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9-1-2021 DRAFT 2022 Scandia City Budget NarativeDraft 2022 City of Scandia 2022 9/1/2021 Page 1 of 6 Draft 2022 City of Scandia 2022 9/1/2021 Page 2 of 6 Proposed General Fund Revenue Highlights Overall, the largest change in revenue needs does not come from the line-items of the budget, but rather the fund’s shifting cash position. The City has a General Fund policy to maintain between 50% to 65%. In practice the city has maintained far higher cash balances in the general fund frequently exceeding 70% to 80%. The net change in general fund levy is $201, 500. The levy was calculated to cover costs and maintain an approximate 69.9% fund balance in the general fund. Considering a higher balance in the fund may be necessary if the 401 General Capital Fund, the fund maintained by the City, in part, for emergency cash drops significantly in fund balance. Generally, the logic of having higher cash balances in this fund is to maintain a contingent reserve of funds for unexpected costly events or emergencies. Generally, the combination of cash in this fund and available future cash in capital funds also serve as a measure of fiscal strength by bond rating agencies. Bond ratings are typically conducted before the issuances of bonds for acquiring debit in local government. These tend to be beneficial to acquiring more competitive bids, which, more often than not, translates into cheaper debt costs. Ratings are essentially risk assessments focused on local economic conditions, demographics, debt structure, and financial condition. Of which, governments only have a direct impact on the last two. So, this is important to keep in mind, especially if the Council seeks to adopt a debt funding strategy to their long-range financial plan presented in this draft budget proposal as Option III. Additional revenue changes include notable increases to permit revenue. This year, the housing market not only returned to its premarket activity, it is likely to exceed it. That is why the city is anticipating that this revenue source will likely match that of prior years. This only accounts for an approximate $45,000 change. Draft 2022 City of Scandia 2022 9/1/2021 Page 3 of 6 Other General Fund Expense Highlights Shifts in Salaries and Wages The 2022 City Budget includes a $24,900 increase to salary and wages. (Please not all changes to the wage area entirely displayed in line-item changes due to percentage distribution between cost areas.) Highlights of the changes include: - Starting DPW Director off at a higher rate of pay. The director position had been previously planned to offer a yearly salary of $78520. The new estimated salary for next year is estimated to be 88550. That is an increase of approximately $10,000. - Proposed adjustments to the compensation for the Office Assistant/Park & Recreation Coordinator – After revaluation of the position and duties, I have determined that this position, currently at pay grade 4 in the 2019-2020 Salary Schedule should have been at grade 6. This would adjust the current hourly rate from $17.23/hr. to $24.44/hr. The net change in projected yearly earnings would increase from $28,962 to 33,663 for an approximate net change in cost of $4,700. - Annual step increases based on the 2019/2020 Pay Scale 2021 and the current Collective Bargaining Agreement for public works staff excluding the above-mentioned changes accounts for approximately $17,300 - Seasonal Employment – Wage costs for seasonal workers, including seasonal maintenance, seasonal plow operators, and the Zamboni Operator now receive higher pay. $15,700 was what was anticipated under last year’s budget. Currently, with only one seasonal laborer, wages would be approximately $16,800. To take on a second worker there would be a cost of $12,600. Wages would increase for seasonal workers to $28,900. This change has been recommended in this budget, taking on two seasonal works this year has made a significant impact on the quality of grounds maintenance. This option was available to us during the 2021 fiscal year due to the 3 months without a person collecting the DPW Director salary. The Most significant change you will note this year is the increase in wages and benefits towards the Building and Planning department. This change was made for two reasons: 1. It is appropriate to distribute compensation to appropriate cost centers based on work. The changes offered reflect the City Administrator, City Clerk, and Administrative Assistant’s work shares proportionate to their work for the department. 2. This change will make it easier for us to present our yearly justification for the permit fees we change. Highlights on Benefit Cost Changes The most significant change in benefits costs is relatively minor. It pertains to $7,800 in additional retirement contributions. Health Insurance Rates are expected to increase by 7% and Dental is anticipated to increase by 5%, but these changes are expected to have an overall modest overall impact on the budget for next year. Administrative/Legislative Budget Highlights - There is a proposed $12,000 increase in legal service expenses for a possible change in prosecution services. Draft 2022 City of Scandia 2022 9/1/2021 Page 4 of 6 - The City’s server is slated for replacement this upcoming year. The cost will be between $4,000 to $5,000. Replacement is needed as the physical hardware on the device is no longer supported by the manufacturer. - This budget reintroduces funds for conferences and travel next year. - With 2022 being an election year, the city must finance hosting a primary and general election. Planning/Building and Assessment Highlights - Most of the wage increases in administration have shifted to the building and planning department. This was not intentional, but rather how the employee compensation distribution percentage was applied. - Given planning related insurance liabilities contributed to the City’s risk modifier this year and last, staff plans to attribute a share of cost to the department. - Planning expenses have been generally lower for the city so there is a recommended $7,600 decrease. - City Assessor Patrick Poshek’s contract with the city continues into next year with the same rate as last year. Public Safety Highlights - The County only extended a modest increase this year for police services. - Animal control services have been light since the city restarted the arrangement next year. The program has been successful collecting lost animals and returning them to their owners. - The Fire Department’s most substantial cost increase comes in the form of retirement contribution increases and additional costs for training existing and new department members. - Overall, there are no expected major significant financial changes to this division of city operations. Public Works - Wages and benefits by $18,300 due to the additional costs associated with taking on our new Public Works Director. This accounts for a little over half of the estimated increased costs for the department going into next year. - The remaining $10,000 in increase comes in the form of a $5000 increase to road maintenance, purchase of new printer scanner, a replacement utility locate device, additional repair costs and tree removal cost increases. Parks, Recreation, and Community Center Highlights - The consideration of adding a second summer seasonal laborer. - Increases can be attributed to additional repairs on the Community Center grounds, repairs to kitchen equipment. Draft 2022 City of Scandia 2022 9/1/2021 Page 5 of 6 - The other most significant increases in the area are to cover recreational programing, participate in the 2022 ice sculpture activity. - There is also a plan to replace damaged park tables, garbage cans, and benches. These funds would also be available to the installation of concrete pads for benches. There are no proposed transfers out as part of this year’s general budget proposal. Capital Budget Highlights The 2022 capital budget presents the city with an unprecedented challenge, as of recent. The timing of budget requests and the sizes of these requests are creating “bubble” fluctuations or spikes anomalies in yearly revenue needs. These spikes are challenging because larger dollar amounts and the timing of implementing bonds and their associated debts can cause increases to the tax rate that may not be acceptable to community tax payers or the city leadership. Therefore, the City Council an consider approaching next steps in any one of the three following options: Option I – Cash Funding Without Debt The guiding principle behind this option is to attempt to fund the City’s general and capital activities by strictly relying on levy and other financing mechanisms as opposed to taking on debt. This alternative also draws down the city’s cash reserve fund balance over time. The real challenge of making this option work is the timing of project activity proposed for the General Capital Fund (401) between the years of 2022 and 2025. This more intensive yearly outlay of $500,000 draws more on cash on hand and inevitably has created substantial tax levy and rate increases. The increase in tax rate expected for 2022, year based on this arrangement, is anticipated to be 4.52%. The levy, under this option would increase by 6.98% These impacts are relatively modest, when considering the cost changes that can be found in the tax impact tables in your packet. However, because of the spike of expenditures over this shorter time frame, there will be an approximate 17.7% tax rate increase and a 21.58%. These financial impacts can be also found in your budget packet. After this spike, we would be able to lower the tax rate substantially in 2024. To proceed with this option, the City Council would need to reconsider funding priorities over the next four years to stretch out the cost, and consequently lower the tax impact. The most significant obstacle towards implementing this funding option is it causes fluctuations in tax rate. Option II – Seek No Tax Rate Impact Option two, is a more traditional approach to the way capital budgeting has been done in the City of Scandia. This option shrinks and spreads spending over time. The net result of this approach is estimated to actually lower the tax rate over the next 3 years. Proceeding with this proposal would lower the tax rate by 2.52% and raise the tax levy 0.21% in 2022. Option III – Broadly Implement Debt This approach assumes debt via bond issues to help reduce the bubble increase in tax levy and rate. This spending approach works in many communities, but it requires diligent long-range financial planning. If not planned out correctly, debt can place undue challenges on the city in the future by diminishing available revenue to pay for debt. Draft 2022 City of Scandia 2022 9/1/2021 Page 6 of 6 This option, as it is proposed now, would increase tax rate by 4.52% in 2022 and the levy by 6.98%. Tax impact tables have been included in the budget packet for all the options. The Council can still consider any of the three approaches even if the current spending schedule. To do so, it may require reworking the Capital Outlay to best meet the City’s financial circumstances and needs, while leveraging the impact on taxpayers. Challenging Budgets Ahead for Both Sewer Utilities Both of the City's two small utilities, the Big Marine Sewer and Uptown Sewer are facing some significant challenges. Earlier this year, the City Council approved a request to the State of Minnesota to obtain state bonding assistance to help cover half of the cost of a major upgrade of the Bliss Wastewater Treatment System that serves the westside of Big Marine Lake. The estimated $1.4 million dollar project, without state bonding assistance, is expected to place the utility in financial distress. The Uptown System also has challenges. Currently the system is at or exceeding daily capacity dependent on usage. To expand this system, the utility would require around $500,000. Included in your packets are the draft budgets and rates. These can and will be revisited at an upcoming workshop. This issue can be deferred after September’s preliminary levy deadline, as these funds are only supported by their rates. Please let me know if you have any questions.