Staff Report 4.1 May 6, 2020Fiscal Year 2020-21 Proposed Budget

Analysis

Background  

• The Cortese-Knox-Hertzberg Act requires LAFCO to establish its own independent budget, adopting a Proposed Budget by May 1 and a Final Budget by June 15 of each year. State law directs that at a minimum, the proposed and final budget shall be equal to the budget adopted to the previous year unless the commission finds that reduced staffing or program costs will nevertheless allow the commission to fulfill (its) purposes and programs….”  

• Historically, the Commission has considered its Proposed Budget at its April meeting and the Final Budget at its June meeting, subsequent to the Budget Committees discussion with staff and after publication of notices of public hearings. Due to the order of the Health Officer of the County of Sonoma for all residents to shelter in place to minimize the spread of COVID-19 caused by the coronavirus, the Commissions April meeting did not occur. The Commissions consideration and review of the Fiscal Year 2020-21 Proposed Budget and public hearing was re-scheduled to May 6.  

• Members of the Budget Committee met with staff on March 4, 2020, to discuss staffs preliminary proposal and to provide feedback. After discussion, the Committee recommended a preliminary budget substantially similar to the Proposed Budget that is attached for Commissionersinformation; a few year-end projections relating to the current fiscal year have been changed due to updated information. Since the Budget Committee meeting, staff has developed alternatives for funding the budget that the Commission may wish to consider.  

• The Commissions expenditures consist of Salaries and Benefits and Services and Supplies, with the former covering the largest segment of the budget. Revenues consist primarily of apportionments from funding agencies: the County, cities, and independent special districts. Other revenues include interest from invested funds and application fees, which are tracked but not budgeted.  

• The Commission also maintains a Fund Balance used at the Commissions discretion.

Organization of Report

This report on the Fiscal Year 2020-21 Proposed Budget is organized into five sections that focus on:  

• Organizational Assessment and Its Potential Impact;
• Projected 2019-20 Year-End Expenditures and Revenues;
• Work Plan: 2019-20 Accomplishments and 2020-21 Goals
• Fiscal Year 2020-21 Proposed Expenditures; and
• Funding the Fiscal Year 2020-21 Budget  

Attached to this staff report, Commissioners will find a draft resolution for adoption of the Proposed Budget (Attachment 1) and two two-page spreadsheets. The first page of each set displays Expenditures and the second page, Revenues. Both spreadsheets show the following:  

• Current-year Adopted Budget,
• Actuals through the end of the current-year second quarter;
• Projected Fiscal Year 2019-20 year-end expenditures and revenues;
• Fiscal Year 2020-21 Proposed Budget;
• Amount of change between the Fiscal Year 2020-21 Proposed Budget and the Fiscal Year 2019-20 Adopted Budget; and
• Percent change between the Fiscal Year 2020-21 Proposed Budget and the Fiscal Year 2019-20 Adopted Budget  

On the second (Revenue) page of Attachment 2, the overall agency apportionments from the current-year Adopted Budget to the Fiscal Year 2020-21 Proposed Budget reflect an increase of three percent, as recommended by the Budget Committee. The Revenue page of Attachment 3 reflects no change from the current year in overall agency apportionments, which is proposed as an alternative recommendation for the Commission to consider. Recommended and alternative actions are discussed later in the staff report.  

Organizational Assessment  

At its February 2020 meeting, the Commission authorized the Executive Officer to initiate a contract with Koff & Associates to conduct an organizational assessment of Sonoma LAFCO, including providing recommendations on appropriate staffing levels  

• Representatives of Koff met with staff on March 12 to kick off the study. Staff had hoped that the results of the study would be available prior to the Commissions consideration of the 2020-21 Final Budget on June 3. Even prior to the events of the last six weeks with regard to sheltering in place and limitations on work/work flow, that projection was likely optimistic. The timeline presented by the firm projected a 12-14-week completion period before a report and recommendations could be submitted to the Commission. With the additional delay due to restrictions associated with the coronavirus pandemic, that end date will be pushed even further, most likely into the next fiscal year.  

• Given the unknowns about whether a change in the staffing level will be recommended and the action which the Commission will take, staff is presenting, with the Budget Committees concurrence, a Fiscal Year 2020-21 Proposed Budget that projects staffing at the current level of 3.2 Full-Time Equivalent (FTE) positions.  

• Staff will work closely with the organizational consultant and will report to the Commission over the next months on the progress of the study. Should the consultant recommend changes in staffing levels and should the Commission accept those recommendations or make other determinations, staff will coordinate efforts with the County Administrators Office and the Human Resources Department to achieve the desired results.  

Projected 2019-20 Year-End Expenditures and Revenues  

To better understand recommendations for Fiscal Year 2020-21, staff has prepared projections of expenditures and revenues through the end of the current fiscal year. With just less than 20 percent of the fiscal year remaining and with the impact of the coronavirus on activities, billings, applications, etc. still unknown at this time, these numbers are preliminary. It should be noted that staff has projected expenditures liberally and revenues conservatively, in an effort to reduce longer-term uncertainty.  

At this time, staff is projecting year-end expenditures of $814,895. This amount is about $52,600, or about 6.5 percent, beyond the adopted budget of $762,295. The projected greater-than-budgeted expenditures are explained below.  

Year-End Projections: Salaries and Benefits  

Overall, salaries and benefits are preliminarily expected to be expended at $631,050, an increase of $18,420, or about three percent, over the budgeted $612,630.  

• Staff projects that most accounts will generally be in line with budgeted line items. Health Insurance (Account 50301) is projected to increase beyond the budgeted amount reflecting a staff members decision, mid-year, to start receiving County health benefits instead of maintaining a previous waiver of those benefits, adding to the cost. The bulk of the increase reflects anticipated payment of about $25,000 for accumulated vacation hours to the Assistant Executive Officer upon her retirement.  

Year-End Projections: Services and Supplies  

The Fiscal Year 2019-20 budget for this category is $149,665. Year-end expenditures are anticipated, at this time, to be $183,845, $34,180, or about 23 percent, above budget.  

In this category, while most accounts are expected to be expended at or below the budgeted level, three accounts appear to reflect the bulk of the projected overage:  

• -Account 51206 (Auditing Services) will reflect an expenditure of $6,570, which covered the majority of the cost of an outside audit for the period July 1, 2016 – June 30, 2018. As indicated in previous quarterly reports to the Commission, the audit was initiated near the end of Fiscal Year 2018-19, and invoicing and payment extended into the current fiscal year.  

• -Account 51249 (Professional Services) could be expended as high as $40,000, well beyond the $10,000 budgeted. Typical expenditures in this account cover payments to the State Board of Equalization for its work relating to processing boundary changes. Through the second quarter, the submittal of boundary changes has included several relating to fire reorganizations whose fees ranged from $3,000 - $5,000 each. Although the agencies initiating the proposals pay these costs as part of Fees for Service (Revenue Account 45061), the actual payment is charged to this expenditure account. Although the Commission approved two additional fire reorganizations in March, it is unlikely that processing with the State Board will occur during this fiscal year (should the level of protest be insufficient for completion of the proposals). Additionally, the cost of translation into Spanish of notices of hearing for the fire district reorganizations and protest hearings will be charged to this account.  

Staff had additionally anticipated that, by the end of this fiscal year, at least some payments to consultants conducting municipal service reviews (for Timber Cove Water District and the Town of Windsor/Windsor Water District) and the organizational assessment referred to above (Koff & Associates) would be made. Although that level of expenditure is projected as $40,000, it might not reach that due to the more recent developments associated with the coronavirus. More payments would then extend into 2020-21. Commissioners may recall the discussion, last year, that Fund Balance monies would be allocated and available for consultant work. A specific amount for consultant studies had not been included in the Fiscal Year 2019-20 Adopted Budget because start dates for the contracts had not been finalized when the budget was developed.  

• -Account 51301 (Legal Notices) is projected to be expended at $6,000 compared to the budgeted $5,000. This reflects the need to publish 1/8-page notices of hearing in a newspaper of general circulation to meet statutory requirements when more than 1,000 owners and voters must be notified of an upcoming Commission hearing on the merits of a proposal or a protest. This year, these have been and will continue to be particularly associated with the fire district reorganizations. Also, due to the cancellation of the April meeting and determination to conduct the May meeting via teleconference, notices of hearing were re-noticed in the Press-Democrat.  

• -Account 51915 (Printing) is projected to be expended at $5,000, $4,500 beyond the budgeted $500. This reflects the cost of printing notices, in English and Spanish, of protest hearing for proposals from the Sonoma County Fire District and Glen Ellen Fire Protection District for reorganizations which the Commission approved in March. Pursuant to state law, when a reorganization would result in the extension of a previously authorized tax to the affected territory, notice of the protest hearing must be mailed to each landowner. Staff contracted with a local company to print staff-written notices of hearing, stuff envelopes, and prepare the mailing, using owner lists submitted by the applicant agencies; costs are charged to the agencies.  

Fiscal Year 2019-20 Year-End Projections: Use of Fund Balance  

At the end of Fiscal Year 2018-19, $10,274 in Fund Balance monies were needed to balance that year’s budget compared to the $124,000 that had been originally projected when the Commission approved the budget. As a result, the Commission’s Fund Balance at the end of 2018-19 and into the beginning of FY 2019-20 was $487,684. A table later in this report shows Fund Balance levels since the Commission became independent in 2001.  

When the Commission reviewed and considered the 2019-20 budget at hearings last April and June, it agreed with the recommendation of the Budget Committee and staff to use Fund Balance monies to help defray some of what were expected to be expenditure increases. Funding for outside consultants to conduct municipal service reviews and/or special studies was expected to come from the Fund Balance.  

The 2019-20 budget, as adopted, anticipated use of $55,000 in Fund Balance monies to balance expenditures. The Commission approved a 4.9 percent increase in agency apportionments but that was significantly lower than the projected 13 percent increase if no Fund Balance monies were used.  

At this time, based on preliminary numbers as identified, staff projects that, to balance anticipated revenues ($777,295 – from agency apportionments, interest, and processing fees) with projected expenditures of $814,895, $37,600 will be needed from the Fund Balance, leaving an available Fund Balance of about $450,000.  

The Auditor’s Office will not allow the total level of expenditures to exceed the level of revenue received. Thus, should staff’s projections hold, staff will request that the Commission approve a Budget Adjustment at or near the end of Fiscal Year 2019-20 to transfer funds from the Fund Balance; this must be formal action of the Commission. As indicated above, the amount of funds transferred could vary from the current projection. 

Work Plan for 2020-21  

Staff anticipates that the following major projects will be part of the work plan for the next fiscal year, utilizing staff and possibly other resources:  

• Municipal Service Review and Sphere of Influence study for North County (Region 6) fire and emergency services agencies
• Municipal Service Review and Sphere of Influence study for south County Fire and Emergency Service Agencies (Ranch Adobe FPD and portions of County Service Area 40 served by four Volunteer Fire Companies)
• Dissolution of the Palm Drive Health Care District
• Potential Municipal Service Reviews for the City of Petaluma, and the Sonoma and Gold Ridge Resource Conservation Districts
• Activities to support the potential formation of a District to provide septic system monitoring services in the Russian River area  

Fiscal Year 2020-21 Proposed Budget  

At this time, the Budget Committee and staff are recommending an expenditure budget for Fiscal Year 2020-21 of $845,510, which is an increase of $83,215, almost 11 percent over the current-year budget of $762,295.  

Both Salaries and Benefits and Services and Supplies categories would reflect increases. Specific line-item details are described below.  

Fiscal Year 2020-21 Proposed: Salaries and Benefits  

The Proposed Budget proposes expenditures of $652,295 for staff salaries and benefits and Commission stipends. This is an increase of $39,665, or about 6.5 percent, over the current-year budget of $612,630.  

In accordance with a Memorandum of Understanding between LAFCO and the County, Commission staff are County employees who work only for Sonoma LAFCO. As indicated earlier in this report, because the results of the organizational assessment and possible adjustment of staffing are not known at this time, 2020-21 staffing is projected at the same level as in the current year: 3.20 Full-time Equivalent (FTE) positions. These are:  

• FTE LAFCO Executive Officer
• .80 FTE Assistant Executive Officer
• .90 FTE Analyst I
• .50 FTE Commission Clerk  

Given this level of staffing, three continuing accounts will reflect the bulk of the greater expenditure, with one new account projected as well. The continuing accounts are described below:  

• -Account 50101 (Regular Wages) is projected at $362,200, an increase of $7,885, over the current-year adopted budget. Based on actions taken last year, the County has scheduled a three percent cost-of-living (COLA) increase to take effect in June 2020 and a second increase in June 2021. The only control LAFCO has over this account is with regard to the staffing level determined by the Commission.  

• -Account 50201/04 (Retirement) is projected to increase by a little more than seven percent, or $10,440, from $141,840 to $152,280. The projections reflect the County’s analysis of future liabilities, after conferring with the Sonoma County Employees Retirement Association (SCERA) as well as the County’s actuary. LAFCO does not control budgeted amounts in this account, which are a function of staffing levels.   

• -Account 50301 (Health Insurance) is projected at $41,590, a 40 percent increase over the current-year $29,680. In its negotiations with bargaining units over the last several years, the County committed to contributing a greater percentage of the cost of health insurance. As a result, the expenditure for health insurance has risen steadily and will for next year. For 2020-21, the projected amount also anticipates a full year of health insurance benefits for a staff member who recently opted in for available coverage. It should be noted that, if staffing levels are adjusted subsequent to the organizational assessment and Commission’s determination, the allocation for health insurance could change.  

• A new account under the Salaries and Benefits category has been added, as of Fiscal Year 2020-21: Unfunded Liability (technically Unfunded Actuarial Accrued Liability or UAAL). Commissioners might recall that at the December 2019 meeting, staff reported that the County Board of Supervisors adopted a new financial policy related to cost recovery as part of its review of the Countys Fiscal Year 2019-20 budget last summer. Under that policy, the County expects full cost recovery for any portion of services provided by the County, including recovery of full future retirement costs of County employees who act as employees for outside entities, such as LAFCO, which has Memorandum of Understanding with the County.  

• Staff had been notified that supplemental unfunded liability” payments would be initially assessed in Fiscal Year 2020-21, with the amount designated for the year at $7,935. Although staff had initiated conversations with the County Administrators Office staff on this subject in March, further discussions have been precluded by the recent events associated with the coronavirus pandemic. Since staff has not been able to confirm the amount or how the County will assess the amount (as a lump sum in a separate line-item or as a regular charge in each payroll period), the $7,935 is included until more information is available.  

Fiscal Year 2020-21 Proposed: Services and Supplies  

The 2020-21 Proposed Budget projects Services and Supplies accounts at $193,215, an increase of $43,550, or 29 percent over the current-year budget of $149,665.  

Explanations for those accounts where significant changes from the current-year Adopted Budget are anticipated are provided below:  

• -Account 51206 (Auditing Services) is projected at $9,000 in anticipation of initiation of a bi-annual audit covering the years July 1, 2018 – June 30, 2020. The previous two-year audit - whose costs were paid in both 2018-19 and the current year - cost $8,400.   

• -Account 51207 (Auditor Accounting Services) is projected at $7,000, an increase of $2,000 over the current-year budget of $5,000. This is based on staff’s experience over the last several audit period cycles when the Auditor’s Office staff has needed to complete annual financial reports, not conducted in off years, in preparation for the outside audit.  

• -Account 51249 (Professional Services) is increased from the current-year $10,000 – typically used for payment to the State Board of Equalization for boundary change processing, although also anticipated for consultant fees this year, as indicated above - to $35,000, to cover additional costs associated with consultant work on MSRs and special studies that are being initiated this fiscal year and in anticipation of further studies.  

• -Account 51421 (Rents & Leases) is projected at $43,000, a slight increase over the current-year $42,000, to cover the incremental increase in monthly rental for leasing office space for the Commission at a privately-owned building in downtown Santa Rosa as well as the cost of a staff member’s garage parking not covered in the lease contract.  

• -Account 51901/02 (Communications) is projected at $3,100, an increase of $500 over the current-year $2,600, to more accurately reflect the actual number of telephone lines for which the Commission is charged by the County.  

• -Account 51904 (Information Systems-Data Processing) is increased to $25,000, from the current-year $22,100, to reflect more accurately, as above, the number of computer connections for which LAFCO is charged by the County.  

• -Account 52091 (Memberships) is budgeted at $8,115 for CALAFCO membership. As staff reported after the CALAFCO Annual Conference in Sacramento last October, the CALAFCO board of directors had reported concerns about the organization’s structural financial deficit and the need to revise the dues structure to better sustain the Association. After much debate and discussion at the Annual Business Meeting, the membership approved a revised dues structure that used a population base of 700,000 and a per capita rate of 0.0138 to achieve a dues amount for each LAFCO.

However, in response to complaints from a number of LAFCOs that the methodology negatively impacted more rural and some suburban counties, the CALAFCO board agreed to re-visit the issue and report on further refinements at the 2020 Annual Conference. The amount included in the 2020-21 budget for Sonoma LAFCO is derived from CALAFCO calculations from last fall. Staff will monitor all communications with CALAFCO on this subject and report to the Commission should any changes be proposed.  

Revenues and Fund Balance  

As Commissioners are aware, funding of the Commission’s operations comes primarily from the County, the cities, and the independent special districts, in accordance with the Cortese-Knox-Hertzberg Act. The County portion is 40 percent; the cities, as a whole, pay 40 percent; and the independent special districts, as a whole, pay 20 percent. (An individual agency’s apportionment is based on the annual revenue reported to the State Controller’s Office, so agency apportionments may vary annually even if the overall category apportionment remains the same.)  

Revenue also accrues through interest from the County’s investment of Commission funds. For 2020-21, staff is conservatively projecting interest revenue at $10,000 although acknowledging that actual interest payments have exceeded that in the last several years (due to the accumulated level of Fund Balance.)  

Finally, those who seek LAFCO action pay application fees. Fee revenue is tracked during the year but is not budgeted due to the difficulty in projecting the number and types of applications that will be submitted. At year-end, fee revenue rolls over into the Fund Balance.  

Fund Balance  

• Since LAFCO became an independent agency in 2001, the Commission has maintained undesignated, unreserved funds to meet unexpected or unforeseen needs of the Commission, to be used at the Commissions discretion. In years past, these monies have been used for various purposes, when needed, such as balancing the Commissions budget at the end of a fiscal year, funding a move of the LAFCO office (three times), or providing credits to funding agencies to reduce apportionments.  

Over the years, the fund balance amount has varied greatly, as is shown below.  

Historical Fund Balance Amounts  

The accumulation, especially over the last several years, has resulted from less-than-expected expenditures and greater-than-anticipated revenues. The Fund Balance at the end of 2018-19/beginning of the current fiscal year is almost $487,700.  

Budget Committee Discussion and Recommendation  

Staff presented and the Budget Committee discussed three options for funding the Commissions 2020-21 operations, all of which involved agency apportionments. Staff offered such options because agency apportionments represent the bulk of the funding for Commission operations, and other budgeted revenue sources do not generate sufficient income so as to offer necessary flexibility

• Option 1 proposed an increase of five percent to overall apportionments and use of Fund Balance monies
• Option 2 proposed an increase of three percent in overall apportionments and greater use of Fund Balance monies.
• Option 3 proposed no increase in the overall apportionment level from the current-year.  

Subsequent to discussion, the Budget Committee recommended that the Commission adopt a 2020-21 budget that would increase agency apportionments by three percent and use Fund Balance monies to fill the gap between projected revenues and expenditures. Without use of Fund Balance monies for that purpose, the increase in overall agency apportionments would be 19.5 percent, which is unacceptable.  

In terms of real dollars, as shown in the table below, with the plus three percent option, the County’s apportionment would increase by $8,392, to $288,110; the apportionment for all the cities, as a whole, would also increase by $8,392, to $288,110, and the apportionment for all the independent special districts, as whole, would increase by $4,196, to $144,055. As noted, the County and the cities, as a whole, contribute 40 percent of the Commission’s budget and the independent special districts, as a whole, provide 20 percent.  

With the use of $115,236 of the Commission’s Fund Balance to help balance expenditures, $334,348 of available Fund Balance monies would remain available, assuming that staff’s projections for year-end expenditures hold.  

• Regarding apportionments for cities and special districts, it should be noted that, since each agencys apportionment is a function of the percentage of the total revenues reported to the State Controllers Office, the apportionment for each agency could increase or decrease in Fiscal Year 2020-21.  

Staff also notes that, if, as a result of the organizational assessment recommendations, the Commission determines to adjust staffing levels with different salaries and benefits costs, such change is likely to occur after adoption of the 2020-21 Final Budget in June. As a result, funds to cover the cost for at least that year would not be included in the adopted budget amount, although charges would accrue to salary/benefit amounts during the year; any overage that might occur to the Commission’s bottom-line expenditures would need to be offset through a Budget Adjustment taking funds from the Fund Balance before the end of Fiscal Year 2020-21. 

Recommendation 

The Budget Committee and staff recommend that the Commission adopt a Fiscal Year 2020-21 Proposed Budget of $845,510, which would be funded by a three percent increase in agency apportionments and supplemented by Fund Balance monies in the amount of $115,236 to balance expenditures.  

Staff recommends that the Commission take the following actions at its May 6, 2020, meeting:  

• 1.Conduct a public hearing on the Fiscal Year 2020-21 Proposed Budget, as required by state law
• 2.Adopt, with any desired changes, a resolution approving the Fiscal Year 2020-21 Proposed Budget
• 3.Direct staff to circulate the Fiscal Year 2020-21 Proposed Budget to funding agencies for review and comment.
• 4.Direct staff to prepare the Fiscal Year 2020-21 Final Budget and Fee Schedule for the Commission’s review and consideration at the June 3, 2020, meeting and provide public notice of the hearing.

Alternate Recommendation 

Given the recent developments associated with the coronavirus pandemic and the implications for potential impacts on local governments, the Commission could consider

alternatives to the budget recommended by the Budget Committee and staff:  

• A.Reduce the proposed expenditure budget
• B.Maintain overall agency apportionments at the current-year level and increase Fund Balance contributions to balance expenditures  

Regarding:  

• A.Reduction in projected expenditures  

Staff does not recommend a reduction in expenditures, in that staff believes such action would negatively impact achievement of the Commission’s goals and work plan, as described earlier in this report. Notwithstanding the Commission’s determinations regarding staffing levels as a result of the organizational assessment, some savings would accrue during the year, at any rate, for at least a period of time, with the retirement of the Assistant Executive Officer. Thus, although not shown in the Adopted Budget figures, the year-end actual would reflect less-than-budgeted expenditures.  

• B.Maintain overall agency apportionments at the current-year level, i.e., zero percent increase, and contribute more Fund Balance monies to balance expenditures  

• With a three percent increase in apportionment level, more than $115,000 of the Commissions Fund Balance would be contributed to balance projected expenditures. If there were no change in overall agency apportionments, about $136,000 of Fund Balance monies would be used to balance expenditures, as illustrated in the table below.

As projected at this time, such action would leave $313,369 as available Fund Balance.  

• Regarding apportionments for cities and special districts, to reiterate the comment regarding individual agency apportionments, since each agencys apportionment is a function of the percentage of the total revenues reported to the State Controllers Office, the apportionment for specific agencies could increase or decrease in Fiscal Year 2020-21.  

Should the Commission wish to consider further use of the Fund Balance or alternatives different from staff’s recommendation, staff requests direction so as to prepare a presentation for the Commission’s consideration of the Final Budget on June 3.

Attachments 

1. Draft Resolution
2. Fiscal Year 2020-21 Proposed Budget, with three percent overall apportionment increase
3. Alternate Fiscal Year 2020-21 Proposed Budget, maintaining current level of overall agency apportionments