2014 FINANCIAL ANALYSIS

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In November 2013, the Board of Directors entered into an agreement with Capital Public Finance Group, LLC to review the District's financial health and make recommendations on budgeting and management of its long term liabilities. The scope of the agreement included:

• Assisting with the development of financial policies, including a policy to prefund pension and other post-employment benefits
• Assisting the District with developing and evaluating a comprehensive plan for prefunding pension and other-post employment options, including an evaluation of a post-employment bond financing should the district wish to consider this option.
• Assisting the District with public information materials regarding the District’s Operating and Capital Budgets and Pension and Other Post-Employment Benefits
• Assisting the District with validating budget assumption including the sustainability of the budget and appropriate levels of unrestricted reserves, capital reserves, catastrophic event reserves and prefunded benefit plans

The report was presented at the April 28, 2014 Regular Board Meeting.

OVERVIEW OF COMMENTS AND FINDINGS

Revenues

• The District has a wealthy and relatively stable tax base that is mostly comprised of residential property.
  • The lack of diversity in the tax base poses some concerns related to the longterm stability of revenues as the top ten taxpayers make up more than 7% of the total tax base.
  • However, the tax base demonstrated that during a time of substantial declines in the real estate market, property values in the District remained stable as the District never saw a decline in tax revenues.
  • The lack of diversity of the tax base should be considered when considering revenue reserves, but balanced by the demonstrated long-term stability.
• The District is not collecting development impact fees.
  • This policy should be re-evaluated to determine whether this is in line with the current desires of the community.
  • Consider alternative development mitigation measures, such as a CFD.

Expenditures

• The proportion of expenditures for Salaries and Benefits is in-line with proportionate expenditures of most public agencies.
• The District’s five year expenditures have remained relatively stable, with no unusual spikes in spending.
• Expenditure levels should reflect the service demands of the Montecito community.
  • Board policy should reflect these community service demands, which are then reflected in expenditure levels.
    • With careful consideration to ensure that expenditures are within revenue limitations.

Related to the Comparison of Revenues to Expenditures

• Historically, the District has avoided deficit spending with annual revenues exceeding annual expenditures.
  • This demonstrates a healthy financial position even during a difficult economic time.
• With the high dependence on property tax revenues, the District will annually face cash shortfalls, typically in November and early December, before property tax revenues are received.
  • The District can use reserves or other cash sources to meet these cash flow shortfalls instead of relying on cash flow borrowings.
• The District maintains healthy fund balances at a level that is considered “Very Strong” by Moody’s.

Budgeting

• The District’s annual budget development process can be more clearly stated to enhance communication and opportunities for input.
  • District staff is in the process of creating a budget calendar. We would recommend utilizing and circulating this budget calendar so that all stakeholders are informed of expectations related to the budget development process. This will improve transparency in budget development.
  • The District’s Governing Board should provide general policy guidelines that are reflected in the budget itself.
    • Such policy guidelines should be communicated to staff early in the budget development process to ensure that they can be adequately incorporated into the budget with the ability to provide alternatives, if necessary.
• The District should consider the creation of a Long-Term Budget to evaluate overall revenue and expenditure trends to help foresee future financial challenges.
  • This will enable issues to be addressed before they reach a level of concern.
  • It will also enable the District to plan for a reallocation of revenues currently allocated to sun setting expenditures.
• The District should consider memorializing its existing capital plans into a formal Capital Budget that can provide the framework for the future funding of the District’s capital needs.
  • This includes: a rehabilitation and modernization plan for funding future improvements to the existing fire stations; the existing apparatus, vehicle and equipment replacement plan; as well as the District’s previously identified new construction needs to meet service demands and the apparatus, vehicles and equipment needed for any new stations.
• Monitoring the variance between budget categories and actual expenditures can identify areas that may need to be adjusted in future budget cycles.
  • Large variances should be explained.

Reserves

• A formal District policy on Reserves can be created to clarify and set the appropriate reserve levels to meet District objectives.
  • Recommended reserve levels are set forth above based on the District’s current financial status.
• The District should consider memorializing its identified capital needs into a formal Capital Plan and resulting Capital Budget to guide in the allocation of capital reserves and resources which address:
  • Station construction needs
  • Apparatus, vehicle and equipment purchases
  • Station refurbishment and modernization
  • Apparatus, vehicle and equipment replacement

Related to Other Post Employment Benefits (OPEB)

• In 2013-14, the District contributed approximately $786,000 from its operating budget to prefund the PARS Trust. Beginning in 2014-15, and over the following two years, we recommend that the District increase the annual contribution by approximately $800,000 to the PARS Trust for a total contribution of approximately $1.6 million per year over a 3 year period.
  • The source of the additional $800,000 per year is existing cash on hand that is currently designated for Station 3.
    • This “reallocation” affords the opportunity for a more efficient use of cash.
    • However, if the District does not pursue the recommendations set forth regarding Station 3, an adjustment to this contribution amount will need to be addressed.
  • Assuming a 6.5% investment rate, the market value of assets in the PARS Trust is estimated to grow to more than $9 million over a three year period, which will substantially reduce the District’s UAL at an accelerated rate.
• Potential risks are increasing healthcare costs, which can add to the OPEB cost, and a lower asset value due to investment returns below the assumed 6.5% investment rate.
• The investment assumption of 6.5% should be reviewed on a periodic basis.
• The District currently earns approximately 0.369% on deposits held in the County Investment Pool. The District can increase interest income by holding funds not currently needed in the PARS Trust.
  • The PARS Trust offers flexibility in terms of withdrawing funds as long as those funds are used for retiree benefits. A strategy to further explore with PARS is making pay-as-you-go payments out of the PARS Trust.

Related to the Pension Plan

• The District has a well-managed debt and pension profile.
• The Safety and Miscellaneous Plans are sufficiently funded, particularly when compared to other public agencies.
  • If the District has sufficient resources, we recommend that the District target a funding ratio of at least 80%.
    • There may be room to make additional catch-up payments to the extent that the District has available cash that is not needed for reserves and operations.
    • The District is not required to maintain a funding ratio of 100%.
  • Pension contributions are expected to increase in 2015-16 by approximately 1- 1.5% of covered payroll.
  • By the year 2018, the District will see decreases in pension expenditures due to the effects of Assembly Bill 340.
• In fiscal year 2014-15, POB annual payments are approximately $767,000. However, payments begin to decline to approximately $452,000 in fiscal 2017 with the final payment of approximately $150,000 in fiscal 2018, when the POB is fully repaid in 2018 this will increase available revenues for future use.

Related to Station 3 Construction

• If Station 3 is needed to provide the desired level of service to the community, given the rate of return on the OPEB Trust, it is financially beneficial to utilize some the funds currently set aside for the new station and borrow to fund the construction of the new station.
  • This could include a cash payment for the acquisition of the land with a reimbursement of land costs from a future borrowing.
• However, if the District is not comfortable borrowing money, then the station can be cash funded.
  • This would eliminate the additional OPEB contribution.