Finance Committee - Regular Meeting

Alright. Good afternoon. Welcome to the oh, wait. Wait. There. Now we're live. Good afternoon, and welcome to the Monday, August 18 meeting of the Olympia City Council Finance Committee. There were called to order at 04:00. The roll call is I'm joined by Kelly, and Jim is excused. So there you go. Two out of three ain't bad. And, the next item is the approval of the agenda.

Oh, I would love to move to prove approve the agenda.

I will second it. All in favor of approving the agenda, say aye. Aye. Right. And, Casey, do we have anybody signed up for remote public comment? No. We do not. Okay. And have our remote watchers trickled in? It's it's always good to make sure they're here before we Good. So folks have been admitted. Welcome, remote watchers. Alright. The next item is approval of the July 21 committee meeting minutes.

I'd move to approve those minutes.

K. Second. All in favor, say aye. Aye. Wonderful. There we are. And that brings us to the first business item this evening, which is a briefing on the results of the 2024 financial and single audit. And, Kenzie, are you gonna kick this one off? We'll introduce Kenzie Wang, our general accounting manager. Welcome.

I did see everyone else do that, and then I forgot when it was my turn. You can do the next slide, Casey, please. How's that? Okay. Perfect. Yes. So I am Kenzie. I am, the general accounting manager and one of the main, audit liaisons with the state auditor's office. So, as council member said, this is a briefing on our audit that just wrapped up last week. So I'll go ahead and give a little bit of background on what that audit was.

We had the annual comprehensive financial report, which is, as the name says, it's annual. We do publish this every year. It's our financial statements and our notes. And those notes provide the details of what those balances are made of. There's also budget to actual information and statistical tables. They go back historically so that anyone reading the statements can kind of compare changes year over year. And the other piece of the audit is the schedule of federal expenditures. Frequently, you'll hear this referred to as the single audit. It's when the state auditor audits certain programs on behalf of federal agencies. So it's all going to be federal dollars.

It's required for any entities expending more than $750,000 during the year, and ours is the calendar year. That threshold's gonna be 1,000,000 next year. We're probably always gonna get this audit because we get a lot of federal funding. So we do expect to keep getting this In '24, about $2,300,000 was on our schedule. And the auditors selected from there.

We had some pretty big programs. We had CDBG at about 400,000, and then SLRF, which is kinda what the auditors call it, but we've frequently referred to it as ARPA. It's the it's the same. It's state, local, fiscal, and recovery. You might hear those interchangeably. We had about 600,000, in expenditures there. That was all passed through from Thurston County. So those were some of our bigger expenditures that were looked at this year. And before I move on, I just always like to say this, that the audit, it it's not meant to be an adversarial relationship. We really do view it as a partnership with Otter's office.

We wanna do things correctly, and they help us do that. Next slide. So these are the levels of reporting. So you can kinda think of these as the audit results, like what the auditors would find. I think everyone here is probably familiar with these.

But just to go through them, findings are the highest level. They're significant. They're made public, and they require a lot of response. So the audity, it gets followed up on. And what we usually need to do is, tell the auditors the next year what we did to fix those deficiencies and provide evidence that we fixed those deficiencies.

The management letter is kind of the second level of finding. It doesn't get made public, but it is referenced that there were enough issues to kind of warrant the attention of upper management. So these are nonmaterial, but they do also require follow-up and subsequent audits. So we do get asked about these still, in, following audits. And exit items are they're I mean, we they're insignificant.

They're really small errors. We're always gonna get some of these, and they're not in the audit report at all. And they're not referenced in it either. Next slide. So, we did have audit adjustments. Some of them are really small, that might result in some of those exit items, But some of them are larger, so that would be, like, prior year adjustments. This year, those were larger. And then there's reclassifications that the auditors might want us to make. There's wording. There's formatting.

They really take a fine tooth comb to our statements and tell us exactly, what the best practice is on on basically everything. So the results this year were that we got an unmodified opinion, and that just means that the financials as they're presented, are fairly stated. There's no material errors, and that everything looks good. So that's what you want, and that is what we got. However, we did have a management letter item on the financial statements.

Largely, that was due to a very late invoice. So it it truly was for the prior year, but we had it recorded in the current year. And then the other issue we had was a finding in the single audit. So, reminder, that's federal funds. The finding was related to not complying with subrecipient monitoring. And there was no compliance violation. It's a control violation. So there was no misappropriation. The money was spent fine. No issues there.

But the proper procedures weren't in place to ensure that everything was fine, is really what the auditors found. And it was not financial in nature. It was more, on the program side, grant management side. So coming up, we've got our accountability audit, and that is going to be on the city's procedures. A lot of these things aren't necessarily financial.

They may look at in the past, they've looked at police investigative funds. They've looked at payroll retros, maybe the tracking of small and attractive assets, things like that, accountability, making sure there's no misappropriation or risks associated with that. So though it's kind of a different level of audit, but, the same levels of reporting exist. And that is expected to start next month. So, usually, the auditors will do a risk assessment, and they'll maybe say something like, what haven't we looked at in a few years?

Or, like, what areas are risky? What have we seen in other cities? And then they'll evaluate, and then we kinda let the departments know, you know, this is what they're gonna be looking at, and then departments can prepare for that. My last slide. So I I know the finance team gets a lot of spotlight when it comes to the audit, but it really is a citywide effort.

We really rely on departments to help us. Their good inputs help us create, like, a better output. So, we really do appreciate it. Like, everyone works really hard for the audit, and, you know, there's different levels of scrutiny on different departments during each year, and it can be different. And people handle it really well, and everyone's just always really helpful. So we do wanna thank everyone for that. Yeah. Formal audit, it's available on the state auditor website. I think, Michael, you had sent out that link today. Yeah. I think that's all I have. I'll take any questions.

Kelly, questions for Kenzie?

I have no questions. I loved looking at the unqualified, document and how, uninteresting it was to read. That's always a great sign and an audit. So kudos to you and your your team. I know those are are not easy with a budget as large and complicated as what you're managing.

So

Yeah. Thank you. I like to say that too. If if your accounting is boring, then that's a good it's a good sign.

So one thing I've wondered I've I've been able to have a number of the initial interviews asking if I see any anything that should be audited and then to sit in on on your exit interviews. And do does the accounting staff or the city manager's office have input in which items they choose when they do the accountability audits? Do is it mostly come from they've been so collaborative over the years and and and so glad to to partner, but do we also some do we sometimes request, or is it always supposed to be blind to us which issues they take on?

Yeah. That's a really good question. So for accountability, there is always a phase, prior to the audit where they will ask us for our input if we see any risky areas, if there's anything in particular that year that they want us to look at. So, we do get a chance to bring up any concerns, but, ultimately, it is their decision on what they wanna look at.

Go ahead, Jay.

Yeah. I'll just really just like, you, council member Gilman. I was interviewed by the auditor in advance of the audit, and they asked me those same questions. Is there anything that I'm concerned about, anything that I'd like them to look at? I didn't have any like you at the time, and so it's just like, this go around is mostly driven by them.

And then the one other thing that I'd like to add here is, a, I wanna start with appreciation for the finance team for how hard they worked at this and with with transition between finance directors and shortages of team members, and we've had we've had a lot going on, transition to Workday. You just add on the layers the finance team has had to work through in the last couple years. And, you know, the Mike and I talked, you know, we never wanna find any of any kind. I mean, our our bar is to never have that happen. In this case, although we don't want that to happen, you know, Kinsey said this, it's a reporting issue.

There's some additional reporting we needed to have from our subrecipients that they got some of our funds that we need to do differently. We're going to close that loop and make sure that happens in the future. But no material misspending of money, no misappropriation of money. The good news is they found that all that money was spent appropriately. They just wished our reporting was better. So we're going to work on that. And everything that's here are things that are easily correctable by our team, and we're going to work hard at it. And we won't you won't see this repeated in the future. So Mike, if you want to add to that, but I just wanted to say that out loud.

Yeah. For sure. I mean, great thanks to Kenzie and really all the finance team and other city departments that partner in this. As Kenzie said, this is a team effort. We've talked about, really some putting some plans in place so that even the management letter, you know, we feel like we can take some steps to make sure that we can correct that.

And, you know, they really this is a Herculean effort when I just to really kind of make this timeline clear, they can't really begin it until sometime in March because we have to leave the year open, and we're making entries and closing. And then it's due in May, and then the auditors are ready to go. So they have a lot to really accomplish in a short amount of time. And so I'm excited. You can quote me on this.

I'm excited to partner with them next year as we work on the annual comprehensive financial report. We've got some meetings set up to really talk about our grant reporting and how we can make some changes to that and partner with the departments. We're, you know, a little bit at the mercy of what's happening in some of that subrecipient monitoring that goes on, but we're taking a proactive stance on it so that we can get ahead of it. And we don't want a finding, as Jay said. That's nothing that we want on the city's record, so we look forward to improving that.

They'll be looking at it. As Kenzie said, we'll have federal single audits. Well, we for sure will for 2025. We know that. So it's something that they'll come back in and check. And but I do thank Kenzie. And, you know, it's really a couple of people that kinda get the lion's share of the auditors who come in, and they're a team of folks, they want many things quickly. And it's to our advantage to keep it moving because this costs the city, a fairly large amount of money. And so making sure that we're correcting these and not kind of getting dive diverged into these investigations saves us money,

and so we'll work hard to make those kinds of changes for our next one. That's great. Well, thank you. And it's it actually it's really been an honor. This part of my my service on council of it's it's been a clean audit each time I've done the entrance and exit conferences, and that's that's just a much easier job and much easier to be proud of things than if there were issues that we were trying to solve together.

So and and I would invite you. There's a there's an invitation that comes out for the entrance and exit audits both for the city and for each of the intergovernmentals that we serve on, and it's it's a perspective to see the the finance staff having their conversation with the auditors. So

it's worth checking out. Thank you for attending, both, Jay and, council member Gilman for attending the exit. I know it takes some time, but I think it really shows some support to the state auditors when we have some staff there to kind of show that we're taking it seriously. And we are, especially with their recommendations. I mean, even the exit items, we look at those. I certainly do and make sure that we can take some of their advisement. They certainly see a breadth of information across many municipalities, and their recommendations can really improve some of our processes.

Terrific. Well, thank you for coming tonight, Kenzie. Yeah. And do do you if if you have other items where you're interested, you're welcome to stay. If that was your part, you're welcome to get on with your evening.

Oh,

there's that.

If you're going back to work, you ought to stay and yeah. Just listen. Yeah. Thank you, Kenzie. Thank you very much.

Thank you.

Yeah. So for the 2025 budget status and process update, Jay, were you gonna introduce it? And I believe Owen's gonna carry the presentation. Oh, Mike is I apologize. I apologize, Mike.

You're up, Owens.

Yeah. Mike, you Oh oh oh You wanna kick it

on, man? Oh oh oh, good.

I'm gonna I'm gonna send it right to Mike. So, actually, I'll just send it right to Mike.

Okay. So I'm gonna review just a bit to start with 2025 and where we're at. Quarterly, finance, our great budget team prepares an update. We meet with the city manager and talk about that quarterly. So I've had the, privilege of seeing one of those. So, I I've seen what you saw at quarter one. Things look better at quarter two. Revenues are coming in. I would say kind of our you know, sales pardon me. Let me start with property tax comes in pretty predictably, if things are working as they should, and we're seeing that.

It's that volatile sales tax number, especially, with our kind of reliance on it that we saw bring us a little bit of pause as the first quarter came around, but we saw some strengthening of those numbers in quarter two. I sit at the advantage, as others do to be able to see even more into this quarter. It's holding steady, which speaks well. We know that can change quickly, but for now, that's holding in there. The city manager gave, a directive to departments to reduce spending and really put a spending freeze in place, in about April.

I remember it because I was in the process of taking the position. So it it's one of those times of infamy where you look at it and say, that's good because we're taking proactive measures to look towards the future of what we have, by way of our budget. And that's impacting in a positive manner our bottom line also. So at the end of the quarter, as you know, we have that baseline 10%, mandatory reserve set aside. So that's 10% of the expenditures.

That changes a little bit as we amend the budget. So you see those quarterly budget amendments come to you as, by way of the consent agenda. So that changes that amount a little bit each quarter. But once we establish that, we had a reserve of just over four over the 10% of just over $4,000,000 at quarter two. To remind you, it was in the $2,000,000 range at quarter one, so that's a step in the right direction that was a positive sign for us.

So I think much of my budget message could be not all that positive, so let me give a positive message there. That's a lot of hard work. When when the city manager orders a spending freeze, that it's kind of like I I think a good analogy is, you know, we're a fast moving freight train down the budget tracks, and it takes a bit to slow that spending down because there's a lot of things in play that just can't be stopped immediately. And so to see that kind of savings by, the '2 is really positive for us. I think we're it I'll let Jay talk more about that if he wants to, but I think we'll probably see the spending freeze continue.

It certainly wouldn't be something I'd recommend from the finance director's position that we back away at this time.

Yeah. Thanks, Mike. So just as a reminder, when I reported accounts that I was gonna put a spending freeze in place, I wanted to do two things. One, in April was the first month we saw a significant dip in sales tax. We dropped about $200,000, and I was worried about what's that going to look like through the balance of the year. And two, if sales tax started to recover, I wanted to build fund balance. Well, two things have happened. One is we've seen sales tax start to rebound, and we haven't lost any ground. So we're still about $200,000 behind, but we've not lost further ground. So that's good news.

To only be a couple $100,000 behind this late in the year, to me, is really good. So we'll continue to watch that. The other is build fund balance. So as you remember, when we balanced the budget, we left you with 2,800,000 above the 10% reserve. We're now at $4,500,000 above the 10% reserve at this moment in time. So we are building capacity within fund balance, as Mike said. So the things I wanted to see happen with the Fannie freeze are happening, which is really good news. And I agree with Mike. He's going to share, I think, some other things we're tracking. Are you going to share the other things we're tracking?

Jail costs and those are you just Okay. So just real quick, I also want to continue to track jail costs because we have seen an increase year over year. BLS, basic life support transport revenues, was a new revenue stream for us this year, so we wanted to see how we're tracking there. So I asked for that. The development fee fund is something we're always tracking. I asked to see that on a regular basis to see how we are versus budget, and then I'm missing one. I know there's another.

Home fund.

Home fund as well. So as Mike goes through these and you see kind of where we are with BLS and jail costs, one thing I'll just point out upfront, because he's going to show you we're running over in jail and we're running under on BLS. But it's reflected in that 4.5 number. So there so even though we're running behind and over, we're still building fund balance because we're saving in other places. So I just wanted to so it doesn't take away from that 4.5 as you see these. So that's important. So I'm gonna stop talking there, but I wanna give you some context and let Mike kinda take it from there.

It's a team effort. Right? So I think on the revenue side, we keep our eye on it, and we hope everything stays where it is. Our investment advisers send out a Monday update on that I track pretty closely. It's largely based on kind of what was the prior week's economic indicators.

So, you know, we we got some kind of interesting, jobs news for July where, you know, the economy didn't create the jobs that the market had built in, if you will. And then retail sales were most recently released. Kind of going along with what we track with sales tax, they came in pretty strong for July, which showed, you know, consumer confidence is still out there. Now the big prediction is what does the Fed do at its September 17 meeting by way of a rate cut and, you know, not to talk too much about that. But I think that following that does certainly play into our revenue projections because a strong economy is what we wanna see.

And so I think we'll start to kind of hone in on our higher sales tax months here coming up and hope for a continued well, this is what I hope for. Just kind of a steady economy going forward. That's good news for us so that everything continues where it is. We're tracking expenditures. So in the general fund, as Jay mentioned, jail costs are certainly something that are escalating.

And so we're building in that prediction that there's the possibility, of course, that we're gonna be over budget in that. We're looking at it. We just talked about it today, and we'll I'll talk a little bit more about the 2026 budget, but really getting a more, realistic estimate for the budget, for next year. I understand that the city just started this jail contract late in 2024, so there wasn't a lot of historical data. This is a hard one.

I struggled with it in the last municipality I was in because it's really difficult to predict where this is going to be. Whether it's a larger scale like we have or smaller, it's tough to hit that kind of budget sweet spot on the, jail costs. So we'll continue to watch that. But as Jay pointed out, that four and a half million were above, our our minimum reserve, includes those kinds of estimates on the BLS, the basic life support, kind of coming in where it's at. We're still hopeful that we get, more revenue on that, but it may not happen until 2026.

You know, we've still got, well, I was gonna say five months. We're kinda getting down to four months, though, to see that revenue. As you look at the BLS collections, you know, they're kinda settling in and coming in at kind of a standard amount. So it's really those federal dollars that we're looking to get reimbursed on. So we'll keep that up.

I'm having the opportunity as the, new finance director to meet with department directors. I have a meeting with the fire chief this week so that we can just kind of stay on top of these things, and finance can be really involved then in information that the departments have. And so this is one we'll stay on top of and keep you apprised of.

Mike, can I add one thing there? Sure. The the the good news with BLS is from quarter one to quarter two, we're seeing an improvement. So we're seeing we're we're we're seeing more, recoupment of our costs as we're billing. We need to bill out about $200,000 a month. And and if you recoup $200,000 a month, there's your 1,900,000 of revenue. I think we're billing out close to double that. Between 3 and 400,000 we're billing out. So we're billing out enough to bring in the revenue we need, and we're just trying to catch our rhythm with our outside consultant about how long it takes to collect and what's the time frame in between. So once we have more data this year, it's gonna inform how we want to set up the revenue projection for next year.

And then the other thing that we have going into next year too that we're we're still working on for this budget is GEMT reimbursement, is federal government reimbursement, which may be a couple million dollars a year, but it comes in arrears. So we have to incur the costs, and then we seek reimbursement. And so we haven't done that yet. This will be our first year to look at it. So we'll be working with the fire chief to the budget process to do our best to estimate what we think that will be and then add that.

And then every every budget year after this, we'll be projecting that. There is obviously some concern about longevity of that fund at the federal level and things we're paying attention to, but we don't have we right now, we have some certainty to the fire chief that there'll be money there, for the coming future. So a lot going on there, but, I mean, that's why we're watching it the way we're watching it on a quarterly basis.

Absolutely. And I think the same is true with the development fee fund and the home fund. You know, finance does a great job of preparing reports. We have analysts that work directly with the departments to help them with not only the analysis of where they're at, but also then reporting that out to you and citywide. So I I think at kind of that quarter two point, we have some questions, but there's also the opportunity for, in particular, the development fee fund to have different revenues come in that we're maybe it's hard to forecast that.

It's what I'm trying to say because you we just don't know when those fees might come. And so we've learned that there's some in the pipeline, and that's a positive for that fund.

So we're running about $1,400,000 behind. Right? And, Susan just provided me, McLaughlin, that in the next one to three months, we're projected to take in at 1.45. So we've got, one, two, three, four significant projects that are anywhere from two to to twelve weeks out in in starting to submit and for us to collect permit revenue. So as Mike said, this is probably the toughest one for us to monitor because it's not on an exact time line and projects come in when they when they come in, but it looks like we're gonna make up the delta before the end of the year, which is good news.

And and we can forecast, based on what we have now. In some ways, on the general fund side, I think there we have a little bit more straightforward way to predict that. This is hard because we don't know about that coming in. So that's that kind of shortfall in revenue that you see when you look at that development fee file.

Kelly mentioned you had you were wondering about the development fee. Since we're on it, do you wanna go ahead and Sure.

Talk to And

and, really, you know, what you two just shared, how some of it was just educational of helping me understand what all goes into that, but it sounds like because my big question was based on what we know is in the pipeline, like, do you still expect it to to end up okay? And it sounds like based on what you shared, you do.

Yeah. I asked I left the the second quarter meeting, and I asked Susan to, hey. Can you go look at the pipeline of projects and go look at what's coming up? And are we are we actually gonna close the gap, or are we not? And she got back to me within about forty eight hours with with that plan. So I feel good about where we are. We still gotta bring those projects across the finish line, and people still those developers still have to make the decision to keep moving on the timeline they're on. So there is some uncertainty there, but the possibility remains for us to close the gap, which is the most important.

While we're there, I I know we've talked about it, but I I can't remember. We in part of the seeking efficiencies and and the work that Leonard began and Tim Tim continued of, you know, working with all the folks in the department, we we the recovery rate was one of the questions of is is our recovery rate at about the right point? And do you do you have a an off the cuff where we ended up with that conversation?

I'm gonna give you an off the cuff, and I'm gonna look down the row and see if they have an exact. But we we strive for an 85% recovery rate. That helps us cover our costs. It's different year to year. I will just say it's difficult to recover 85%.

I think, typically, we're in the 70% range. Owen's nodding his head, so I think I'm pretty close. And so what we we did is we made a change structurally within the the the general fund support, and we looked back at the history of how much the general fund typically supports the development fee fund. And we front load that in the budget now versus waiting till the end and then trying to figure out what we need at the end. So we made that change, which helps us get ahead of this uncertainty within development fee fund.

But those estimates of what we put in still need input on what the permit team and leadership in CPD think we're going to take in and permit revenue to offset it, And we do that balance every year. So, and, one of the things that's being asked of me and the budget is the CPD team are asking for money in the budget to do a rate study, for the coming year because we haven't done one since 2022. So if our rates fall behind, it gets even harder to hit the 85% threshold. So gonna probably do some of that work next year, but we're not quite hitting 85%. I'm gonna say we're in the seventies, and something we gotta continue to to look at. Does that help?

Thank you. I just wanted to to to make sure you were considering that there's the projects in the pipeline, and then there's also those two levers we have of what percentage of general fund subsidy or direct funding, however you wanna frame it, put into community planning and economic development, and then what we think are reasonable fees to charge and whether those need adjustments. So we we have a a couple of levers that we can adjust as we're trying to hit these revenue targets. Yeah. Thank you. Yeah.

And I know as just to share with you, as I was looking at the position here at the city of Olympia, this fund is one of the things that I I'm excited about because it's difficult from a finance perspective to have those highs and lows if it just sinks in the general fund because you have those years where you have a lot of development, but that review continues, and you need your employees to continue that. And so the next year, if it's down, that's a struggle. So but it's a new fund. So I think it'll take us a bit to kinda hit our stride, but it's it's good for the city's finances to have it. It it really is.

And I I know I'm not telling you anything because I but it's a it's exciting for me because it it really stabilizes not only the general fund, but for the staffing in community planning and economic development. And that's good for them too if they have that, budget they can count on. So continue. We monitor it. So that's where, that is.

So let me know if we can answer any more questions on that. Another item, we talked a little bit about the home fund. I think that's something where, we're we're as we finish out 2025 and continue into 2026, it's gonna be monitoring our grants, monitoring our partnerships, and where that all ends. We get sometimes some kinda mixed news first where we think we're not getting a grant, then we are, and that's a little bit of the times we're in. I think we'll continue watching it closely.

I think one of the things we do really good here is we monitor the budgets closely. We keep, not only the city manager updated, but you all as well as our department. So that's what we can continue to do. Moving on to something we kind of, I think, shared not the best news with Jay at the quarterly update, and that's our workers' comp, fund. So this, to remind you, is where the city of Olympia went to, the state.

We were self insured, so we had our own workers' comp fund. We went to, where the Department of Labor and Industries insures us for workers' comp. The employer and the employee pay a rate. We have some legacy claims, if you will, in our self insured fund that are going to have to be maintained at a higher level than we had budgeted, to put it bluntly. So that's gonna be a drag down on that 4 and a half million.

We're looking at Joan and I talked. We've increased the rate expectations for 2026 in the budget so that we're taking that, we hope, element of a surprise where we have to fund this because are some ongoing legacy claims that aren't going to go away from that fund anytime soon. So making sure that we're positioned to budget that is where we're at. To kind of take you through department department of labor and industry, it's gonna take us some experience ratings to kinda get our rate set for, where that might be on both the employer and employee side. But that has a little bit more predictability, but it's gonna take us some time to get there because we're new into that system.

So I think this was a little bit of a shock because, you know, when you see that 4 and a half million above reserve, you're kinda thinking, yes. And then we kinda get to one of the last pages of the report, and it takes a little bit of the joy out of the 4 and a half million. But, you know, I think it's all in planning for next year and making sure that we're covering that and mindful of what we need. So that was kind of where we ended our quarterly update. I think, all in all, it's not bad news.

It's certainly, as Jay pointed out, that the sales tax coming in a little bit, more than we were thinking it was in the spring, and I shouldn't say more, steadily, more targeted to budget is where I wanna see it. And that's where we're seeing it. You know, we we received the report about two or three business days before the end of the month from the department of revenue, so get a little sneak peek in finance, and I'm kind of on that thing. So what is it? They've just forwarded it to me now so I don't have to go ask anymore.

But, you know, it's looking solid, and and we are you know, remember sales tax is that month delay. So at the August, we're getting the receipts for June. So, you know, we're heading into those months where the consumers are spending more. I'm trying to talk myself into all this, but

It's gonna be good.

It's it's gonna be positive. It's you know, it speaks well to our whole economy that that's happening. So

Going back to the workers' compensation piece, and this is probably a Jay question since you weren't here, but you said a lot of these were kinda legacy claims. So when we were estimating, you know, bringing that on, were our estimates just off? Or

Yeah. So this this is not an easy one to answer. I'll do my best to kinda get you an answer. So, you know, what we had certainty on from l and I is what our rates are gonna be moving to l and I. And then we have certain amount of legacy claims, not all of which have have progressed through a place where we knew what the remedy was gonna be.

Right? And then we had to kinda we kinda looked at our fund. And last year, when we did budget, and we said, do we have enough money in the budget, we think, to to take care of what we think the legacy claims are gonna come in? We got surprised with a couple of claims that have come in just significantly higher than we thought they were gonna be. And so to Mike's point, so now what we're doing is we're gonna renew our estimates for 2026 moving forward based on what we now know.

We're gonna refine our rates so that we're addressing it through future budgets. And then through the 2026 budget process, we also have to rightsize that fund. And so we'll be working to bring counsel some options for how we do that. So Mike said, the bad news for me is I was working on how we balance the budget minus that. Now we've got to figure out a way to balance 2026 and account for a loss in workers' comp that we weren't expecting at a much higher rate than we were expecting.

So it's always hard within the workers' comp world. I think the finance team and our HR team do the best job they can to figure out what we think is going to come through. And every now and then, something comes through much more significant than we thought it would. And it usually comes down to a drug or a procedure or some sort of therapy that's needed for somebody that's a lot more than what we thought. So we're, I remain optimistic, about where we are with our budget heading into 2026. We've just started that process this week, and there's still a lot to work on, but we'll get there.

And we the city does work with a third party administrator on our legacy system, and there were just some surprises that, I'll just say the city couldn't have anticipated, unfortunately. So what we're trying to do is in so we have really two rates in our budget for 2020 well, for both years. But for 2026, we have the l and I employer rate and then the city rate, if you will, for our self insured legacy system that we're increasing to try to anticipate, we hope, a more, coverage of what that'll be. I mean, obviously, if it's less, that's great, but I don't think we can anticipate that for 2026. So we're gonna try to cover it.

That's a little bit of a snapshot on 2025. I think part of this presentation is to talk to you just a little bit about what we're anticipating for 2026. So let me take you into that. That budget process is many months long. It's well underway now so that what you will see and council will see from the city manager's recommended budget is the culmination of a lot of work, as you know, from every department in the city.

Lots of people are working on this. The budget team has been fabulous. You know, they've, I I can't speak highly enough of the work that they do, to support departments me when I have all these little questions as I'm trying to get my head into it. I think one of the things that you can we'll folk or I'm gonna focus on is just the general fund. Certainly, you'll see presentations. You've seen the presentations on the capital plan. The public works team is doing great work on that. The budget review team had its first day today. This is a great process. I really like it.

Of course, I'm new to it. But having, the ability to hear from each department is really great to kind of maybe I'm speaking partly from the new person's perspective, but it's a way to really hear from them. Even if it's just a kind of stagnant budget, They're not asking for any increases. You really see what they're focused on, what their goals are, what their measures are, and and that's really helpful for me. From a revenue standpoint on the general fund, it's increasing, but it they're modest increases.

So we're not projecting any revolutionary. I wish I could tell you. This solves it all, but there's just not it's all as you know, it's pretty darn predictable. Property tax is predictable. There's good and there's bad with that, but it's only gonna go up 1%.

You know, we get that factor for new construction, but the kind of part you can bank on is that 1%. So I guess that's the good. The bad is that it doesn't grow much more than that because we know our costs are going up incrementally much higher than what, property taxes are. So our overall revenue increase and and it changes kind of as we're putting this together. Sometimes I feel like from hour to hour, but certainly from week to week.

You know, call it about a 4% increase. So, I have to tell you also, I I feel like I'm bragging on finance a lot, but that's okay. The tax and review team, they do such a great job of making that forecast on really, concrete data for the sales tax so that I think, particularly from your perspective, from Jay's perspective, from my perspective, it's not just kinda putting your finger in the wind and say, well, where do we think it looked busy at the mall this weekend? They're really looking at trends and data to set that. And we're gonna talk a little bit more about sales tax tomorrow night.

But those assumptions are for an increase in next year. And I think, you know, I tend to be, which I'm gonna say you probably want in a finance director, pretty conservative in what I wanna do with the those estimates. But when I look at first, I was like, nuh-uh. But when I look at the data, it's grounded well. What they have to support it looks solid.

And so I'm really pleased with what is being put together in that revenue forecast. The expense side of the, general fund house is increasing, and that's no surprise to any of us. Salaries, wages, benefits are increasing. We know we have agreements with our bargaining units, but those are going up exponentially, because cost of employees never goes down. That investment continues.

We saw pretty decent savings in the employer PERS rate. That was a plus. We've seen, a little bit of savings, and this will shock you, in the liability insurance area also due to some restructuring, our pooled, insurance provider made. So that's a positive also. But the costs in other areas are increasing.

I think we have I've I've looked at, our we call them enhancement requests, things that would be above baseline budget. They're very conservative on the part of departments. Many of them are revenue neutral. So looking at what the city's you know, when you consider everything that a full service city does, like the size of Olympia is, it's amazing what our departments are able to do. And so those, presentations are ongoing this year this week. Sorry. It feels like a year, but it's just this week. And

and you're gonna get your first look next month at your at your finance committee about kinda where we are as a as a starting point. I don't wanna throw any numbers at you tonight because we're still we're it's day it was day one today. And and thanks, Mike, for saying that. Well, I'm good. Yeah. But, I mean, our our work ahead we've got work ahead. And I think you knew this. I mean, we closed out last year using, some one time money, so we knew we had a starting point of a of of a $4,000,000 deficit we're gonna have to work from. And with costs going up, we knew that was gonna grow. So we've got work cut out for us.

Tomorrow night, we're going to talk to the full councilor and give you an update on a couple of revenues. One is kind of what we know now about House Bill twenty fifteen and timing. And then a couple of council members have asked about, when we think about a B and O increase of any kind, what did the state do, and what's that impact look like? So we're going bring you that tomorrow so you can get a sense of that, and we're going to keep talking revenues. Because one of the things, we're going to need some we're going to need one, if not both, of those revenue streams to help us move into the future. So we'll talk more about that with the full council tomorrow. And then we come in September, we'll give you an idea of kinda really where we are over on what the work ahead looks like.

The budget review team will start doing a lot of work after the presentations conclude this week, working with the city manager and and his team on preparing a balanced budget to bring to finance committee and then the full council. So there's a lot of work that happens over the next two or three months to bring that full budget to fruition, but there's a lot of great minds in this and a lot of positive things happening. So, I mean, I think most times when you build that initial city budget, unfortunately, the expenses exceed revenue. That's just where it's at, and I think that's probably true with many agencies. So we're working at that phase of it, and there's a lot of work to do.

But there's a really good work coming in. I think people have done a great job, you know, working with the analysts, a lot of the things I've seen, asking questions, really kind of digging into some of those lines that might be elusive that we have in municipal finance to really look at it and say, well, what's in here, and what can we kinda shake loose and maybe even change to make it better? So we're hard at work at preparing the 2026 budget, and you'll see more to come on that in upcoming meetings. So that's a little bit of a picture of where we're at in 2025 and then upcoming for 2026.

And, Owen, I I apologize for putting you in charge of everything. I I opened up my notebook and realized that I have an identical notebook that has my notes from when they helped me carefully plan this meeting. It's not here, and this is my to do lists. So, anyhow but I appreciate that for the the especially the last couple of planning meetings, Owen has stepped us through the the projects and processes, and that that work is really appreciated. So next up, we're gonna have a a briefing on the development of a priority based budget. And assistant city manager Debbie Sullivan is driving that ship.

Yes. Thank you, chair Gilman. I am happy to give you an update, and I think I have a PowerPoint that's gonna be coming here pretty pretty soon. Thank you, Casey. So just a little bit to get us grounded about why we're here.

I know you've seen this, but those who may be listening, just to give a little bit of context. So what is priority based budgeting? It really is an opportunity to transform our line item budget into programs and services. So it helps us tell the story of what we do, why we do it, and how much it costs to do that. And it also provides a framework for decision makers to evaluate how we use those resources to explore new revenue, cost saving measures, and those types of things.

And you've seen this graphic before. We kicked this work off in February, and you can kind of barely see a little shadow of a red line up there, but we are on the final step of taking action. And that is a very exciting place for us to be. Next slide. So the last time I gave you an update was at the Mid Year Retreat in June where we reported that all the data was entered, scored, and peer reviewed.

The programs and services had been categorized based on impact, reliance, the mandate, alignment and cost of programs. At that retreat we decided to give space to department directors in order to be able to start entering in their 2026 budget. And so we took a little bit of a pause. And during that pause, the consultant produced a ROI report, which does not stand for return on investment, but it stands for draft recommendations, opportunities, and insights. And they delivered that report, and it is about 300 pages long.

And next slide. Thank thank you. And just to a little bit about the report. It's really a comprehensive playbook for strategic decision making. And before I go into kind of what's in the report, I want to say that it is generated by AI and it looks at case studies about different municipalities who have also done these types of programs and services.

And it generates ideas for saving money, generating revenue. It never makes a recommendation to increase taxes. And then again, case studies of real world examples. Well because it is generated by AI it is our due diligence to go through that 300 page report, which I have done, and read it. Yes. And I just say that because AI doesn't always pick up the right things. And so there was I I heard this term at the last conference I went to, hallucinations. So I went through and I've gone through and I've taken things out and restructured things and that just took a body of work to do. But that work is done now. So that is great.

And the last thing I want to say about the ROI report is it's really a foundation for creating a path forward. This gives us ideas to think about how we do work. It will help us prioritize opportunities, implement best practices, and continue to monitor and adjust. So I want to talk a little bit about next yeah. As I was reading through it, there were some kind of high level findings about where these ideas lived.

Some were on the cost savings side and some were in the revenue generating side. And the cost savings side, they really look towards process improvement, And you're familiar with that. Centralizing services within the organization, finding ideas to do that. Really a lot around leveraging technology to better do our work. And regionalization within Thurston County or other areas.

And also outsourcing either with non partner agencies or private businesses. So those were some of the themes around cost savings. And so what department directors will do is they will look at their programs and services and probably think through, you know, what have they already done? There are many things in there that we've already done. What's feasible and what's probable? On the revenue generating ideas, some of the ideas were around fees for service. Now let me give you a little bit about fee for service. You think about the traditional fees for service, there's other ideas around. I will just take an idea like Leadership Academy. Leadership Academy is a program that we put together for City of Olympia employees.

One idea might be to provide a leadership academy and charge others in order to attend it. Right? So generating revenue that way. Of course there's always grants and then private sponsorships. So when I say private sponsorship, there was a lot of ideas around there about having private businesses sponsor our programs and generating revenue that way.

Similar to OLE on Ice. So what makes OLE on Ice work the way it does is the private sponsorships. And without those, we can't pull it off. So so so I think what they're saying is there's a model, and can we expand that model into other things that we do? And it's tricky, in this mix of things too with private sponsorships because, there's a sweet spot with it of things that make sense for it to help us, pay for and things that it doesn't.

Next slide. The other thing the report does and I say draft on here because we're still going through the programs and services and things of that nature and making sure they're in the right categories. But what this does and you can't see that at all on that screen and I apologize, but I will tell you what's on it. Oh, there you go. Zooming in. Thank you. So it really summarizes the findings. Along the y axis is impact impact. And on the y axis is the cost. So you look into that box right there and it talks about high impact, low cost programs or services.

And it breaks it down even further into subcategories. And what it will tell you is there's nine programs there. The investments, I'm on the upper left hand corner, is $1,400,000 and it is a rank 12, so they rank them one through 16 in these categories, and it's in category 10. So kind of have to have a decoder ring to figure it out, but it is helpful at a glance. And then the blue that is right under high impact, low cost, low no mandate talks about the approach that you should take to either reduce costs or generate revenue.

And that says getting higher impact for lower costs, consider if increases would further achieve the impact. So again, kind of at a glance on this one. The next slide these are the the the when you get the report, you'll see it broken to chapters. And these are the basic chapters by the categories that I just talked about, what the impact is, and then what the opportunities are, and then it has the potential savings and opportunities. So again, on these potential savings and opportunities where it says you have you could save 19.4 to 28,400,000.0, those are based on what they found in their AI results.

Some of those things we have done, some of them don't apply to us. So I just hear it with a grain of salt. You know? So but but it is still helpful. Go ahead, Jay.

Yeah. So to Debbie's point, this is where our work is. So some of the things we can't do because our state laws in Washington might be different than the state law in South Dakota. So they found some some city and some state that that does this, but we can't do it because of laws in the state of Washington. So we have to truth the AI piece and get through all 19.4 to 28.4 of these recommendations and say, what do we think is actually real here in the city of Olympia in the state of Washington? And to Debbie's point, it's just taken us a bit more time to get through all that because what we wanna be able to bring you and show you as a full counsel is what's realistic, and then and then what's our approach for how we're gonna go after that, and what that what's that gonna look like. So that's still to come.

Yeah. I appreciate your your comments on that, and I recognize that that '19 to '28 is not all real. But in my head, I was kinda like, okay. What if even 50% of it's real? You know? Like, those can be really significant. So I just do you get a sense as well, how much have, department directors gotten through some of this? I think

it varies by department director. Some of them took the report early on and and had their team started to take a look at it. Others were busy with other things. But the final report will be delivered to them this week, and we're asking them to go through it. So that, my next slide talks about you go ahead and switch to our next slide. We are having a workshop next Tuesday where we're going to work through this. But your point is well made. There are very viable ideas in there that we could pursue. Are they can we do them on day one? Probably not. But but maybe there are a few. But it really is a idea generator. It gets you thinking about what's possible. Yeah. And it also gives you a resource to call.

Oh, you did this in where whatever city, and you can call them up and ask them what they did and dig in a little bit more. Yeah.

That's great. Yeah. The reason I asked about directors is is, you know, I guess my hope is that they're coming into this with really open minds of even, okay. We tried this ten years ago. It didn't work. But it it might be worth a phone call to say, okay. This didn't work for us, but you found a way to make it work. What's that magic thing? So Yeah. Go ahead.

Yeah. And I'm they know this. I'm not gonna give up on easy answers, so I wanna make sure we've fully vetted. So we're gonna ask lots of questions as a team of each other. And I really appreciate that example of just because we tried something ten years ago, a lot changes in ten years. And so it could be that another city has figured out something we couldn't figure out. And so we need to make that phone call, as Debbie said, and said, tell us your magic formula here. And if we learn something, then we'll we'll bring you those recommendations. So, you know, you said 50%. I'm in my mind, if even 25% of that, right, that closes that closes a big part of our budget gap at 25%.

So I'm really hopeful here that there'll be some really good things that we're gonna be able to bring the council as a way for us to look at some real good possibilities. Most of what we find now, very little of it's probably gonna help us balance this year. So it's really forward looking because we're probably gonna have to take time in 2026 to really vet some of this. So as we look towards 2027 and beyond is when I hope we're gonna get some some real good ideas.

And to follow-up on that, I don't know if I already said it, but we're asking department directors to come to this meeting with the ideas and identify whether it's a yes, a no, or a maybe, and what is probable in 2026 so that we can start developing a plan for implementation and for these actions. So again, the workshop's on August 26, it's three hours, our consultant is coming to help facilitate it. There are a few things I want to make sure we're all on the same page and in agreement to affirm the goals of priority based budgeting, which is transparency on how the city is allocating resources to implement the community's vision, as stated in our comprehensive plan. And to create a roadmap to develop financially resilient operating budget. This is where the incremental improvement comes in.

I just think it's key by identifying cost savings and revenue generating ideas. So that's the report. The other thing that is really important is the scoring methodology. Again making sure that we're all on the same page Because the scoring talks to the impact that our programs and services have on our community. So we're going to be reviewing the weighting criteria of all of the attributes, the scoring methodology of how we applied the scores to focus areas so that we did it all consistently.

And that may result in the need to update the data, which is no problem at all. I can go in and update it. And in talking with the consultant, it won't significantly impact the results or the report that they gave us. So so that part is is good. Lisa.

To to me, the, you know, the prior conversation we had is about cost savings, and the other big piece is is the transparency piece and making sure that we have our budget in the right focus areas and that we're showing our community where we're spending our money. That's a lot of where this comes in. So if we don't get our scoring criteria right, then we end up putting things in different buckets and not the right buckets. And so making sure we spend the right amount of time to make sure that everyone understands it and we get the questions answered will help us make sure that our end result is exactly what we want it to be.

And then the next slide oh, I already said this, so I won't say it again. So I want I do want to say that we are very close. We are very, very close. Now that department directors have put their budget in, we have the information, it's in the format that we need to be able to have a discussion and put forward a recommendation. So our next steps is to come back to finance committee to share the results and affirm the priorities.

We'll also have a city council study session, and then we can start doing public communication. We working with communication services right now to develop a video and working on data visualization of that for the community. So that is my update, and I'm happy to take any questions.

So I don't have a question, but I I do have an inspiration I just wanted to try out. And and that is, right now, one set of issues that have been probably the most public input and and most controversial have been about attempts to streamline building permission

Yeah.

Both land development and construction. And and I I think about this lens because we have the tool of different kinds of data analysis and that what we used to look for elegance and be opposed to brute force, and now there's so much capacity that brute force is okay. That's really a a big change in how you can crash through enormous amounts of data like this. But I think that for it for these efficiencies to come, we have to imagine how we simplify the the processes. We try to protect the same sort of regulations that are in the community or the environment's interest, but maybe they're not in 54 categories that have staggered timelines on them.

Right? That that sort of thing. So I I think that we're we're having and it's either because the issues become sort of tangible when we have a specific narrow decision, or it's because we're taking them on as little bites like that. But but either way, I'm I'm excited that this might prompt a conversation that we've talked about form based codes. We've talked about collapsing some of the many kinds of zoning areas we have.

And I I I think that combining this lens of a of a an efficiency and and systems kind of thinking along with what we can do to have a simpler model that we plug into seeking a more efficient way to to conduct that model. And I I that's just because I I'm I'm certainly cautious about allowing more to be AI automated. I'm not having a good time with customer service from any organization right now because there's no more humans. Nope. Right?

That's that's challenging. So I'm not asking us to take humans out of the processes, But I think that if we use these tools to help us design processes that humans can still walk folks through, that that might be a really big benefit. So I just anyhow, I'm just inspired by your your work along the way and and thinking that this could be the the occasion for having these broader looks at our at our systems across departments and not just taking on parking in residential six to 12, because it you know, in in isolation, each of those those measures don't, don't get us to greater efficiency or to the quicker time frames that our development partners are looking for. So, anyhow, I just that's just I'm inspired. I'm looking forward to your getting to the point where you're sharing it with counsel and then where we have some tools for the community to look at.

So glad. Keep going. Yeah. Yeah. Well, believe it or not, this brings us to reports. Mike,

do you

have any reports for us this evening?

I don't think beyond what I've shared. Mhmm. As you and I discussed last week in our planning meeting Yeah. There'll be more information to come to counsel on the investment policy language. I need to work that through with Jay, and so we'll con that's a focus, and I'll continue on that. But, otherwise, there's a lot of focus on budget, which probably doesn't surprise you. But that's kind of where it's at. So I'll leave it at that for tonight.

Thank you. Jay, Debbie, any other

Nope. Not for

me. Mark, would you like to break your silence?

No.

Momentarily. Owen, please. For the good

of the order, we did, publish the preliminary CFP document after last meeting, so that is on our website if you'd like to read that. You all had some questions I was not able to answer last meeting. So I talked to the public work staff and the planning staff, and they wrote up some responses. So I emailed them to you. If you didn't get them, I have a printout, but, they got back to

you on this. So Thanks. Yep. Thank you, Owen. Casey, anything to add for good of the order?

Nothing for me. Thank you.

Alright. Good. Well, with no other business before us, we will adjourn the finance committee meeting at 05:12PM, and we'll see everybody again in a month. Thank you very much for your work, and I'm I'm excited about the clean audit. That's a good way to head into the next year's budget process.