Council - Regular Meeting

we are going to turn it over to our city manager mr smith for a presentation of the proposed fiscal year 2026-2027 annual budget um tonight is just his presentation so we're not going to have discussion or questions or anything we're just going to hear from mr smith and then we're going to have a multitude of budget hearings that will begin in september obviously of course public meetings open to the public where we will go through everything on a granular basis but tonight is just sort of an overview from mr smith and i'm going to turn it over to him now

Mayor and members of council, thank you for the opportunity to present the proposed FY27 budget. Before I begin, I want to thank our department directors, finance staff, administrative team, and everyone who has helped contribute to this process. They've all spent months reviewing revenues, staffing, operating needs, capital requests, and individual line items. I especially want to thank Allison Palacheski and Melanie Jennings for their work.

They're actually in the room, so raise your hand, Melanie and Allison.

I also appreciate you guys for the time that you've already invested in the budget process, including participation in the budget workshop held in June. I want to begin with this. This is a proposed budget and it will change. This budget is an estimate based on the best information we have today. We are forecasting revenues and expenses for a fiscal year that hasn't yet started. Some estimates will be very close and others are going to need to be adjusted. This is also our first budget under the council manager form of government and our budget process is still developing. This document is not perfect, but we will continue to improve our process. We also still have six weeks remaining in FY26. That means we don't know exactly where the current year's gonna finish. For example, the Centennial Committee still has funding available this year. Some of those expenses may occur before September 30th, while others may need to carry into FY27. Demolition is another example. We've included approximately $85,000, which reflects what we would normally expect to spend in a typical year for two to three single-family residential condemnation cases. However, for the upcoming fiscal year, we may be exposed not only to those routine costs, but also to extraordinary demolition expenses associated with at least one large multifamily development. Because those matters involve legal, financial, and other issues that are still developing, I anticipate bringing additional information to the council in the near future with the city attorneys so that any necessary budget revisions can be considered with the benefit of more complete information. Those are the types of adjustments we're going to work through before adoption. And changes aren't going to stop October 1. Revenues will perform differently than we projected, expenses will change, projects will evolve, and unexpected needs will occur. When budget amendments are required, council will continue to be involved in those financial decisions throughout the year. A brief instruction on the budget book, which you all now have in front of you, This is the housekeeping portion of the presentation. So we've totally renovated the budget book for FY27. The intent is for you to better understand the budget as we walk through it during the budget hearings. As we make revisions over the next six weeks, we will update the book for you and you will hopefully use it as a reference manual throughout the year. So feel free to take it home tonight but bring it back with you when it's time. The budget book groups the city's individual funds into broader categories. General funds, capital projects, courts, narcotics, parks, gas tax, and other funds. So each major fund group, so under each major fund group, you'll find the funds and the ENCODE details that make up those funds. An example, the general fund is made up of funds 01, general, fund 23, sales tax, and fund 99, AP clearing. That distinction matters because not all city money is interchangeable. Some revenues are restricted or dedicated to specific purposes. One disclaimer on the ENCODE sheets. The date listed on the ENCODE printouts says as of August 31st, 2026. know that for us to run ENCODE reports as accurately as possible, we have to tell ENCODE to print the report through the end of the month. In reality, we haven't reconciled July yet. So the information shown in ENCODE for year to date is the best information that we have to date, not August 31st. I just want to make that clear. If you have any questions about the organization of the book, feel free to reach out. All right, back to the budget. So I think about the city's finances in four areas. Revenue, operations and personnel, debt, and capital. Staffing decisions affect recurring operating costs. Capital projects require available funding. borrowing creates future debt obligations. If one of the expense categories on the right is out of alignment with revenues, then we have to use fund balance. But fund balance should be considered differently depending on whether we are funding a one-time expense or an ongoing obligation. And that's one of the more important issues in this budget. Fund balance is money left over from the previous years that remains available for future city needs. The proposed general fund budget includes approximately 4.87 million in carryover fund balance. Of that 1 million, I'm sorry, of that amount, one million is proposed for an OPEB trust to begin setting aside funding for future retiree benefit obligations. I view that as an appropriate one-time use of reserves. The larger issue is the use of fund balance to support recurring operations. Homewood has strong reserves, which is a significant financial asset, but reserves are not a permanent source of operating revenue. We will not fully solve this issue this year, but we do need a long-term plan to bring recurring revenues and recurring expenses into better alignment. So kind of dig in now. Speaking of the general fund, the general fund is the city's primary operating fund. It supports all of our departments and most of the city's daily operations. The proposed FY27 general fund totals approximately 77.9 million in both revenues and expenditures. The budget balance is on paper, but I want council to focus not only on whether the totals match, but also on how that balance is achieved. On the revenue side, approximately 58.8 million, or about three quarters of the general fund revenue, comes from taxes. Licenses and permits contribute another 10.6 million, and the remainder comes from intergovernmental revenue, service charges, fines, transfers such as fund balance, interest income, and other sources. Now I'm gonna dig into the two most important revenue sources, property tax and sales tax. So first, property tax. Homewood's portion of the property tax is 31.7 mils. Of that amount, 14.2 mils go to the Board of Education, and 17.5 mils come to the city. Of the city's 17.5 mils, 8.5 mils support debt service, and 9 mils support operations. For this budget, 1 mil equals $871,785. So for the non-operating mills, the total is approximately $7.85 million. We've taken a conservative approach to revenues where information is uncertain. I would rather budget below what we ultimately collect than assume revenue growth that doesn't materialize. Sales tax. Homewood receives $0.04 of the $0.10 sales tax rate. For FY27, one penny is estimated to generate approximately $11.574 million. One penny is dedicated to the Board of Education and a quarter penny supports capital projects. The remaining sales tax supports city operations and other obligations, including debt service. How we allocate those revenues between operations, debt, and capital will continue to be a part of our budget discussions. Personnel is our largest operating expense at approximately $42.2 million. When pass-through items and fund balance accounting are removed, personnel represents roughly 68% of operating expenditures. That is a significant commitment, but it also reflects the nature of local government. Most of what we provide is delivered by the folks that work here. This budget continues to invest in employees while taking a more measured approach to personnel costs. The proposal includes a 1% cost of living adjustment. It also assumes a 5% increase in the city's health insurance costs, but does not increase employee health insurance premiums, so paycheck deductions will increase. In addition, the city's RSA contribution rate will increase from 20.02% to 22.45%. That increase does not show up in an employee's paycheck, but it is a real additional cost to the city, and it's an important part of employee compensation and benefits. Over the previous few years, the city has added several full-time staff positions while also providing a total COLA of 8.5% in the prior two years. Together with the rising cost of RSA contributions and health insurance rates, those changes increased annual personnel costs by more than $6 million in two years. That rate of growth has exceeded recurring revenue growth. The goal is not to stop investing in employees. The goal is to make sure that our staffing levels and compensation structure is financially sustainable. The next area is debt. Our municipal debt comes from previous bond issues. FY27 debt obligations are approximately 10.5 million. So how do we pay for that? The city has 8.5 mils of property tax dedicated to debt service, generating approximately 7.41 million. We also have about 530,000 in interest income. The remaining amount is paid from general fund transfers. The current proposal includes using 2.16 million in general fund contributions to fully fund our debt obligations while maintaining an appropriate reserve. We will spend additional time on the debt structure during the budget process, but the objective is straightforward. Dedicated debt revenues should be clearly identified, debt service fund Debt, sorry, debt fund reserve limits should be a council decision, and any general fund support should be easy for council to see and evaluate. The fourth major area is capital. The proposed FY27 capital budget includes investments in sidewalks, stormwater, facilities, vehicles, and major equipment. Capital expenses need to be viewed differently from recurring operating expenses. A stormwater project or a vehicle replacement is not the same financial commitment as adding a permanent position or a recurring program. And when we talk about 8.85 million in the capital budget this year, I want to put some real projects behind that number. The budget proposes the purchase of 14 police vehicles along with two other city vehicles. It funds creek walls and storm water repairs and a new building at Public Works so we can protect the assets that we have in Public Works from the weather. It also includes a difficult but important sidewalk project on Salter Road connecting Broadway to Sylvia Drive. We are investing in needed equipment for both police and fire, resurfacing our tennis courts, and replacing and upgrading technology across the city. The budget in front of you is a starting point. Over the next six weeks, we're going to continue to refine revenue assumptions, personnel cost, capital projects, FY26 year-end activity, and other expenses. The new finance director starts in one week, and I'll certainly welcome her input. I expect there to be items that council wants to add, reduce, or change. But as we move into the budget hearings, I want to encourage council to first focus on the larger financial questions. Are revenue assumptions reasonable? How much fund balance should we use on a recurring basis? What level of reserve should we maintain? How much should we invest in capital each year? How should we fund debt? And what staffing and service levels can we sustainably support? Those are the major policy questions that will shape this and future budgets. This is our first budget under the new form of government, and I expect our financial planning and reporting to improve each year. We've already made meaningful progress by reviewing departmental budgets and current staff, reorganizing the budget book, and more clearly separating operations, debt, and capital. We are also beginning to plan more intentionally for longer-term needs, including OPEB and sustainable capital funding. Homewood remains strong in a strong financial position with a strong tech space and healthy reserves. This budget also gives us an opportunity to better align recurring revenues and expenses over time and be thoughtful about how we use those reserves. We will not be able to address everything in this single budget year, but the goal is to understand where we are, establish a sound direction, and continue to improve. The budget I present tonight is my recommendation based on the information that we have today. Tonight is only an introduction. Over the next six weeks, we'll study and review each page in the budget book and discuss each line item during the budget hearings. I'll be happy to answer any specific questions during those meetings. I appreciate everyone who helped us get to this point, and I look forward to working with the council towards adoption on September 28th.

Thank you, Mr. Smith. I appreciate you very much.