FY_2013_Budget_Message

							                            Town of Dewey Beach
                             105 Rodney Avenue
                         Dewey Beach, Delaware 19971

                                    Memorandum


Date: January 4, 2012

To: The Honorable Mayor
       and Members of the Town Council

       Members of the Budget &
       Finance Committee

From: William R. Brown, Jr.
      Director of Finance

Re: Fiscal Year 2013 Operating Budget

       In anticipation that each of you will be attending the Budget & Finance Committee
meeting on January 14, 2012 I have prepared materials related to the Fiscal Year (FY) Operating
Budget for 2013 for your review in advance of the meeting to make it more productive. This
memorandum and accompanying documents cover all aspects of the Requested Operating
Budget for the FY 2013 and offers short-term and long-term strategies for additional revenue
generation.

        During the Budget & Finance Committee meeting on December 3, 2011, the Committee
established the following parameters for the FY 2013 Operating Budget:
     The Town has a fixed source of undeterminable income that is approximately $ 2.4
        million, which should be the target operating revenue for the FY 2013;
     We need to balance replenishment of the surplus against minimizing negative impacts
        on Town employees and public safety (approximately $ 1.7 million in total payroll and
        human resources costs);
     We need to set a realistic objective of contributing to the reserves an amount;
        somewhere between 5% to 10% of the budgeted operating revenue—starting in the FY
        2013 at the lower end, and increasing the contribution percentage in subsequent years,
        and
     The Town management needs to fit its operating budget within this framework and
        manage to the final budget.
    Memorandum to Commissioner and Budget & Finance Committee
    Dated January 4, 2012
    Page 2


     Based on the foregoing, one could conclude that the basis for beginning the replenishment
of the unrestricted fund balance (surplus) is to develop a FY 2013 Operating Budget with
revenues of $ 2.4 million, expenditures of $ 2.2 million, and the remainder (or difference) of
$ 200,000 to begin replenishing the unrestricted fund balance.

Background
       At the beginning of 2008 the unrestricted fund balance was $ 2,147,209. Primarily
because of an overestimate of real property transfer taxes in the budget for 2008, expenditures
exceeded revenues by $ 722,524 resulting in a reduction in the unrestricted fund balance.
Subsequently, when the Town initially undertook the Bayard Avenue Drainage project in the FY
2011 at a cost of $ 1 million and only borrowed $ 450,000 it had the effect of reducing the
unrestricted fund balance in the General Fund further. Thus, the unrestricted operating fund
balance is currently $ 895,611, or approximately $ 1.2 million below the level at the beginning
of 2008. Rebuilding the fund balance to its former level as soon as reasonably possible is an
appropriate objective.

        I was requested to prepare an Operating Budget for the Fiscal Year 2013 (April 1, 2012
through March 31, 2013) in conformity with the aforementioned parameters at an expenditure
level of $ 2.2 million and provide it to the Committee for the next meeting scheduled on
January 7, 2011.

Budget Approach
        In developing the FY 2013 Operating Budget, the following information was utilized:
Actual operating results for the FY 2011, the Operating Budget for the FY 2012, actual operating
results for the eight months ended November 30, 2011, and projected operating budget results
for the remainder of the FY 2012. FY 2012 revenues and expenditures applicable to the Bayard
Avenue Drainage project were excluded in determining the Operating Budget for the FY 2013
because they are non-recurring.

        A FY 2013 Maintenance-of-Effort Budget was initially prepared utilizing information in
the FY 2012 Operating Budget, actual operating results in the FY 2011 and projected operating
results for the FY 2012. Then, considering the four parameters established by the Budget &
Finance Committee, adjustments to the FY 2013 Maintenance-of-Effort Budget were made with
the objective of achieving operating expenditures of $ 2.2 million. Using this approach, I was
able to make expenditure reductions of $ 118,412 to the FY 2013 Maintenance-of-Effort Budget
bringing the FY 2013 Budget to a level of $ 2,397,022, including annual debt service costs of
$ 52,247. That is beyond the $ 2.2 million target level by $ 197,022.
Memorandum to Commissioners and Budget & Finance Committee
Dated January 4, 2012
Page 3



       If we are to honor the second parameter established by the Budget & Finance
Committee we can go no further. However, through other means we have the ability to begin
replenishing the unrestricted fund balance, possibly as soon as the current fiscal year 2012.

       Under the “fair share” concept the Town could actually generate an additional
$ 102,000 in revenue that could be used to replenish the unrestricted fund balance. Currently,
the Town’s policy is that property owners may purchase up to two seasonal parking passes for
½ the normal selling price of $ 400, or $ 200, thus saving $ 200 on the purchase of two seasonal
parking passes. This past year, 1,024 seasonal parking passes were sold at the discounted rate,
accounting for $ 102,400 in potential revenues to the Town.

          We understand the rationale for the policy is that since property owners pay Beach
Replenishment taxes the discount would help mitigate the impact of the Beach Replenishment
tax. It is interesting to note, however, that the bulk of property owners pay Beach
Replenishment taxes at a level substantially below $ 200. In that regard, the Town’s General
Fund is actually subsidizing many of its property owners and reducing its revenue potential.
Thus, it is recommended that this policy be discontinued.

         Another opportunity is currently available to increase the unrestricted fund balance;
possibly in the current fiscal year; if not then, in the FY 2013. And that is a building permit fee
received from Dewey Beach Enterprises this year in the amount of $ 480,000. This was
conservatively recorded as a deferred revenue instead of an operating revenue because of
litigation that may be resolved by the end of the fiscal year, March 31, 2012. In anticipation that
the Town is entitled to the building permit fee, regardless of the outcome of the litigation, the
$ 480,000 can be removed from the deferred revenue account, 10%, or $ 96,000 transferred to
the Street Repairs account per the Town Code, and the remainder of $ 384,000 can be reflected
as a General Fund operating revenue item, thus further increasing the unrestricted fund
balance.

       These two items together would replenish the unrestricted fund balance by $ 486,000
accounting for 41% of the $ 1.2 million needed to fully restore the unrestricted fund balance to
the level at the beginning of 2008 of $ 2.1 million.

Outcome
        Based on the foregoing, the Town can achieve a balanced budget for the FY 2013 at a
level of $ 2,498,865 within the parameters established by the Budget & Finance Committee,
including $ 102,000 in additional revenues annually to replenish the unrestricted fund
Memorandum to the Council and Budget & Finance Committee
Dated January 4, 2012
Page 4


balance and an additional one-time replenishment of $ 384,000 to the unrestricted fund
balance. The FY 2013 Operating Budget would then be comparable, within a few dollars, to the
operating budgets for the Fiscal Years 2011 ($ 2,373,672) and 2012 ($ 2,496,681).

Alternative Operating Budget at $ 2.2 Million
        As mentioned earlier, in order to reduce the FY 2013 Budget Request from $ 2,397,022
to a level of $ 2.2 million, additional reductions of $ 197,022 would be required. Because payroll
and human resources (Salary & wages, employee benefits and payroll taxes) represent a
significant portion of the operating budget (76%), in order to achieve an operating budget at a
level of $ 2.2 million, a minimum of 25% of full-time employee positions would have to be
eliminated.

       Currently, the Town has full-time employees in the following areas:
           Administrative           5, including the Town Manager position (1 is assigned to
              the Alderman and the Police Department)
           Police Department 9, including the Police Chief
           Code Enforcement 1
           Alderman’s Court         1
           Streets & Highways 1
           All other positions (Lifeguards and Seasonal Police) are part-time

        To achieve a further reduction in the operating budget equivalent to $ 197,022, a
minimum of 4 employee positions in the Police Department or a combination of 7-8
employee positions in the Police Department and other departments would be required to be
eliminated. Alternatively, if ½ of the part-time Seasonal Police positions are eliminated,
estimated budgetary savings of $ 142,429 would be realized. However, it is important to note
that revenue reductions may be proportionate to position reductions because employees in
these positions generate parking fines and other revenues. So, net savings may be minimal.
Simply put, staffing reductions of the magnitude described above will result in a significant
disruption to governmental operations in virtually every area that positions are eliminated. It
is simply not a viable alternative.

Bottom Line
        The Town of Dewey Beach has reached a point of diminishing revenue capacity under
its current revenue structure. For the past three years operating revenues have hovered
around $ 2.4 to $ 2.5 million--$ 2,483,590 in FY 2011, $ 2,470,619 in FY 2010, and $ 2,364,215
in FY 2009. As a result, during these periods, operating expenditures were somewhat
constrained to stay within the Town’s revenue generating capacity.
Memorandum to the Council and Budget & Finance Committee
Dated January 4, 2012
Page 5


        The Town needs to add more stable revenue sources to its operating budget revenue
structure. One source that immediately comes to mind is a real property tax, the one most
common in other jurisdictions in the State of Delaware. A real property tax to support ongoing
government operations could mitigate future potential losses of revenue from tourism,
especially in adverse economic or weather climates. It would also make it easier to plan for
current and future needs, in terms of services and infrastructure, and provide a pledge for
financial obligations associated therewith.

Short-term Revenue Strategy
        Most property owners in the Town of Dewey Beach are non-residents, comprised of
businesses, investors and property owners with second homes. Obviously, as with any property
owner, especially investors and businesses, keeping costs as low as possible is important. In the
Town of Dewey Beach these property owners vote in the Town’s general election each year.
Recognized this, it is important for the Town to provide information to all property owners
informing them that virtually all operating revenues the Town receives are attributable
directly or indirectly to tourism and those revenues have, essentially maxed out.

      They should be informed that in order to continue to protect businesses, property
owners, their properties and the safety of visitors the Town needs to have a stable source of
revenue, such as a property tax. With appropriate facts and information, hopefully the property
owners would be willing to approve a moderate property tax at referendum.

Longer-Term Revenue Strategy
        Once a property tax is approved and implemented, the Town of Dewey Beach will be
like other municipalities in Sussex County, with a property tax. Then, as a group, they could
approach Sussex County officials and request the payment of a municipal tax differential
from Sussex County annually for the cost of services they provide that Sussex County would
otherwise have to provide and pay for in the absence of the townships and municipalities in
the County. The municipal tax differential can be negotiated among the parties and once
established can be adjusted for inflation annually and reviewed and re-negotiated every five
years. If the assessable base for all properties in the municipalities is converted to the
assessable base in Sussex County (and municipalities’ property tax rates are adjusted to the
uniform assessable base) then Sussex County could actually levy all property taxes for the
County and municipalities. Following collections at the end of each month Sussex County could
remit amounts collected to municipalities for a fee of 3%, for example to cover its costs, and
the property tax billing and collection process would be streamlined, thus benefiting all parties.

HAPPY NEW YEAR!