Finance Advisory Committee

AGENDA Finance Advisory Committee Meeting Wednesday October 29, 2014 6:00 p.m. City Hall Council Chambers (Second Floor) 1. Call to Order 2. Roll Call for Attendance 3. Approval of Minutes a. Finance Advisory Committee Meeting September 11, 2014 4. Financial Policies 5. General Fund Overview 6. Tax Levy 2014 Discussion 7. Other Items 8. Confirm Next Meeting Date and Time a. November 13, 2014 – Joint Finance Advisory and City Council meeting 9. Adjournment The Finance Advisory Committee’s role (as listed in Chapter 54-11) is to provide well-reasoned, financially sound recommendations to the Council. Meetings and reporting shall be on a project- by-project basis or as otherwise assigned by the City Council. The Finance Advisory Committee shall work in cooperation with the City Council and the City Manager to analyze the City’s financial policies, long term financial stability, options for greater efficiencies and possible revenue and expenditure modifications. 1  MINUTES FINANCE ADVISORY COMMITTEE CITY OF DEKALB SEPTEMBER 11, 2014 The Finance Advisory Committee (FAC) meeting of September 11, 2014, was called to order at 5:30 p.m. by Chairperson Mike Peddle. Committee members present were Mike Peddle, Connie Golden, Dave Colin, Tom Teresinski, Mike Peddle, and Mike Verbic. Absent committee members were Chris Fricker and Gary Peele. City staff present were City Manager Anne Marie Gaura, Finance Director Cathy Haley, Police Chief Gene Lowery, Fire Chief Eric Hicks, Public Works Director T.J. Moore, City Engineer John Laskowski, and Economic Development Coordinator Jennifer Diedrich. Others present were Elizabeth Hennessey, Managing Director of William Blair. The minutes of the August 20, 2014 Finance Advisory Committee meeting were approved on a motion by Mike Verbic, seconded by Connie Golden. Ms. Golden had one correction on page three of the minutes, changing her name from Mr. Golden to Ms. Golden. Refunding Opportunity Series 2004 Bonds Finance Director Cathy Haley introduced Elizabeth Hennessey, financial consultant to the City. Ms. Hennessey made a presentation to the Finance Advisory Committee regarding the City’s refunding options that included historical AAA Municipal Market Data (MMD) interest rates, municipal yield curve comparison, outstanding debt, refunding opportunity, method of sale, and a proposed financing schedule. Mr. Peddle asked what municipal yield curves would look like without AAA rates. Ms. Hennessey replied that the rates would be higher. Ms. Hennessey recommended private placement of the bonds with a bank for a better interest rate. A proposed financing schedule would be brought before the FAC and then Council for approval once a bid was received from the bank chosen. Mr. Peddle asked the FAC for comments regarding the proposal. There were none. Mr. Teresinski moved to accept Ms. Hennessey’s proposal, seconded by Ms. Golden. All in favor, none opposed. Infrastructure and Capital Mr. Laskowski stated that during the August 20, 2014 FAC meeting, a question was raised regarding the percentage of taxes that go towards road construction and what neighboring cities are putting towards road construction. Mr. Laskowski stated that the vendor used to collect that 2 Finance Advisory Committee Meeting September 11, 2014 Page 2 of 3 data is reluctant to hand over a list of clients so we can reach out to other communities for comparisons. Mr. Peddle asked if it were possible to get questions answered through the vendor, perhaps by asking them to email specific questions to their clients for the City of DeKalb. Mr. Laskowski said he would look into that option. Mr. Moore spoke to the FAC about the capital needs of the City, specifically the City’s fleet and equipment needs. Mr. Moore stated that vehicles a big part of the core services the City delivers. Further the City has experienced major financial upheaval over time, which in turn causes a ripple effect in the fleet’s effectiveness. Mr. Moore referenced a chart that showed years where nothing was purchased for the City’s fleet causing the vehicles to be kept much longer than their expected life span. The City has one ladder truck that’s over 24 years old that will be replaced this year. Part of the money used to purchase the truck will come from a grant from Northern Illinois University (NIU Chief Hicks stated that a new ladder truck costs approximately $1 million dollars and a used truck about $600,000. Mr. Peddle asked where used ladder trucks are found. Chief Hicks stated brokers help find the needed equipment which can come from departments that have changed, gone out of business, downsized or upsized. Chief Hicks also stated that there are other departments that are also looking for high quality equipment at two-thirds of the price. Mr. Moore went on to explain that the cost of maintaining an older fleet is an issue because they’re always needing oil changes, tires, etc. Chief Lowery stated the police department’s vehicles are on duty twenty four hours a day, seven days a week. Further, a large percentage of the active service fleet has 130,000 miles or more on them. Municipal miles are brutal on police vehicles. Mr. Peddle asked if the City does 70 to 80 percent of its own maintenance. Mr. Moore replied that the City has two mechanics on staff who work on police and public works vehicles. However, some things are just not economical to do in house, such as transmission or body work. Mr. Peddle stated that DeKalb is one of the largest communities in the area and asked if some of our mechanical services could be offered to other local municipalities. Mr. Moore stated that the garage could be expanded to offer mechanical services to other agencies, if that’s something they would partake in. However, our vehicles would always take priority over someone else’s. 3  Finance Advisory Committee Meeting September 11, 2014 Page 3 of 3 Mr. Moore stated that the City can’t afford to have an entire fleet that has to be replaced and that a plan is needed so that that the maintenance of the vehicles is paced and consistent and we need to start the process of getting a vehicle replacement plan program. CONSIDERATION OF TAX INCREMENT FINANCING EXPENDITURES FY2015- FY2023 Jennifer Diedrich shared the background on the City’s TIF districts and the effect of their impending expiration on the general fund. The City has two TIF districts, the first being the Central Area TIF, created in 1986 and set to expire in 2020. The second being TIF#2, created in 1994 and set to expire in 2018. Through FY2015, eight percent of the revenues generated in each TIF have been transferred to the General Fund as support for administrative costs. This practice is planned to continue through the expiration of each TIF district with the goal of annually decreasing this amount. The City Manager has developed a TIF Phase Out team that meets biweekly to discuss the TIFs and develop a plan for when they expire, including how to cover the costs of some high impact projects and identifying new revenue sources. The team hopes to present a plan to City Council before the end of the year. There was a discussion regarding sales tax surplus, how it’s calculated by the state, and what each taxing body receives. Mr. Peddle complimented the City Manager and staff on working on a plan now for the expiring TIF districts. FINANCIAL POLICIES Mr. Teresinski discussed changing some of the wording in the newly revised financial policies. Mr. Peddle recommended changing the word “shall” to “should”. Ms. Haley stated that the policies were meant to be a guideline and would make the changes as requested, replacing “shall” to “should”. Mr. Verbic moved to adjourn the meeting of the FAC, seconded by Mr. Conlin. All in favor. The meeting adjourned at 7:01 p.m. Respectfully submitted: _________________________________________________ Ruth A. Scott Administrative Associate, Deputy Clerk 4 To: Finance Advisory Committee From: Cathy Haley, Finance Director Date: 10/24/2014 Re: Policies for review At the September 22, 2014 Council meeting several questions were brought forward regarding the Financial Policies. Based on these questions the following changes were made. 1. Budget Policy – Several “shoulds” were changed to “shalls”. 2. Budget Policy – Added the following to number 10 in the first sentence; “specifically if our anticipated fund balance is below our Fund Balance Reserve Policy of 25%. 3. Fund Balance Policy - Added the word “State” in front of MFT under the Capital Projects Fund Reserves paragraph. 4. Capital Asset Policy – Per the preliminary audit recommendation and to correlate with the City’s actual practice, changed original cost to $25,000 or more instead of $10,000 to $25,000 or more. Changed the useful life of infrastructure from 40 to 50, to 25 to 50. 5. Debt Policy – Took the last sentence out under Line of Credit “If the City Manager draws on the line of credit, it shall be immediately be reported to the City Council.” Added “City Council” after City Manager for final approval prior to drawing down on the line of credit in the second to last sentence under line of credit. The City Council recommended after these changes were made that the Finance Advisory Committee take another look at them prior to having them come back for final Council approval. 5 Subject: Budget Policy Number: 01-01 Date: October 29, 2014 Purpose: The City Manager shall submit an annual budget to the City Council which is within the City’s ability to pay. The annual budget should provide for the following: 1. Management shall prepare a draft of the annual budget for review by the Finance Advisory Committee in April of each year. The recommended budget should be submitted to the City Council for review in May of each year. The final budget document shall be submitted to the full membership for approval prior to June 30 of each year. 2. The annual budget should effectively communicate meaningful and understandable information to the City residents, City Council, City Staff, and other readers. 3. The annual budget shall be monitored on a monthly basis. Revenue and expenditure budget reports shall be prepared and made available to City management staff for departmental review on a monthly basis. A quarterly budget summary report (Treasurer’s Report) shall be presented to the City Council. 4. The annual budget should allow for the implementation of as many of the City Council’s goals and objectives as financially possible. 5. The annual budget should provide for the adequate funding of all pension plans (IMRF, Police Pension Fund, and Firefighters Pension Fund). An independent actuary should be used to determine the annual City contributions to the Police Pension Fund and the Firefighters Pension Fund and determine if these pension funds are adequately funded. 6. The annual budget should provide funding for the adequate maintenance of municipal equipment, municipal facilities, and infrastructure. 7. The annual budget should set aside-adequate funding (pay-as-you-go funding) for the replacement of major equipment. Annual funding (depreciation funding) for 6  these replacements will eliminate major expenditure jumps in the annual budget when these acquisitions are made. 8. During the budget process, the City will assess the need for contingency funds to be included in the budget to fund unanticipated expenditures that might arise. 9. The annual budget should finance current operating expenditures, excluding major capital expenditures, with current revenues. The use of reserve funds to finance current operating expenditures should be carefully considered and avoided if possible. 10. The City should limit the use of the reserve fund to nonrecurring operating expenditures or capital expenditures, specifically if our anticipated fund balance is below our Fund Balance Reserve Policy of 25%. This fund reserve will be calculated by comparing the difference between current assets and current liabilities to current annual budget operating expenses, excluding enterprise expenditures. 7 Subject: Fund Balance Policy Number: 01-02 Date: October 29, 2014 Purpose: Part I – Purpose Fund balance measures the net financial resources available to finance expenditures of future periods. Fund balance reserve policies are established to avoid cash flow interruptions, generate investment income, and reduce the need for borrowing. The fund balance reserves identified within this policy are the minimum balances necessary to accomplish these objectives. While keeping in mind the uneven nature of the City’s cash flows, should the projected ending fiscal year fund balance fall below the desired percentage or amount, the City should create a plan to restore the appropriate levels. Part II – Governmental Funds This section only applies to fund balances reported in the General Fund, Special Revenue Funds, Debt Service Funds, Capital Projects Funds, and Permanent Funds. 1. Definitions The five fund balance classifications outlined in GASB Statement 54 follows: Nonspendable Fund Balance: This classification includes amounts that cannot be spent because they are either (a) not in spendable form or (b) legally or contractually required to be maintained intact. This would include items not expected to be converted to cash including inventories and prepaid amounts. It may also include the long-term amount of loans and receivables, as well as property acquired for resale and the corpus (principal) of a permanent fund. Restricted Fund Balance: This classification should be reported when constraints placed on the use of resources are either (a) externally imposed by creditors, grantors, contributors, or laws or regulations of other governments or (b) imposed by law through constitutional provisions or enabling legislation. Committed Fund Balance: This classification reflects specific purposes pursuant to constraints imposed by formal action of the district’s highest level of decision-making 8 authority (generally the governing board). Also, such constraints can only be removed or changed by the same form of formal action. Assigned Fund Balance: This classification reflects amounts that are constrained by the government’s intent to be used for specific purposes, but meet neither the restricted nor committed forms of constraint. Unassigned Fund Balance: This classification is the residual classification for the general fund only. It is also where negative residual amounts for all other governmental funds would be reported. 2. Fund Balance Commitments & Assignments Committed fund balance for a specific use must be taken by formal action of the City Council. Amendments or modifications of the committed fund balance must also be approved by formal action of the City Council. In order to be recognized in the annual Audit Report, commitments of fund balance must be enacted prior to the end of that Report’s particular fiscal year. Assigned Fund Balance is intended for specific purposes not imposed by external parties or City Council’s formal action. The City Council authorizes the City Manager and/or his/her designee(s) to assign fund balance. Such assignments cannot exceed the available (spendable, unrestricted, uncommitted) fund balance in any particular Fund. 3. Reserves General Fund Unassigned fund balance will be maintained at a minimum level equal to 25% of annual expenditures. The City’s unassigned General Fund balance will be maintained to provide the municipality with sufficient working capital and a margin of safety to address emergencies without borrowing. TIF Funds The City currently has two budgeted TIF Funds (the Central Area TIF and TIF II). These Funds should be self-supporting and should maintain a fund balance equivalent to meet the planned improvements identified in a multi-year capital schedule(s). Capital Projects Fund This Fund is used for resources accumulated and used in right of way improvements such as street repair, street reconstruction, and curb & gutter replacement. Costs associated with this Fund must not be State MFT eligible and must cost over $5,000 and have a useful life of at least three years. The funding source for this Fund will be the local home rule motor fuel tax. The Capital Projects Fund should maintain a fund balance of the planned improvements for the current fiscal year. 9  Special Revenue Funds These Funds are used to account and report the proceeds of specific revenue sources which are restricted or committed toward expenditures for specific purposes other than debt service or capital projects. In general, all these Funds should maintain the least fund balance necessary to cover current fiscal year expenditures, plus an amount to pay for those expenditures of the subsequent fiscal year needed to avoid a cash deficit position. 4. Fund Balance Classification Fund balance classifications depict the nature of the net resources that are reported in a governmental fund type. An individual governmental fund may include nonspendable resources and amounts that are restricted, committed, or assigned, or any combination of those classifications. The General Fund may also include an unassigned amount. 5. Prioritization of Fund Balance Use When an expenditure is incurred for a purpose which can be paid from multiple fund balance classifications, the City will spend the most restricted dollars before less restricted, in the following order:  Nonspendable (if funds become spendable)  Restricted  Committed  Assigned  Unassigned Part III – Enterprise, Internal Service, & Fiduciary Funds This section applies to Funds outside the scope of GASB 54. 1. Definitions Restricted Net Assets: The component of net assets restricted by external parties, constitutional restrictions, and enabling legislation. Net Assets Invested in Capital Assets, Net of Related Debt: A component of net assets calculated by reducing capital assets by accumulated depreciation and the principal portion of related debt. Unrestricted Net Assets: The portion of net assets that is neither restricted nor invested in capital assets net of related debt. 10 2. Reserves Water Fund The unrestricted net assets of the Water Fund will be maintained at a minimum level equal to 25% of the annual budgeted operational expenses, plus the budgeted capital improvements (stemming from the water system construction impact fees). Airport Fund The unrestricted net assets of the Airport Fund will be maintained at a minimum level equal to 25% of annual budgeted operational expenses, plus the budgeted capital improvements for the current fiscal year. Other Specified Funds The Health Insurance Fund should maintain unrestricted net assets of one month of IPBC premium. Any amount above this threshold may be transferred to the Workers’ Compensation Fund or Liability/Property Insurance Fund to be used toward claims, eliminate potential deficits, or maintain net asset policy in these other Funds. The Workers’ Compensation Fund should maintain unrestricted net assets of $1,000,000 collectively (or 1 year premium for reinsurance plus the average annual retention costs associated with that premium). The Liability/Property Insurance Fund should maintain unrestricted net assets approximately equivalent to 25% of annual budgeted expenses. The Fleet Replacement Fund will account for revenue and expenditures associated with the acquisition of City vehicles and major equipment (i.e. trailers and plows). A chargeback system from each division and Fund requiring vehicles will be utilized as the main revenue source. The Fleet Replacement Fund should maintain unrestricted net assets of the planned replacements for the current fiscal year. The Equipment Fund is used to track the resources collected for and used in obtaining major improvements to equipment which costs over $5,000 and has a useful life expectancy of at least three years. Equipment to be funded includes computer equipment, office furniture, copy and facsimile machines and other like equipment. A chargeback system from each division and Fund requiring equipment will be utilized as the main revenue for the Fund. The Equipment Fund should maintain unrestricted net assets of the planned replacements for the current fiscal year. 11 Part IV – Other 1. Cash Deficits Should any Fund incur a cash deficit by the end of the fiscal year, an interfund loan will be created with a Fund or Fund(s) which have a cash surplus (unless restricted by statute or Fund Balance policy). 2. Reporting Year to date revenues and expenditures for the General Fund will be issued to the City Council by their second regular meeting of each month. On a quarterly basis, the City Council shall receive an update on the General Fund with a year-end forecast for the fiscal year and also receive a summary of major fund balances. TIF Funds will be reported in greater detail to Council by the end of March and by the end of September of each year. The City Council shall receive an update on workers’ compensation claims through December 31 by the end of March and claims through June 30 by the end of September of each year. A semi-annual report on economic development incentives will be reported to Council by the end of March and by the end of September of each year. An update on retiree insurance costs will be reported annually by the end of March of each year. 12 Subject: Revenue and Expenditure Policy Number: 01-03 Date: October 29, 2014 Purpose: Revenues The City desires to maintain a diversified and stable revenue base to reduce the impacts of fluctuations in any one revenue source. The revenue mix combines elastic and inelastic revenue sources to minimize the effects of an economic downturn. The City also incorporates the following principles related to revenues as it furthers its financial planning and fulfills its fiscal responsibilities: 1. The City prefers to keep its property tax rate as low as possible. The following components shall be followed in priority order each year when establishing the property tax levy: a. Levy for Police, Fire and IMRF pensions per actuary calculations. If the actuarial reports indicated a higher employer contribution is needed, said increase will need to be added to the City’s overall previous year levy request to avoid underfunding problems. b. Levy for FICA. c. Levy for general obligation bond principal and interest less abatements. d. Levy to support General Fund operations including Police, Fire, Public Works, Community Development, Finance, Human Resources, I.T. and Administration. The annual increase for this component should not exceed the rate of inflation. e. Levy to fund additional personnel as determined by the City Council. 2. User charges and tap-on fees will be sufficient to finance all operating and debt service costs for the Water Fund. 13  3. The City Manager should impose spending limits if, in his/her judgment, revenues will be below original estimates. Staff should review and monitor on a monthly basis expenditures to assure control of spending within available revenues. 4. Ongoing transfers will be made from the General Fund to the Fleet Replacement fund on an annual basis to help plan for the purchasing of large capital equipment needs. Expenditures The City will strive to adhere to the following policies: 1. The City will consistently budget the minimum level of expenditures which will provide for the public well-being and safety of the residents and businesses of the community. 2. Expenditures will be within the confines of generated revenue. Fund balances will not be used to pay for operating expenditures except in the case of emergencies and after careful consideration. 14 Subject: Accounting, Auditing and Financial Reporting Policy Number: 01-04 Date: October 29, 2014 Purpose: The City shall have an annual audit conducted on its financial records by a qualified, independent public accounting firm. The City should request proposals from qualified independent accounting firms to conduct an annual audit of its financial statements every five to six yearsby the use of a request for proposal (RFP) process. In accordance with Government Finance Officers Association’s (GFOA’s) Best Practice Guidelines, the current auditors can be included in the RFP process, however, it is recommended changing the audit team if the same firm came in with the best proposal. The audit shall be conducted on an annual basis to be completed and filed within six months after the end of each fiscal year. The City should submit its Comprehensive Annual Financial Report (CAFR) to the Government Finance Officers Association’s (GFOA) Certificate of Achievement for Excellence in Financial Reporting Program. The City’s financial statements shall be prepared according to generally-accepted accounting principles (GAAP) as promulgated by the Governmental Accounting Standards Council (GASB). The City should contract with an independent actuary to determine the City’s annual contribution to the Police and Fire Pension Funds. 15 Subject: Capital Asset Policy Policy Number: 01-05 Date: October 29, 2014 Purpose: Capital assets purchased or acquired with an original cost of $25,000 or more are reported at historical cost or estimated historical cost. Contributed assets are reported at fair market value as of the date received. Additions, improvements and other capital outlays that significantly extend the useful life of an asset are capitalized. Other costs incurred for repairs and maintenance are expensed as incurred. The accounting and financial reporting treatment applied to a fund is determined by its measurement focus. General capital assets are long-lived assets of the City as a whole. Infrastructure such as streets, traffic signals and signs are capitalized. In the case of the initial capitalization of general infrastructure assets (i.e., those reported by the governmental activities) the government chose to include all such items regardless of their acquisition date. The valuation basis for general capital assets are historical cost, or where historical cost is not available, estimated historical cost based on replacement costs. Capital assets in the proprietary funds are capitalized in the fund in which they are utilized. The valuation bases for proprietary fund capital assets are the same as those used for the general capital assets. Donated capital assets are capitalized at estimated fair market value on the date donated. Depreciation on all assets is computed and recorded using the straight-line method of depreciation over the following estimated useful lives: Buildings and Building Improvements 40 to 50 Years Equipment 10 to 20 Years Vehicles 3 to 20 Years Infrastructure 25 to 50 Years Water Distribution System 40 to 65 Years 16 Subject: Debt Management Policy Number: 01-06 Date: October 29, 2014 Purpose: The City of DeKalb developed this Debt Management Policy to help ensure the City’s credit worthiness and to provide a functional tool for debt management and capital planning. The City of DeKalb faces continuing capital infrastructure requirements to meet the increasing needs of its citizens. The City limits long-term debt to only those capital improvements that cannot be financed from current revenues. The City of DeKalb will not use long-term debt to fund operating programs. The costs of the capital requirements will be met through the issuance of various types of debt instruments. Consequently, the City needs to anticipate increases in debt levels based upon historical data. With these increases, the effects of decisions regarding the type of issue, method of sale, and payment structure become ever more critical to the City's financial well- being. To help ensure the City's credit worthiness, an established program of managing the City's debt becomes essential. To this end, the City Council recognizes this "Debt Management Policy" to be financially prudent and in the City's best economic interest. This policy will provide a functional tool for debt management and capital planning, and enhance the City's reputation for managing its debt in a conservative and prudent manner. Goals Related to the Issuance of General Obligation and Revenue Bond Debt: The City shall pursue the following goals below when issuing debt. Though the City may not have achieved all these goals as of yet, these are long term objectives for which we must continue to strive toward. 1. Maintain at least an Aa3 (Moody’s) or equivalent credit rating for each general obligation debt issue. 2. Take all practical precautions to avoid any financial decision which will negatively impact current credit ratings on existing or future debt issues. 17  3. The City should attain a General Fund unassigned balance equal to a minimum of twenty five percent (25%) of total annual appropriations, exclusive of inter fund transfers by Fiscal Year 2015. 4. Consider market timing. 5. Determine the amortization (maturity) schedule which will best fit with the overall debt structure of the City’s general obligation debt and related tax levy at the time the new debt is issued. The City may choose to delay principal payments or capitalized interest during project construction. For issuance of revenue bonds, the amortization schedule which will best fit with the overall debt structure of the fund and its related rate structure will be considered. Consideration will be given to coordinating the length of the issue with the lives of assets, whenever practicable, while considering repair and replacement costs of those assets to be incurred in future years as an offset to the useful lives, and the related length of time in the payout structure. 6. Consider the impact of such new debt on overlapping debt and the financing plans of local governments which overlap, or underlie the City. 7. Assess financial alternatives to include new and innovative financing approaches, including whenever feasible, categorical grants, revolving loans or other state/federal aid. 8. Minimize debt interest costs. Debt Issuance in General: 1. Authority and Purposes of the Issuance of Debt The laws of the State of Illinois authorize the issuance of debt by the City. The Local Bond Law confers upon municipalities the power and authority to contract debt, borrow money, and issue bonds for public improvement projects as defined therein. Under these provisions, the City may contract debt to pay for the cost of acquiring, constructing, reconstructing, improving, extending, enlarging, and equipping such projects or to refund bonds. The City Charter authorizes the City Council to incur debt by issuing bonds for any lawful municipal purpose as authorized by the State Constitution or its Home Rule Powers. 2. Short-Term Debt (three years or less) The City may issue short-term debt to finance projects or portions of projects for which the City ultimately intends to issue long-term debt. This will be used to provide interim financing which will eventually be refunded with proceeds of long-term obligations, which may include, but not be limited to, bond anticipation notes or variable rate demand notes. The City will have an estimated timeframe when any short-term debt issue will eventually be converted into long-term debt. 18  a. Line of Credit The City may also issue debt instruments to meet cash flow requirements. With the approval of the City Council, the City may establish a tax- exempt line of credit with a financial institution selected through a competitive process. This line should have a limit of $2,500,000. Draws should be made on the line of credit when the need for financing is needed to meet operating expenditures on a temporary basis. Draws made on the line of credit must be requested by the Finance Director and approved by the City Manager and the City Council. 3. Long-Term Debt (more than three years) The City may issue long-term debt which may include, but not limited to, general obligation bonds, certificates of participation, capital appreciation bonds, special assessment bonds, self-liquidating bonds and double barreled bonds. Level or declining debt service should be employed unless operational matters dictate otherwise, or except to achieve overall level debt service with existing bonds. The City shall be mindful of the potential benefits of bank qualification and will strive to limit its annual issuance of debt to $10 million or less when such estimated benefits are greater than the benefits of exceeding the bank qualification limit. Should subsequent changes in the law raise this limit, then the City policy will be adjusted accordingly. The cost of issuance of private activity bonds is usually higher than for governmental purpose bonds. Consequently, private activity bonds will be issued only when they will economically benefit the City. The cost of taxable debt is higher than for tax-exempt debt. However, the issuance of taxable debt is mandated in some circumstances and may allow valuable flexibility in subsequent contracts with users or managers of the improvement constructed with the bond proceeds. In addition, there may be circumstances in which the issuance of taxable debt may be more cost effective than the issuance of tax-exempt debt. Therefore, the City will usually issue obligations tax exempt, but may occasionally issue taxable obligations. a. Capital Leasing The City may also enter into long-term leases for public facilities, property, and equipment with a useful life greater than one year that costs less than $500,000. The City should be limited to issuing a capital lease of no more than $1,000,000 in a fiscal year. 19  Whenever a lease is arranged with a private sector entity, a tax-exempt rate should be sought. Whenever a lease is arranged with a government or other tax-exempt entity, the City should strive to obtain an explicitly defined taxable rate so that the lease will not be counted in the City’s total annual borrowing subject to arbitrage rebate. The lease agreement should permit the City to refinance the lease at no more than reasonable cost should the City decide to do so. A lease which can be called at will is preferable to one which can merely be accelerated. 4. Capital Improvement Program The Capital Improvement Program (CIP), approved by the City Council as part of the annual budget, should determine the City's capital needs. The program should be a five-year plan for the acquisition, development and/or improvement of the City's infrastructure. Projects included in the CIP should be prioritized; and the means for financing each should be identified. If the current resources are insufficient to meet the needs identified in the CIP, the City Council may consider incurring debt to fund the shortfall. The City Council may also consider incurring debt to fund multiple years of the Capital Improvement Program. The CIP should be revised and supplemented each year in keeping with the City's stated policies on debt management. 5. Structure of Debt Issues The duration of a debt issue should remain outstanding beyond the asset’s useful life. Each new bond issue should be structured to be callable in 10 years. The City should design the financing schedule and repayment of debt so as to take best advantage of market conditions and, as practical, to recapture or maximize its credit capacity for future use, and moderate the impact to the taxpayer. In keeping with the stated goals of this debt management policy, the City should structure each general obligation issue (except refunding and mini-bond issues) to comply with the rapidity of debt repayment provisions in Section III. E-4 following. 6. Credit Enhancements Credit enhancements are mechanisms which guarantee principal and interest payments. Typically they include bond insurance and/or a line or letter of credit. Usually this will bring a lower interest rate and a higher rating from the rating agencies, thus lowering costs. The City may enter into agreements with commercial banks or other financial entities for the purpose of acquiring credit enhancements when their use is judged cost effective or otherwise advantageous. Any such agreements shall be approved by the City Council. 7. Inclusion of Local Institutions 20  Whenever practical and in the best interest of promoting the City of DeKalb, local financial institutions are to be offered the opportunity to bid on debt instruments. Legal Constraints and Other Limitations on the Issuance of Debt 1. State Law 30 ILCS 305/0.01, et. seq.: the short title is "The Bond Authorization Act." 2. Authority for Debt The City may, by bond ordinance, incur indebtedness or borrow money, and authorize the issue of negotiable obligations, including refunding bonds, for any capital improvement of property, land acquisition, or any other lawful purpose with approval by the City Council. 3. Debt Limitation The City of DeKalb is a home rule community. As such, the debt limitations of the bond laws are not applicable because the General Assembly has set no limits for home rule municipalities. 4. Methods of Sale When feasible and economical, obligations should be issued by competitive rather than negotiated sale. A sale may be negotiated when the issue is predominantly a refunding issue or in other non-routine situations which require more flexibility than a competitive offer allows. Whenever the option exists to offer an issue either for competition or for negotiation, analysis of the options should be performed to aid in the decision-making process. When a sale is not competitively bid, the City will publicly present the reasons and select the underwriter or direct purchaser. If a Financial Advisor is hired to assist the City in bond issuance, the Financial Advisor will not underwrite any debt issues on which it is advising. The criteria used to select an underwriter in a competitive sale should be the true interest cost. In a negotiated sale, the underwriter may be selected with or without a request for proposals (RFP). The criteria used to select an underwriter in a negotiated sale should include the following:  Overall experience  Marketing philosophy  Capability  Previous experience as managing a co-managing partner  Financial statements  Public Finance team and resources  Underwriter’s discount 21  When cost/beneficial, the City may privately place its debt. Since no underwriter participates in a private placement, it may result in lower costs of issuance. Private placement is sometimes an option for small issues. 5. Credit Implications When issuing new debt, the City should strive not to exceed credit industry benchmarks where applicable. Therefore, the following factors should be considered in developing debt issuance plans: a. Ratio of Gross Bonded Debt to Full Market Value of Taxable Property The formula for this computation is Gross Bonded Debt, which is the total outstanding debt, divided by the current Full Market Value of Taxable Property as determined by the Township Assessors. The City should not exceed 2% of Gross Bonded Debt per Full Market Value of Taxable Property. b. Gross Bonded Debt Per Capita The formula for this computation is Gross Bonded Debt divided by the current population as determined by the most recent U.S. Census. The City should not exceed $1,200 for Gross Bonded Debt per capita. c. Ratio of Annual Debt Service to General Fund Expenditures The formula for this computation is annual debt service expenditures divided by General Fund expenditures (excluding certain interfund transfers). The City should not exceed 10% of General Fund expenditures for annual debt service. d. Rapidity of Debt Service Repayment The City's general obligation bond issues should be so structured whereby the duration of the debt should not exceed 120% of the life of the asset. e. Current Fund Balance General Fund Cash Reserve The City should maintain a General Fund unassigned balance equal to a minimum of twenty five percent (25%) of total annual appropriations, exclusive of interfund transfers. Such calculation, including a projection to June 30th (of the current fiscal year), should be made on an annual basis by the Finance Director (or designee) during the budget process. Debt Administration 1. Financial Disclosures The City shall prepare appropriate disclosures as required by the Securities and Exchange Commission, the federal government, the State of Illinois, rating agencies, 22  underwriters, investors, agencies, taxpayers, and other appropriate entities and persons to ensure compliance with applicable laws and regulations. 2. Review of Financing Proposals All capital financing proposals that involve a pledge of the City's credit through the sale of securities, execution of loans or lease agreements and/or otherwise directly involve the lending or pledging of the City's credit shall be referred to the Finance Director who shall determine the financial feasibility, and the impact on existing debt of such proposal, and shall make recommendations accordingly to the City Manager. 3. Establishing Financing Priorities The Finance Director shall administer and coordinate the City's debt issuance program and activities, including timing of issuance, method of sale, structuring the issue, and marketing strategies. The Finance Director along with the City's bond consultants shall meet, as appropriate, with the City Manager and the City Council regarding the status of the current year's program and to make specific recommendations. 4. Credit Rating The City should endeavor to maintain and/or to improve its credit rating and staff will specifically discuss with the City Council any proposal which might cause that rating to be lowered. Before a general obligation bond is issued, the City will update its rating from at least one national rating agency. The City Manager, Finance Director, and the City's bond consultants should meet with a rating agency to disclose the City's capital plans, debt issuance program, and other appropriate financial information as required by the rating agency. 5. Refunding Policy The City should consider refunding outstanding debt when legally permissible and financially advantageous. When refunding for savings purposes, a net present value debt service savings of at least two percent or greater must be achieved. Depending on the time to maturity and the absolute level of interest rates of the refunding candidate this target may change. For longer maturities the target can be higher, for shorter maturities, lower. For higher interest rates the target may be higher, for lower rates it could be lower. There may be circumstances where the City may refund bonds for restructuring purposes that may not generate any savings. 6. Investment of Borrowed Proceeds The City acknowledges its ongoing fiduciary responsibilities to actively manage the proceeds of debt issued for public purposes in a manner that is consistent with Illinois statutes that govern the investment of public funds, and consistent with the permitted 23  securities covenants of related bond documents executed by the City. The management of public funds should enable the City to respond to changes in markets or changes in payment or construction schedules so as to (i) optimize returns, (ii) insure liquidity, and (iii) minimize risk. The City will invest bond proceeds in accordance with the City’s investment policy and federal arbitrage requirements. Glossary of Terms: Ad Valorem Tax - A direct tax based "according to value" of property. Advanced Refunding Bonds - Bonds issued to refund an outstanding bond issue prior to the date on which the outstanding bonds become due or callable. Proceeds of the advanced refunding bonds are deposited in escrow with a fiduciary, invested in United States Treasury Bonds or other authorized securities, and used to redeem the underlying bonds at maturity or call date. Amortization - the process of paying the principal amount of an issue of bonds by periodic payments either directly to bondholders or to a sinking fund for the benefit of bondholders. Arbitrage - Usually refers to the difference between the interest paid on the tax-exempt securities and the interest earned by investing the proceeds in higher yielding taxable securities. Internal Revenue Service regulations govern arbitrage (reference I.R.S. Reg. 1.103-13 through 1.103-15). Arbitrage Bonds - Bonds which are deemed by the I.R.S. to violate federal arbitrage regulations. The interest on such bonds becomes taxable and the bondholders must include this interest as part of gross income for federal income tax purposes (I.R.S. Reg. 1.103-13 through 1.103-15). Assessed Value - An annual determination of the just or fair market value of property for purposes of ad valorem taxation. Basis Point - 1/100 of one percent. Bond - Written evidence of the issuer's obligation to repay a specified principal amount on a date certain, together with interest at a stated rate, or according to a formula for determining that rate. Bond Anticipation Notes (BANS) - Short-term interest bearing notes issued by a government in anticipation of bonds to be issued at a later date. The notes are retired from proceeds of the bond issue to which they are related. Bond Counsel - An attorney retained by the City to render a legal opinion whether the City is authorized to issue the proposed bonds, has met all legal requirements necessary for issuance, and whether interest on the bonds is, or is not, exempt from federal and state income taxation. Bonded Debt - The portion of an issuers total indebtedness represented by outstanding bonds. Direct Debt or Gross Bonded Debt - The sum of the total bonded debt and any unfunded debt of the issuer. 24  Net Direct Debt or Net Bonded Debt - Direct debt less sinking fund accumulations and all self-supporting debt. Total Overall Debt - Net direct debt plus the issuer's applicable share of the direct debt of all overlapping jurisdictions. Net Overall Debt - Net direct debt plus the issuer's applicable share of the net direct debt of all overlapping jurisdictions. Overlapping Debt - The issuer's proportionate share of the debt of other local governmental units which either overlap or underlie it. Callable Bond - A bond which permits or requires the issuer to redeem the obligation before the stated maturity date at a specified price, the call price, usually at or above par value. Capital Appreciation Bonds (CAB) - A long-term security on which the investment return is reinvested at a stated compound rate until maturity. The investor receives a single payment at maturity representing both the principal and investment return. Certificates of Participation - Documents, in fully registered form, that act like bonds. However, security for the certificates is the government's intent to make annual appropriations during the term of a lease agreement. No pledge of full faith and credit of the government is made. Consequently, the obligation of the government to make basic rental payments does not constitute an indebtedness of the government. Commercial Paper - Very short-term, unsecured promissory notes issued in either registered or bearer form, and usually backed by a line of credit with a bank. Coupon Rate - The annual rate of interest payable on a coupon bond (a bearer bond or bond registered as to principal only, carrying coupons evidencing future interest payments), expressed as a percentage of the principal amount. Debt Limit - The maximum amount of debt which an issuer is permitted in incur under constitutional, statutory or charter provision. Debt Service - The amount of money necessary to pay interest on an outstanding debt, the serial maturities of principal for serial bonds, and the required contributions to an amortization or sinking fund for term bonds. Demand Notes (Variable Rate) - A short-term security which is subject to a frequently available put option feature under which the holder may put the security back to the issuer after giving specified notice. Many of these securities are floating or variable rate, with the put option exercisable on dates on which the floating rate changes. 25 Double Barreled Bonds (Combination Bonds) - A bond which is payable from the revenues of a governmental enterprise and are also backed by the full faith and credit of the governmental unit. Enterprise Funds - Funds that are financed and operated in a manner similar to private business in that goods and services provided are financed primarily through user charges. General Obligation Bond - A bond for whose payment the full faith and credit of the issuer has been pledged. More commonly, but not necessarily, general obligation bonds are payable from ad valorem property taxes and other general revenues. Lease Purchase Agreement (Capital Lease) - A contractual agreement whereby the government borrows funds from a financial institution or a vendor to pay for capital acquisition. The title to the asset(s) normally belongs to the government with the lessor acquiring security interest or appropriate lien therein. Letter of Credit - A commitment, usually made by a commercial bank, to honor demands for payment of a debt upon compliance with conditions and/or the occurrence of certain events specified under the terms of the commitment. Level Debt Service - An arrangement of serial maturities in which the amount of principal maturing increases at approximately the same rate as the amount of interest declines. Long-Term Debt - Long-term debt is defined as any debt incurred whose final maturity is more than three years. Maturity - The date upon which the principal of a municipal bond becomes due and payable to bondholders. Mini-bonds - A small denomination bond directly marketed to the public. Net Interest Cost (NIC) - The traditional method of calculating bids for new issues of municipal securities. The total dollar amount of interest over the life of the bonds is adjusted by the amount of premium or discount bid, and then reduced to an average annual rate. The other method is known as the true interest cost (see "true interest cost"). Offering Circular - Usually a preliminary and final document prepared to describe or disclose to investors and dealers information about an issue of securities expected to be offered in the primary market. As a part of the offering circular, an official statement should be prepared by the City describing the debt and other pertinent financial and demographic data used to market the bonds to potential buyers. Other Contractual Debt - Purchase contracts and other contractual debt other than bonds and notes. Other contractual debt does not affect annual debt limitation and is not a part of indebtedness within the meaning of any constitution or statutory debt limitation or restriction. 26 Par Value or Face Amount - In the case of bonds, the amount of principal which must be paid at maturity. Parity Bonds - Two or more issues of bonds which have the same priority of claim or lien against pledged revenues or the issuer's full faith and credit pledge. Principal - The face amount or par value of a bond or issue of bonds payable on stated dates of maturity. Private Activity Bonds - One of two categories of bonds established under the Tax Reform Act of 1986, both of whom are subject to certain tests and State volume caps to preserve tax exemption. Ratings - Evaluations of the credit quality of notes and bonds, usually made by independent rating services, which generally measure the probability of the timely repayment of principal and interest on municipal bonds. Refunding Bonds - Bonds issued to retire bonds already outstanding. Registered Bond - A bond listed with the registrar as to ownership, which cannot be sold or exchanged without a change of registration. Reserve Fund - A fund which may be used to pay debt service if the sources of the pledged revenues do not generate sufficient funds to satisfy the debt service requirements. Self-Supporting or Self Liquidating Debt - Debt that is to be repaid from proceeds derived exclusively from the enterprise activity for which the debt was issued. Short-Term Debt - Short-term debt is defined as any debt incurred whose final maturity is three years or less. Spread - The income earned by the underwriting syndicate as a result of differences in the price paid to the issuer for a new issue of municipal bonds, and the prices at which the bonds are sold to the investing public, usually expressed in points or fractions thereof. Tax-Exempt Bonds - For municipal bonds issued by the City tax-exempt means interest on the bonds are not included in gross income for federal income tax purposes; the bonds are not items of tax preference for purposes of the federal, alternative minimum income tax imposed on individuals and corporations; and the bonds are exempt from taxation by the State of Illinois. Tax Increment Bonds - Bonds secured by the incremental property tax revenues generated from a redevelopment project area. Term Bonds - Bonds coming due in a single maturity. True Interest Cost (TIC) - Also known as Canadian Interest Cost. A rate which, when used to discount each amount of debt service payable in a bond issue, will produce a present value 27 precisely equal to the amount of money received by the issuer in exchange for the bonds. The TIC method considers the time value of money while the net interest cost (NIC) method does not. Yield to Maturity - The rate of return to the investor earned from payments of principal and interest, with interest compounded semiannually and assuming that interest paid is reinvested at the same rate. Zero Coupon Bond - A bond which pays no interest, but is issued at a deep discount from par, appreciating to its full value at maturity. 28 TO: Finance Advisory Committee FROM: Anne Marie Gaura, City Manager Catherine L. Haley, Director of Finance DATE: 10/24/2014 RE: General Fund Overview As has been noted in the Budget Transmittal letter, the General Fund supports nine other funds because they are not self-sufficient. These funds are being supported by either inter-fund transfers or direct expenditures. For FY 2015, a total of $2,687,700 in inter-fund transfers were budgeted. The following is the breakdown of this amount: Health Insurance Fund $350,000 Public Safety Building Fund $400,000 Fleet Replacement Fund $162,500 Equipment Fund $35,000 Airport Fund $730,000 General Debt Service Fund $1,010,200 $2,687,700 There is also $863,563 budgeted in FY 2015 in the General Fund to cover the cost associated with retiree health insurance. When all of the items above are combined, the total expenditures allocated to other funds from the General Fund total $3,551,263. These dollars being used to prop up other non-self-sufficient funds take away funding of basic operations and services from the residents and businesses of the City. As it is, the City is not meeting Fund Balance goals for the General Fund. 29 These policy questions will determine the main issues that the Finance Advisory Committee and the City Council will need to discuss for the future financial stability of the City. 1. How will the General Fund continue to support its current level of operations once the TIF funds expire? The General Fund will lose $942,600 from annual transfers from the two TIF funds along with $492,500 worth of tax surplus revenue generated from these funds. This equates to $1,435,100 of lost revenue to the General Fund. The discontinuation of the TIF’s does bring an opportunity to the City to capture additional property tax dollars without affecting the tax rate. In other words, the end of a TIF should mean a growth in EAV for the City. Therefore the City can increase the requested dollars without affecting the tax rate and in turn without affecting an individual resident’s tax bill. (Tax Dollars = EAV x Tax Rate) The City Council would need to approve this increase. However, this will not cover the total loss of the $1,435,100. At best guess it should cover approximately $500,000, which still leaves almost a $935,100 shortfall of revenue. This $500,000 estimate is based on the City’s EAV which fluctuates annually, and the increment of the TIF’s, which also fluctuate annually. 2. How can the City continue to maintain long-term sustainable operation expenditures? Below shows the City’s full-time equivalent headcount and the reduction the City has undergone since FY 2008. This is a 12% reduction in full-time and part-time employees between 2008 and 2015. Page |2 30  The next several charts show General Fund expenditures for the City in comparison to other municipalities. The City is currently working on a Pay and Compensation Classification study with Sikich LLP. The following list of municipalities are recommended by Sikich (for the study in progress) based on similar comparable data to the DeKalb. These charts show how fiscally conservative the City already is based on the services being provided. DeKalb is an extreme value for the services received versus costs. GENERAL FUND TOTAL - EXPENSE PER CAPITA Municipality Population Total General Fund Per Capita Expense 1 Elk Grove Village 33,127 $41,538,685 $1,253.92 2 Rolling Meadows 24,099 $26,100,317 $1,083.05 3 St. Charles 32,974 $32,401,981 $982.65 4 Romeoville 39,860 $35,725,074 $896.26 5 Hoffman Estates 51,895 $44,443,289 $856.41 6 Sycamore 17,446 $13,883,564 $795.80 7 Batavia 26,045 $19,615,128 $753.12 8 Hanover Park 37,973 $26,353,864 $694.02 9 DeKalb 44,030 $29,592,367 $672.10 10 Carpentersville 37,691 $25,215,447 $669.00 11 Wheaton 52,894 $34,047,914 $643.70 12 Crystal Lake 40,743 $25,815,456 $633.62 13 West Chicago 27,086 $16,763,857 $618.91 14 Streamwood 39,858 $23,700,341 $594.62 15 Belvidere 25,585 $13,526,035 $528.67 General Fund expenditures cover services for residents that include police protection, fire protection and street maintenance. The chart above shows the City of DeKalb ranked 9th out of 15 at a per capita expense of $672.10. Compared to number one on the list, Elk Grove Village, almost doubles that amount at $1,253.92. Page |3 31  This next chart shows full-time employees only, unlike the graph on page 1 that included both full-time and part-time employees. It shows a comparison of number of employees per 1,000 population. This data is for FY 2013 from all municipalities. FULL-TIME EMPLOYEES PER 1,000 RESIDENTS Full-Time Employees/1,000 Municipality Population Employees Population 1 Elk Grove Village 33,127 296 8.94 2 St. Charles 32,974 237 7.19 3 Rolling Meadows 24,099 159 6.60 4 Crystal Lake 40,743 264 6.48 5 Hoffman Estates 51,895 325 6.26 6 Batavia 26,045 153 5.87 7 Sycamore 17,446 100 5.73 8 Romeoville 39,860 211 5.29 9 Hanover Park 37,973 193 5.08 10 Belvidere 25,585 123 4.81 11 Streamwood 39,858 181 4.54 12 Carpentersville 37,691 170 4.51 13 Wheaton 52,894 236 4.46 14 DeKalb 44,030 189 4.29 15 West Chicago 27,086 104 3.84 The chart above shows the City of DeKalb ranked 14th out of 15 at 4.29, compared to number one on the list, Elk Grove Village which is more than double at 8.94. 3. How does the City attain financial stability, build fund balance reserves, and secure funding to replace city vehicles? These will be the major policy questions that the Finance Advisory Committee and the City Council will need to discuss for the future financial stability of the General Fund Operations for the City of DeKalb. Page |4 32 To: Finance Advisory Committee From: Anne Marie Gaura, City Manager Catherine L. Haley, Director of Finance Date: 10/24/2014 Re: Tax Levy Analysis The following memorandum includes several pieces of information to help with the analysis of the 2014 tax levy. While residents live within the City limits, their property tax bill is comprised of no less than ten separate taxing districts. Each taxing district determines the total dollar amount to levy on the property which resides within the taxing district boundaries. A tax rate is calculated based on this total dollar request and the total assessed value of property within the taxing districts boundaries. The tax rate is what a resident sees on their tax bill for each entity having authority to place a levy on their property. The equalized assessed value (EAV) of an individual resident’s property is multiplied by each tax rate to determine the amount of tax owed for the respective calendar year. Below shows the total 2013 tax bill percentage break-out for a current resident living in the City of DeKalb. AGENCY RATE AGENCY RATE CC 523 Kishwaukee 0.72938 DeKalb Park 0.75187 City of DeKalb 0.98093 DaKalb Road & Bridge 0.19765 County 1.20126 DeKalb Township 0.16865 DeKalb Library 0.37013 Forest Preserve 0.08521 DeKalb Sanitary 0.13931 School District 428 7.82153 TOTAL TAX RATE 12.44592 33  About 8% of a resident’s current tax bill goes to the City. The chart below shows the City of DeKalb total property tax dollars, rate and percentage of total tax bill compared to other communities. It also shows tax dollars per capita based on these comparables. PROPERTY TAX DOLLARS PER CAPITA Municipality Population Property Tax $ Per Capita Expense Tax Rate 1 Rolling Meadows 24,099 $12,167,830 $504.91 Did not provide 2 Elk Grove Village 33,127 $16,340,195 $493.26 0.84 3 Wheaton 52,894 $19,478,300 $368.25 1.03 4 St. Charles 32,974 $12,055,112 $365.59 0.90 5 Hoffman Estates 51,895 $17,945,023 $345.79 1.37 6 Carpentersville 37,691 $11,902,305 $315.79 2.67 7 Romeoville 39,860 $11,589,209 $290.75 1.12 8 Streamwood 39,858 $10,889,140 $273.20 1.57 9 Batavia 26,045 $6,687,460 $256.77 0.73 10 Hanover Park 37,973 $7,453,671 $196.29 1.26 11 Crystal Lake 40,743 $7,907,318 $194.08 0.80 12 Belvidere 25,585 $4,573,916 $178.77 1.59 13 Sycamore 17,446 $2,623,378 $150.37 0.76 14 West Chicago 27,086 $3,510,370 $129.60 0.60 15 DeKalb 44,030 $4,761,615 $108.14 0.98 * This includes the debt service levy for the Library. DeKalb is ranked 15th out of 15 municipalities with a per capita expense of $108.14. This is compared to Rolling Meadows at #1, which is over 4.5 times higher. The total dollars levied equal the EAV x Rate. Over the past five years, the City’s EAV has continued to drop while levy dollars have remained fairly constant. The estimated EAV from the County shows another drop between 2013 and 2014 of -4.14%. The impact on the rate can be seen in the chart below. Note, for comparison purposes this chart does not include the dollars levied for the library’s debt payment. Levy Police Social Change in EAV Year Corporate IMRF Fire Pension Pension Security Total Levy levy EAV Rate Change 2007 - 795,624 1,526,494 864,244 556,575 3,742,937 342,789 623,822,841 0.6000 9.48% 2008 - 615,952 1,756,468 1,112,808 389,903 3,875,131 132,194 645,855,095 0.6000 3.53% 2009 - 277,142 2,009,921 1,348,297 550,098 4,185,458 310,327 643,916,597 0.6500 -0.30% 2010 - 479,245 2,063,405 1,334,743 319,496 4,196,889 11,431 608,332,947 0.6899 -5.53% 2011 148,422 668,366 1,837,569 1,097,555 445,150 4,197,063 174 582,504,715 0.7205 -4.25% 2012 - 320,337 2,078,106 1,379,248 467,027 4,244,718 47,655 533,805,903 0.7952 -8.36% 2013 251,028 2,057,012 1,472,203 490,297 4,270,540 25,822 485,923,623 0.8788 -8.97% The City is a home rule municipality and levies for dollars. The increased rate over the last few years can be attributable primarily to the drop in the City’s EAV and not due to the City increasing property tax dollars. (EAV x Tax Rate = Levy Dollars) For information purposes, the City’s levy is comprised of the following categories: General Corporate Debt Service IMRF Police Pension Fire Pension Social Security Page |2 34 With the exception of the “General Corporate”, each of the categories listed above are tied to a specific expenditure that the City incurs on an annual basis. There has been only one year in the past ten that the city levied any dollars for “General Corporate” expenses. The General Corporate category would include all those other operating expenses other than pension costs and a portion of the debt expenditures that are not abated. This is the only portion of the community’s tax bill that is not tied directly to any one particular line item or cost. This portion helps to cover all the remaining costs that the City incurs in providing municipal services to the residents and businesses. Past practice shows the City also fully abating its debt expenditures and has covered those costs through transfers from other City funds. The General Fund transfer to cover debt payments for fiscal year 2015 is $1,410,200. This dollar amount will grow in FY 2016 to over $2.0 million. In levy year 2013 for collections in calendar year 2014, there was $491,075 levied for the bond payments on the library expansion project that the City Council approved in 2013. However, no other property taxes have been levied to cover any of the City’s debt payments which hinders the City’s ability to meet other operational expenses. The Executive Partners Inc. (EPI), Strategic Planning Review from June of 2013, recommends not making debt payments from the General Fund. Making debt payments from the General Fund is not a sustainable practice, particularly in light of escalating employee and material costs. Specifically, the use of property taxes over the life of capital items is instead recommended. This EPI report goes on to further indicated that some increase in property tax may be necessary. Staff is making a recommendation of options to increase the levy based on this report. The current property tax levy is also not fully funding employer pension obligations. The 2013 property tax levy is funding the Police and Fire pension funds based on an independent actuarial valuation. It should be noted the actuarial valuation method used is the PUC method (Projected Unit of Credit Cost Method) which is the lowest level of funding acceptable by the State of Illinois. Currently the Police Pension Fund is funded at 60% while the Fire Pension Fund is funded at only 43%. By using this lower level of funding method the unfunded obligation to the pension funds will continue to increase. Funding at a higher method or putting in additional dollars to these funds may be necessary in the future to ensure the funds are at the 90% funding level by 2040. IMRF was only funded in FY 2014 at 26.00% of actual costs to the City compared to Social Security which was funded at 97.00% of actual costs to the City. IMRF FY 2014 actual dollars were $970,375 and the dollars levied for this obligation were $251,028. FICA obligation for FY 2014 was $504,745 compared to dollars levied of $490,297. Page |3 35 The following details the history of the tax levy allocation for the City of DeKalb. Again, for comparison purposes this graph does not include the portion levied for the Library’s debt payment. As shown from the history, the City’s past practice was not to levy dollars for debt payments. It is also clear that the funding level for the employer contribution in to IMRF has fluctuated and dropped greatly. By trying to simply keep up with the annual police and fire pension cost increases, and attempting to keep the levy flat, other General Fund revenues need to be used to support the full City obligation into IMRF and Social Security. Staff has identified several different options to increase the levy versus past practice of holding the levy relatively flat. Below are four different options for discussion regarding the 2014 Tax Levy. OPTION #1 Assumptions: 1. Fully funding Social Security employer obligations. 2. Fully funding IMRF employer obligations. 3. The City has not yet received an actuarial valuation for the pension funds. It has been estimated at a 5% increase to both of these dollars. 4. Increase SSA #4 to account for the negative fund balance position at the end of FY 2014 and to cover the expenditures budgeted FY 2015. 5. Increase SSA #6 to cover the costs in the FY 2015 budget for the installation of an additional 16 lighting fixtures on Greenbrier Drive, Hillcrest Drive, Kimberly Drive and Edgebrook Drive. 6. Continue to keep the one debt payment for the 2013A bond series principal and interest for the library expansion. 7. Estimated EAV drop from DeKalb County is -4.14% The next chart shows last year’s levy compared to the projection of what the 2014 tax levy might look like based on the above assumptions. This will be the estimated levy presented to the Council on November 10, 2014. In accordance with the Truth in Taxation Act the estimated levy is required to be received and filed at least twenty days before the actual levy ordinance is passed. This estimate will set the ceiling of the maximum levy that can be requested this levy year. Page |4 36  2014 Estimated Tax Levy 2013 Tax Levy 2014 Estimated 2014 Estimated $ Increase/ after Tax Levy before Tax Levy after Decrease over OPTION #1 Abatements Abatements Abatements prior year General Fund Corporate $0 $0 $0 $0 IMRF $251,028 $803,550 $803,550 $552,522 Fire Pension $2,057,012 $2,159,862 $2,159,862 $102,850 Police Pension $1,472,203 $1,545,813 $1,545,813 $73,610 Social Security $490,297 $518,000 $518,000 $27,703 Total General Fund $4,270,540 $5,027,225 $5,027,225 $756,685 Debt Service G.O. Bonds 2013A-Library $491,075 $620,000 $488,125 ($2,950) G.O. Bonds 2013B&2012A-Police $0 $900,000 $0 $0 G.O. Bonds 2010A - TIF $0 $1,428,300 $0 $0 G.O. Bonds 2010B&2010C-Refund $0 $1,350,000 $0 $0 G.O. Bonds 2004-Refunding $0 $1,486,025 $0 $0 Total Bond & Interest Ext. $491,075 $5,784,325 $488,125 ($2,950) TOTAL $4,761,615 $10,811,550 $5,515,350 $753,735 Estimated EAV 465,805,549 Estimated RATE 1.1840 Special Service Areas SSA #3-Heritage Ridge $0 $0 $0 $0 SSA #4-Knolls $1,600 $4,406 $4,406 $2,806 SSA #6 - Greek Row $5,100 $10,000 $10,000 $4,900 SSA#14 Heartland Fields $2,500 $2,500 $2,500 $0 Total General Fund $9,200 $16,906 $16,906 $7,706 While it has been a recommendation of the June 2013 EPI report to discontinue making debt payments from the General Fund, staff is not recommending adding the debt payments in to the 2014 levy request. This assumption recommends fully funding all employer pension obligations. Below is the impact to a resident who has an average home market value of $100,000, $150,000 and $200,000. The current average home value for a resident of DeKalb ranges between $150,000 and $199,000. This levy will cover primarily all the City’s pension obligation amounts along with the debt payment for the Library. PROPERTY TAX COMPUTATION CALCULATION COMPARISON BETWEEN 2013 AND 2014 OPTION #1 % Increase/ 2013 Market Value 2013 2014 Difference Decrease $ 100,000.00 Home EAV 33,333 31,953 $.14 - Per Day Tax Rate 0.9809% 1.1840% $4.28 - Per Month Tax Bill $327 $378 $51 - Annually 15.70% $ 150,000.00 Home EAV 50,000 47,930 $.21 - Per Day Tax Rate 0.9809% 1.1840% $6.42 - Per Month Tax Bill $490 $567 $77 - Annually 15.70% $ 200,000.00 Home EAV 66,667 63,907 $.28 - Per Day Tax Rate 0.9809% 1.1840% $8.56 - Per Month Tax Bill $654 $757 $103 - Annually 15.70% ** EAV x Tax Rate = Property Tax Revenue Page |5 37 OPTION #2 Assumptions: (Staff Recommendation) 1. Fully funding social security employer obligations. 2. Phase in fully funding IMRF employer obligations. Half this year and half next year. 3. The City has not yet received an actuarial valuation for the pension funds. It has been estimated at a 5% increase to both of these dollars. 4. Increase SSA #4 to account for the negative fund balance position at the end of FY 2014 and to cover the expenditures budgeted FY 2015. 5. Increase SSA #6 to cover the costs in the FY 2015 budget for the installation of an additional 16 lighting fixtures on Greenbrier Drive, Hillcrest Drive, Kimberly Drive, and Edgebrook Drive. 6. Continue to keep the one debt payment for the 2013A bond series principal and interest for the library expansion. 7. Estimated EAV drop from DeKalb County is -4.14% The next chart shows last year’s levy compared to the projection of what the 2014 tax levy might look like based on the above assumptions. 2014 Estimated Tax Levy 2013 Tax Levy 2014 Estimated 2014 Estimated $ Increase/ after Tax Levy before Tax Levy after Decrease over OPTION #2 Abatements Abatements Abatements prior year General Fund Corporate $0 $0 $0 $0 IMRF $251,028 $527,289 $527,289 $276,261 Fire Pension $2,057,012 $2,159,862 $2,159,862 $102,850 Police Pension $1,472,203 $1,545,813 $1,545,813 $73,610 Social Security $490,297 $518,000 $518,000 $27,703 Total General Fund $4,270,540 $4,750,964 $4,750,964 $480,424 Debt Service G.O. Bonds 2013A-Library $491,075 $620,000 $488,125 ($2,950) G.O. Bonds 2013B&2012A-Police $0 $900,000 $0 $0 G.O. Bonds 2010A - TIF $0 $1,428,300 $0 $0 G.O. Bonds 2010B&2010C-Refund $0 $1,350,000 $0 $0 G.O. Bonds 2004-Refunding $0 $1,486,025 $0 $0 Total Bond & Interest Ext. $491,075 $5,784,325 $488,125 ($2,950) TOTAL $4,761,615 $10,535,289 $5,239,089 $477,474 Estimated EAV 465,805,549 Estimated RATE 1.1247 Special Service Areas SSA #3-Heritage Ridge $0 $0 $0 $0 SSA #4-Knolls $1,600 $4,406 $4,406 $2,806 SSA #6 - Greek Row $5,100 $10,000 $10,000 $4,900 SSA#14 Heartland Fields $2,500 $2,500 $2,500 $0 Total General Fund $9,200 $16,906 $16,906 $7,706 Again staff is not recommending adding the debt payments in to the 2014 levy. This assumption recommends phasing in the funding of IMRF employer pension obligations. Below is the impact to a resident who has an average home market value of $100,000, $150,000 and $200,000. Page |6 38  PROPERTY TAX COMPUTATION CALCULATION COMPARISON BETWEEN 2013 AND 2014 OPTION #2 % Increase/ 2013 Market Value 2013 2014 Difference Decrease $ 100,000.00 Home EAV 33,333 31,953 $.09 - Per Day Tax Rate 0.9809% 1.1247% $2.70 - Per Month Tax Bill $327 $359 $32 - Annually 9.91% $ 150,000.00 Home EAV 50,000 47,930 $.13 - Per Day Tax Rate 0.9809% 1.1247% $4.05 - Per Month Tax Bill $490 $539 $49 - Annually 9.91% $ 200,000.00 Home EAV 66,667 63,907 $.18 - Per Day Tax Rate 0.9809% 1.1247% $5.40 - Per Month Tax Bill $654 $719 $65 - Annually 9.91% ** EAV x Tax Rate = Property Tax Revenue OPTION #3 Assumptions: 1. Keeping the overall levy increase just below 5%. This lowers the IMRF funding back down to where it was last FY. The General Fund would need to pay for the remaining $547,436 which takes away revenue from the City to meet other operational expenses. 2. Social Security would not be fully funded for the employer portion of these payments. 3. The City has not yet received an actuarial valuation for the pension funds. It has been estimated at a 5% increase to both of these dollars. 4. Increase SSA #4 to account for the negative fund balance position at the end of FY 2014 and to cover the expenditures budgeted FY 2015. 5. Increase SSA #6 to cover the costs in the FY 2015 budget for the installation of an additional 16 lighting fixtures on Greenbrier Drive, Hillcrest Drive, Kimberly Drive, and Edgebrook Drive. 6. Continue to keep the one debt payment for the 2013A bond series principal and interest for the library expansion. 7. Estimated EAV drop from DeKalb County is -4.14% This assumption is showing the aggregate levy below 5%. Any aggregate levy increase above 5% requires the City to file a Truth in Taxation notice and hold a public hearing. (Aggregate levy = proposed levy, less election costs, less debt service levies.) Therefore the SSA levies are incorporated in this percentage increase. The City will file a Truth in Taxation notice and hold a Public Hearing regardless of the option chosen. The next chart shows last year’s levy compared to the projection of what the 2014 tax levy might look like based on the above assumptions. Page |7 39  2014 Estimated Tax Levy 2013 Tax Levy 2014 Estimated 2014 Estimated $ Increase/ after Tax Levy before Tax Levy after Decrease over OPTION #3 Abatements Abatements Abatements prior year General Fund Corporate $0 $0 $0 $0 IMRF $251,028 $256,114 $256,114 $5,086 Fire Pension $2,057,012 $2,159,862 $2,159,862 $102,850 Police Pension $1,472,203 $1,545,813 $1,545,813 $73,610 Social Security $490,297 $514,812 $514,815 $24,518 Total General Fund $4,270,540 $4,476,601 $4,476,604 $206,065 Debt Service G.O. Bonds 2013A-Library $491,075 $620,000 $488,125 ($2,950) G.O. Bonds 2013B&2012A-Police $0 $900,000 $0 $0 G.O. Bonds 2010A - TIF $0 $1,428,300 $0 $0 G.O. Bonds 2010B&2010C-Refund $0 $1,350,000 $0 $0 G.O. Bonds 2004-Refunding $0 $1,486,025 $0 $0 Total Bond & Interest Ext. $491,075 $5,784,325 $488,125 ($2,950) TOTAL $4,761,615 $10,260,926 $4,964,729 $203,115 Estimated EAV 465,805,549 Estimated RATE 1.0658 Special Service Areas SSA #3-Heritage Ridge $0 $0 $0 $0 SSA #4-Knolls $1,600 $4,406 $4,406 $2,806 SSA #6 - Greek Row $5,100 $10,000 $10,000 $4,900 SSA#14 Heartland Fields $2,500 $2,500 $2,500 $0 Total General Fund $9,200 $16,906 $16,906 $7,706 Below is the impact to a resident who has an average home market value of $100,000, $150,000 and $200,000. PROPERTY TAX COMPUTATION CALCULATION COMPARISON BETWEEN 2013 AND 2014 OPTION #3 % Increase/ 2013 Market Value 2013 2014 Difference Decrease $ 100,000.00 Home EAV 33,333 31,953 $.04 - Per Day Tax Rate 0.9809% 1.0658% $1.13 - Per Month Tax Bill $327 $341 $14 - Annually 4.15% $ 150,000.00 Home EAV 50,000 47,930 $.06 - Per Day Tax Rate 0.9809% 1.0658% $1.70 - Per Month Tax Bill $490 $511 $20 - Annually 4.15% $ 200,000.00 Home EAV 66,667 63,907 $.07 - Per Day Tax Rate 0.9809% 1.0658% $2.26 - Per Month Tax Bill $654 $681 $27 - Annually 4.15% ** EAV x Tax Rate = Property Tax Revenue OPTION #4 1. Any other option as recommended by the Finance Advisory Committee. Page |8 40 Staffs is recommending option #2 based on the recommendation from the 2013 EPI to fully fund the City’s pension obligations. Staff realizes that doing this all in one year would have a large impact on a resident, therefore phasing it in over two years becomes more palatable. Below shows the dollar impact of each option.  Option #1 increase to General Fund Revenues = $756,685  Option #2 increase to General Fund Revenues = $480,424  Option #3 increase to General Fund Revenues = $206,065  Option #4 increase to General Fund Revenues = To Be Determined Timeline for this year’s levy process: October 29, 2014 Initial discussion of the levy with the Finance Advisory Committee November 10, 2014 Estimated levy presented at the City Council meeting November 13, 2014 Joint Finance Advisory meeting and City Council meeting to discuss the final recommendation of the levy. November 24, 2014 Truth in Taxation notice published and Public Hearing. First reading of the Levy. December 8, 2014 Second reading of the 2014 Tax Levy. Page |9 41