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10-01-2019 Quarterly Finance ReportMajor Revenues—10 Year History This issue Major Revenues P.1 2018 Audit P.2 Future Challenges P.3 Savings From SCORE P.3 Upcoming Events P.4 CITY’S FINANCIAL HEALTH Just as we check a person’s blood pressure, sugar level in the blood and other items to determine how healthy the individual is, we can also measure a city’s financial condition by the growth in its revenue source compared to its spending. The City of Federal Way is exploring many other options to have adequate sus- tainable revenues to fund its opera- tions and the community needs. The City is spending within its revenue sources and maintaining Council’s required minimum fund balance. The city currently spends more than it brings in for Prop !. OTHER REVENUE SOURCES In addition to the major revenues dis- cussed above the city has:  Admission tax that grew from $547k in 2017 to $867k in 2018, a growth of 56% due to the council removing the cap on the tax.  Traffic Safety that grew from $2.03 million in 2017 to $2.10 million in 2018 resulting a modest growth of 3.4%. Quarterly Financial Report For the Quarter Ending June 30, 2019 JUNE 2019  Sales tax increased by 39.2% over a 10-year period which is average of 3.92% per year. There was a sales tax slight decrease in 2017 due to end of major constructions reducing sales tax on construction activities. There was a modest increase on services and retail sales tax, and the PAEC came online at the end of 2017. THIS REVENUE HAS GROWN OVER THE YEARS BUT NOT AS WELL AS OTHER CITIES.  Utility tax had a 13.51% decrease over the same period resulting in annual aver- age decrease of 1.35%. The major de- creases were in regular land phone and cellular phone. Regular land phone de- creased from $1.18 million in 2009 to $0.74 million in 2018, that is 37.3% de- crease over a ten-year period. Cellular phone decreased by 57.83% over the same time. Gas had a similar decrease of 32.8% due to gas prices and climate change. Prop 1 expenses have grown during this same period. 0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sales tax Utility tax Property tax REET tax  Property tax had a 14.36% in- crease over the same period re- sulting in a 1.44% average annual growth. According to the state law, city’s annual property tax growth other than new construction is capped at 1%. The excess of 1% is due to the new construction. Oth- er communities in the area saw significant property Tax revenue growth during these periods, and the City of Federal Way had high number of nontaxable property construction during this time like schools, affordable housing, and the PAEC.  REET tax had a good run of 196.8% over the period and gave the City about 20% annual growth from the low of the recession time to the high of economic boom. Things are cooling off now. ABOUT THE AUDIT Audit is an independent examination of city’s operation which involves performing procedures to obtain evidence about the City’s uses of pub- lic resources, compliance with state laws and regulations in accordance with general auditing practices, audit does not examine every transac- tion, activity, or area. Management is responsible for ensuring compli- ance and adequate safeguarding of public resources, compliance with state laws and regulations and its own policies and procedures and internal controls over such matters. Audit of 2018 Financial Report of the City. Washington State Auditor’s Office (SAO) has completed the audit of City of Federal Way’s financial report in accordance with RCW 43.09.230 and issued unmodified opinion. RCW 43.09.230 states: “The state auditor shall require from every local government financial reports covering the full period of each fiscal year, in accordance with the forms and methods prescribed by the state auditor, which shall be uniform for all ac- counts of the same class. Such reports shall be prepared, certified, and filed with the state auditor within one hundred fifty days after the close of each fiscal year. The reports shall contain accurate statements, in summarized form, of all collections made, or receipts received, by the officers from all sources, all accounts due the pub- lic treasury, but not collected; and all ex- penditures for every purpose, and by what authority authorized; and also : (1) A statement of all costs of ownership and operation, and of all income, of each and every public service industry owned and oper- ated by a local govern- ment; (2) a statement of the entire public debt of every local government service indus- try owned and operated by a local government; (3) classified statement of all receipts and expenditures by any public institution; and (4) a statement of all expend- itures for labor relations consultants, with the identification of each con- sultant, compensation, and the terms and condi- tions of each agreement; together with such other information as may be required by the state au- ditor. The reports shall be certified as to their cor- rectness by the state audi- tor, the state auditor’s deputies, or other person authorized to make such cer- tification. Their substance shall be published in an annu- al volume of comparative sta- tistics at the expense of the state as public document.” Washington State Auditor’s Office conducts three differ- ent audits of City’s operations annually and they are: 1) Financial reports—audits the financial report to determines its accuracy, and compliance to the established reporting standards. 2) Single audit-audits all ma- jor grants during the year. OMB Circular A-133 pre- scribed a threshold of $300,000 to distinguish between Type A and Type B programs. 3) Accountability-audits the city’s compliance with state laws and regula- tions, and its own policies and procedures. Future Challenges The city will realize $2.1 million in savings by leaving SCORE. The $2.1 million is the difference between the SCORE cost in 2018 and what the cost will be in 2020. As Mayor Ferrell promised he will spend a substantial amount to bring em- ployees’ salaries up to market rate and increase the staff level in some areas to handle the workload level. He also mentioned that we need to know how far off we are and devel- op a plan to bring it to where it needs to be. We may not be able to get there in one year but he is com- mitted to start working toward it. With the approval of the Council, he awarded the contract to do sala- ry study and workload study with the hope of having the results around January 2020. A portion of the savings will be set aside for the annual COLA. A budget amendment will be re- quired to implement Mayor’s rec- ommendation and he plans to im- plement the results of the study based on the following golden rules: (1) understanding the total cost, (2) determine the salary per- centile the city of Federal Way needs to be, (3) establish path to get there (1 to 3 years), and (4) maintain adequate fund to pay for COLA while implementing the sala- ry study result.  Sustainable revenue. As shown on the first page, our utility tax on land phone and cellular phone have de- creased drastically over the past ten years. Decrease in these areas are also affecting Prop 1 funding. Prop 1 fund is exclusively for fund- ing salaries in police, court, law, and community development. Un- fortunately, despite the decrease our salary and benefit expenses have grown more than 5% over the past 5 years. As the economy gets better, the cost will keep increasing and we need to ensure that the city’s unrestricted revenue contin- ues to grow with it.  Manage expenses. Effective gov- ernment is not just about increas- ing revenue to provide the needed services, we should con- tinue to look for efficien- cy in how we provide our services. We need to constantly evaluate the priority of the communi- ty and provide the ser- vices they want at rea- sonable costs. On manag- ing costs, the City of Fed- eral Way has less staff, and pay our employees less com- pared to comparable cities.  Citizens/Legislative impact on city’s ability to generate adequate revenue to fund its service. *Marijuana revenue sharing. State is currently paying 30% instead of 40%. * Property tax cap at 1%. The cost is rising faster than 1% * Pension cost. State removed $300 m from LEOFF 2 pension fund in 2019 the employers will have to pay more when the pension fund is short. *License tab. Initiative limiting the license tab fee will limit city’s power to use Transportation Benefit District to fund transportation program.  Utility tax extension to water and sewer. The City extended utility tax to water and sewer ser- vices on March 20, 2018 to take effect on March 28, 2018. The authority of the city to levy this tax is currently being challenged in court and we are awaiting the supreme court decision. The city expects about $1 m in revenue from this source and expects a decision with a year or two.  Rising labor cost. The salary and benefits are growing faster than our revenue sources and we are having to compete with our neighboring cities for staff. Savings from SCORE Gas, Phone, and Cell phone decreased greatly over the past ten years.  The gas price continues to come down compared to the early 2000 resulting in lower utility tax, also warmer weather resulting in less use of gas for heating.  Revenue from land phone contin- ue to decrease due to continue decline in its use. Most people no longer have land phone when they have cell phone.  Cell phone revenue is decreasing because of transient nature of our residents. Most people pay their bills electronically without disclos- ing where they currently reside or the bill is paid by someone else living in another city. It may also be because of Weyerhaeuser gradually reducing its workforce. Utility Tax 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 2018 2009  Growth of Property tax and Sales tax base. City of Federal Way has more non taxable prop- erties as a ratio of property value than most neighboring cities. The ratio of commercial properties to the total value is less than our neighboring cities. Outstanding Debt Debt and Debt Capacity City’s debt capacity as of the end of 2018 were as follows: No Vote required Capacity $140.58 m Outstanding Bonds $ 31.50 m Excess Capacity $109.08 m With vote Capacity $819.54 m Balanced Budget means that operating revenues equal or exceed operating expenses. Council’s policy requires the city to maintain a minimum fund balance in certain funds. The city’s budget and the it’s opera- tion are in line with this policy. We made our rate presentation to Moody’s Investors Service in San Francisco on May 17, 2019 with the plan of selling the bond in June in line with SCORE schedule. As of July 29, 2019 the earliest time SCORE will be able to call the bonds for refinancing is October 2019. SCORE has to call the bonds before we can refinance. 2019/2020 Budget Amendment—October 2019 Refinance of SCORE Bonds—Before the end of the year Starting in October, businesses will be able to renew or register their business through the state. This is one-stop shopping to be able to renew businesses for City of Federal Way licenses and other licenses throughout the state. If a busi- ness is already registered with the state there is no additional cost. For a busi- ness that is not currently enrolled with the state there will be an annual $11.00 fee. A business will not have to come to City Hall and owners can renew all their business licenses of multiple cities all at the same location at any time without any additional fee. Business Registration through the state—October 2019 Upcoming Events FINANCE DEPARTMENT 33325 8TH Avenue South Federal Way, WA 98003 253.835.2527 ph www.cityoffederalway.com RCW 34A.34.130 Budget-Mid-biennial review and modification. The legislative authority of a city having adopted the provisions of this chapter shall provide by ordinance for a mid-biennial review and modification of the bien- nial budget. The ordinance shall provide that such review and modification shall occur no sooner than eight months after the start nor later than conclusion of the first year of the fiscal biennium. The chief administrative officer shall prepare the proposed budget modification and shall provide for publication of notice of hear- ings consistent with publication of notices for adoption of other city ordinances. City ordinances providing for a mid-biennium review and modification shall es- tablish procedures for distribution of the proposed modification to members of the city legislative authority, procedures for making copies available to the public, and shall provide for public hearings on the proposed budget modification. The budget modification shall be by ordinance approved in the same manner as are other ordinances of the city. A complete copy of the budget modification as adopted shall be transmitted to the state auditor and to the AWC. Balance Budget Desc. O. Amt (M) Balance (M) Annual Pay. Bonds FWCC 12.42 9.89 0.52 Target 6.00 6.00 0.19 SCORE 15.52 12.89 0.43 HUD 3.03 2.71 0.16 Inter. F PAEC C. 13.00 6.76 PAEC O. 0.50 0.50 CDBG 0.40 0.22 Transp. 2.50 0.00 HUD Bond annual payment is made from annual allocation from HUD.