Annual Budget and Program of Services & Capital Improvements Program

Official Transmittal Letter from the City Manager

October 1, 2009

Honorable Mayor and Members of City Council:

In accordance with Texas Statute and the City of Sugar Land Charter, Section 6.03, the annual budget for the fiscal year beginning October 1, 2009 and ending September 30, 2010 is hereby presented. The budget for FY10 is structurally balanced, addresses Council priorities, and follows the fundamentals of the City’s Financial Management Policy Statements. The budget strives to maintain the current level of services within available resources while providing increases needed to serve an estimated population of 83,819 as of January 2010, which includes the annexation of River Park effective December 1, 2009.

Financial and Economic Outlook

Development continues within the City despite a downturn in the national economy. Residential growth is fed by strong demand for new homes in Telfair and commercial development is thriving due to the success of employment centers such as Town Square and Lake Pointe. The challenge in preparing the budget this year was being fiscally conservative during the economic downturn while meeting a growing demand for services with added population and completion of capital projects.

In fiscal year 2009, the City anticipated a prolonged economic downturn early and began taking steps to mitigate the fiscal impact. A limited hiring freeze was implemented in October 2008 and remains in effect to ensure the financial health of the City can be maintained within available resources. Going into the FY10 budget, a conservative approach to revenue estimation was taken, with no growth over the FY09 estimates anticipated in the FY10 budget.

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Operating Budget

The fiscally conservative budget seeks to preserve core City services while minimizing risk due to dependence on sales tax revenues. Actions were implemented last spring to manage the budget, including a 3% reduction to departmental operating expenditures for FY09. Departments were asked to reduce their base operating budgets by an additional 1% for FY10 in anticipation of a continued slowdown in revenue growth. Since personnel costs account for about 65% of the operating budget, the reduction to the budget have limited resources available to departments. Despite the reductions, departments continue to provide excellent services to Sugar Land residents and visitors. Increases approved in the FY10 budget are based on the need to continue providing excellent service. Many of the requests that are being funded are one‐time expenditures that can be supported from fund balances in excess of policy requirements.

The total operating budget is increasing 0.69% over the FY09 adopted budget. While individual funds are experiencing different rates of growth due to unique situations applicable to each fund, the overall City budget remains conservative. Increases are seen in the Debt Service Fund due to the amount of capital projects that will be undertaken in FY10, coupled with the payment of debt service for River Park beginning in December. Provision of services to the River Park area is driving much of the increase in the Utility Fund, along with increased debt payments for some major capital improvements. Expenditures in the Solid Waste Fund are increasing due to growth in the number of households, along with a scheduled contractual increase in March 2010. One fund that is seeing a decrease in expenditures is the Airport Fund as a result of declines in the cost of aviation fuel.

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The tax rate for 2009 remains at $0.3000 and continues to be one of the lowest in the state, and second lowest for cities over 25,000 in population. While the tax rate remains unchanged, a reallocation between the debt service and operations component of the tax rate was made to support the increasing costs of operations from the completion of capital projects. In May it was recommended to City Council that no changes be made to the homestead exemption for tax year 2009. City Council concurred with this recommendation and the homestead exemption will remain at 7% for tax year 2009.

Given the current economic conditions and potential for this climate to continue into next year, there are very limited additions to the budget for new programs and services. Operating impacts of capital improvement projects are analyzed and identified as part of the CIP process. The operating impact of CIP projects are also identified and incorporated into the five‐year forecast. Funding is incorporated into the budget for landscape management and beautification along US59 and US90A along with maintenance of the dog park currently under construction at Sugar Land Memorial Park, and maintenance for the Eldridge Park Trail and Telfair Parkland. The Fire Engine to serve Fire Station #7, which will be completed in FY11, will be ordered this year to provide adequate time for delivery prior to station completion. The budget proposal includes increased funding for signature events that can draw people into Sugar Land. Working with funds from the Sugar Land Development Corporation, Sugar Land 4B Corporation, Tourism Fund and Town Square TIRZ #1, a program of events will be developed, both enhancements to existing events and new events, that can help stimulate the local economy. During the past year, staff has been working on a program that will help address the City’s transportation needs. The budget includes resources for the development of a comprehensive mobility plan. The success of the intergovernmental relations program at the state level has highlighted the need for adding legislative representation at the federal level. In addition, the changing economic climate has resulted in the need to focus on economic development efforts. While business recruitment remains important, increased emphasis must be placed on compliance monitoring and business retention to preserve the current corporate base in the City.

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Capital Improvement Program

The 2010‐2014 capital improvement program totals $303.75 million, with $86.77 million for appropriation in the FY10 budget, a significant increase over prior year budgeted projects. The five year CIP includes construction of several major projects: a surface water treatment plant and a wastewater treatment plant expansion, plus construction of several major roadway projects and an additional fire station in the City. A large percentage (32%) will utilize alternate funding sources such as CIP fund balance, Grants, County Mobility Bonds and contributions from New Territory MUDs under their Strategic Partnership Agreement.

There were many projects requested in the five year CIP that exceeded the current debt capacity of the City. As a result, several projects were shifted to upcoming fiscal years in order to ensure the debt capacity of the City can be effectively managed. In addition, over $24 million in projects were unfunded in the CIP. There are also several projects in the preliminary stages that do not have construction estimates that can be included in the CIP. To move forward with all of the projects identified in the five year CIP, the City may need to consider a future bond referendum as many of these projects are not affordable under the current tax rate and forecast.

Projects funded in FY10 include construction of drainage improvements at Sugar Mill and additional conveyance to Jane Long Lake. Fire Station #7 will break ground in 2010 in Telfair, with participation by the New Territory districts; the City will purchase parkland in Telfair along with improvements to First Colony Park and Imperial Park. The trail at Eldridge Park will be extended while hike and bike trails along Brooks Street will be constructed. Landscape improvements along the recently completed US59 expansion will be underway in FY10. Street projects make up nearly half of the FY10 CIP, with construction of University Blvd South through Brazos Landing, and the University North Bridge to US90A, Lexington Blvd will be extended as well as major reconstruction of Dulles Avenue; over half of the cost of these projects will be funded through Fort Bend County Mobility Bonds and TIP funding. Traffic projects include geometric improvements at the heavily traveled US59 and SH 6 intersection and the City’s participation in the SH6 median extension project.

Wastewater projects include emergency power for lift stations and annual rehabilitation projects. Water projects include construction of an elevated storage tank in the southeast quadrant of the City, alternative disinfection systems and a 20” water line that will be constructed parallel and simultaneously to University Blvd South. For the City’s mandated conversion to surface water, design work will begin on the treatment plant and transmission lines while non‐potable projects continue to benefit the City through conversion credits. At Sugar Land Regional Airport, with the completion of the T‐hangars and demolition of the old T‐hangars, construction of taxiway “Juliette” can begin when TxDOT aviation is ready to move forward. Acquisition of adjacent “Smithville” from the state prison system is another key project for the Airport in fiscal year 2010.

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There are several projects in the preliminary engineering and design stages that could have a significant impact on the next few years. An Emergency Operations Center/Police and Courts Expansion project is in the preliminary engineering phase. Requests for a Public Safety Training Facility and an Annex south of the Brazos River are also being reviewed. The construction phases of these projects will significantly impact the City, both in the ability to deliver services and potential impact to the overall financial position.

Annexation of River Park

The Strategic Partnership Agreement approved in 2007 with Fort Bend MUD 1 provided for limited purpose annexation of the area beginning in March 2007 with full purpose annexation to follow in 2009. The operating budget includes the funding for police officers in Beat Five, streetlight and ROW maintenance, park and trail maintenance, code enforcement, animal control, fire prevention & investigation, utility services and residential solid waste collection. City staff has met with MUD representatives monthly to ensure the details of the annexation are clear and all services can begin upon annexation. A communication plan is being developed and the City will welcome approximately 3,600 new residents to the City on December 1, 2009. Funding to provide services in the River Park area are included as part of the budget.

Financial Summary

The FY10 operating budget totals $133.68 million, a 0.69% increase over the FY09 approved budget. Capital projects for FY10 total $86.77 million, a 134.73% increase over last year. The total operating and capital budget is $220.46 million. Although these numbers may initially appear large, the key factors described above have a significant impact on the size of this year’s budget.

The budget compares to last year as follows:

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As identified in the Financial Management Policy Statements (FMPS), a long‐range forecast has been prepared for each of the major operating funds. The forecast shows that the budget is sustainable over a longer period and facilitates progress toward objectives identified in the FMPS. The forecast shows that the City has some challenges ahead, due to the debt service and operating impact of planned capital improvements. A growing fund balance requirement in the General Fund will pose challenges with the additional operating expenditures from these capital projects; key decisions will need to be made in each year to ensure the policy requirements are met. Adjustments to some rates will be necessary in the enterprise funds to maintain self‐sufficiency as new improvements are constructed, but the City remains financially sound through the forecast.

Personnel

The budget includes limited additions to City staff. Conservative revenue estimates have minimized additions to the General Fund. There are four positions funded from general revenues: a General Maintenance Worker I, a General Maintenance Worker II and a Crew Chief in Public Works, and one General Maintenance Worker I in Parks. Three positions in the Business and Intergovernmental area, an Assistant Director, Management Assistant I, and Secretary, will assist the City with implementation of the City’s Transportation, Intergovernmental and Economic Development programs. These three positions are partially or wholly supported through the economic development sales tax. An additional five positions are included in the Utility Fund: two General Maintenance Worker I, one General Maintenance Worker II, a Utility Operator, and a Water Quality Manager. There are a number of positions that may be reallocated to different areas to respond to different challenges facing the City. One key reallocation is an Assistant City Manager for Public Safety, which can be accomplished through the reallocation of two existing positions in the Police Department.

The City participates in the Texas Municipal Retirement System (TMRS) for employees. The actuarial methods used by TMRS were revised in 2008 to better account for anticipated growth in salaries over employee careers. The increase in contributions to TMRS was fully funded in fiscal year 2009 based on the new actuarial model using a strategy of one‐time merit awards to employees to help offset the recurring costs of the retirement contributions. The actuarial model shows another increase of 1.19% of salaries in contributions to the City’s TMRS accounts for 2010 based on updated data. Because the City does not participate in Social Security, it is critical that funding for the retirement system be maintained so the City can recruit and retain quality employees.

City employees continue to meet or exceed the expectations of our residents on a daily basis, adapting well to the budgetary constraints that the City may be facing. Sugar Land’s employees are in a unique situation compared to other cities in that they received reduced merit awards in FY09, with a large portion as a lumpsum payment. Employees last saw a regular merit increase in the fall of 2007. Funding for a 3% merit pool is included in the budget, contingent upon meeting financial targets that have been established for FY09 yearend.

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Awards will be allocated to each employee based on performance evaluations given in October, with raises tentatively to be given out before year‐end. It is important that the City recognize employees for their performance and compensate them accordingly.

The City’s compensation philosophy includes a section addressing the benefits burden as a percentage of total compensation, with the calculation based on a formula from the State Auditor’s Office, and with limitations within the State of Texas and industry standards. The compensation package for employees results in benefits at 39.89% of total compensation. This benefits burden is within the guidelines established by Council policy and staff will be evaluating the compensation philosophy during the coming year and will make any proposed changes to be implemented with next year’s budget.

Rate and Fee Adjustments

The budget includes rate increases for the Utility Fund effective in October 2009; the third step of base rate increases based on recommendations from the rate study that was completed in 2007. These rate increases were originally planned for implementation in March 2009 but were delayed due to savings realized from a five year electricity contract that the City approved beginning in January 2009. With the increase, most residential bills will increase by $3.30 per month beginning in October.

Pumpage fees for participants in the City’s Groundwater Reduction Plan (GRP) will be increased to $0.60 per 1,000 gallons beginning October 2009. The increase is needed as the City gears up for design and constructionof the surface water plant. The transition to surface water will allow the City to comply with the mandate to reduce 30% of groundwater consumption by 2013. Through careful financial planning, the City has set aside capacity within the utility rates to allow a buy‐down of the GRP fees for City customers. Since 2007, the City has been setting aside a reserve for surface water within the Utility Fund that will allow the City to contribute the full GRP fees while minimizing the impact to customer utility bills.

The City is entering the second year of a five year contract with Allied Waste. The contract calls for annual increases to residential garbage collection rates in March; customers currently pay $15.82 per month for twice weekly curbside garbage and recycling pickup. The rates will increase to $16.70 in March 2010 with no changes to service levels.

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Summary

I encourage you to read further into the fiscal year 2010 annual budget. The budget summary that follows this transmittal letter provides a review of revenues and expenditures included in each of the City’s operating funds, and a description of the capital improvements program and employee compensation. Within each fund summary are further descriptions of services for the departments that will support Sugar Land as it continues to grow and serve its residents.

The appendices to the budget include the five year financial forecast, the compensation plans for FY10, and a listing of departmental requests that were unable to be funded under the conservative revenue estimates. With the conservative revenue estimates, it is possible that the City could realize revenues higher than anticipated in the FY10 budget. These revenues could be utilized to fund some of the budget requests that were not included in the FY10 budget. Staff will monitor the situation closely and return to City Council with a recommendation for funding some of these requests once the information is available. Accompanying the budget, under separate cover, is the five‐year Capital Improvement Program.

Respectfully,

Allen Bogard

City Manager

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