City of Lawrence, Kansas
First Quarter Report – 2004
Purpose of Report
The following information summarizes the financial activities of the City of Lawrence for the first three months of 2004 and alerts the City Commission to future issues that may become a concern. The first section of the Report gives a general economic forecast with information of interest at the national, state, and local level that may affect revenues and expenditures for the City. In the second section, the major funds of the City are analyzed, including the General, Recreation, and Transportation Funds, which are partially funded by property taxes, and the Water & Sewer, Sanitation, Storm Water and Public Golf Funds. These last four funds are classified as Enterprise Funds, meaning that primarily user fees support the activities. Combined, the above funds account for over 85% of the City’s budget. Included in this section are tables depicting the year-to-date budgetary status of the funds followed by an analysis of significant issues that occurred during the quarter. A discussion about possible future concerns follows the quarterly analysis of each fund. A review of the City’s investment portfolio is included in the next section and the Report concludes with a summary of noteworthy issues.
The economic expansion may finally be creating jobs and as a result, consumer confidence is starting to show signs of improvement. The growth in first quarter GDP has been estimated at 4.5%. Retail sales in the first quarter showed good growth, both nationally and locally. Business profits have been good and it appears that spending by businesses is starting to increase. The benefit from refinancing mortgages at lower rates is no longer boosting consumer spending, however. The consumer price index grew at a 3.6% annualized rate in the first quarter of 2004. However, the core CPI rate was only 1.8%. The consumer confidence index fell to 93.2 in the quarter over concerns about the war in Iraq and gasoline prices.
Long-term interest rates increased significantly after a report showing a large increase in jobs created. Short-term rates remain relatively low because the Federal Reserve has not started to increase rates. An increase in the federal-funds rate is now predicted to occur in August. Since the City primarily invests in securities with three or six month maturities, our interest earnings continue to be lower than past years (from 2.20% to 1.99% for the first quarter). The City is no longer investing in callable federal agencies. The result will be a further reduction in interest earnings due to the lower rates paid on short-term agencies and certificates of deposit.
Revenue Source 1st Qtr. % of budget 1st Qtr . % of budget
Taxes $ 6,319,076 40.2 $4,930,773 40.4
Sales Tax 5,237,124 29.3 4,628,153 25.4
Licenses & Permits 232,763 36.4 241,451 39.8
Intergovernmental 175,346 27.3 183,466 10.0
Service Charges 96,613 26.0 100,339 26.8
Fines 563,182 37.5 447,750 29.8
Interest 94,603 18.9 109,151 12.8
Miscellaneous 532,502 17.9 669,612 22.2
Transfers 339,625 27.0 339,625 28.3
Total Revenue 13,590,834 33.5 11,650,320 29.3
Expenditures
General Government 3,377,435 23.5 3,226,601 23.1
Public Safety 4,498,843 21.3 4,680,767 21.6
Public Works 837,814 16.4 828,552 14.5
Parks & Recreation 564,937 21.2 605,004 20.5
Total Expenditures 9,279,029 21.5 9,340,924 21.2
Revenues over Expenditures 4,311,805 2,309,296
The General Fund receives approximately 50% of its property tax revenue with the January 20 distribution. While there will be a total of six distributions during the year, the January and June distributions are by far the largest. Motor vehicle revenue is more evenly distributed during the year. The property tax levy for the General Fund increased by 2.7 mills and assessed value increased by 7.2%. Franchise fees are also seasonal with large distributions from the natural gas franchise fee early and late in the year and electric franchise fees highest in the summer months. Telephone and cable franchise fees are evenly distributed. Gas franchise fees are $16,000 more than the first quarter of 2003 because of the relatively cold winter. Collections were 67% of budget. The Lawrence gas franchise fee is based upon volume, not price. Cable franchise revenue was also up by $16,000. Sales taxes experienced an 8.0% increase from the first quarter of 2003 and distributions were just over 29% of budget. Interest revenue is only 19% of budget because of extremely low short-term interest rates. Miscellaneous revenue includes payments from Douglas County for ambulance reimbursements. A large payment is received quarterly after the end of the quarter.
General Fund expenditures were only 21.5% of budget during the first quarter. Legal Services, Information Systems, and Risk Management were over 25% of budget. Legal Services has encumbered most of their office lease. Information Systems also encumbered some of the future expenses for hardware and software maintenance. Litigation expenses already exceed the amount budgeted for attorney fees in Risk Management. Public Works expenditures will pick up during the spring and summer months when the weather allows the construction of street maintenance projects. The Capital Equipment Reserve Fund is being used to purchase approximately $700,000 in capital equipment (cars, computers, trucks, etc.) that would normally be General Fund expenditures. To avoid reducing the balance in the reserve fund to below $500,000, it is recommended that General Fund related capital outlay be purchased out of the General Fund in 2005.
Future Issues- Sales taxes show an increase (7%) over the previous year (see attached). The national economy is rebounding, so consumer spending should continue to increase. Interest revenue will likely be below budget due to the extremely low short-term rates. However, if the Federal Reserve does raise the federal funds rate in August, short term rates will increase. While the current quarter shows a surplus, it is projected revenues will exceed expenditures by at least $700,000 in 2004.
Revenue Source 1st Qtr. % of budget 1st Qtr. % of budget
Taxes $ 158,574 42.8 $ 285,113 44.0
Service Charges 308,842 22.9 319,834 25.1
Miscellaneous 66 0.0 336 0.0
Transfers 300,000 25.0 250,000 25.0
Total Revenue 767,482 26.3 855,283 28.4
Expenditures
Parks & Recreation 565,544 18.2 586,901 19.1
Total Expenditures 565,544 18.2 586,901 19.1
Revenues over Expenditures 201,938 268,382
The Recreation Fund receives just under 50% of its revenue from user fees. The rest comes from property taxes and a transfer of County sales tax receipts. The property tax levy was reduced by .53 mills or over 50% in 2004. Revenue from service charges is at 23% with Adult Sports programs showing an increase over last year. The Indoor Aquatic Center is down $23,000 from the 2003 first quarter due to 2002 payments being received in the first quarter of 2003. The budgeted transfer of a portion of the City’s share of the County sales tax receipts was increased to $1,200,000 in 2004 from $1,000,000 in 2003.
Recreation Fund expenditures are down slightly in the first quarter when compared to 2003, primarily for personal services. Expenditures will increase in the second and third quarters due to the operation of the outdoor pool and other summer recreation activities.
Future Issues- With experience operating the Indoor Aquatic Center, revenue and expenditure levels are better known in 2004. Poor weather conditions could affect the $240,000 in revenue that is expected to be generated by the outdoor pool. Outdoor pool revenue was only $160,000 in 2003. The shortfall in revenue is projected to continue in 2004, with revenue from the outdoor pool likely to be at least $60,000 short of budget. It is currently estimated that Recreation Fund revenue will be $20,000 below budget
Revenue Source 1st Qtr. % of budget 1st Qtr. % of budget
Taxes $ 580,202 46.5 $ 367,267 39.8
Service Charges 34,788 36.7 28,760 30.3
Miscellaneous 0 0.0 0 0.0
Total Revenue 614,990 45.8 396,027 38.9
Expenditures
Public Transportation 230,105 11.4 287,417 13.1
Total Expenditures 230,105 11.4 287,417 13.1
Revenues over Expenditures 384,885 108,610
The activities of the Public Transportation division are divided into two funds. The Public Transportation Fund is primarily financed with property taxes. Property taxes are used as matching funds for transportation grants. The second fund is used to record grant revenue and related expenditures. With the large January distribution of property taxes, taxes are over 46% of budget. Fare box revenue was budgeted at $95,000 for the year. In 2003, fare box revenue was just over $103,000. Almost 75% of the Transportation Fund budget is the contract with MV Transportation. As a result, unless there are changes to the scope of services of the contract, expenditures in the fund should be predictable.
Future Issues-The Public Transportation levy was restored by .56 mills in 2004. The levy was reduced by 1.27 mills in 2003. Because the transit system did not incur significant expenses until late 2000, but property taxes were collected for the full year, the fund had a $1.9 million fund balance at the end of 2002. The estimated year end balance for 2003 is $1.5 million. It appears that the expenditure for the MV Transportation contract will be at least $800,000 less than budgeted for 2004 resulting in expenditures significantly below budget. The Public Transportation Advisory Committee (PTAC) is currently evaluating changing some of the existing routes and will be asking for a study session later this year to discuss PTAC recommendations.
Water/Sewer % Sanitation % Storm % Golf % Revenue Sources
Service Charges $5,211,508 26.0 $1,977,961 26.3 $ 651,998 27.2 $ 91,896 7.7
Interest 130,709 32.2 20,832 34.7 9,786 97.9 53 1.8
Miscellaneous 28,685 37,146 86.9 0 420
Total Revenues 5,833,402 28.9 2,035,939 26.7 661,784 27.5 92,369 7.8
Expenses
Net Income (389,357) (18,225) 392,112 (136,710)
2003
Water/Sewer % Sanitation % Storm % Golf % Revenue Sources
Service Charges $4,959,199 24.2 $1,901,122 26.2 $ 623,240 27.1 $ 79,927 6.8
Interest 152,165 42.8 16,092 24.8 4,809 48.1 475
Miscellaneous 71,851 25,843 86.1 10,050 1,058
Total Revenues 5,183,215 24.9 1,943,057 26.4 638,099 27.6 81,460 6.9
Expenses
Net Income (118,864) 107,904 191,374 (148,084)
The first quarter operating results of the major enterprise funds are shown above. With the exception of the Golf Course Fund, all of the funds revenues met or exceeded 25% for the quarter. The Golf Course Fund had revenues below expectations in 2003. The revenue in 2004 shows some growth with first quarter revenues above the same quarter last year. The first quarter is the slowest in terms of rounds played. Interest earnings were very conservatively budgeted in the enterprise funds, with the exception of the Golf Course Fund. For example, interest earnings in the Water and Sewer Fund were $22,000 less than the first quarter of 2003 yet exceeds 30% of budget. The other enterprise funds showed an increase in interest earnings. Expenses for the various funds were all less than 25% of budget. The Storm Water Fund has a significant amount budgeted for capital projects to be started in the second or third quarter. The negative net income in Water & Sewer should be covered as warmer weather allows for lawn watering. The Golf Course Fund loss narrowed by $12,000 compared to the first quarter of 2003.
Future Issues- The Water & Sewer Fund and Golf Fund revenues are very dependent upon the weather. A dry, hot summer will greatly increase water revenue due to lawn watering. A cool, wet summer will reduce revenue in both funds. Because of an increasing debt load to pay for large capital projects, especially the wastewater treatment plant expansion, it is important that Lawrence not experience successive cool, wet summers. A cost of service and rate study for the Water and Sewer Fund is currently being completed by Black & Veatch.. Sanitation and storm water revenues are more predictable because revenues are not dependent upon weather conditions. The operating results of the golf course remain a concern. Revenue in 2003 was less than $883,000, while a total of $1,178,000 was budgeted. A total of $1,189,000 is budgeted for revenue in 2004. With fees raised modestly, the additional revenue will have to be generated by an increase in the number of rounds played. A 20% increase in rounds played is not considered likely. Golf course expenses will need to be held below budget in 2004 for the fund to avoid running out of cash. A transfer of $150,000 from the City’s share of the County sales tax funds was made in 2003 to provide the fund working capital.
Investments
As of March 31, 2004, the City of Lawrence had over $102 million in cash and investments. Approximately 48% of our portfolio was invested in certificates of deposits, 39% in government agencies and 11% was in cash. The City’s investment policy limits the portfolio to a maximum of 30% in any one financial institution’s certificates of deposit. The City’s certificates of deposit are with Commerce Bank, Corner Bank, and Central National Bank. The average rate of return on our investments during the quarter was 1.99%.
Nearly 70% of the City’s portfolio has an original maturity of less than six months. Approximately 7% had a maturity longer than twenty-four months. The City no longer purchases callable agencies due to a concern that interest rates may rise in the near future. Both Commerce Bank and Corner Bank are at or near the 30% maximum.
Debt Issues
On April 27th the City Commission approved the sale of $10.1 million in temporary notes and $3.5 million in general obligation bonds. The City currently has $27.3 million in temporary notes that mature on September 1, 2004. If all of these notes are refinanced with bonds, the City could have $90 million outstanding in general obligations as of the end of 2004 compared to $66.3 million at the end of 2003. The statutory limitation on the City’s outstanding general obligation debt is over $222 million. The amount of general obligation debt could be reduced by approximately $7.5 million if it is decided to issue storm water revenue bonds to pay for the storm water projects instead of general obligation bonds. In addition, a substantial amount of the current temporary note financing is for benefit district projects and will retired with special assessments on the benefiting property. Other large projects financed with temporary notes are W. 6th at $4.6 million and $1.8 million in airport improvements. Future projects still needing to be financed are Fire Stations 4 & 5 which are estimated at over $7 million.
Conclusions
For the first three months of 2004, the financial results appear to be improving when compared to 2003. Major revenue sources are showing growth. Among the major revenue sources, only interest revenue will not reach budgeted levels in the General Fund due to the continuation of low short-term rates. It is currently estimated that General Fund revenue will be approximately $2.5 million more than budget. It appears likely that revenues will exceed expenditures by at least $700,000 in 2004. General Fund capital outlay expenditures reduced by more the $700,000 and will be expended from the Equipment Reserve Fund in 2004. It is anticipated that these expenditures will need to return to the General Fund in 2005 to avoid depleting the reserve fund.
In addition, it appears that Golf Course Fund revenue will again be less than budgeted. A reduction in planned Golf Course expenditures will be required. The Recreation Fund may fall slightly short of budgeted revenue, but it is too soon to predict accurately. No department or fund exceeded anticipated expenditure levels, after adjusting for timing and encumbrances. Two items that appear to have an adverse impact on the budget are gasoline prices and the legal expenses. The price of gasoline remains high and may go higher. It is currently projected that higher gasoline prices may result in approximately $100,000 more being spent for gasoline than was anticipated in the 2004 budget. Litigation costs are already equal the amount budgeted for legal expenses for the year.
The 2005 General Fund budget will be difficult to balance between revenues and expenditures. New positions will be added in late 2005 to staff the new Fire Station. In addition, the return of over $700,000 in capital outlay expenses may be necessary to prevent depletion of the Equipment Reserve Fund. Another future consideration is the loss of grant funding for the Police Department Traffic unit and School Resource Officer positions.