0 D1a 0 0 1 Street Maintenance 2018 PW $0 $750,000 $0 $0 $0 D1a 0 0 1 Street Maintenance 2018 Engineering PW $0 $75,000 $0 $0 $0 D1a 0 0 1 Street Maintenance 2019 PW $0 $0 $750,000 $0 $0 D1a 0 0 1 Street Maintenance 2019 Engineering PW $0 $0 $75,000 $0 $0 Total Expenditures $370,000 $2,476,000 $3,230,000 $3,983,777 $1,305,000 Ending Fund Balance $4,445 ($2,111,555) ($4,981,555) ($8,605,332) ($9,550,332) FLEET FUND (52) - FUNDING SHEET ATTACHMENT B Include those items in excess of $10,000 with an expected useful life of more than one year. Vision, Goal Occurrence Dept. Priority Department Useful Life (Yrs) Age (Yrs) Stage Project Name 2017 2018 2019 2020 2021 BEGINNING FUND BALANCE $2,213 $12,156 ($1,457,312) ($1,646,181) ($2,262,030) REVENUES Circuit Court Vehicle Revenue $10,000 $10,000 $10,000 $10,000 $10,000 Sale of Assets $5,000 $5,000 $5,000 $5,000 $5,000 Rental Leases $156,610 $156,610 $156,610 $156,610 $156,610 Miscellaneous Income $35,000 $35,000 $35,000 $35,000 $35,000 Transfer from General Fund - Restrictive Revenue $66,896 Total Revenues $273,506 $206,610 $206,610 $171,610 $171,610 EXPENDITURES E 8 16 3 U H CHEVY SUBURBAN FD $40,000 $0 $0 $0 $0 E 8 16 3 U H CHEVY SUBURBAN FD $0 $40,000 $0 $0 $0 E 8 13 3 U H DODGE DURANGO FD $0 $40,000 $0 $0 $0 A,C,E 5 0 5 R H Fleet Replacement Police Vehicle PD $33,448 $0 $0 $0 $0 A,C,E 5 0 5 R H Fleet Replacement Police Vehicle PD $33,448 $0 $0 $0 $0 A,C,E 5 0 5 R H Fleet Replacement Police Vehicle PD $0 $47,637 $0 $0 $0 A,C,E 5 0 5 R H Fleet Replacement Police Vehicle PD $0 $47,637 $0 $0 $0 A,C,E 5 0 5 R H Fleet Replacement Police Vehicle PD $0 $47,637 $0 $0 $0 A,C,E 5 0 5 R H Fleet Replacement Police Vehicle PD $0 $0 $49,906 $0 $0 A,C,E 5 0 5 R H Fleet Replacement Police Vehicle PD $0 $0 $49,906 $0 $0 A,C,E 5 0 5 R H Fleet Replacement Police Vehicle PD $0 $0 $0 $53,597 $0 A,C,E 5 0 5 R H Fleet Replacement Police Vehicle PD $0 $0 $0 $53,597 $0 A,C,E 5 0 5 R H Fleet Replacement Police Vehicle PD $0 $0 $0 $53,597 $0 A,C,E 5 0 5 R H Fleet Replacement Police Vehicle PD $0 $0 $0 $0 $57,565 A,C,E 5 0 5 R H Fleet Replacement Police Vehicle PD $0 $0 $0 $0 $57,565 D 10 15 3 U H P-23 Dump truck with snow plow/ salt spreader PW $140,000 $0 $0 $0 $0 D 10 15 3 U H P-22 Dump truck with snow plow/salt spreader PW $0 $140,000 $0 $0 $0 H Lease Payment $16,667 $16,667 $16,667 $16,667 $16,667 E 5 0 5 R M Replace Department Pool Car CD2 CD $0 $35,000 $0 $0 $0 E 15 16 4 U M PIERCE SABER - ENGINE 4 FD $0 $400,000 $0 $0 $0 D 10 18 3 U M P-13 Pickup Truck with snow plow PW $0 $35,000 $0 $0 $0 D 7 7 3 U M P-33 Toro Z-Master riding mower PW $0 $10,500 $0 $0 $0 E 8 13 3 U L DODGE DURANGO FD $0 $40,000 $0 $0 $0 E 20 9 3 U Aerial Ladder Truck FD $0 $0 $0 $0 $0 E 8 8 4 U FORD AEV AMBULANCE FD $0 $0 $0 $150,000 $0 E 8 11 4 U FORD AMBULANCE FD $0 $150,000 $0 $0 $0 E 8 4 4 U AEV FIRE AMBULANCE FD $0 $0 $0 $0 $150,000 E 8 14 4 U INTERNATIONAL AMBULANCE FD $0 $0 $0 $0 $0 E 8 14 3 U FORD AMUBLANCE FD $0 $0 $0 $0 $0 E 8 12 3 U INTERNATIONAL NAVISTAR FD $0 $150,000 $0 $0 $0 E 8 10 4 U CHEVROLET TAHOE FD $0 $45,000 $0 $0 $0 E 8 3 4 U FORD EXPLORER FD $0 $0 $0 $0 $40,000 E 8 3 4 U FORD EXPLORER FD $0 $0 $0 $0 $40,000 E 15 11 4 U ALEXIS FIRE ENGINE - ENGINE 2 FD $0 $0 $0 $0 $400,000 E 10 15 3 U DODGE RAM CC SQUAD 1 FD $0 $40,000 $0 $0 $0 E 10 19 3 U CHEVY ONE TON TRUCK - SQUAD 4 FD $0 $40,000 $0 $0 $0 E 15 32 3 U HESSE BEVRG RCK SEMI TRAILER - RESCUE 6 TRAILER FD $0 $0 $0 $50,000 $0 D 10 19 3 U P-6 Pickup Truck with snow plow PW $0 $36,000 $0 $0 $0 D 10 18 3 U P-37 Aeriel traffic signal truck PW $0 $60,000 $0 $0 $0 D 10 16 3 U P-21 One ton dump with plow/salt spreader PW $0 $60,000 $0 $0 $0 E 7 12 3 U Line Lazer road marking paint machine PW $0 $10,000 $0 $0 $0 D 10 12 3 U P-31 Bobcat with hydraulic concrete breaker PW $0 $30,000 $0 $0 $0 D 10 19 3 U P-24 Tandem Axel Dump with plow/salt spreader PW $0 $155,000 $0 $0 $0 D 10 15 3 U P- 3 Chevrolet Tahoe PW $0 $0 $30,000 $0 $0 D 10 16 3 U P-4 Chevrolet S-10 Blazer PW $0 $0 $30,000 $0 $0 D 10 10 3 U P-7 Pickup truck with snow plow PW $0 $0 $37,000 $0 $0 D 10 16 3 U P-12 Pickup truck with snow plow PW $0 $0 $37,000 $0 $0 D 10 19 3 U P-24 Tandem Axel Dump with plow/salt spreader PW $0 $0 $145,000 $0 $0 D 10 11 3 U P-9 Utilty truck with liquid deicer tank PW $0 $0 $0 $35,000 $0 D 10 16 3 U P- 15 Dump truck with snow plow /salt spreader PW $0 $0 $0 $145,000 $0 D 10 15 3 U P-34 Mechanics service truck PW $0 $0 $0 $40,000 $0 D 15 19 3 U P-36 60' Aerial forestry truck PW $0 $0 $0 $150,000 $0 D 15 13 3 U P-44 Mower Tractor PW $0 $0 $0 $40,000 $0 D 10 11 3 U P-11 Pickup truck with snow plow PW $0 $0 $0 $0 $35,000 D 10 11 3 U P-28 Dump truck with snow plow/spreader PW $0 $0 $0 $0 $143,000 D 10 11 3 U P-29 Dump truck with snow plow/spreader PW $0 $0 $0 $0 $143,000 Total Expenditures $263,563 $1,676,078 $395,479 $787,459 $1,082,797 Ending Fund Balance $12,156 ($1,457,312) ($1,646,181) ($2,262,030) ($3,173,217)  EQUIPMENT FUND (53) - FUNDING SHEET ATTACHMENT C Include those items in excess of $10,000 with an expected useful life of more than one year. Vision, Goal Dept. Priority Department Useful Life (Yrs) Age (Yrs) Stage Project Name 2017 2018 2019 2020 2021 BEGINNING FUND BALANCE $29,145 $15,464 ($661,357) ($969,057) ($927,757) REVENUES E911 Reimbursements $160,000 $160,000 $160,000 $160,000 $160,000 Sale of Assets $0 Miscellaneous Income $0 Transfer from General Fund $0 Transfer from DSATS $3,000 Transfer from Water $7,500 Transfer from Work Comp Total Revenues $170,500 $160,000 $160,000 $160,000 $160,000 EXPENDITURES E 0 0 3 H Document Management Software Purchase IT $0 $39,325 $0 $0 $0 E 0 0 3 H Adjudication Software Purchase CMO $0 $50,000 $0 $0 $0 E 10 0 5 H City Network Switches IT $15,000 $0 $10,000 $0 $10,000 E 10 0 3 H Color scanner/plotter IT $21,000 $0 $0 $0 $0 E 10 0 3 H Panasonic Tough Pads (6) FD $0 $36,000 $0 $0 $0 E 10 0 3 H Classroom Smart Boart for Station 1 FD $0 $15,000 $0 $0 $0 E 10 12 3 H LifePak 12 Monitor (2) FD $44,181 $0 $0 $0 $0 E 10 14 3 H Radio Portable HT1000 (31) and vehicle charger FD $25,000 $30,800 $0 $0 $0 E 10 11 3 H Radio Portable HT1250 (35) and vehicle charger FD $0 $63,000 $0 $0 $0 A,C,E 5 0 3,5 H 911 Console Dispatch Work Station Project PD $0 $28,000 $35,000 $0 $0 A,C,E 5 0 5 H Taser Replacement Project PD $0 $13,679 $0 $0 $0 A,C,E 5 0 5 H Mobile Data Browser Replacement Project (2) PD $8,000 $0 $0 $0 $0 A,C,E 5 0 5 H Mobile Data Browser Replacement Project (2) PD $0 $24,000 $0 $0 $0 A,C,E 5 0 5 H Mobile Data Browser Replacement Project (2) PD $0 $24,000 $0 $0 A,C,E 5 0 5 H Mobile Data Browser Replacement Project (2) PD $0 $0 $20,000 $0 A,C,E 5 0 5 H Mobile Data Browser Replacement Project (2) PD $0 $0 $0 $20,000 0 0 0 5 M Furniture City Hall CMO $20,000 $20,000 $20,000 $20,000 $20,000 E 5 0 5 H New Computer Cycles (x20) IT $16,000 $16,000 $16,000 $16,000 $16,000 E 5 0 5 M Exchange Server 2016 Or Office 365 IT $25,000 $0 $0 $25,000 $0 E 10 0 3 M Stryker Power Load (4) FD $0 $100,000 $0 $0 $0 A,C,E 5 0 3 M Police Body Worn Camera Project PD $0 $215,279 $0 $0 $0 E 10 NEW 3 M Storm Sewer inspection camera PW $10,000 $0 $0 $0 $0 E 5 0 5 L Copier Replacements IT $0 $42,000 $0 $0 $0 B 5 0 3 L Downtown Wireless Hardware IT $0 $15,000 $0 $0 $0 E 10 0 3 L Video conferencing equipment FD $0 $22,215 $0 $0 $0 E 10 0 3 L Station Alerting System FD $0 $30,000 $0 $0 $0 E 10 0 3 L Firehouse Cloud Service FD $0 $10,618 $0 $0 $0 E 10 0 3 L Outfit 1990 aerial truck as reserve unit FD $0 $20,000 $0 $0 $0 A,C,E 7 0 5 L Speed Trailer Replacement Project PD $0 $15,505 $0 $0 $0 E 10 1 3 Lifepak X Series (4) FD $0 $0 $0 $0 $0 E 10 8 4 Stretchers - 6 FD $0 $0 $70,000 $0 $0 E 20 18 4 HAZMAT TRAILER UNIT FD $0 $0 $10,000 $0 $0 E 10 13 4 Radio Mobile Radius M1225 (2) FD $0 $2,400 $0 $0 $0 E 10 8 4 Radio Mobile CDM1250 (35) FD $0 $0 $47,000 $0 $0 E 10 16 4 Radio Mobile Kenwood (1) FD $0 $0 $0 $1,200 $0 E 15 11 4 Radio Pagers Minitor 5 (73) FD $0 $0 $0 $36,500 $0 E 15 13 4 SCBA haz mat 60 minute bottles - Draeger (7) FD $0 $0 $7,700 $0 $0 E 10 8 4 SCBA Packs (36) FD $0 $0 $180,000 $0 $0 E 10 13 4 SCBA Packs (4) FD $0 $0 $20,000 $0 $0 E 10 5 3 LUCAS 2 FOR MEDIC 3 FD $0 $0 $0 $0 $15,000 E 10 13 3 P-193 Dinkmar leaf machine PW $0 $28,000 $0 $0 $0 E 10 10 3 P-190 Dinkmar leaf machine PW $0 $0 $28,000 $0 $0 E 10 10 3 P-190 Dinkmar leaf machine PW $0 $0 $0 $0 $30,000 Street Sweeper PW $0 $0 $0 $0 $0 Total Expenditures $184,181 $836,821 $467,700 $118,700 $111,000 RETURN TO AGENDA Ending Fund Balance $15,464 ($661,357) ($969,057) ($927,757) ($878,757) DATE: October 17, 2016 TO: Honorable Mayor John Rey City Council Finance Advisory Committee FROM: Anne Marie Gaura, City Manager Cathy Haley, Finance Director SUBJECT: Policies for review Below are the financial policies that have been incorporated in the budget process for review by the City Council and the Finance Advisory Committee. Several changes are being recommended due to the fiscal year change for the City and the incorporation of a long-term Capital Improvement Program (CIP). P age |1 Budget Policy ______________________________________________________________________________ Policy Number: 01-01 Date: August 2016July 27, 2015 Purpose: The City Manager shall submit an annual budget to the City Council which is within the City’s ability to pay. The annual budget should provide for the following: 1. Management shall prepare a draft of the annual budget for review by the City Council and the Finance Advisory Committee in October/NovemberApril of each year. The recommended budget should be submitted to the City Council for review and a public hearing the second meeting in Novemberin May of each year. The final budget document shall be submitted to the full membership for approval prior to December 31June 30 of each year. 2. The annual budget should effectively communicate meaningful and understandable information to the City residents, City Council, City Staff, and other readers. 3. The annual budget shall be monitored on a monthly basis. Revenue and expenditure budget reports shall be prepared and made available to City management staff for departmental review on a monthly basis. A quarterly budget summary report (Treasurer’s Report) shall be presented to the City Council. 4. The annual budget should allow for the implementation of as many of the City Council’s goals and objectives from the 2025 strategic plan as financially possible. 5. The annual budget should provide for the adequate funding of all pension plans (IMRF, Police Pension Fund, and Firefighters Pension Fund). An independent actuary should be used to determine the annual City contributions to the Police Pension Fund and the Firefighters Pension Fund and determine if these pension funds are adequately funded. 6. The annual budget should provide funding for the adequate maintenance of municipal equipment, municipal facilities, and infrastructure. 7. The annual budget should set aside-adequate funding (pay-as-you-go funding) for the replacement of major equipment. Annual funding (depreciation funding) for these replacements will eliminate major expenditure jumps in the annual budget when these acquisitions are made. 8. During the budget process, the City will assess the need for contingency funds to be included in the budget to fund unanticipated expenditures that might arise. 9. The annual budget should finance current operating expenditures, excluding major capital expenditures, with current revenues. The use of reserve funds to finance current operating expenditures should be carefully considered and avoided if possible. 10. The City should limit the use of the reserve fund to nonrecurring operating expenditures or capital expenditures, specifically if our anticipated fund balance is below our Fund Balance Reserve Policy of 25%. This fund reserve will be calculated by comparing the difference between current assets and current liabilities to current annual budget operating expenses, excluding enterprise expenditures. 11. When the City is required to undertake a budget amendment and/or execute expenditure transfers to ensure that actual expenditures are within approved budgetary limits as authorized by City Council the following procedures will be followed. Administration of these procedures will be the responsibility of the City’s Finance Director and the Finance Director will sign off that these procedures have been adhered to for any budget amendments and/or expenditure transfers undertaken by the City. Those procedures are as follows: 12.a. Upon knowledge that a budget amendment and/or expenditure transfer Formatted will be required, the City’s Finance Director will inform both the Finance Committee and the City Council. 13.b. Documents will be drafted by the Finance Director with the reason for Formatted the required budget amendment and/or expenditure transfer, including the specific accounts affected and the dollar amounts of said amendments and/or expenditure transfers. 14.c. Formal City Council review and approval of proposed budget Formatted amendments and/or expenditure transfers will be required before any amendments and/or transfers are executed by the Finance Director. Fund Balance Policy ______________________________________________________________________________ Policy Number: 01-02 Date: August 2016July 27, 2015 Purpose: Fund balance measures the net financial resources available to finance expenditures of future periods. Fund balance reserve policies are established to avoid cash flow interruptions, generate investment income, and reduce the need for borrowing. The fund balance reserves identified within this policy are the minimum balances necessary to accomplish these objectives. While keeping in mind the uneven nature of the City’s cash flows, should the projected ending fiscal year fund balance fall below the desired percentage or amount, the City should create a plan to restore the appropriate levels. Part II – Governmental Funds This section only applies to fund balances reported in the General Fund, Special Revenue Funds, Debt Service Funds, Capital Projects Funds, and Permanent Funds. 1. Definitions The five fund balance classifications outlined in GASB Statement 54 follows: Nonspendable Fund Balance: This classification includes amounts that cannot be spent because they are either (a) not in spendable form or (b) legally or contractually required to be maintained intact. This would include items not expected to be converted to cash including inventories and prepaid amounts. It may also include the long-term amount of loans and receivables, as well as property acquired for resale and the corpus (principal) of a permanent fund. Restricted Fund Balance: This classification should be reported when constraints placed on the use of resources are either (a) externally imposed by creditors, grantors, contributors, or laws or regulations of other governments or (b) imposed by law through constitutional provisions or enabling legislation. Committed Fund Balance: This classification reflects specific purposes pursuant to constraints imposed by formal action of the district’s highest level of decision-making authority (generally the governing board). Also, such constraints can only be removed or changed by the same form of formal action. Assigned Fund Balance: This classification reflects amounts that are constrained by the government’s intent to be used for specific purposes, but meet neither the restricted nor committed forms of constraint. Unassigned Fund Balance: This classification is the residual classification for the general fund only. It is also where negative residual amounts for all other governmental funds would be reported. 2. Fund Balance Commitments & Assignments Committed fund balance for a specific use must be taken by formal action of the City Council. Amendments or modifications of the committed fund balance must also be approved by formal action of the City Council. In order to be recognized in the annual Audit Report, commitments of fund balance must be enacted prior to the end of that Report’s particular fiscal year. Assigned Fund Balance is intended for specific purposes not imposed by external parties or City Council’s formal action. The City Council authorizes the City Manager and/or his/her designee(s) to assign fund balance. Such assignments cannot exceed the available (spendable, unrestricted, uncommitted) fund balance in any particular Fund. 3. Reserves General Fund: Unassigned fund balance will be maintained at a minimum level equal to 25% of annual expenditures. The City’s unassigned General Fund balance will be maintained to provide the municipality with sufficient working capital and a margin of safety to address emergencies without borrowing. TIF Funds: The City currently has two budgeted TIF Funds (the Central Area TIF and TIF II). These Funds should be self-supporting and should maintain a fund balance equivalent to meet the planned improvements identified in a multi-year capital schedule(s). Capital Projects Fund: This Fund is used for resources accumulated and used in right of way improvements such as street repair, street reconstruction, and curb and gutter replacement. Costs associated with this Fund must not be State MFT eligible and must cost over $5,000 and have a useful life of at least three years. The funding source for this Fund will be the local home rule motor fuel tax. The Capital Projects Fund should maintain a fund balance of the planned improvements for the current fiscal year equivalent to meet the planned improvements identified in a multi-year capital schedule(s).. Special Revenue Funds: These Funds are used to account and report the proceeds of specific revenue sources which are restricted or committed toward expenditures for specific purposes other than debt service or capital projects. In general, all these Funds should maintain the least fund balance necessary to cover current fiscal year  expenditures, plus an amount to pay for those expenditures of the subsequent fiscal year needed to avoid a cash deficit position. 4. Fund Balance Classification Fund balance classifications depict the nature of the net resources that are reported in a governmental fund type. An individual governmental fund may include nonspendable resources and amounts that are restricted, committed, or assigned, or any combination of those classifications. The General Fund may also include an unassigned amount. 5. Prioritization of Fund Balance Use When an expenditure is incurred for a purpose which can be paid from multiple fund balance classifications, the City will spend the most restricted dollars before less restricted, in the following order:  Nonspendable (if funds become spendable)  Restricted  Committed  Assigned  Unassigned Part III – Enterprise, Internal Service, & Fiduciary Funds This section applies to Funds outside the scope of GASB 54. 1. Definitions Restricted Net Assets: The component of net assets restricted by external parties, constitutional restrictions, and enabling legislation. Net Assets Invested in Capital Assets, Net of Related Debt: A component of net assets calculated by reducing capital assets by accumulated depreciation and the principal portion of related debt. Unrestricted Net Assets: The portion of net assets that is neither restricted nor invested in capital assets net of related debt. 2. Reserves Water Fund: The unrestricted net assets of the Water Fund will be maintained at a minimum level equal to 25% of the annual budgeted operational expenses, plus the amount needed to meet the planned improvements identified in a multi-year capital schedule(s). budgeted capital improvements (stemming from the water system construction impact fees).  Airport Fund: The unrestricted net assets of the Airport Fund will be maintained at a minimum level equal to 25% of annual budgeted operational expenses, plus the budgeted capital improvements for the current fiscal year. Other Specified Funds: The Health Insurance Fund should maintain unrestricted net assets of one month of IPBC premium. Any amount above this threshold may be transferred to the Workers’ Compensation Fund or Liability/Property Insurance Fund to be used toward claims, eliminate potential deficits, or maintain net asset policy in these other Funds. The Workers’ Compensation Fund should maintain unrestricted net assets of $1,000,000 collectively (or 1 year premium for reinsurance plus the average annual retention costs associated with that premium). The Liability/Property Insurance Fund should maintain unrestricted net assets approximately equivalent to 25% of annual budgeted expenses. The Fleet Replacement Fund will account for revenue and expenditures associated with the acquisition of City vehicles and major equipment (i.e. trailers and plows). A chargeback system from each division and Fund requiring vehicles will be utilized as the main revenue source. The Fleet Replacement Fund should maintain unrestricted net assets of the planned replacements for the current fiscal year. The Equipment Fund is used to track the resources collected for and used in obtaining major improvements to equipment which costs over $5,000 and has a useful life expectancy of at least three years. Equipment to be funded includes computer equipment, office furniture, copy and facsimile machines and other like equipment. A chargeback system from each division and Fund requiring equipment will be utilized as the main revenue for the Fund. The Equipment Fund should maintain unrestricted net assets of the planned replacements for the current fiscal year. Part IV – Other 1. Cash Deficits Should any Fund incur a cash deficit by the end of the fiscal year, an interfund loan will be created with a Fund or Fund(s) which have a cash surplus (unless restricted by statute or Fund Balance policy). 2. Reporting Year to date revenues and expenditures for the General Fund will be issued to the City Council by their second regular meeting of each month. On a quarterly basis, the City Council shall receive an update on the General Fund with a year-end forecast for the fiscal year and also receive a summary of major fund balances. TIF Funds will be reported in greater detail to Council by the end of March and by the end of September of each year. The City Council shall receive an update on Workers’ Compensation claims through December 31 by the end of March and claims through June 30 by the end of September of each year. A semi-annual report on economic development incentives will be reported to Council by the end of March and by the end of September of each year. An update on retiree insurance costs will be reported annually by the end of March of each year. Capital Equipment Replacement Fund Policy Number: 01-03 Date: August 2016 Purpose: The City of DeKalb has established the Capital Equipment Replacement Fund (CERF) to encourage departments to set aside funds each year for the eventual replacement of existing equipment and to avoid significant fluctuations in the operating budget from one year to the next. In order to build and maintain sufficient funds on hand to replace items at the end of their useful life, water tower rental income, revenue received from the E911 Board for OSSI payments will be dedicated annually as well as, transfers by each department from the General Fund determined annually through the budget process. The remainder of this policy is intended to provide guidance as to how the CERF will operate. Formatted: Font: 12 pt The Capital Equipment Replacement Fund shall be used only to replace existing equipment owned by the City. The fund shall not be used to purchase equipment not currently owned Formatted: Font: 12 pt by the City or as a means to circumvent the process for having new equipment approved by Formatted: Font: 12 pt the City Council. Requests for new equipment shall be made as part of the annual operating Formatted: Font: 12 pt budget and must be approved by the City Council before acquisition; Formatted: Font: 12 pt Only those items which individually have a replacement cost of more than $10,000 or groups of similar equipment (e.g. personal computers, bullet proof vests, etc.) which, in the aggregate, exceed $10,000 shall be included in the CERF. Departments shall include individual items or groups of items with a value of less than $10,000 in their annual operating budget; The cost of items associated with new vehicles such as vehicle markings, light bars, radios and similar equipment shall be included in the replacement cost of the vehicle; The replacement cost and useful life for each vehicle or technology related equipment will be re-evaluated by the individual departments on an annual basis. This re-evaluation may change the annual amounts that programs contribute for the replacement of each item. The Department Head, in consultation with the City Manager and the Finance Director shall determine when a vehicle or equipment is due for replacement. Final capital asset replacement decisions using CERF monies will be discussed and approved by the City Council as part of the annual budget process. When CERF equipment is sold, the proceeds of the sale shall be credited to the CERF Fund. From time to time, departments may be assigned previously used technology related equipment from within their department or another department in the City. The Director of Information Technology, in consultation with the Department Head, shall recommend that such equipment be assigned to a department when it meets the department’s needs and when doing so will help avoid the expense of purchasing new equipment. Consideration shall be given to the annual operating cost of maintaining the used equipment when deciding whether or not to continue using it. The City Manager shall have the final say in determining whether or not previously used technology is assigned to a department. Formatted: Font: 12 pt Formatted: Font: 12 pt Revenue and Expenditure Policy ______________________________________________________________________________ Policy Number: 01-043 Date: August 2016July 27, 2015 Formatted: Tab stops: 4", Left Purpose: Revenues The City desires to maintain a diversified and stable revenue base to reduce the impacts of fluctuations in any one revenue source. The revenue mix combines elastic and inelastic revenue sources to minimize the effects of an economic downturn. The City also incorporates the following principles related to revenues as it furthers its financial planning and fulfills its fiscal responsibilities: 1. The City prefers to keep its property tax rate as low as possible. The following components shall be followed in priority order each year when establishing the property tax levy: a. Levy for Police, Fire and IMRF pensions per actuary calculations. If the actuarial reports indicated a higher employer contribution is needed, said increase will need to be added to the City’s overall previous year levy request to avoid underfunding problems. b. Levy for FICA. c. Levy for general obligation bond principal and interest less abatements. d. Levy to support General Fund operations including Police, Fire, Public Works, Community Development, Finance, Human Resources, I.T. and Administration. The annual increase for this component should not exceed the rate of inflation. e. Levy to fund additional personnel as determined by the City Council. 2. User charges and tap-on fees will be sufficient to finance all operating and debt service costs for the Water Fund.  3. The City Manager should impose spending limits if, in his/her judgment, revenues will be below original estimates. Staff should review and monitor on a monthly basis expenditures to assure control of spending within available revenues. 4. Ongoing transfers will be made from the General Fund to the Fleet Replacement fund on an annual basis to help plan for the purchasing of large capital equipment needs. Expenditures The City will strive to adhere to the following policies: 1. The City will consistently budget the minimum level of expenditures which will provide for the public well-being and safety of the residents and businesses of the community. 2. Expenditures will be within the confines of generated revenue. Fund balances will not be used to pay for operating expenditures except in the case of emergencies and after careful consideration. Accounting, Auditing and Financial Reporting Policy ______________________________________________________________________________ Policy Number: 01-054 Date: August 2016July 27, 2015 Purpose: The City shall have an annual audit conducted on its financial records by a qualified, independent public accounting firm. The City should request proposals from qualified independent accounting firms to conduct an annual audit of its financial statements every five to six yearsby the use of a request for proposal (RFP) process. In accordance with Government Finance Officers Association’s (GFOA’s) Best Practice Guidelines, the current auditors can be included in the RFP process, however, it is recommended changing the audit team if the same firm came in with the best proposal. The audit shall be conducted on an annual basis to be completed and filed within six months after the end of each fiscal year. The City should submit its Comprehensive Annual Financial Report (CAFR) to the Government Finance Officers Association’s (GFOA) Certificate of Achievement for Excellence in Financial Reporting Program. The City’s financial statements shall be prepared according to generally-accepted accounting principles (GAAP) as promulgated by the Governmental Accounting Standards Council (GASB). The City should contract with an independent actuary to determine the City’s annual contribution to the Police and Fire Pension Funds. When the City prepares monthly significant account reconciliations, prepares the year-end adjustments, and prepares the year-end financial statements, the following procedures will be followed. Administration of these procedures will be the responsibility of the City’s Finance Director and the Finance Director will sign off that these procedures have been adhered to on a monthly and year-end basis. Those procedures are as follows: The Finance Department, under approval of the Finance Director, will prepare a listing of all significant accounts of the City that are to be reconciled on a monthly basis. These accounts are to include at a minimum all balance sheet accounts at month-end, all grant related revenue and expense accounts, all restricted use revenue accounts and all other accounts deemed necessary by the Finance Department to be reviewed on a monthly basis. A monthly checklist of these accounts will be prepared and signed off by the Finance Director. Within 90 days after the close of the fiscal year the Finance Department will be required to submit to the Finance Director all required year-end close adjustments. These adjustments are to be approved and reviewed by the Finance Director and posted to the general ledger prior to the auditors beginning audit fieldwork. The City’s auditors assist in the preparation of the City’s financial statements, including the footnote disclosures, in accordance with generally accepted accounting principles. Further, the City will review a complete initial draft and final draft of the financial statements as prepared by the auditors. The City Finance Director will be responsible for a final complete review of the financial statements, including the footnotes disclosures, to ensure that the financial statements are prepared in accordance with generally accepted accounting principles. Any questions or concerns related to the financial statements will be discussed with the City’s auditors. The City’s audited financial statements will be approved by the City Council and available for distribution no later than six months after the close of the City’s fiscal year-end. Capital Asset Policy ______________________________________________________________________________ Policy Number: 01-065 Date: August 2016July 27, 2015 Purpose: Capital assets purchased or acquired with an original cost of $25,000 or more are reported at historical cost or estimated historical cost. Contributed assets are reported at fair market value as of the date received. Additions, improvements and other capital outlays that significantly extend the useful life of an asset are capitalized. Other costs incurred for repairs and maintenance are expensed as incurred. The accounting and financial reporting treatment applied to a fund is determined by its measurement focus. General capital assets are long-lived assets of the City as a whole. Infrastructure such as streets, traffic signals and signs are capitalized. In the case of the initial capitalization of general infrastructure assets (i.e., those reported by the governmental activities) the government chose to include all such items regardless of their acquisition date. The valuation basis for general capital assets are historical cost, or where historical cost is not available, estimated historical cost based on replacement costs. Capital assets in the proprietary funds are capitalized in the fund in which they are utilized. The valuation bases for proprietary fund capital assets are the same as those used for the general capital assets. Donated capital assets are capitalized at estimated fair market value on the date donated. Depreciation on all assets is computed and recorded using the straight-line method of depreciation over the following estimated useful lives: Buildings and Building Improvements 40 to 50 Years Equipment 10 to 20 Years Vehicles 3 to 20 Years Infrastructure 25 to 50 Years Water Distribution System 40 to 65 Years When capital assets are purchased with the use of federal funds the following procedures will be completed by the City. Administration of these procedures will be the responsibility of the City’s Finance Director and the Finance Director will sign off that these procedures have been adhered to for the purchase of every federal funded capital asset. Those procedures are as follows: Capital assets purchased with federal funds will be tagged with a special notation of “F” in addition to the regular identification number system used by the City. The description of the capital asset in the City’s capital asset records will also include the words “federally funded” before the description of the specific asset acquired. The source of federal funds must be noted and include a description of who holds title to the assets, along with the asset acquisition date, the asset cost, location of the asset, condition and use/purpose of the asset. The portion of the asset that is federally funded must also be noted in the City’s capital asset records. Upon disposition of any federally acquired assets, the City must note in the capital asset records the disposition date and sale price. A physical inventory of all assets acquired with federal funds will be performed on a biennial basis. The results of the City’s inventory of federally funded capital assets will be reconciled to the City’s capital asset records to ensure accuracy. This inventory will be overseen and approved by the City’s Finance Director. Debt Management Policy ______________________________________________________________________________ Policy Number: 01-076 Date: August 2016July 27, 2015 Purpose: The City of DeKalb developed this Debt Management Policy to help ensure the City’s credit worthiness and to provide a functional tool for debt management and capital planning. The City of DeKalb faces continuing capital infrastructure requirements to meet the increasing needs of its citizens. The City limits long-term debt to only those capital improvements that cannot be financed from current revenues. The City of DeKalb will not use long-term debt to fund operating programs. The costs of the capital requirements will be met through the issuance of various types of debt instruments. Consequently, the City needs to anticipate increases in debt levels based upon historical data. With these increases, the effects of decisions regarding the type of issue, method of sale, and payment structure become ever more critical to the City's financial well- being. To help ensure the City's credit worthiness, an established program of managing the City's debt becomes essential. To this end, the City Council recognizes this "Debt Management Policy" to be financially prudent and in the City's best economic interest. This policy will provide a functional tool for debt management and capital planning, and enhance the City's reputation for managing its debt in a conservative and prudent manner. Goals Related to the Issuance of General Obligation and Revenue Bond Debt: The City shall pursue the following goals below when issuing debt. Though the City may not have achieved all these goals as of yet, these are long term objectives for which we must continue to strive toward. 1. Maintain at least an Aa3 (Moody’s) or equivalent credit rating for each general obligation debt issue. 2. Take all practical precautions to avoid any financial decision which will negatively impact current credit ratings on existing or future debt issues. 3. The City should attain a General Fund unassigned balance equal to a minimum of twenty five percent (25%) of total annual expenditures.appropriations, exclusive of inter fund transfers.  4. Consider market timing. 5. Determine the amortization (maturity) schedule which will best fit with the overall debt structure of the City’s general obligation debt and related tax levy at the time the new debt is issued. The City may choose to delay principal payments or capitalized interest during project construction. For issuance of revenue bonds, the amortization schedule which will best fit with the overall debt structure of the fund and its related rate structure will be considered. Consideration will be given to coordinating the length of the issue with the lives of assets, whenever practicable, while considering repair and replacement costs of those assets to be incurred in future years as an offset to the useful lives, and the related length of time in the payout structure. 6. Consider the impact of such new debt on overlapping debt and the financing plans of local governments which overlap, or underlie the City. 7. Assess financial alternatives to include new and innovative financing approaches, including whenever feasible, categorical grants, revolving loans or other state/federal aid. 8. Minimize debt interest costs. Debt Issuance in General: 1. Authority and Purposes of the Issuance of Debt The laws of the State of Illinois authorize the issuance of debt by the City. The Local Bond Law confers upon municipalities the power and authority to contract debt, borrow money, and issue bonds for public improvement projects as defined therein. Under these provisions, the City may contract debt to pay for the cost of acquiring, constructing, reconstructing, improving, extending, enlarging, and equipping such projects or to refund bonds. The City Charter authorizes the City Council to incur debt by issuing bonds for any lawful municipal purpose as authorized by the State Constitution or its Home Rule Powers. 2. Short-Term Debt (three years or less) The City may issue short-term debt to finance projects or portions of projects for which the City ultimately intends to issue long-term debt. This will be used to provide interim financing which will eventually be refunded with proceeds of long-term obligations, which may include, but not be limited to, bond anticipation notes or variable rate demand notes. The City will have an estimated timeframe when any short-term debt issue will eventually be converted into long-term debt.  a. Line of Credit The City may also issue debt instruments to meet cash flow requirements. With the approval of the City Council, the City may establish a tax-exempt line of credit with a financial institution selected through a competitive process. This line should have a limit of $2,500,000. Draws should be made on the line of credit when the need for financing is needed to meet operating expenditures on a temporary basis. Draws made on the line of credit must be requested by the Finance Director and approved by the City Manager and the City Council. 3. Long-Term Debt (more than three years) The City may issue long-term debt which may include, but not limited to, general obligation bonds, certificates of participation, capital appreciation bonds, special assessment bonds, self-liquidating bonds and double barreled bonds. Level or declining debt service should be employed unless operational matters dictate otherwise, or except to achieve overall level debt service with existing bonds. The City shall be mindful of the potential benefits of bank qualification and will strive to limit its annual issuance of debt to $10 million or less when such estimated benefits are greater than the benefits of exceeding the bank qualification limit. Should subsequent changes in the law raise this limit, then the City policy will be adjusted accordingly. The cost of issuance of private activity bonds is usually higher than for governmental purpose bonds. Consequently, private activity bonds will be issued only when they will economically benefit the City. The cost of taxable debt is higher than for tax-exempt debt. However, the issuance of taxable debt is mandated in some circumstances and may allow valuable flexibility in subsequent contracts with users or managers of the improvement constructed with the bond proceeds. In addition, there may be circumstances in which the issuance of taxable debt may be more cost effective than the issuance of tax-exempt debt. Therefore, the City will usually issue obligations tax exempt, but may occasionally issue taxable obligations. a. Capital Leasing The City may also enter into long-term leases for public facilities, property, and equipment with a useful life greater than one year that costs less than $500,000. The City should be limited to issuing a capital lease of no more than $1,000,000 in a fiscal year.  Whenever a lease is arranged with a private sector entity, a tax-exempt rate should be sought. Whenever a lease is arranged with a government or other tax-exempt entity, the City should strive to obtain an explicitly defined taxable rate so that the lease will not be counted in the City’s total annual borrowing subject to arbitrage rebate. The lease agreement should permit the City to refinance the lease at no more than reasonable cost should the City decide to do so. A lease which can be called at will is preferable to one which can merely be accelerated. 4. Capital Improvement Program The Capital Improvement Program (CIP), approved by the City Council as part of the Formatted: Highlight annual budget, should determine the City's capital needs. The program should be a five-year plan for the acquisition, development and/or improvement of the City's infrastructure. Projects included in the CIP should be prioritized; and the means for financing each should be identified. If the current resources are insufficient to meet the needs identified in the CIP, the City Council may consider incurring debt to fund the shortfall. The City Council may also consider incurring debt to fund multiple years of the Capital Improvement Program. The CIP should be revised and supplemented each year in keeping with the City's stated policies on debt management. 5. Structure of Debt Issues The duration of a debt issue should not remain outstanding beyond the asset’s useful life. Each new bond issue should be structured to be callable in 10 years. The City should design the financing schedule and repayment of debt so as to take best advantage of market conditions and, as practical, to recapture or maximize its credit capacity for future use, and moderate the impact to the taxpayer. In keeping with the stated goals of this debt management policy, the City should structure each general obligation issue (except refunding and mini-bond issues) to comply with the rapidity of debt repayment provisions in Section III. E-4 following. 6. Credit Enhancements Credit enhancements are mechanisms which guarantee principal and interest payments. Typically they include bond insurance and/or a line or letter of credit. Usually this will bring a lower interest rate and a higher rating from the rating agencies, thus lowering costs. The City may enter into agreements with commercial banks or other financial entities for the purpose of acquiring credit enhancements when their use is judged cost  effective or otherwise advantageous. Any such agreements shall be approved by the City Council. 7. Inclusion of Local Institutions Whenever practical and in the best interest of promoting the City of DeKalb, local financial institutions are to be offered the opportunity to bid on debt instruments. Legal Constraints and Other Limitations on the Issuance of Debt 1. State Law 30 ILCS 305/0.01, et. seq.: the short title is "The Bond Authorization Act." 2. Authority for Debt The City may, by bond ordinance, incur indebtedness or borrow money, and authorize the issue of negotiable obligations, including refunding bonds, for any capital improvement of property, land acquisition, or any other lawful purpose with approval by the City Council. 3. Debt Limitation The City of DeKalb is a home rule community. As such, the debt limitations of the bond laws are not applicable because the General Assembly has set no limits for home rule municipalities. 4. Methods of Sale When feasible and economical, obligations should be issued by competitive rather than negotiated sale. A sale may be negotiated when the issue is predominantly a refunding issue or in other non-routine situations which require more flexibility than a competitive offer allows. Whenever the option exists to offer an issue either for competition or for negotiation, analysis of the options should be performed to aid in the decision-making process. When a sale is not competitively bid, the City will publicly present the reasons and select the underwriter or direct purchaser. If a Financial Advisor is hired to assist the City in bond issuance, the Financial Advisor will not underwrite any debt issues on which it is advising. The criteria used to select an underwriter in a competitive sale should be the true interest cost. In a negotiated sale, the underwriter may be selected with or without a request for proposals (RFP). The criteria used to select an underwriter in a negotiated sale should include the following:   Overall experience  Marketing philosophy  Capability  Previous experience as managing a co-managing partner  Financial statements  Public Finance team and resources  Underwriter’s discount When cost/beneficial, the City may privately place its debt. Since no underwriter participates in a private placement, it may result in lower costs of issuance. Private placement is sometimes an option for small issues. 5. Credit Implications When issuing new debt, the City should strive not to exceed credit industry benchmarks where applicable. Therefore, the following factors should be considered in developing debt issuance plans: a. Ratio of Gross Bonded Debt to Full Market Value of Taxable Property The formula for this computation is Gross Bonded Debt, which is the total outstanding debt, divided by the current Full Market Value of Taxable Property as determined by the Township Assessors. The City should not exceed 2% of Gross Bonded Debt per Full Market Value of Taxable Property. b. Gross Bonded Debt Per Capita The formula for this computation is Gross Bonded Debt divided by the current population as determined by the most recent U.S. Census. The City should not exceed $1,200 for Gross Bonded Debt per capita. c. Ratio of Annual Debt Service to General Fund Expenditures The formula for this computation is annual debt service expenditures divided by General Fund expenditures (excluding certain interfund transfers). The City should not exceed 10% of General Fund expenditures for annual debt service. d. Rapidity of Debt Service Repayment The City's general obligation bond issues should be so structured whereby the duration of the debt should not exceed 120% of the life of the asset. e. Current Fund Balance General Fund Cash Reserve The City should maintain a General Fund unassigned balance equal to a minimum of twenty five percent (25%) of total annual appropriations, exclusive of interfund transfers. Such calculation, including a projection to  June 30th (of the current fiscal year), should be made on an annual basis by the Finance Director (or designee) during the budget process. Debt Administration 1. Financial Disclosures The City shall prepare appropriate disclosures as required by the Securities and Exchange Commission, the federal government, the State of Illinois, rating agencies, underwriters, investors, agencies, taxpayers, and other appropriate entities and persons to ensure compliance with applicable laws and regulations. 2. Review of Financing Proposals All capital financing proposals that involve a pledge of the City's credit through the sale of securities, execution of loans or lease agreements and/or otherwise directly involve the lending or pledging of the City's credit shall be referred to the Finance Director who shall determine the financial feasibility, and the impact on existing debt of such proposal, and shall make recommendations accordingly to the City Manager. 3. Establishing Financing Priorities The Finance Director shall administer and coordinate the City's debt issuance program and activities, including timing of issuance, method of sale, structuring the issue, and marketing strategies. The Finance Director along with the City's bond consultants shall meet, as appropriate, with the City Manager and the City Council regarding the status of the current year's program and to make specific recommendations. 4. Credit Rating The City should endeavor to maintain and/or to improve its credit rating and staff will specifically discuss with the City Council any proposal which might cause that rating to be lowered. Before a general obligation bond is issued, the City will update its rating from at least one national rating agency. The City Manager, Finance Director, and the City's bond consultants should meet with a rating agency to disclose the City's capital plans, debt issuance program, and other appropriate financial information as required by the rating agency. 5. Refunding Policy The City should consider refunding outstanding debt when legally permissible and financially advantageous. When refunding for savings purposes, a net present value  debt service savings of at least two percent or greater must be achieved. Depending on the time to maturity and the absolute level of interest rates of the refunding candidate this target may change. For longer maturities the target can be higher, for shorter maturities, lower. For higher interest rates the target may be higher, for lower rates it could be lower. There may be circumstances where the City may refund bonds for restructuring purposes that may not generate any savings. 6. Investment of Borrowed Proceeds The City acknowledges its ongoing fiduciary responsibilities to actively manage the proceeds of debt issued for public purposes in a manner that is consistent with Illinois statutes that govern the investment of public funds, and consistent with the permitted securities covenants of related bond documents executed by the City. The management of public funds should enable the City to respond to changes in markets or changes in payment or construction schedules so as to (i) optimize returns, (ii) insure liquidity, and (iii) minimize risk. The City will invest bond proceeds in accordance with the City’s investment policy and federal arbitrage requirements. Glossary of Terms: Ad Valorem Tax - A direct tax based "according to value" of property. Advanced Refunding Bonds - Bonds issued to refund an outstanding bond issue prior to the date on which the outstanding bonds become due or callable. Proceeds of the advanced refunding bonds are deposited in escrow with a fiduciary, invested in United States Treasury Bonds or other authorized securities, and used to redeem the underlying bonds at maturity or call date. Amortization - the process of paying the principal amount of an issue of bonds by periodic payments either directly to bondholders or to a sinking fund for the benefit of bondholders. Arbitrage - Usually refers to the difference between the interest paid on the tax-exempt securities and the interest earned by investing the proceeds in higher yielding taxable securities. Internal Revenue Service regulations govern arbitrage (reference I.R.S. Reg. 1.103-13 through 1.103-15). Arbitrage Bonds - Bonds which are deemed by the I.R.S. to violate federal arbitrage regulations. The interest on such bonds becomes taxable and the bondholders must include this interest as part of gross income for federal income tax purposes (I.R.S. Reg. 1.103-13 through 1.103-15). Assessed Value - An annual determination of the just or fair market value of property for purposes of ad valorem taxation. Basis Point - 1/100 of one percent. Bond - Written evidence of the issuer's obligation to repay a specified principal amount on a date certain, together with interest at a stated rate, or according to a formula for determining that rate. Bond Anticipation Notes (BANS) - Short-term interest bearing notes issued by a government in anticipation of bonds to be issued at a later date. The notes are retired from proceeds of the bond issue to which they are related. Bond Counsel - An attorney retained by the City to render a legal opinion whether the City is authorized to issue the proposed bonds, has met all legal requirements necessary for issuance, and whether interest on the bonds is, or is not, exempt from federal and state income taxation. Bonded Debt - The portion of an issuers total indebtedness represented by outstanding bonds. Direct Debt or Gross Bonded Debt - The sum of the total bonded debt and any unfunded debt of the issuer. Net Direct Debt or Net Bonded Debt - Direct debt less sinking fund accumulations and all self-supporting debt. Total Overall Debt - Net direct debt plus the issuer's applicable share of the direct debt of all overlapping jurisdictions. Net Overall Debt - Net direct debt plus the issuer's applicable share of the net direct debt of all overlapping jurisdictions. Overlapping Debt - The issuer's proportionate share of the debt of other local governmental units which either overlap or underlie it. Callable Bond - A bond which permits or requires the issuer to redeem the obligation before the stated maturity date at a specified price, the call price, usually at or above par value. Capital Appreciation Bonds (CAB) - A long-term security on which the investment return is reinvested at a stated compound rate until maturity. The investor receives a single payment at maturity representing both the principal and investment return. Certificates of Participation - Documents, in fully registered form, that act like bonds. However, security for the certificates is the government's intent to make annual appropriations during the term of a lease agreement. No pledge of full faith and credit of the government is made. Consequently, the obligation of the government to make basic rental payments does not constitute an indebtedness of the government. Commercial Paper - Very short-term, unsecured promissory notes issued in either registered or bearer form, and usually backed by a line of credit with a bank. Coupon Rate - The annual rate of interest payable on a coupon bond (a bearer bond or bond registered as to principal only, carrying coupons evidencing future interest payments), expressed as a percentage of the principal amount. Debt Limit - The maximum amount of debt which an issuer is permitted in incur under constitutional, statutory or charter provision. Debt Service - The amount of money necessary to pay interest on an outstanding debt, the serial maturities of principal for serial bonds, and the required contributions to an amortization or sinking fund for term bonds. Demand Notes (Variable Rate) - A short-term security which is subject to a frequently available put option feature under which the holder may put the security back to the issuer after giving specified notice. Many of these securities are floating or variable rate, with the put option exercisable on dates on which the floating rate changes. Double Barreled Bonds (Combination Bonds) - A bond which is payable from the revenues of a governmental enterprise and are also backed by the full faith and credit of the governmental unit. Enterprise Funds - Funds that are financed and operated in a manner similar to private business in that goods and services provided are financed primarily through user charges. General Obligation Bond - A bond for whose payment the full faith and credit of the issuer has been pledged. More commonly, but not necessarily, general obligation bonds are payable from ad valorem property taxes and other general revenues. Lease Purchase Agreement (Capital Lease) - A contractual agreement whereby the government borrows funds from a financial institution or a vendor to pay for capital acquisition. The title to the asset(s) normally belongs to the government with the lessor acquiring security interest or appropriate lien therein. Letter of Credit - A commitment, usually made by a commercial bank, to honor demands for payment of a debt upon compliance with conditions and/or the occurrence of certain events specified under the terms of the commitment. Level Debt Service - An arrangement of serial maturities in which the amount of principal maturing increases at approximately the same rate as the amount of interest declines. Long-Term Debt - Long-term debt is defined as any debt incurred whose final maturity is more than three years. Maturity - The date upon which the principal of a municipal bond becomes due and payable to bondholders. Mini-bonds - A small denomination bond directly marketed to the public. Net Interest Cost (NIC) - The traditional method of calculating bids for new issues of municipal securities. The total dollar amount of interest over the life of the bonds is adjusted by the amount of premium or discount bid, and then reduced to an average annual rate. The other method is known as the true interest cost (see "true interest cost"). Offering Circular - Usually a preliminary and final document prepared to describe or disclose to investors and dealers information about an issue of securities expected to be offered in the primary market. As a part of the offering circular, an official statement should be prepared by the City describing the debt and other pertinent financial and demographic data used to market the bonds to potential buyers. Other Contractual Debt - Purchase contracts and other contractual debt other than bonds and notes. Other contractual debt does not affect annual debt limitation and is not a part of indebtedness within the meaning of any constitution or statutory debt limitation or restriction. Par Value or Face Amount - In the case of bonds, the amount of principal which must be paid at maturity. Parity Bonds - Two or more issues of bonds which have the same priority of claim or lien against pledged revenues or the issuer's full faith and credit pledge. Principal - The face amount or par value of a bond or issue of bonds payable on stated dates of maturity. Private Activity Bonds - One of two categories of bonds established under the Tax Reform Act of 1986, both of whom are subject to certain tests and State volume caps to preserve tax exemption. Ratings - Evaluations of the credit quality of notes and bonds, usually made by independent rating services, which generally measure the probability of the timely repayment of principal and interest on municipal bonds. Refunding Bonds - Bonds issued to retire bonds already outstanding. Registered Bond - A bond listed with the registrar as to ownership, which cannot be sold or exchanged without a change of registration. Reserve Fund - A fund which may be used to pay debt service if the sources of the pledged revenues do not generate sufficient funds to satisfy the debt service requirements. Self-Supporting or Self Liquidating Debt - Debt that is to be repaid from proceeds derived exclusively from the enterprise activity for which the debt was issued. Short-Term Debt - Short-term debt is defined as any debt incurred whose final maturity is three years or less. Spread - The income earned by the underwriting syndicate as a result of differences in the price paid to the issuer for a new issue of municipal bonds, and the prices at which the bonds are sold to the investing public, usually expressed in points or fractions thereof. Tax-Exempt Bonds - For municipal bonds issued by the City tax-exempt means interest on the bonds are not included in gross income for federal income tax purposes; the bonds are not items of tax preference for purposes of the federal, alternative minimum income tax imposed on individuals and corporations; and the bonds are exempt from taxation by the State of Illinois. Tax Increment Bonds - Bonds secured by the incremental property tax revenues generated from a redevelopment project area. Term Bonds - Bonds coming due in a single maturity. True Interest Cost (TIC) - Also known as Canadian Interest Cost. A rate which, when used to discount each amount of debt service payable in a bond issue, will produce a present value precisely equal to the amount of money received by the issuer in exchange for the bonds. The TIC method considers the time value of money while the net interest cost (NIC) method does not. Yield to Maturity - The rate of return to the investor earned from payments of principal and interest, with interest compounded semiannually and assuming that interest paid is reinvested at the same rate. Zero Coupon Bond - A bond which pays no interest, but is issued at a deep discount from par, appreciating to its full value at maturity. Investment Policy ______________________________________________________________________________ Policy Number: 01-087 Date: August 2016July 27, 2015 Purpose: 1.01 Policy It is the policy of the City of DeKalb to invest public funds in a manner that will conform to state statute, maximize security, meet daily cash flow demands, and attempt to attain a market rate of return. 1.02 Scope This policy includes all funds governed by the City Council and, except for cash in certain restricted funds, the City of DeKalb will consolidate cash balances to maximize investment earnings. Investment income will be allocated to the various individual funds based on their respective participation. Interest income derived from non-fund specific consolidated bank accounts will be attributed to the General Fund. 1.03 Objectives The primary objectives of the City of DeKalb's investment activities are, in order of priority: A. Safety of principal Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio, while mitigating credit and interest rate risks, as defined below: 1. Credit Risk, that is, the risk of loss due to the failure of the security issuer or backer. It may be mitigated by:  Limiting investments to the safest types of securities;  Pre-qualifying the financial institutions, broker/dealers, intermediaries, and advisors with which the City will do business; and  Diversifying the investment portfolio so that potential losses on individual securities will be minimized. 2. Interest Rate Risk, that is, the risk that the market value of securities in the portfolio will fail due to changes in general interest rates. It may be mitigated by:  Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to maturity, and  By investing operating funds primarily in shorter-term securities B. Liquidity, so as to meet all operating requirements that may be reasonably anticipated, the portfolio shall consist largely of securities with active secondary or resale markets (dynamic liquidity). C. Yield, with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the investment risk constraints and liquidity needs. Return on investment is of least importance compared to the safety and liquidity objectives described above. The core of investments shall be limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. Securities shall not be sold prior to maturity with the following exceptions: 1. a declining credit security could be sold early to avoid loss of principal; 2. a security swap would improve the quality, yield, or target duration in the portfolio; or, 3. liquidity needs of the portfolio require that the security be sold. 1.04 Standards of Care A. Prudence The standard of prudence to be used by investment officials shall be the "prudent person" standard and shall be applied in the context of managing an overall portfolio. Investment officers and employees of the City of DeKalb, while acting in good faith in accordance with this investment policy and any written procedures as might be established, shall be relieved of personal liability for an individual security’s credit risk or market price changes. Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived. B. Ethics and Conflicts of Interest City of DeKalb employees involved in the investment process shall refrain from personal business activity that could conflict with the proper execution and management of the investment program, or that could impair their ability to make impartial decisions. They shall disclose any material interests in financial institutions with which they conduct business. They shall further disclose any personal financial/investment positions that could be related to the performance of the investment portfolio. Employees shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of their entity. C. Delegation of Authority Authority to manage the investment program is granted to the authorized municipal official described in Chapter 54 of the DeKalb Municipal Code. Responsibility for the operation of the investment program is hereby delegated to the Finance Director or his/her designee, who shall carry out established written procedures and internal controls for the operation of the investment program consistent with this investment policy. These procedures shall include references to: safekeeping, delivery vs. payment, investment accounting, repurchase agreements, wire transfer agreements collateral/depository agreements and banking services contracts. All investments shall follow the investment plan designed and approved by the Finance Director or his/her designee prior to execution. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the DeKalb City Council. The Finance Director, as Chief Financial Officer, shall be accountable for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. 1.05 Safekeeping and Custody All trades where applicable will be executed by Delivery vs. Payment (DVP). This shall ensure that securities are deposited in the eligible financial institution prior to the release of funds. Securities will be held by a third party custodian as evidenced by safekeeping receipts. 1.06 Authorized Financial Dealers and Institutions A list shall be maintained of financial institutions authorized to provide investment services to the City of DeKalb, as well as a list of approved security broker/dealers (or their respective custodial clearing firm) selected for creditworthiness (minimum capital requirement of $10,000,000 and at least five years of operation). These may include "primary" dealers or regional dealers that qualify under Securities and Exchange Commission rule 15C3-1 (uniform net capital rule). All financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply the following (as appropriate): 1. audited financial statements 2. proof of National Association of Securities Dealers (NASD) certification 3. proof of state registration 4. completed broker/dealer questionnaire 5. certification of having read the City of DeKalb’s investment policy and that all investments will comply with the policy An annual review of the financial condition and registration of qualified bidders will be conducted by the Finance Director or his/her designee. 1.07 Internal Controls The Finance Director or his/her designee is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the entity are protected from loss, theft or misuse. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that (1) the cost of a control should not exceed the benefits likely to be derived; and (2) the valuation of costs and benefits requires estimates and judgments by management. Accordingly, the Finance Director or his/her designee shall establish a process for an annual independent review by an external auditor to assure compliance with policies and procedures. The internal controls shall address the following points: 1. Prevention of collusion 2. Separation of transaction authority from accounting and record keeping. 3. Custodial safekeeping (Securities purchased from any bank or dealer including appropriate collateral, as defined by State Law, shall be placed with an independent third party for custodial safekeeping). 4. Avoidance of physical delivery securities. 5. Clear delegation of authority to subordinate staff members. 6. Written confirmation of telephone transactions for investments and wire transfers (may be via fax if on letterhead and the safekeeping institution has a list of authorized signatures). 7. Development of a wire transfer agreement with the lead bank or third party custodian, which shall outline the various controls, security provisions, and delineate responsibilities of each party making and receiving wire transfers. 1.08 Suitable and Authorized Investments Investment Types Consistent with the GFOA Recommended Practice on State Statutes Concerning Investment Practices, the following investments will be permitted by this policy and are those defined by state law where applicable: 1. U.S. Government obligations, U.S. Government agency obligations, and U.S. Government instrumentality obligations 2. Repurchase agreements 3. Certificates of deposit 4. Savings and loan association deposits 5. Investment-grade obligations of state, provincial and local governments and public authorities 6. Money market mutual funds regulated by the Securities and Exchange Commission and whose portfolios consist only of domestic securities 7. Statewide investment pools Use of repurchase agreements should be consistent with GFOA Recommended Practices on Repurchase Agreements (see attached "GFOA Recommended Practices"). Consistent with the GFOA Recommended Practice on Use of Derivatives by State and Local Governments, extreme caution shall be exercised in the use of derivative instruments (see attached "GFOA Recommended Practices"). From time to time, the City may choose to invest in instruments offered by minority and community financial institutions. These financial institutions may not meet all the criteria under this section. All terms and relationships will be fully disclosed and authorized by the City Manager prior to purchase and shall be consistent with state or local law. 1.09 Collateralization Funds on deposit (checking accounts, certificates of deposit, etc.) in excess of FDIC or SIPC limits, excluding interest, must be secured by some form of collateral, witnessed by a written agreement (see the attached "GFOA Recommended Practices"). Pledged collateral shall be held in safekeeping by the Federal Reserve Bank of Chicago (or other independent third party designated by the Finance Director or his/her designee) in the name of the municipality. In addition, the value of the pledged collateral must be marked to market monthly, or more frequently depending on the volatility of the collateral pledged. Last, the City requires that the amount of collateral pledged equal 110% of the uninsured amount on deposit. 1.10 Diversification The City of DeKalb shall attempt to diversify its investments appropriate to the nature of the funds, the purpose for the funds, and the amount available to invest. Diversification can be by type of investment, number of institutions invested in, and length of maturity. 1.11 Maximum Maturities To the extent practicable, the City of DeKalb shall attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, the City of DeKalb will not directly invest in securities maturing more than 3-years from the date of purchase. Reserve funds may be invested in securities exceeding 3-years if the maturity of such investments is made to coincide as nearly as practicable with the expected use of the funds. Regardless of the foregoing, no funds may be invested in securities maturing in excess of 7- years from the date of purchase unless authorized by the City Council. 1.12 Reporting The Finance Director or his/her designee shall prepare a monthly investment and bank balance report for City Council that provides: 1. Cash balances held at the end of the month; 2. A listing of individual securities and corresponding maturities held at the end of the reporting period; 3. The percentage of the total portfolio which each type of investment represents; 4. Inception-to-date yields for each individual security; 5. Average weighted inception-to-date yield to maturity of the entire portfolio as compared to applicable benchmarks. 1.13 Performance Standards This investment portfolio will be managed in accordance with the parameters specified within this policy. The portfolio should attempt to obtain a comparable rate of return during a market/economic environment of stable interest rates. The portfolio performance should be benchmarked to the return of the 90-day Treasury bill.  1.14 Investment Policy Adoption The investment policy shall be adopted by the City Council. 1.15 Policy Exemption and Amendment Exemption Any investment currently held that does not meet the guidelines of this policy shall be exempted from the requirements of this policy. At maturity or liquidation, such monies shall be reinvested only as provided by this policy. Amendment This policy shall be reviewed on an annual basis. Any changes must be approved by the City Manager and any other appropriate authority, as well as the individual(s) charged with maintaining internal controls. RETURN TO AGENDA DATE: October 19, 2016 TO: Honorable Mayor John Rey City Council Finance Advisory Committee FROM: Anne Marie Gaura, City Manager Cathy Haley, Finance Director SUBJECT: Annual Tax Levy Tax Year 2016. The following memorandum includes several pieces of information to help with the analysis of the 2016 tax levy. While residents live within the City limits, their property tax bill is comprised of no less than 10 separate taxing districts. Each taxing district determines the total dollar amount to levy on the property which resides within the taxing district boundaries. A tax rate is calculated based on this total dollar request and the total assessed value of property within the taxing districts boundaries. The tax rate is what a resident sees on their tax bill for each entity having authority to place a levy on their property. The equalized assessed value (EAV) of an individual resident’s property is multiplied by each tax rate to determine the amount of tax owed for the respective calendar year. The City of DeKalb is a home rule community and levies for dollars. The tax rate becomes a calculation based on the EAV. (EAV x Rate = Total Levy Dollars) Below shows the total 2015 tax bill percentage break-out for a current resident living in the City of DeKalb. RATE AGENCY RATE CC 523 Kishwaukee 0.69723 DeKalb Park 0.79595 City of DeKalb 1.19420 DeKalb Road & Bridge 0.21330 County 1.23640 DeKalb Township 0.18199 DeKalb Library 0.49107 Forest Preserve 0.08530 DeKalb Sanitary 0.15044 School District 428 8.24998 TOTAL TAX RATE 13.29586 State and federal law mandates that the City provide certain pension benefits to all its full- time employees. The City of DeKalb, like most municipalities, uses its annual property tax levy to help finance these costs. An independent actuary calculates the levies for Police and Fire pensions. FICA and IMRF rates are set by the state and/or federal governments and are basically a function of expected payroll. This recommended levy (Attachment A) used the following assumptions: 1. Funding the Police and Fire Pension Funds based on the actuarial valuation received on September 22, 2016 from Foster & Foster Actuaries and Consultants. The funding level used by City of DeKalb from 2011 – 2014 was the Projected Unit of Credit (PUC) method. This is the lowest funding level permissible by the state. City Council began phasing back up to the higher funding level with the 2015 levy. Staff is continuing this phase up fully back to the Entry Age Normal Method with the 2016 tax levy. This higher funding method is recommended both by the Government Accounting Standards Board (GASB) and Moody’s. Funding at this higher level will assist in reducing the City’s large pension liability in hopes of having a positive impact on the Aa3 bond rating the City received this past summer from Moody’s. The actuarial reports from Foster & Foster were sent out last week to the City Council and the FAC. 2. Leave the funding for IMRF and Social Security employer contributions at the same level as tax levy year 2015. While this is still not funding these City obligations 100% for the General Fund, it is not decreasing this contribution being required of the City. The table below shows the General Fund picking up $927,182 annually to pay for these mandatory expenditures. Levy Actual Difference IMRF $251,035 $ 788,722 $537,687 Social Security $204,818 $ 594,313 $389,495 Total $455,853 $1,383,035 $927,182 Page |2 3. Continue to keep the debt payment for the 2013A bond series principal and interest for the library expansion. 4. Continue to abate all other debt payments and cover the costs out of the General Fund. While some revenue has been dedicated to cover a portion of the payments to 2012A and 2013B, it is not enough to make the full principal and interest payment. Dedicated revenue consists of 1.5 cents per gallon on the local motor fuel tax as well as 1% of hotel/motel revenue that is currently paying off a portion of the City's annual debt payments. Transfers from the General Fund cover the remaining payments. For FY2017, this transfer totals $1,493,998. 5. The DeKalb Public Library is a component unit of the City and therefore the City is required to levy on their behalf each year. The DeKalb Library Board reviewed the requested levy amount in October and will be keeping their levy dollar amount at the same is held at the same level from 2015 at $2,298,549. This includes the $500,000 for their short-term line of credit as the funds have still not been received from the State of Illinois. 6. Utilize the estimated equalized assessed value (EAV) from DeKalb County showing an increase of 8.27%. About 9% of a resident’s current tax bill goes to the City which includes the amount of debt not abated for the Library bond issuance. The chart below shows the City of DeKalb’s 2015 property rate compared to other communities. While the City’s tax rate has gone up due to the dropping EAV, it is still in the lower 50% of comparable municipalities. Those communities on the right are from our comparable municipalities identified during the City’s Pay, Compensation and Classification study completed in the spring of 2015. These municipalities are most directly comparable to the City of DeKalb based on economic criteria. Comparable 2015 Tax University 2015 Tax Municipalities Rate Comparables Rate 1 Carpentersville 2.9299 1 Urbana 1.3550 2 Rolling Meadows 1.8700 2 Champaign 1.3152 3 Streamwood 1.6720 3 DeKalb 1.1942 4 Belvidere 1.6337 4 Bloomington 1.0772 5 Hoffman Estates 1.5630 5 Carbondale 0.3420 6 Hanover Park 1.2897 7 Crystal Lake 1.2129 8 DeKalb 1.1942 9 Romeoville 1.1674 10 Elk Grove Village 1.1588 11 Wheaton 1.0342 12 St. Charles 0.9199 13 Sycamore 0.7774 14 Batavia 0.6955 Page |3 This comparison across the same group for the “Total Tax Rate” shows the City of DeKalb s in the upper to high end when comparing the rates from the FY2015 CAFR’s. This shows the impact the large rate from the DeKalb School District has on a resident’s tax bill. 2014 Comparable Total Tax University 2014 Total Municipalities Rate Comparables Tax Rate 1 Wheaton 20.1656 1 DeKalb 13.0667 2 Hanover Park 13.6880 2 Urbana 10.6011 3 DeKalb 13.0667 3 Champaign 8.4125 4 Streamwood 12.8180 4 Bloomington 8.1142 5 Carpentersville 12.2734 5 Carbondale 8.0533 6 Crystal Lake 12.1542 7 Belvidere 11.4100 8 Rolling Meadows 11.1840 9 Sycamore 11.0468 10 Elk Grove Village 10.9850 11 St. Charles 10.6223 12 Hoffman Estates 9.7440 13 Batavia 9.5587 14 Romeoville 6.5382 Continuing comparisons to the City’s comps, the charts below show total population, FTE’s, Median Family Income, total Property Tax revenue and total General Fund expenditures. Comparable Comparable Municipalities Population Municipalities FTE 1 Champaign 83,424 1 Bloomington 619 2 Bloomington 78,730 1 Champaign 514 3 Wheaton 52,894 2 Hoffman Estates 362 4 Hoffman Estates 51,895 3 Elk Grove Village 314 5 DeKalb 44,030 4 Romeoville 312 6 Urbana 42,044 5 Wheaton 293 7 Crystal Lake 40,448 6 Urbana 273 8 Streamwood 40,435 7 Carbondale 268 9 Romeoville 39,680 8 St. Charles 267 10 Carpentersville 38,196 9 Crystal Lake 239 11 Hanover Park 37,973 10 DeKalb 234 12 Elk Grove Village 33,419 11 Hanover Park 206 13 St. Charles 33,264 12 Carpentersville 189 14 Carbondale 26,324 13 Streamwood 182 Page |4  15 Batavia 26,045 17 Rolling Meadows 176 16 Belvidere 25,132 15 Batavia 156 17 Rolling Meadows 24,099 16 Belvidere 128 18 Sycamore 17,712 18 Sycamore 126 Total Total General Comparable Property Tax Comparable Fund Municipalities Revenue Municipalities Expenditures 1 Bloomington $23,719,066 15 Batavia N/A 2 Hoffman Estates $18,785,350 16 Bloomington $94,553,779 3 Crystal Lake $16,736,021 1 Champaign $84,184,101 4 Wheaton $13,269,455 2 Hoffman Estates $55,851,840 5 St. Charles $12,534,572 3 Romeoville $49,943,700 6 Carpentersville $11,948,933 4 Elk Grove Village $48,465,170 7 Elk Grove Village $11,768,996 5 St. Charles $42,251,420 1 Champaign $11,632,010 6 Wheaton $41,716,916 2 Hanover Park $11,603,891 7 DeKalb $34,415,937 3 Romeoville $10,568,000 8 Urbana $32,707,173 17 Rolling Meadows $10,424,147 9 Hanover Park $32,199,242 18 Streamwood $9,915,247 10 Crystal Lake $31,317,466 15 Batavia $6,254,072 17 Rolling Meadows $31,295,788 16 Belvidere $4,870,714 18 Carpentersville $29,894,761 17 DeKalb $4,270,540 19 Streamwood $28,743,191 18 Urbana $4,187,748 20 Carbondale $24,528,770 18 Sycamore $1,764,497 16 Belvidere $18,141,143 19 Carbondale $1,035,263 18 Sycamore $14,621,058 Again, the total dollars levied equal the EAV x Rate (EAV x Rate = Levy Dollars). The EAV is determined by the Township Assessor’s Office, the dollars are requested by the City for the City’s portion of a resident’s tax bill. Therefore the rate is a factor of these two amounts. The preliminary estimated EAV from the County shows a potential increase from 2015 of 8.42%. With this increase in the EAV the total tax rate will show a lower increase based upon this recommended levy amount as shown in the chart below. Levy Year Rate EAV Dollars Increase 2015 1.1942 468,077,742 $5,589,784 2016 1.3747 468,077,742 $6,434,582 $844,798 Levy Year Rate EAV Dollars Increase 2015 1.1942 468,077,742 $5,589,784 2016 1.2697 506,786,682 $6,434,582 $844,798 Page |5 The first chart shows EAV remaining the same, dollars going up by this estimated ceiling and the impact these two factors have on the tax rate. The second chart shows the EAV increasing by the 8.42% and the impact that has on the tax rate. The chart below shows the impact to a resident with the dollar increase of $844,798 and the EAV increase of 8.42%. PROPERTY TAX COMPUTATION CALCULATION COMPARISON BETWEEN 2015 AND 2016 Full Pension Contribution 2015 Market Value 2015 2016 Difference Home $ 100,000.00 EAV 33,333 36,090 $.16 - Per Day Tax Rate 1.1942% 1.2697% $5.01 - Per Month Tax Bill $398 $458 $60 - Annually Home $ 150,000.00 EAV 50,000 54,135 $.25 - Per Day Tax Rate 1.1942% 1.2697% $7.52 - Per Month Tax Bill $597 $687 $90 - Annually Home $ 200,000.00 EAV 66,667 72,180 $.33 - Per Day Tax Rate 1.1942% 1.2697% $10.03 - Per Month Tax Bill $796 $916 $120 - Annually ** EAV x Tax Rate = Property Tax Revenue For informational purposes, the City’s levy is comprised of the following categories: 1) General Corporate; 2) Debt Service; 3) IMRF; 4) Police Pension; 5) Fire Pension; and 6) Social Security. Past practice shows the City fully abating its debt expenditures, with the exception of the Library issuance, and has covered those costs through transfers from other City funds. The General Fund transfer to cover debt payments for fiscal year 2017 is $1,493,998. By not levying for the payment of debt through property tax revenue, the City hinders its ability to meet other operational expenses. The Executive Partners Inc. (EPI) Strategic Planning Review from June of 2013 recommends not making debt payments from the General Fund. Making debt payments from the General Fund is not a sustainable practice, particularly in light of escalating employee and material costs. Specifically, the use of property taxes over the life of capital items is instead recommended. This EPI report goes on to further indicate that some increase in property tax may be necessary. The City’s current financial policies also state “Levy for Police, Fire and IMRF per actuary calculations. If the actuarial reports indicate a higher employer contribution is needed, said increase will need to be added to the City’s overall previous year levy request to Page |6 avoid underfunding problems.” The current property tax levy is also not fully funding employer pension obligations. This estimated levy for 2016 is fully phasing the funding of the Police and Fire pension funds back up to the higher allowable funding method based on an independent actuarial valuation. Last year the City Council and FAC voted to phase back up to this higher level of funding to help reduce the pension liability in hopes to not negatively impact the bond rating from Moody’s any further. It should be noted the actuarial valuation method used between 2008 and 2014 was the PUC Method which is the lowest level of funding acceptable by the State of Illinois. However, both Moody’s and the GASB use the Entry Age Normal method of funding to calculate the City contribution to these pension funds. Based on the difference in these two dollar amounts, Moody’s is showing in their report that the City did not fund these pension funds at the required level and in turn downgraded the City’s bond rating from a Aa2 to a Aa3. This recommended tax levy is not even complying with all of the City’s financial policy guidelines as it is not fully funding the dollars required to cover the costs associated with IMRF or FICA. Levy Actual Difference IMRF $251,035 $ 788,722 $537,687 Social Security $204,818 $ 594,313 $389,495 Total $455,853 $1,383,035 $927,182 The General Fund for the City of DeKalb, which should be used to cover operational expenditures, is also paying for the following non-operational expenditures that are an annual known mandatory expense: FY2017 Cost General Obligation Debt Payments $1,493,998 The City Abates all Debt Retiree Health Insurance Payments $ 961,359 Unique to DeKalb IMRF $ 537,687 Cost not covered by Property Tax FICA $ 389,495 Cost not covered by Property Tax County Sales Tax Rebated Dollars $1,729,000 Unique to DeKalb $5,111,539 Discussion can be pursued regarding funding other operational costs through property tax revenue such as funding IMRF and Social Security fully through property tax revenue, levy for Police Protection, Fire Protection or other operational costs currently not being funded through property tax revenue. Further discussion can be pursued on not abating all the City’s debt obligations and paying a portion of these out of the property tax levy to allow the City to have debt Page |7 extension available for future debt issuances in the event of a property tax freeze by the State of Illinois. Staff is recommending to fully levy for the Police and Fire Pension obligations at the higher State recommended funding level per the actuarial valuation of Foster & Foster and keep the IMRF and FICA portions of the levy as is. Staff is also recommending to leave the debt abatements as is and only extend the library debt issuance as has been past practice. While staff realizes this is a small step in funding non-operational costs through the tax levy, it is the most critical to do at this point to try to keep our bond rating from falling even lower. Please find the following timeline for this year’s levy process: • Monday, October 24, 2016 Estimated Tax Levy at City Council Meeting (Levy Ceiling Set) • Thursday, October 27, 2016 Budget Review Sessions with Finance Committee, City Council and Staff. Review Tax Levy. • Thursday, November 3, 2016 Budget Review Sessions with Finance Committee, City Council and Staff. • Tuesday, November 8, 2016 Budget Review Sessions with Finance Committee, City Council and Staff. • Friday, November 4, 2016 Publish notice of Public Hearing on 2016 Tax Levy. • Monday, November 14, 2016 Public Hearing Conducted on the 2016 Tax Levy. • Friday, November 18, 2016 Publish notice of Public Hearing for FY2017 budget and put budget document on display for citizen review. • Monday, November 28, 2016 Public Hearing Conducted and the First Reading of the Ordinance held authorizing the FY 17 Budget. First Reading of the 2016 Tax Levy. • Monday, December 12, 2016 City Council Meeting – Second Reading FY17 Budget and 2016 Tax Levy Page |8  Attachment A $ Increase/ % Increase/ 2016 Estimated Tax 2016 Tax Decrease Decrease 2016 ESTIMATED TAX LEVY 2015 Tax Levy Levy before Levy after over prior over prior Extensions Abatements Abatements year year AGGREGATE LEVIED FUNDS Corporate $824,107 $824,107 $824,107 $0 0.00% IMRF $251,035 $251,035 $251,035 $0 0.00% Social Security $204,818 $204,818 $204,818 $0 0.00% Public Library $2,298,549 $2,298,549 $2,298,549 $0 0.00% SSA #3-Heritage Ridge $0 $1,000 $1,000 $1,000 100.00% SSA #4-Knolls $5,000 $5,500 $5,500 $500 10.00% SSA #6 - Greek Row $10,000 $14,000 $14,000 $4,000 40.00% SSA#14 Heartland Fields $2,500 $2,500 $2,500 $0 0.00% Aggregate Levy Totals $3,596,009 $3,601,509 $3,601,509 $5,500 0.15% PUBLIC SAFETY PENSION LEVIES Fire Pension $2,177,856 $2,632,815 $2,632,815 $454,959 20.89% Police Pension $1,636,914 $2,035,981 $2,035,981 $399,067 24.38% Public Safety Pension Totals $3,814,770 $4,668,796 $4,668,796 $854,026 22.39% DEBT SERVICE LEVIES G.O. Bonds 2013A-Library $493,050 $620,000 $486,626 ($6,424) -1.30% G.O. Bonds 2013B&2012A-Police $0 $900,000 $0 $0 0.00% G.O. Bonds 2010A - TIF $0 $1,425,125 $0 $0 0.00% G.O. Bonds 2010B&2010C-Refunding $0 $1,350,000 $0 $0 0.00% G.O. Bonds 2014-Refunding $0 $400,875 $0 $0 0.00% Total Bond & Interest $493,050 $4,696,000 $486,626 ($6,424) -1.30% TOTAL $7,903,829 $12,966,305 $8,756,931 $853,102 10.79% REVENUES - Police and Fire Pension Levies CORPORATE $824,117 POLICE PENSION $2,035,981 FIRE PENSION $2,632,795 $5,492,893 EXPENDITURES - Police and Fire Pension Levies POLICE PENSION $2,502,904 FIRE PENSION $2,990,000 $5,492,904 RETURN TO AGENDA DATE: October 19, 2016 TO: Honorable Mayor John Rey City Council Finance Advisory Committee FROM: Anne Marie Gaura, City Manager Cathy Haley, Finance Director SUBJECT: Proposed FY2017 Budget General Fund Summary Please find for your review and consideration the proposed Fiscal Year (FY) 2017 Budget for the City of DeKalb. The City has switched its fiscal year to coincide with the calendar year and this is the inaugural budget for a 12-month period of time running from January – December 2017. This budget incorporates the total program of City expenditures and supporting revenues for the coming year, working to continue to keep fund balance reserves at the recommended levels set forth by the City Council. The operating and capital budgets contained herein have been prepared in accordance with Illinois statutes, the City Municipal Code and generally accepted accounting principles. The budget document is the culmination of months of effort by City staff to balance available resources with service priorities. The dollars set forth in the budget provide a means of measuring the costs of services, programs and projects. This assists in making cost/benefit judgments on the value of services offered. More than a financial document, the budget represents the process by which municipal policy is made, programs put into effect and legislative and administrative controls established. The annual budget is prepared under the direction of the City Manager with coordination by the Finance Director. Each department director formulates that segment of the budget related to his or her department, presents it to the City Manager and the Finance Director, and then makes revisions as necessary or recommended. After revenue and expenditure estimates are finalized, the full draft budget is then reviewed during joint meetings of the City Council and the Finance Advisory Committee. If necessary, further revisions are made. Finally, the recommended budget is offered for comment at a public hearing and subsequent adoption by the Mayor and the City Council. The City’s budget was prepared using a “target‐based” approach. The target‐based budget has two primary components: a "target level" budget that finances a basic level of municipal services; and an unspecified number of incremental expenditure requests considered by the City Manager. GENERAL FUND OVERVIEW The General Fund, which is the City’s main operating fund, has estimated budgeted revenues for FY2017 (without transfers) of $35,819,662 and estimated budgeted expenditures (without transfers) of $34,861,695. The General Fund is showing a surplus in FY2016 of over $1.0 million bringing fund balance reserves up to 27%. FY2016.5 is showing a deficit of $403,524 which accounts for one time transfers to the Fleet and Equipment to purchase items such as ambulances and squad cars that are well past their life expectancies. Even with this one time transfer amount, FY2016.5 fund balance reserves are being maintained at the financial policy goal of 25%. GENERAL FUND SUMMARY FY 2015 FY 2016 FY 2016.5 FY 2016.5 FY 2017 Actual Actual Budget Estimate Budget REVENUES Property Taxes 4,203,086 4,231,993 5,094,730 5,094,730 5,948,756 Sales & Use Taxes 14,871,442 15,009,558 7,875,550 7,875,550 15,432,641 Franchise & Utility Tax 3,919,346 3,701,236 1,795,000 1,795,000 3,867,000 Licenses & Permits 902,452 1,069,443 428,650 428,650 1,104,350 Intergovernmental Revenues 5,152,467 5,346,898 2,681,530 2,681,530 5,196,175 Service Charges & Fees 1,850,465 1,950,960 1,023,750 1,023,750 2,252,675 Fines 803,428 749,130 370,500 370,500 789,819 Other Income 1,379,258 1,015,129 888,302 888,302 1,228,246 REVENUES NET OF TRANSFERS 33,081,944 33,074,347 20,158,012 20,158,012 35,819,662 Transfer In 2,211,417 1,558,884 688,666 688,666 1,314,401 TOTAL GENERAL FUND REVENUES 35,293,361 34,633,231 20,846,678 20,846,678 37,134,063 EXPENDITURES Legislative 299,501 301,446 102,687 102,687 164,711 City Manager's Office 1,136,537 1,058,728 606,600 606,600 1,117,593 Human Resources 0 253,906 274,034 274,034 455,954 Finance 1,660,999 664,946 353,410 353,450 692,894 IT 0 783,360 409,521 409,346 929,247 Community Development 835,936 1,047,615 829,645 832,170 1,431,030 Public Works 3,328,795 3,286,770 1,980,322 1,958,692 3,840,566 Fire 9,308,910 9,863,844 6,843,743 6,843,743 10,529,849 Police 11,124,811 11,533,571 7,708,309 7,708,309 12,914,492 General Fund Support w/out Transfers 3,960,146 3,001,516 1,580,572 1,528,902 2,785,359 EXPENDITURES NET OF TRANSFERS 31,655,635 31,795,702 20,688,843 20,617,933 34,861,695 Transfers Out 2,556,959 1,536,138 612,569 612,569 1,787,306 TOTAL GENERAL FUND EXPENDITURES 34,212,594 33,331,840 21,301,412 21,230,502 36,649,001 Surplus/(Deficit) 1,080,767 1,301,391 (454,734) (383,824) 485,062 ENDING FUND BALANCE 8,018,755 9,320,146 8,865,412 8,936,322 9,421,384 PERCENTAGE OF EXPENDITURES 23.44% 27.96% 26.60% 26.81% 25.71% WHERE THE MONEY COMES FROM WHERE THE MONEY GOES The General Fund accounts for the provision of essential services expected from a local government and is supported, primarily, by taxes, but also charges for service, fines, and various fees. Intergovernmental revenue is primarily Income Tax revenue. Other income includes the property tax surplus dollars and the sales tax surplus dollars we receive from the Central Area TIF District. With FY2016 projecting to end with a surplus of over $1.0 million and the proposed FY2017 budget showing a surplus of $485,062 the City’s fund balance is projected to increase to 25.71% of annual expenditures or over $9,400,000. This is the strongest fund balance reserve the City has had in more than 13 years. General Fund Reserve Balance History 9,421,384 9,320,146 8,865,412 8,018,755 7,144,433 5,177,514 4,669,218 2,692,928 2,161,911 416,652 22,169 2008 2009 2010 2011 2012 2013 2014 2015 2016 2016.5 2017 Projection Budget Budget GENERAL FUND REVENUE ASSUMPTIONS The FY2017 General Fund budget is based upon estimated revenues from taxes, fees, and other sources totaling $35,819,662, before transfers in. This represents an increase in Income Tax revenues and Local Use Tax revenues based on the most recent Illinois Municipal League (IML) projections. These revenues also include the most recent revenue fee increases for ambulance billing and video gaming licensing. Several major categories of C i t y revenue are described in greater detail as follows: State & Home Rule Sales Tax – Sales tax represents 42% of total General Fund revenues. In the State of Illinois, there is a base 6.25% sales tax on general merchandise. It is administered and collected by the Illinois Department of Revenue. One percent of the Sales Tax is distributed to the municipality where the sale occurred. This tax is captured in the City’s General Fund and is used for basic City operations. The City also imposes a 1.75% Home Rule Sales Tax. This tax, while approved locally, is administered and collected by the Illinois Department of Revenue. These two sources of sales tax revenue have remained fairly flat over the last four years. The FY2017 budgeted dollars show an increase between 2-3% for both these revenue sources based on the increase in building permit activity and Community Development activity being seen now and in the future. Property Tax – The property tax revenue for FY2017 budget year shows it accounts for 16% of all General Fund revenue. This is an increase in this revenue source compared to the total tax base. In FY2016 this revenue source only accounted for about 12% of total General Fund revenue. The City approves a tax levy in December of each year, and, the following year, the DeKalb County Treasurer collects the funds and remits them to the City. This budget will be the first fiscal year that coincides with the passing of the tax levy. Actuarial valuations for both the police and fire pension funds came in high as was expected. The City committed to returning back up to the higher finding level in a two phase jump. FY2016.5 being the first step and FY2017 would be the second step. This increase to get these two pension funds back to the “Entry Age Normal” funding method recommended both by Moody’s and the Government Accounting Standard Board (GASB) equals $854,026. The FY2017 budget reflects this increase to property tax revenue and pension contributions for Police and Fire. Therefore it is a one for one revenue increase to expenditure increase. While residents live within the City limits, their property tax bill is comprised of no less than 10 separate taxing districts. Each taxing district determines the total dollar amount to levy on the property which resides within the taxing district boundaries. Below shows the total 2015 tax bill percentage break-out for a current resident living in the City of DeKalb. About 8% of a resident’s current tax bill goes to the City. On a home with a market value of $150,000 the total tax bill would be $6,648. Of that, $597 goes to the City, in comparison to $4,125 going to the largest group which is the School District. While the City currently only levies dollars to cover a portion of the City’s mandated pension obligations, a resident receives the services of the City which include, police protection, fire protection, street maintenance including street sweeping and snowplowing for $597 a year. State Income Tax – State Income Tax, which is included under Intergovernmental Revenues, is the third largest source, 14%, of General Fund revenue. As with sales tax, income taxes are collected by the State of Illinois and distributed to the City on a per capita basis. The FY2017 budget for income tax revenue is based on the most recent projections from the Illinois Municipal League (IML) in August 2016. That projection equates to $102.50/capita or $4,513,075, which is about a .5% increase over the FY2016.5 budgeted amount. While income tax receipts were hit hard by the downturn in the economy, they have continued to show an upswing through FY2016.5. The City has been closely monitoring pending legislation at the state and federal levels to stay abreast of any issues that may have an impact on the City. Illinois lawmakers have begun to address the numerous challenges that are plaguing our state. Interfund Transfers- The transfer in to the General Fund from the Water Fund is again for a payment in lieu of taxes calculation recommended by the EPI study. This increased by $44,900 from last fiscal year. In FY2016 expenditures were changed to directly hit the Water Fund, which allowed for the elimination of the lump transfer from the Water Fund which had been done in years past meant to cover costs in the General Fund. This direct charge to the Water Fund becomes much more transparent and allows the City to comply better with GASB statement 34 by showing charges in the correct activity group. (Governmental vs. Business Type) The City’s General Fund has also relied heavily over the last several years on annual transfers from the two TIF funds. Below shows a chart of the effect this revenue source will have on the General Fund over the next seven years. This assumes the City Council will increase the Property Tax levy dollar request at the end of each of the TIFs to capture the new growth brought on by their closing. TIF impact on the General Fund FY 16 FY16.5 FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 Transfer to GF TIF #1 $678,576 $339,288 $678,576 $678,576 $678,576 $678,576 $678,576 $678,576 $0 Transfer to GF TIF #2 $113,198 $56,599 $113,198 $113,198 $113,198 $0 $0 $0 $0 TIF Property Tax Surplus $190,221 $185,000 $180,000 $180,000 $180,000 $180,000 $180,000 $180,000 $0 TIF Sales Tax Surplus $350,000 $339,915 $320,000 $305,000 $290,000 $275,000 $260,000 $255,000 $0 Pick-up in Property Tax $95,754 $95,754 $95,754 $656,274 Revenue to the General Fund $1,331,995 $920,802 $1,291,774 $1,276,774 $1,261,774 $1,229,330 $1,214,330 $1,209,330 $656,274 Overall, the reliance of transfers from other funds in to the General Fund has started to decrease and will continue to decrease to help create a sustainable General Fund for City operations. GENERAL FUND EXPENDITURE ASSUMPTIONS FY2017 expenditures in the General Fund total $36,649,001, including interfund transfers. This represents expenditures for the time period of January 1, 2017 through December 31, 2017. A transfer of $215,042 is budgeted to the Airport Fund in order to balance the budget. There is no additional needed transfer to be done to the Health Insurance Fund. This fund is “funded” through the health insurance line item under personnel located within each department within the General Fund and is sufficient to cover all the needed costs for FY2017. Salary Assumptions  Police Union Contract ended June 30, 2016. This contract is currently in negotiations.  AFSCME Union Contract end December 2016. This contract is currently in negotiations.  Fire Union Contract salaries increased by 2.5% through June 30, 2017 based on the approval of this contract by City Council. This contract expires at June 30, 2017.  Assumptions were made on all employee groups including Non-bargaining unit employees for salary increases to ensure placeholder amounts will be adequate within the FY2017 budget.   All salary increases will need City Council approval prior to being implemented. Staffing Changes  There are no recommended staffing changes within the General Fund budget for FY2017 Other Expenditure Assumptions- • Additional training under the Legislative budget for Elected Official training - $3,650 • Additional Competency training under HR - $5,500 • New folding machine Finance - $2,389 • Priority Based Budgeting software and training - $30,000 • Additional training dollars IT Director - $2,500 • CH14 Hardware refresh - $6,000 • FOIA tracking and processing software - $9,780 • Enhancement Commission training - $2,500 • MABAS Primary Transmitter - $8,367 • Two Police Department Vehicles have been budgeted under the Fleet Fund using restricted revenue from Police Forfeitures, DUI fines, Crime lab and Anti-Crime Activities. This is revenue collected in the General Fund and transferred out to the Fleet Fund. - $66,896 CONCLUSION The proposed FY2017 budget maintains the high level of service residents and businesses expect, and that visitors enjoy, in a fiscally sound manner. This budget is focused on planning for the future. City staff is working to implement a true 5-year plan in FY2018 by implementing the 2025 Strategic Plan Goals, continuing to update the 5-year financial forecast, incorporating a 5-year Capital Improvement Plan in FY2017 and looking for true funding sources to implement this plan in FY2018. This budget is keeping the General Fund reserves at 25%, implementing phase two of funding the pension funds back to the higher funding method as suggested by GASB and Moody’s, aligning these contributions with the tax levy as is stated in the City’s financial policies, the EPI 2013 report and shows a one for one dollar to the revenue and expenditure side of these mandatory expenses. In FY2017 the increase in Part-time staffing level was in the Transportation Fund within the Public Works Department. The City is strictly a fiscal and staffing agent for the management of the DeKalb- Sycamore Area Transportation Study (DSATS) and the Metropolitan Planning Organization (MPO). This Fund is completely separate from the General Fund operations. No staffing levels were increased in any of the City operational funds in FY2017. Finally, a new 5-year CIP will be presented during the second joint budget meeting with the City Council and the Finance Advisory Committee. Moving forward, the budget will guide and ensure the City’s continued progress in times of economic uncertainty. The uncertainty regarding legislation State of Illinois lawmakers may enact is somewhat troubling, as their decision regarding the Local Government Distributive Fund (income tax distributions) could profoundly impact municipalities state-wide. However City staff will continue to identify “Best Practices” to assist in implementing specific policies and procedures to continue to contribute to improved government management. This will continue to promote and facilitate positive change rather than merely to codify current accepted practice.  FUTURE MEETING AGENDAS November 3, 2016 5:30 p.m. 1. Five-Year Capital Improvement Plan (CIP) 2. FY 2017 Utility Fund Budget 3. FY 2017 Airport Budget 4. FY 2017 Capital Budgets a. Capital Projects, Fleet & Equipment b. MFT c. TIF’s d. SSA’s November 8, 2016 5:30 p.m. 1. All Other Funds Review 2. Wrap-up and Final Recommendations RETURN TO AGENDA DATE: October 21, 2016 TO: Honorable Mayor John Rey City Council Finance Advisory Committee FROM: Anne Marie Gaura, City Manager Tim Holdeman, Public Works Director SUBJECT: New Revenue Source FY2017 Budget I. Summary Fuel for City vehicles is purchased through a contract administered by the Public Works Department. The fuel is delivered to the City’s fuel farm located at 1316 Market Street and dispensed through a self-service pumping system. The system includes a fuel tank safety system and computerized accounting system. The fuel system is used by all City departments as well as Voluntary Action Center (VAC), Children’s Learning Center (CLC), and the Park District. Currently, the VAC, CLC, and Park District pay an additional $.03 per gallon administrative fee. A review of costs associated with the fuel farm was recently conducted and the cost per gallon pumped was calculated to be $0.0923. The calculation of this cost is detailed below. COST TO PUMP FUEL AT CITY FACILITIES Capital Investment Original cost Life Expectancy Amortization Fuel Dispensing System (1995) $311,936 50 $6,239 per year Operating Costs Cost Maintenance / Regulatory Testing (Average of last 8 years) $2,711 per year Personnel (Ordering, Vendor Management, Maintenance, Testing) $4,408 per year Cost to City $13,358 per year Average Annual Fuel Pumped (last 3 years) 144,799 gallons Average Cost to the City per Gallon Pumped $0.0923  II. Recommendation In order to recover the direct costs associated with providing other agencies with vehicle fuel, it is recommended that the administrative fee charged to the VAC, CLC, and Park District be increased from $0.03 to $0.09 per gallon. Currently, the City receives about $1,500 annually from the administration fee. Implementation of the increase could be completed over multiple years. The annual increase in administrative fees per gallon of fuel and the revenue from these fees for different implementation periods is shown below. Fee Increase Period Revenue From Administrative Fees (Years) Administrative Fee Collected (based on 50,000 gallons) 2017 2018 2019 2017 2018 2019 1 $0.090 $0.090 $0.090 $4,500 $4,500 $4,500 2 $0.060 $0.090 $0.090 $3,000 $4,500 $4,500 3 $0.045 $0.068 $0.090 $2,250 $3,375 $4,500 Page |2 RETURN TO AGENDA