Town of Little Elm

City of Pilot Point, Texas 102 E. Main Street Pilot Point, TX 76258 (940) 686-2165

August 6, 2011

Mayor Janet Groff Members of the Pilot Point City Council 102 E. Main Street Pilot Point, Texas 76258

Dear Mayor and Members of the City Council:

With this letter I submit to you the proposed Budget for the 2011-2012 Fiscal Year. The City’s Budget and Fiscal Year begins on October 1 and ends on September 30 of each year. Our schedule following this submission will be to consider setting a date for a public hearing on September 12, 2011 on the proposed budget, and to give public notice in the news paper about the hearing on August 19th and 26th. Following the public hearing on September 12th, Council may consider the Budget and the Property Tax Rate for the new fiscal year.

Financial Policy

In the 2010-11 Budget, the City Council approved the use of debt service, capital and special revenue funds to help improve financial controls, accounting and monitoring of city financial operations. Along with this effort, staff members have worked with an accountant and auditor to further clarify the City’s Balance Sheet Report for accuracy and reliability. With this budget we are now able to provide estimated beginning and ending fund balances. The City Council will begin considering implementation of a written financial policy to implement GASB 54 to further clarify and improve financial policy.

The City’s Bond Rating by Standard and Poor’s (S&P) for the City is A+. They are concerned at this point that the City adopt written financial policy guidelines since our fund balances are adequate. This will be an administrative goal in the new fiscal year. Some policies, like the investment policy, are already in writing. The written policies will be submitted to the City Council for review and approval.

Fund Balances

1 The City Council set in the past a goal to set aside a reserve fund balance equivalent to 25% of the operating budget expenditures (3 months operation) to improve the City’s financial position. The property tax rate was increased by 5 cents about three years ago to help rebuild the City’s General Fund Balance. The proposed budget will begin with a General Fund Committed Reserve of 19.3% and end with a General Fund Committed Reserve of 24.6%. The total estimated General Fund Committed Reserve at the end of the 2011-12 Fiscal Year is $565,499. This includes the return of $25,000 to the General Fund from the Pilot Point Economic Development Corporation to reimburse the City for the Façade Grant Loan. The total General Fund Balance at the end of the year will approach $900,000 or about 39% of the budgeted operating expenditures.

The Water (Enterprise) Fund will have a Committed Reserve of about $260,000 or 15.6% of the Water (Enterprise) Fund expenditures. The total estimated Water (Enterprise) Fund Balance at the end of the 2011-12 Fiscal Year is estimated at $557,892 or 33.4% of the planned annual expenditures. The City will continue to build on the Committed Reserve for the Water Fund in order to reach the 25% goal. These are conservative estimates for the Water Fund, and due to the long, dry and hot summer, the City should add to the Committed Reserve at the start of the 2011- 12 Fiscal Year.

The 2011-2012 Fiscal Year Budget includes an All Fund Summary that shows estimated beginning and ending fund balances for the year.

General Fund

The General Fund Revenues are proposed at $2,326,611 and Expenditures at $2,312,818 for the 2011-2012 Fiscal Year. This represents a $3,000 to $4,000 increase in revenues and expenditures from the previous year. The City continues to make a concerted effort to use available funds in the best manner possible in order to provide quality services while reducing costs where possible. General economic conditions continue to make it difficult to fully fund all service needs, but essential services continue to be addressed.

The budget is based upon a $0.69 per $100 valuation property tax rate and this rate is 1 cent higher than the one approved last year. The increase would fund $18,000 more in the budget for street maintenance. Most services have enough funding that they will be able to provide basic city services during the 2011-2012 Budget Year. Street maintenance has not had sufficient funding to put all streets in at least fair condition. The Denton County funded 2011 Street Project and previous City Projects, the City has made major progress towards improving streets, but some streets remain in a poor and deteriorated condition. Failure to address these issues will result is resulting in the complete failure of portions of some city streets.

The 2011 Certified Property Values showed about $1 million increase in Market Value, and this includes $500,124 in new Market Value. The increase in Freeze Adjusted Taxable Value was a almost $2 million for the year. These positive changes help the City continue to fund essential operations while minimizing property tax increases just to remain even. Hopefully it is also a sign that real estate values are holding or improving for our area.

The Total Effective Tax Rate for the 2011 Tax Year is $0.710881, so the proposed budget is based upon a property tax rate that is slightly more than 2 cents below the Effective Rate. The Effective Rate for Operations and Maintenance for the 2011 tax year is $0.627501 while the proposed rate is $0.548101, so the Operation and Maintenance Effective Rate is almost 8 cents below the effective rate.

The Debt Service Rate is $0.151899 and this assumes that the City approves the refinancing of the 2002 Bonds and the leveling out of the 2010 Tax Note Debt Service. If this option is not approved, the Debt Service portion of the tax rate will increase by over 3 cents for the 2011 and 2012 Tax Years.

Other rates and fees have changes due to historical collection but do not include rate increases. New rates and fees were adopted in the 2010-2011 Fiscal Year for EMS Services, but this was an effort to simplify and not increase the rates for services. The EMS billing and collection service was also assigned to Emergicon in an effort to improve collections and accountability on billing and collection services. Projected EMS revenues have been reduced sharply over the last couple of years based upon actual collections. We will continue to watch and be prepared to make budget expenditure adjustments based upon actual EMS service revenue during the next year.

Sales tax collections for the 2010-2011 Fiscal Year were up during the first half of the year compared to the 2009-2010 Year, and then dropped below the 2009-2010 year levels when prices at the gas pump for automobiles approached the $4 level. Accordingly projected sales tax revenues are projected lower in the 2011-2012 Fiscal Year by 4.3%. Sales tax revenues will also be closely monitored during the new fiscal year.

Water (Enterprise) Fund

Water (Enterprise) Fund Revenues for the 2011-2012 Fiscal Year are at $1,686,200 while Expenditures are budgeted at $1,668,308. This represents a 1.8% increase in revenues and a 5.5% increase in expenditures during the new budget year.

The Water Fund has continued to perform reasonably well over the 2010-2011 Fiscal Year. A portion of a rate increase that was originally approved in 2009 was implemented in 2011 for Sewer Rates. The increase should help both the Water and Sewer Departments to be able to fund their own operations. A Water Rate increase will need to be considered as the City develops a new water supply well to increase water production in late 2012 or early 2013.

Solid Waste Services for refuse collection, bulk pickup, disposal and recycling may require a rate increase in the new fiscal year as a result of increases in the cost of fuel. We will find out more on whether this increase is needed or not in the coming months. The City requested and IESI, the Contractor for Solid Waste Services, proposed a calendar for holiday services during the year in an effort to improve service and customer information on collection schedules. This information has been placed on the City’s web page and web calendar. In addition, the City news letter also has provided information on the schedule for service.

3 Pilot Point Economic Development Corporation (EDC) Fund

The Pilot Point Economic Development Corporation Fund (EDC Fund) is again included in the budget for your consideration as required by the By-Laws and Articles of Incorporation. The Financial Auditors did break away the EDC from the City’s financial reporting in the city’s Comprehensive Annual Financial Report as a separate reporting unit.

EDC Revenues are projected at $149,000 which is down a little over 4% from last year due to lower Sales Tax collections. EDC Expenditures include $35,000 for economic development incentives this year. An important budget change was to clarify and justify the expenditures from EDC for promotional programs like Main Street since the use of EDC Funds is limited to 15% for promotion. In the past this has been considered a general administrative cost. The result for EDC is available funding for economic development as well as greater accountability for use of EDC funds. The City General Fund does pick up more of the Main Street budget now since it can be a promotional program and service.

As part of the change, both the General Fund, on behalf of the City Council, and the EDC Fund, on behalf of the EDC Board Members, will participate as Platinum members of the Chamber of Commerce. The EDC Fund will participate using a part of their promotional funds for this purpose and the Chamber of Commerce uses these membership fees to promote the Chamber, local business and the community. They will replace former methods of contribution to the Chamber that were not backed by an agreement for the use of the funds.

This arrangement will also eliminate the sharing of Hotel/Motel Tax Funds with the Chamber of Commerce and allow the City to focus the use of these funds on qualifying historic preservation projects as a means to encourage tourism along with other approved uses. The Chamber will actually receive more revenue under this proposal, but the City will save time and money by not having to contract for, administer and monitor the use of the funds.

The budget proposes the repayment of $25,000 back from the EDC to the General Fund Committed Reserve since the EDC now has funding for economic development projects and incentives under the new budget program.

General and Water Capital Program Funds

The City has about $59,000 remaining in the General Capital Program Fund. Of this total, $20,000 is dedicated from the 2002 Bonds for City Hall improvements, $30,000 is dedicated from the 2002 Bonds for Park Improvements, and $9,000 is dedicated from the 2010 Tax Notes for Street Improvements. Other General Fund Capital Fund projects will be closed due to the completion of the projects, and this includes the Downtown Sidewalk project.

The City has about $25,000 in 2002 Bond Funds for water system improvements, and a total of $380,000 from the 2010 Tax Note for water system improvements. In total, $405,000 in water system improvement funds are available to assist the city with water projects. These funds will assist with the proposed water line replacement projects, the development of a water well, and other important water system improvements.

4 The next capital program is scheduled for 2013 when the General Capital Fund will have about $400,000 available for improvements, and the Water Capital Fund projects will focus on the completion of a new water supply well. The City continues to work towards a capital program that enables funding every three years with the debt being paid for in six years. This enables a regular capital program without binding the City financially for 20 years or more with each major project.

Equipment Fund

The Equipment Fund will help account for the replacement of a Police Car, an Ambulance and a Backhoe in the new fiscal year.

The City is making an effort to replace its aging police vehicles as they begin to wear out. Changing out the vehicles will reduce vehicle maintenance and improve the reliability of police vehicles as they respond to calls for service. Funding for the Police Car is projected to be from Unassigned Fund Balances that are left over from the 2010-2011 Fiscal Year. This transfer will need to be considered for approval once the year ends and available funding is documented for this purchase.

A new Ambulance is needed to replace the older of two ambulances operated by the Fire Department. The ambulance to be replaced is now about 14 years old, and has not been in service for a number of months due to the cost of needed repairs. A new Ambulance is needed for emergency back up as well as to enable the city to handle multiple calls which happens occasionally. The Fire Department is working on plans to rotate the use of the ambulances so that use between the newer and older units remains even until the older unit is replaced in order to get the most use possible out of the older unit prior to replacement.

With the purchase of a new Frazier Ambulance, the City will now have two Frazier Ambulances, and the next replacement can be the chassis only with the box being moved from the older ambulance to the new chassis. This will save the City some replacement cost in the future.

The new Ambulance will be funded from a note through PointBank that currently finances the 2006 Ford Frazier Ambulance, the 2003 Pierce Enforcer Custom Pumper Truck (Fire Truck), and the 2007 American LaFrance Liberty Tanker Pumper (Fire Truck). The balance on the note at the end of the 2010-2011 Fiscal Year prior to the purchase of the new Ambulance will be about $150,000, so most of the original note has been paid off.

The original financing was a lease purchase arrangement though an out of town firm. Now that the City is a Home Rule City, and the Home Rule Charter allows the City to have a note with a local bank, the lease purchase was converted to a note with PointBank. The City saves on interest cost and PointBank benefits from the City’s business. The new interest rate will be 3.950% compared to a lease purchase rate of between 5-6%. Funds are available in the General Fund Fire and EMS Department budgets to repay the existing note and the increased amount for the new Ambulance.

5 A new Backhoe is also proposed to be purchased in the Equipment Fund. The Water and Sewer Departments are providing funds for this purchase. The purchase will replace a 1998 Case Backhoe now in use by Public Works by the Street Department. The Street Department works in tandem with the Water Department for excavation of water and sewer lines and the following street repair services as the water and sewer system improvements and repairs are completed. Having two working backhoes, with one being a backup, is essential to ensure that the Water Utility can quickly respond to and address water and sewer line emergencies.

If funds are available at the end of the 2010-2011 Fiscal Year in addition to the amount necessary for the new Police Car, it is recommended that the City also consider the purchase of some needed Street maintenance equipment. Two pieces of equipment are recommended and they include: (1) Street Crack Seal equipment, and (2) a small Street Chip Seal Asphalt Sprayer.

The Crack Seal equipment would allow the city to maintain streets in the cooler months when cracks appear in the asphalt. Sealing the cracks will help eliminate the intrusion of water into the road base during our wet seasons. The Chip Seal Asphalt Sprayer will enable the city to patch deteriorating areas that have begun to show alligator cracking and stop the intrusion of water into the road bed that leads to street failure. These two pieces of equipment are initially estimated to cost about $35,000. More documentation is needed to firm up this cost estimate. These two pieces of equipment will help the city improve its ability to maintain city streets in good repair.

Action on these items will come back to Council for approval if funding is available at the end of the 2010-2011 Fiscal Year and these figures are not yet included in the budget since they have not been discussed and considered by Council yet.

Debt Service Funds

The Debt Service Funds for the City of Pilot Point include total payments of $589,411 for:

(1) 2010 Refund Certificates (1996 and 1999 Certificates); (2) 2010 Tax Note; and (3) 2011 Refund Certificates (2002 Bonds).

General Debt Service Fund payments will total to about $250,894 and include payments related to all debt issuances but the 1999 Certificates. Water Debt Service Fund payments will total to about $283,367 to pay their appropriate portions on all debt issuances. The EDC will contribute $55,150 to the General Debt Service Fund to help pay on the 2010 Refund Certificates (1996 Certificates).

All of the City’s Bonds and Certificates are backed and guaranteed by the City’s ability to assess a property tax to ensure collection. For this reason, the City must maintain adequate funds on hand to meet bond covenants each year. The requirements are for a minimum fund balance of 2% of the original bond issue. The City has $150,000 in the General Debt Service Funds and this is more than enough to cover this requirement.

6 The City makes an interest payment in February of each year on the Bonds and Certificates that have been issued. In August of each year the City then makes an additional interest payment as well as a principal payment on the outstanding debt.

The City has a goal of keeping the debt load at a reasonable level. A survey was completed of some North Texas cities and their debt load, so we have some comparison at this time. The ratio compares the debt tax rate to the operation and maintenance tax rate. Grapevine is high with a 61% ratio while Highland Park is low with zero debt. Pilot Point was not included in the survey, but our city would be in the middle with Grand Prairie and Lewisville with a 27% ratio. Dallas has a 34% ratio. Only 31 cities were included in the report so the report does not include all North Texas cities.

Employee Compensation

Due to economic and budgetary factors, there have been no changes to the City’s pay plans during the past three years. Competitive pay is an important issue as the City tries to hire and retain quality employees. The current budget does not provide for any changes to the pay plans to remain competitive. I propose to conduct a study to look at our position in the area market for municipal employees and then report back to the City Council on any recommendations for consideration. Both the General and Water Funds have some budgeted operational balances that could be used to help address the competitive pay issue. This effort should be completed in 2011 so that any proposed changes can be considered early in 2012.

Conclusion

With this letter I again submit the 2011-2012 Annual Budget for the City of Pilot Point. The City Departments have participated in the preparation of this document for your consideration, and I have also participated with the Department Directors in making some necessary cuts in order to balance the budget. The Budget, as mentioned earlier, does propose a one cent property tax increase to address street maintenance needs.

I look forward to meeting with you for your comments and suggestions in the meetings ahead, and also for citizen comments and suggestions during our meetings and the public hearing process. We will target September 12, 2011 for final consideration and any needed changes to the proposed budget prior to adoption.

We appreciate your support as we work to improve our financial and service strength, reliability and accountability as we look forward to beginning a new year on October 1, 2011.

Sincerely,

Thomas L. Adams City Manager