James M. Cline Reba Weis Christopher J. Casillas ASSOCIATES Labor Consultant M. Katherine Kremer Law Clerk Kelly M, Tumer Paralegal/Bookkeeper ‘Shawn Siers Legal Assistant/Office Mgr. ‘Susan Burnett Office Assistant Darrah Hinton www.clinelawfirm.com September 2, 2010 ‘Via Email: Poulsbo Police Officers’ Assn. Attn: Dan LaFrance, President P.O. Box 98 Poulsbo WA 98370 dlafrance@poulsbopoa.com Poulsbo Police Officers” Assn. Attn: John Halsted, VP P.O. Box 98 Poulsbo WA 98370 ial: ulsbopoa.com ‘Dear Dan and John, In response to the City’s notification to the PPOA that some of its officers may be laid off due to alleged budgetary constraints, our office has conducted an analysis of the City's current fiscal situation. We discussed many of our findings with the City at a meeting on August 25" in our offices, but I wanted to provide you with a written recap of those discussions and a summary of what we discovered. One important caveat to the analysis below is that we have yet to be provided, despite making several requests, any substantive information on the 2011 preliminary budget and accompanying revenue and expenditure forecasts. As a result, we cannot analyze any of the City’s claims conceming the 2011 budget cycle, as we have no data to assess that situation, Notwithstanding that fact, below is our view of where the City of Poulsbo stands year- to-date in its budget and financial situation. 2003 Wester Avenu, Suite $80, Seat, WA 98121 (206) 838-8770 - Fax (206) 838-8775September 2, 2010 Page 2 Revenues * The budgeted revenue for 2010 in the General Fund is slightly above $9.1 million. + Through the first half of 2010, the City’s actual receipts show that collections are right on target if not slightly above what was projected. The City’s main revenue sources are from tax receipts, principally sales tax, and the tax receipts through the end of June were at 51.39%, * Focusing just on sales tax receipts, the City’s single largest revenue source, receipts through half of the year were at 104.5% of what was budgeted. Importantly, while the levels are back to the 2005/2006 amounts, they are trending in a positive direction in comparison to 2009. In all but one of the first six months of 2010, receipts came in higher in comparison to 2009. ‘+ Most of the City’s other main revenue categories, such as licenses, permits, and grants, are all above budgeted amounts through mid-year. * The City’s overall revenue receipts through June are reported at 45.64% of what was budgeted; however, this discrepancy in receipts versus what was budget, is due almost exclusively to the fact that the City budgeted a transfer from its reserve accounts to the general fund in the amount of $425,496 for 2010 and, to date, it’s only been necessary to transfer less than $30,000. This should be understood as a positive development because the City has been able to maintain a fund balance without the need to transfer money from its reserves, indicating to us that the City’s revenue picture remains healthy. Expenditures ‘+ The second main component of the City’s budget picture is the expenditure side of the equation. Overall, we believe the City’s expenditure reports year-to-date show that it is expending less money than budgeted for most departments, which likely will result in a higher ending fund balance than originally projected. This is important because a higher fund balance means the City has more cash on hand and a reduced need to make any transfers out of their reserve accounts to fund the City’s operations, It is important to note that the mid-year expenditure report does not equate to 50% of the City's obligations for the year as there is an additional payroll in December and other end-of-the-year one- time expenditures that must be accounted for at that time. Nonetheless, the expenditures are still overall under what was budgeted. * In the general fund, the police department represents the single largest line item, with a budget of over $2.4 million. The June 30, 2010 expenditure reports show, however, that the police department has only expended 43.54% of budgeted funds. If that trend holds, there should be between $250-$300K of unspent budget dollars at the end of the year,September 2, 2010 Page 3 © The overwhelming majority of other departments in the general fund aze also below, in some cases significantly below, in year-to-date expenditures. © The expenditure report for the month ending June 30, 2010 shows that overall expenditures are at 49.09% of what was budgeted. However, this number is significantly distorted due to the fact that the City has already made a total transfer out of over $1.3 million out of an expected yearly amount of over $1.8 million. This money was transferred out to various other accounts maintained by the City, such as the Street Fund, Without accounting for these transfers, the mid-year expenditure report would be in the mid-to-low 40% range, again well under budgeted amounts. Cash Flow & Reserv ‘* Instead of maintaining their reserve amounts as a fund balance in their general fund, the City maintains its main cash reserves in at least two accounts. Reserves are stored both in the general fund, account 001, as an ongoing fund balance, and the City has a special Teserve account called the Revenue Stabilization Fund, account 122. ‘* As of June 2010, the City was showing a fund balance of $432,176 in its general fund. ‘The City’s finance director indicated this amount was actually closer to $150,000 due to some accounting issues, but their cash flow statement indicates this higher figure. ‘* In addition, the Revenue Stabilization Fund as of June 30" was showing a fund balance of $1,720,129. The combined cash flow for the City was in excess of $2.1 million in just these two accounts. * As indicated above, the City has a general fund budget of just over $9.1 million. As a percentage of that amount, the City has approximately 24% of its general fund expenditures in just these two reserve accounts, * According to general accepted budgeting practices, maintaining this level of reserves is well in excess of recommended amounts. The Government Finance Officers Association (GFOA) recommends that municipalities like the City of Poulsbo maintain between 5% and 15% of their general fund operating revenues in general reserves. Poulsbo is nearly 10% above the top end of the recommended range. To put this in dollar amounts, the City could draw down between $650,000 and $700,000 from its reserve accounts and still be at the top range of recommended reserve amounts. counts © In addition to its General Fund and Revenue Stabilization Fund, the City maintains dozens of different funds to finance various operations. While some of these funds are dedicated enterprise funds with money that can only be used for statutorily prescribed Purposes, several of the funds have no such restrictions. It is our opinion that this moneySeptember 2, 2010 Page 4 also represents available resources that the City could utilize to fund certain operations, including police department operations. * For instance, the City maintains a Police Restricted Fund, account 191. The fund is for dedicated law enforcement activities, but money from that account could be used to at least partially fund police officers or police department operations to free cash from the general fund that is dedicated to the police department. This fund, as of the end of June, had a fund balance of $236,946. We believe this money represents available resources to S. ‘* Other funds like this include the City Street Fund, the Street Reserve Fund, and the Street Equipment Reserve Fund. The fund balances for these three combined funds total around $1.6 million, While expenditures from these funds may be limited to financing street operations and capital equipment purchases, the City finances parts of these funds through transfers from the General Fund, which transfers are discretionary. According to the City’s Finance Director, the City did transfer less into these funds in 2010 than it had historically done, but these accounts still represent available General Fund resources. The above analysis represents some of the highlights from our review of the City’s budget and financial resources. From our perspective, the overall picture to emerge from this analysis is that the City of Poulsbo has weathered the broader financial downturn in the economy quite well. It has not only maintained healthy reserve levels that it can tap into, if necessary, as the broader economy continues to struggle, but it also appears that some of its main funding sources are actually beginning 1o trend back in a positive direction. While the future is always somewhat uncertain, it appears to us that the City is in a uniquely strong financial position, and not only is it in a position to avoid any layoffs but it should have no financial problems maintaining current service levels. In fact, we believe it is well positioned to rapidly increase services as the economy begins to improve. hope this information helps. Should you have any questions, please do not hesitate to contact me at your convenience. CLINE & ASSOCIATES Christopher J. Casillas ce